Mail.ru Group Ltd (OTCPK:MLRUY) Q3 2021 Earnings Conference Call October 28, 2021 9:00 AM ET
Tatiana Volochkovich - Director, IR
Boris Dobrodeev - CEO, Russia
Matthew Hammond - MD & CFO
Fedor Rubtsov - CFO, Russia
Vladimir Gabrielyan - First Deputy Chief Executive Officer (Russia)
Vladimir Nikolsky - Chief Operating Officer (Russia)
Conference Call Participants
Ulyana Lenvalskaya - UBS
Vladimir Bespalov - VTB Capital
Cesar Tiron - Bank of America
Slava Degtyarev - Goldman Sachs
Luke Holbrook - Morgan Stanley
Anna Kupriyanova - Gazprom Bank
Anna Kurbatova - Alfa-Bank
Dmitry Vlasov - Wood & Company
Sebastian Patulea - Jefferies
Thank you all, and welcome to VK's Third Quarter Unaudited Financial Results Conference Call. I'm joined by Boris Dobrodeev, Matthew Hammond, Fedor Rubtsov, Vladimir Gabrielyan and Vladimir Nikolsky. In light of the elevated number of COVID cases in Russia, we continue to work remotely until at least the end of this year. As a result, we are in multiple different locations, and hence, coordination during Q&A might cause some minor delays in our responses. [Operator Instructions]
We will take time to answer all of your follow-up questions, and thank you in advance for your understanding and cooperation.
Before I pass it on to Matthew, I will read the safe harbor statement. Please note that our results press release contains statements of expectations and other forward-looking statements regarding future events or future financial performance of the group. The forward-looking statements in the release are based upon various assumptions that are inherently subject to significant uncertainties and contingencies, which are difficult or impossible to predict and may be beyond the group's control.
Many factors could cause actual results to differ materially from those discussed in the forward-looking statements, including those referenced on the risk factors in the group's public filings.
We would like to direct you to read the forward-looking disclaimer at the back of our release, particularly with respect to the possible differences between management and IFRS accounts. Matthew, please go ahead.
Thank you very much. Good afternoon, and thank you all for joining us. I may be reading a little slower today, and so you'll have to forgive me because COVID can spread literally anywhere.
Anyway, Q3 group revenue grew nearly 19% to RUB 30.4 billion in the third quarter with strong year-over-year performance from advertising and education technology services. Community IVAS returned to growth with largely flat performances to MMO games, given the still challenging base effects, combined with no major new launches. When it comes to profitability, Q3 group EBITDA grew 28% to RUB 8.4 billion with a margin of 27.7%, a 2 percentage point improvement year-over-year, driven by the improvements in profitability across Communications and Social, Games and New Initiatives.
Group net profit from consolidated subsidiaries grew 41% to above RUB 3.8 billion. At the same time, the group reported a net loss of RUB 1.4 billion, including the contributions from the key strategic associates and JVs versus a net loss of RUB 415 million a year ago. The main drivers for the JVs, the RUB 3.9 billion share in losses reported for the O2O JV and RUB 1.2 billion for AER in the third quarter. JVs remained in investment phase with roughly RUB 26 billion in related investments that we've made in 2021, including RUB 21.5 billion into the O2O JV at and 4.4 into AER. However, we are focused on both growth and unit economics.
For example, losses from O2O JV were flat quarter-over-quarter, and most of its components are expected to reach EBITDA breakeven in the next 2 to 3 years.
Before I move to provide specific comments on key business areas, I'd like to turn you over to Boris to comment on our rebranding. Boris, please go ahead.
Thank you very much, Matthew. Good afternoon, everyone. So 2 weeks ago, we started a new chapter in our history and our company, having rebranded into VK. The rebranding came as a natural step in the process of our evolution into an ecosystem with the related strategy announced back in 2020. To achieve the leading position on the market and the new Internet era, we're required not only to continue to launch high-quality and convenient services for millions of users, but also to maximize links between our products and services.
Until now, we were linking such association in the minds of our users. This came clear from our recent poll showing that nearly 60% of all Russians associate our group with e-mail and less than 10% associate us with social networks, games and other services. With social and communication products being at the heart of our ecosystem, time has come to change perception by building stronger links between our nearly 200 different services with VKontakte as the core of the group.
Why VK? Because the VK brand is universal. It has major potential and is highly recognizable. 100% of Russian Internet users know it, and more than 85% use the social network VK every month. And it is the most favorite social media for almost 90% of Zoomers, which means VKontakte is not just about the present, it's also about the future.
Following the rebranding, we're adding VK to product names, fully renaming some of our services and endorsing the other sites as those we own partially. All the new products will be launched under the new VK branding. Following multiple experiments carried during the past 1.5 years, we already see positive effects from association with VK. For example, VK jobs following its rebranding from Worki, saw product awareness rise by almost 40%, with intention to use increasing by over 50%.
We want to scale these effects across the group and across other use cases.
Some of the near-term releases will include VK Apps, VK Music, VK Games, VK Devices, with VK Video Group unified already -- video platform already launched. Also, Youla is in process of full rebranding into VK Classifieds.
So the new chapter requires legal entity and ticker changes as well. Based on current timeline, this shall be done before year-end. Rebranding doesn't lead to major changes in the strategy of the group as this is the next step in the logical ecosystem development strategy announced a few years back.
We have seen major progress across our ecosystem development since then with multiple visible benefits for the group already. For example, the average number of services used within Combo rose by 35% year-on-year in October, with Combo users having nearly 40% more active days in our services per month versus an average user within the user ARPU increasing by almost 30% after joining our loyalty program, including more than 50% high ARPU for our O2O services.
Marusia monthly active users grew by more than a quarter, quarter-on-quarter in Q3 to almost 7 million users following its integration into VKontakte. Total cumulative number of VK ID users outside U.K. and in Mini Apps rose by almost third since June, hitting 50% launch last summer with more than 30 connected devices and nearly 370,000 in daily first authentication using VK ID outside VKontakte and Mini Apps.
And we think that this is just the beginning. However, our broader ambition is for the branding not only to bring us closer to the aspired local ecosystem leadership, but also lead to revenue and margin benefits for the group as unification of services and unification of games add more room for higher efficiency.
For example, integration of our hedging team has already resulted in 4 [indiscernible] and accuracy of our big prediction, with 3x growth in app installs and 30% lower acquisition costs for advertisers. We therefore target multiple positive effects from the rebranding with those benefits across all business areas, and we are very excited about this major milestone in the history of the group.
Matthew, please continue.
Boris, Thank you very much. Turning back to the key business highlights. First, on advertising. Advertising grew by 28% year-over-year in the third quarter exceeding RUB 12 billion and remains the key driver of our revenue, accounting for over 40% of the group's total.
Performance advertising remained the key driver with 40% year-over-year growth in the third quarter. Within advertising formats, we saw 52% year-over-year growth of interim video ad revenues, significantly above the 36% growth rate seen in Q1, with further monetization of video being amongst the key strategic priorities.
The SME subsegment continues to increase as a percentage of ad revenues and the number of advertisers continues to rise, with the largest 10 advertisers now just below 15% of total ad revenue, with related concentration down by almost 3 percentage points year-over-year as of the first 9 months of this year.
Above market advertising revenue growth is driven by constantly improving our AdTech. For example, we recently saw ad clicks per user per day reach a 3-year high, with only about half of the previous numbers of ad impressions needed to get 1 click given the improvements in the predictive models. We also see nearly 50% reduction in cost per install through better predictive models, which drives revenues from ad -- in-store ads.
2021 has very different base effects in advertising as a result of COVID. And with the Q4 2020 base effect higher than Q3, there is obviously an effect. Notwithstanding this, we continue to expect that we will outgrow the broader digital market.
On Community IVAS. IVAS, which accounts for nearly 15% of the group's total revenue returned to growth with an expansion of almost 6% versus a decline in the first half of the year. The main driver of IVAS is music, which sits at the heart of our VK Combo loyalty program, where we had over 4.5 million subscribers as of the end of September with 94% in paying users. We expect similar growth rates for IVAS in Q4 with moderate growth for the year.
On contacting, VK maintained its local social networking leadership with an average Russian MAU of 72 million and a DAU of 46.2 million. Revenue grew 29% year-over-year to about RUB 7 billion in the third quarter, driven by very active engagement, with 9 billion news feed views, 15 billion messages delivered and almost 1.2 billion videos viewed every day.
The Super App development continues with the number of VK Mini Apps rising by almost 70% year-over-year in September to just under 37,000 with the related MAU rising by 26% to 34 million in September, and the most popular Mini App having MAU in excess of 8 million.
Monetization of the platform is also progressing with in-app ads, revenue rising by 550% year-over-year in the third quarter, along with growing new fee-based promotion revenues. Communications products and related technology enhancements continue with the rollout of unlimited duration, free of charge group video calls, and video call MAU being around 20 million. Overall, video remains a major focus area with several significant video platform updates in the third quarter, which helped drive 5x year-over-year increase in contactless revenues from video ads to be further stimulated by the rollout of VK Video, which happened in October, unifying all the group's video resources in a platform with 40 million video daily active users, which is the largest in the Russian Internet market.
In order to provide further color on the latest development strategy and near-term plans of VKontakte. We plan to host a related teaching event in November with details to follow.
Games. MY.GAMES grew 2.3% to RUB 10.1 billion and was around 33% of the group's revenues in the third quarter. There were no major new launches to support growth during the first 9 months of 2021 versus 8 launches made during the same period last year Launch activity has been muted given the ongoing adjustment of our marketing models and new rules around identification of users across iOS devices, and we expect a more normalized release schedule next year.
Q3 EBITDA grew 22.6% to RUB 2.4 billion with a margin of 24.2%, rising 4 percentage points versus the third quarter of 2020.
Mobile revenue share stood at 75% in the third quarter with 77% of revenues coming from markets outside of Russia and the CIS. Average MAUs was 21 million in the third quarter with a 4.3% share of monthly paying users. War Robots, Warface, Rush Royale, Hustle Castle and Grand Hotel Mania were the largest revenue contributors for the quarter.
We continue to diversify our portfolio through M&A, including 4 minority new studio investments in the third quarter. In September, we consolidated Mamboo Games, which develops and publishes hypercasual and hybrid casual titles, albeit it currently has marginal contribution to our financials given its start-up nature.
Today, a total of 14 internal studios on MY.GAMES have more than 20 titles in active development across PC, console and mobile platforms, with 5 to 8 games launches suitable for the launch in the next 12 months. Launches will resume only in 2022. Despite this, we expect revenue growth from MY.GAMES in 2021 versus the expected slight contraction from the board games market in light of the base COVID effect. Sorry, to be clear, we do expect revenue growth from MY.GAMES. I'm sorry, I read that slightly wrong.
In the meantime, we expect MY.GAMES to deliver EBITDA margin of around 20% in 2021 versus 16% in 2020 with a peak margin in Q4, unlike last year, when active marketing resulted in a 13% margin in the fourth quarter.
Online education. Online education grew by 56% year-over-year to RUB 2.5 billion and accounted for 8% of the group's revenues. Units launched more than 160 new courses and programs during the quarter, and most active additions in programming and gaming, design, marketing and management and the overall number of courses now exceeds 1,200. Active ongoing course for expansion helps drive user growth, with cumulative registered students approaching 2 million, up 1.5x year-over-year. Nearly 37,000 of new paying students were added in the third quarter, with the cumulative number approaching 273,000, more than doubling year-over-year.
EdTech revenues are now expected to exceed RUB 10 billion in 2021.
EBITDA margin improved quarter-over-quarter with a moderate loss of RUB 0.3 billion for the quarter. We target further improvements in profitability in the fourth quarter.
New Initiatives. New Initiatives grew 68% to almost RUB 3 billion, with most units demonstrating an improvement in economics and a progress towards breakeven, with the level of EBITDA burn at 35% in Q3 versus 83% a year ago.
More specifically, on Youla. Youla accounts for more than 1/3 of the segment's revenues. Its sales grew by almost 30% year-over-year in the third quarter to nearly RUB 1 billion, driven by the rising share of B2B sales. EBITDA loss as a proportion of revenue continued to decline in Q3. Overall, Youla remains on track to deliver RUB 3.6 billion to RUB 3.9 billion in revenues in 2021 with significant progress towards breakeven.
On VK Clips, we continue to be very encouraged by the ongoing progress of Clips with its video inventory exceeding 8 million from more than 2 million unique offers. 20 million people, which is twice the number a year ago, was a total of 350 million clips per day on average in September, with the number of users spending 10-plus minutes per day on clips, expanded by more than 70% year-over-year.
There is already certain advertise base monetization in Clips eclipse with 2 main formats used: traditional video promos and special projects, albeit the main near-term focus remains on rising engagement and retention on the platform.
On recommendation platform. Pulse MAU nearly doubled to 70 million, with recommendation platform revenue approaching RUB 0.3 billion in the third quarter, up more than 140% year-over-year. Recommendation systems also delivered a small positive EBITDA versus a loss during the prior year.
Margins and guidance. Our group is in a very solid position, especially our largest local advertising revenue streams where we continue to gain market share. We're also very confident about our global MY.GAMES business and its growth prospects. The 2021 presents us with a tough COVID-related hurdle rate, which was further complicated by the IDFA related user identification changes. We decided to take extra time to fully adjust our marketing models to be able to achieve maximum ROI on our marketing spend in the new iOS reality.
With marketing being the largest cost item for MY.GAMES, this meant prudently shifting launches into next year. We also saw no major studio acquisitions year-to-date to support near-term growth. Given the scale of the My.GAMES business, this results in a slight tweak to our full year growth guidance to RUB 124 million to RUB 127 billion in revenue for 2021, with part of MY.GAMES growth effectively shifting into next year.
On the margin side, all of our reporting segments showed quarter-over-quarter improvement in profitability in the third quarter. The margin of the core C&S segment rose by 3 percentage points to 49%, with MY.GAMES profitability improving by 4 percentage points to 24%. In the meantime, both New Initiatives and EdTech segments made progress towards breakeven. We aim to continue this trend in Q4, with slight year-over-year margin improvement targeted for the year for the group versus the 25.3% delivered in 2020.
O2O and AliExpress Russia joint ventures are not part of the consolidated scope of the group, but given their materiality, ongoing investment levels and impact on our bottom line, we'll also provide some highlights around both.
On O2O. The GMV of the O2O JV grew by more than 55% year-over-year in the third quarter to nearly RUB 48 billion, with 70% of GMV coming from the food tech assets. The assets remained in active investment phase with EBITDA burn of around RUB 7.6 billion in the third quarter. At the same time, both mobility and food tech segments of the JV showed sequential margin improvement and overall O2O EBITDA margin improving to minus 16% as a percentage of GMV versus minus 20% in Q2 and 25% in Q3 2020.
On Delivery Club. Delivery Club grew gross revenues by 53% to RUB 4 billion driven by 45% growth in orders to RUB 22 million, with a 64% share in 1P and 17% share of e-grocery orders. This was driven by double-digit growth in active customers and order frequency. Delivery time also continues to improve, reaching 33 minutes on average in Moscow in September.
Q3 marked the lowest level of burn at Delivery Club since the formation of the O2O JV at 8% of GMV, an improvement versus 11% in Q3 2020 and the high teens prior to that.
On Samokat. Samokat has more than quadrupled both revenues and orders in Q3 with nearly 7 million in monthly orders in September and more than 45 million in completed orders as of the 9 months. We believe it is the fastest-growing local e-grocery platform in Russia today. Its monthly audience exceeds 1 million, having more than doubled year-to-date. Samokat is present in 22 cities versus 4 cities in January.
It plans to roll out operations in more cities with a plan to reach 1,000 dark stores by the end of 2021 versus around 758 in September. The regions are contributing a rising share of orders with 60% of orders from Moscow and St. Pete in September versus almost 90% in January. Despite the active regional rollout, Samokat saw significant improvements of cash burn as a percentage of GMV in Q3, both on a year-over-year and quarter-over-quarter basis, with the level of burn versus GMV at the lowest level since the formation of the O2O JV.
On Citymobil. Citymobil completed nearly 45 million rides and delivered almost 15 billion in GMV in the third quarter with rides growing in the key regions such as Moscow and St. Pete. High-margin B2B and premium segment rides were up more than 3x and nearly 2x, respectively. Increased focus on unit economics resulted in a 20% increase in contribution profit per passenger ride quarter-over-quarter with Citymobil turning contribution positive across the platform in October.
We provided nearly RUB 38 billion in capital to the O2O JV since inception, including RUB 21.5 billion in 2021.
Finally, AER. They recently published their own update in September about their performance, but a few highlights. AER is demonstrating solid trends, especially its local businesses with the local marketplace, nearly tripling GMV on a year-over-year basis in September with ongoing acceleration. When it comes to CB, it remains the platform's major competitive edge versus other Russian e-commerce players, given its more than 160 million SKUs and attractive profitability profile, with potential and profitability already next year. In the meantime, it is already growing at a very healthy rate, including 25% year-over-year growth in September.
Last 12 months active buyers stood at almost 28 million as of September with 114% growth at local buyers. We provided $60 million in additional capital to AER in August as part of the funding round, which will be completed in November.
With that, I thank you, and we'll turn to Q&A, and we'll leave as much time as we possibly can.
[Operator Instructions] We'll take our first question from Ulyana Lenvalskaya with UBS.
Let's maybe start with VK performance of VKontakte. Could you please describe a bit the level of competition in social in Russia at the moment? So I'm looking at the presentation and see a decline in DAU for second quarter in a row and also a decline in MAU for -- M-A-U for Mini Apps also for third quarter in a row. So could you please comment on what is driving this decline?
Ulyana, thank you very much. So we see actually both the daily and the monthly audience continue to grow year-on-year. The growth is not that fast given the market is quite saturated. But we still have positive growth, and we still have very high user loyalty since our thickness ratio or DAU to MAU is about 64%.
So if you look at the Mini App, so MAU was up 28% year-on-year in June and similar to 26% in September. So the DAU of Mini Apps also grew year-on-year. So we also see the engagement in Mini Apps also rising, same as monetization of the platform -- of this platform.
At the same time, I mean answering kind of the broader question, I think that the Mini Apps is still a fraction of the overall usage breakdown of VK. We see all the major lines of VK case studies doing well. So as for competition, I think as we stated before, we think the only real status quo disturber, it is short video format, which is presented by TikTok, and this is what we're really focused on with Clips having 20 million daily active users -- 20 million daily active users. We -- I think we stated before -- we stated in the release that we have 3 million daily video. I think just recently, we ticked the deed of 400 million daily short video views, Click video views, and we will continue to pursue the strategy.
We think that, generally, video and especially the short media looks like the single biggest engagement driver.
This is why we launched VK Video, our unified video, long-form video type of product. And as we said before, we have one of the largest users with 40 million people watching video, and we will continue to grow that as we plan to launch a stand-alone app as well as integrate it into other third party, so to say, that our ML team is doing some open recommendations, which adds to the [indiscernible]. So this is generally how our picture of the VK competition landscape looks like.
Next, we'll go to Vladimir Bespalov with VTB Capital.
Can I ask you about the financing of your joint ventures? As Matthew mentioned that this is going to be EBITDA breakeven in 2, 3 years from now, but maybe could you give kind of broad picture of how much are you going to invest, for example, next year in the joint venture?
And apart from financing from the shareholders, do you consider any other options of attracting capital or may be borrowing for -- to finance this transaction. And I will follow up later one other thing.
Thank you, Vladimir. I don't think we are now ready to disclose the exact figures for next year's budget. At the same time, probably we expect them -- for the O2O JV, we expect them to be lower, the budget this year. But of course, this is subject to our continued internal discussions. As of now, we are committed to O2O JV.
We are very bullish on it. At the same time, we don't want to currently stress -- rule out or insist on any other external financing means. So probably, we will be analyzing all options. But again, as of now, we are fully committed to finance the JV. We're very bullish and we're happy to continue to do that.
And next, we'll go to Cesar Tiron with Bank of America.
Yes. I have 2 questions, if that's okay. I'll ask the first one. It's on the Games cluster. So it looks like in the past 2 quarters, growth has been very slow. And of course, we understand the base effect, but I think the press release also mentioned some games which were delayed in terms of launches. So just if you can please explain, do you have the games ready and you haven't launched them? That would be one of the areas of questions. And then I've also noticed that you made quite a high-profile hire for the Games division. Should we conclude that there would be some kind of change in strategy for that division going forward?
Thank you very much. So I will first answer the first question. I think I would -- thank you very much, Cesar, for your question. So I would address it in a more kind of broad way.
So generally, I think that gaming has a certain, of course, headwind this quarter in January this year, for a number of reasons. First, we have tough year-on-year comparison. On another hand, we see the general market -- I mean gaming market advertising market condition are not favorable for some number of reasons. The first reason is that -- well, the auctions are quite overheated. We think that the pricing is still quite high for the marketing.
And as you know, we are very ROI and [indiscernible] driven.
So number two, of course, the IDFA changes were also expected. The way we acquire marketing, I think our marketing team coped with the problem quite well. They have a lot of -- they put a lot of work and have a lot of technology to cope with that. But still, that also had an effect and contributed towards this.
So I think given that, we took a prudent decision not to pursue with aggressive marketing and especially launch of new titles because we think now just the time for launching is not favorable. So this year, for us, is more like profitability versus growth. So this is why we have quite a good pipeline with 20 games in development across our 14 studios, which will be ready for rollout. We think that 5 to 8 titles will be soon 12 months.
So again, it's mostly a prudent approach. So that market has now adapted and is adapting to this new reality. I think if you -- at least we've been looking at group stack where [indiscernible] in H1. I think it was mostly broadly in line with the market, right? In line with the market median more or less. So this is where -- and what was the second question?
So yes, so I just observed that you've made quite a high-profile hire into that division. Does it change anything in the longer term in terms of strategy?
There is no -- there are absolutely no changes in the strategy. We -- I think we've been quite consistently executing our 360-degree strategy where we create a lot of games in Insight, where we do a lot of M&A, we do venture investments. We also license game. We also, of course, since we already have 77% of our audience outside of Russia, we grow our international presence a lot. We have a strategy to create a big franchise of shooters.
So I think generally, that there is no change in strategy. It's mostly execution of our strategy, which we talked about before. So it's just another step in the strategy.
[Operator Instructions] We'll next go to Slava Degtyarev with Goldman Sachs.
There was a solid improvement in communication and social margins in Q3. Can you help us decompose how much was coming from the IVAS and if there was an improvement in non-IVAS profitability? And would you expect Communications and Social margins to be structurally high in the medium term compared to the levels that we have seen over the last couple of years?
Well, look, I think everything improved. It was a broad-based improvement in both revenue and costs. As we said before, like 2020 was real like peak investment year for like this segment and for a lot of tech-heavy and product-heavy directions since we saw COVID and we saw a lot of new opportunities. So we wanted to grasp, including Communications, Video, which we just launched.
So I think this is kind of both the top and bottom line effect. So probably this is -- we don't want to give forward-looking statements, but probably we will continue to see like margin closer to current level, maybe slightly better going ahead.
And next, we'll go to Luke Holbrook with Morgan Stanley.
I just had a question on Samokat. You're increasing quite aggressively the number of dark stores that you have, and now you're venturing into cities with less than 500,000 population. I mean how do you see the unit economics working there to justify that investment compared to larger dense cities? And have you closed any dark stores in the quarter where unit economics just isn't working?
We actually think it's a very sound business from an economic perspective. Most of the cities with like 12 months -- with 2 to 12 months maturity become contribution positive. So we already have more than 20 cities indeed, and we continue to -- and actually, so far, what we see, we see really no big difference in the economic level of these new cities that we opened, although we prefer to continue to scale, and maybe we'll continue to scale even more. So we are focused not on closing, but opening the dark stores. And I think as you can see [indiscernible] open in the growth of users, and orders grew more than 4, 6 year-on-year significantly.
So we plan to do so, yes, and we see some come across the board.
Next question will come from -- I'm sorry, go ahead, sir.
And then just going to quickly -- if I could as a follow-up, just on the O2O and Citymobil, I think rides were down 10% year-on-year. Just any color on that, the entrance into more cities or driver shortages? Any color there would be helpful.
Yes. I think that there is a need indeed. I think you're absolutely right. I think for some time, we see DiDi scaling back some investments, but there was some time of DiDi quite -- quite strong push from DiDi. There also is a very strong labor shortage that we see.
I think we see it across all the segments. We see it in drivers. So we see it in -- also in couriers. So we see it across the board. And then at the same time, the team is now much more focused on unit economics and on economics. So currently, it has kind of more rationalization stage. So in October, it turned contribution positive in most of the like -- in a lot of key cities. So -- or at least where the focus is now, and this is -- I mean, what is related to the current client.
Our next question will come from the line of Anna Kupriyanova with Gazprom Bank.
My question will be regarding VKontakte and further possible integration with your JV assets. In these great results of social communication growth, do you see any impact, particularly from e-commerce segment, maybe some share of revenues coming from AliExpress or maybe you can give us some understanding how positive your JV can impact your major segments.
So I don't think that we -- thank you very much. So I don't think that there is like really a material impact on our results. I think that -- I think we are contributing a certain amount of -- I mean, if you're talking about VK, right?
So for VK, I think social commerce remains quite minor, insignificant revenue driver at this time, and we continue to hone the product. So social commerce, it's not such a big contributor. So most of the money where we get, it is like general e-commerce, it is also financing fintech, and it's education, which were especially strong this quarter. And the key success is attributed to, I would say, to big improvements in EdTech [indiscernible] lines of advertiser segment and advertising products such as performance growing significantly more than the core revenue. We also saw increased video much better and also continue to track well.
So these were the key points of growth. So for social, I think it's a great concept, but now, it's more kind of a product than a big revenue contribution for us.
And maybe a quick follow-up. Do you see changes in your online advertising, specifically following recent lockdowns in Russia?
We haven't noticed it yet. So I think it is yet to be seen. As you saw, we had quite a good quarter and actually a very strong September. Given that the lockdown's just started, it is just too early to judge.
Now we'll go back to Vladimir Bespalov with VTB Bank.
So I have a question on your guidance. You downgraded your revenue guidance for the full year. If we take into account the upgrade of your guidance for -- revenue guidance for TAC, so the net downgrade would be around 4 billion. So is it right to understand that this is attributable to the Games segment and kind of the delay of the Games and that kind of stuff?
And the second question here, maybe you could help me understand if this is about like cutting marketing spend on new games and that kind of stuff. And as you mentioned, the focus on profitability rather than growth, why the EBITDA margin guidance hasn't changed with this change in the revenue guidance.
So it is mainly lack of new launches and lack of new aggressive marketing, which would have had a significant impact on revenue, and that were postponed to the next year. I would say the majority of the guidance comes from -- I mean guidance decrease comes from this decline. .
Okay. But then on the profitability side, why the margin guidance remained unchanged? Like you're still guiding like slightly higher than a year ago, as I understand, but on much lower...
On margin, we didn't specify our guidance, and we are indeed targeting an improvement, including driven by Games where it's 20% margin for the year. And as you saw, we saw a significant increase in gaming EBITDA year-on-year. So I think it is actually already reflected in our metrics if you look at them. And Matthew will follow up on that.
Yes. So just to make a comment that, obviously, a large part of the margin driver is the revenue mix. And with advertising continuing to do well, that obviously is supportive of the margin. But at the same time, the losses in the new initiatives continue to decline, as we were very clear. And so you put all of that together, and hence, that is where we see the margin improvement coming through for the full year.
Next question will come from the line of Anna Kurbatova with Alfa-Bank.
Two questions from my side, please. First of all, still on the Communications and Social margins a very good number of 49% this quarter, but I remember that you were in the first half of the year, like navigating us that the new products and services that you introduced like Music, Clips, et cetera, they -- you are starting to monetize them with some lag and that investments continue. So still the question remains for me, personally, the nature of this high margin in the third quarter, and what should we expect going forward until the year -- in the fourth quarter, let's say.
And the second question, if any comments, if you have, on potential impact on your business on your revenue and margins from this IDFA changes. So as far as I understand, the most change will come, again, on the game side, yes, because the change is introduced on 2 iOS platform. And so as far as you have 70% or almost 80% of your Games business coming from international markets developed, so it's mostly exposure to this segment. So any comments on the potential impact would be very helpful.
So I think in terms of the second question, we already see IDFA impact on our gaming revenue. As we said, we think it's not that simple. It's not just IDFA, but I think that it's a mix of IDFA and general marketing environment. And I think it's already kind of factored into our results and into our guidance. And we expect us to adapt and to normalize -- things to normalize next year.
So as for the like advertisement segment. We also saw some effect on our performance -- on our performance in performance advertisement. But again, it's already reflected in our results. But we -- I think we managed to cope quite well because we is holding -- cover 90% of Russian Internet population. We also have our own tools, such as VK ID, which actually help us to mitigate this risk a lot in the online advertisement.
And actually, you saw that we actually, on opposite, we made progress in the performance of our ad business. And may I ask you to repeat the first question so I would answer it correctly.
Yes. There is surprisingly good EBITDA margin in the Communications and Social segment. So I remember that at the beginning of the year, you were providing kind of the guidance that you introduced, you launched a lot of new services and functionalities on the platform, and that you start monetizing them like very carefully, yes.
So the effect on revenue comes with some lag and while investments continue. So for me, this margin came as a surprise. And I wonder what should we expect in the next quarter. And I really expect some kind of maybe a one-off in third quarter, which drove such margin.
No. I mean, IVAS, I don't think there is any one-off, I think probably we were a little bit conservative in our forecasting on one hand, again. And as I said before, it's a mix of -- it's a mix of a couple of factors. You saw, obviously, revenue advertising revenue growth was good. IVAS was good, whereas it was declining in the first half.
And it's breaking operating leverage in general, higher reps. And with a larger proportion of fixed costs, that's what gives you the margin and the operating leverage.
I think this is the first quarter when we start to see it because, again, we will quite open about that, like a lot of last year was an investment year for us where when we invested a lot in the product, hired a lot of people, launched a lot of directions.
At least to date, this looks like it was like the peak period. So now you have known us. Like really, really, we do, of course, continue to develop a lot of products and invest. But there are no similar sizable investments on Communications and Social...
Operator, did we lose Boris?
Yes, it looks like Boris had disconnected.
Yes, let's continue for now, and he can comment when he's back.
Okay. We'll move on to Dmitry Vlasov with Wood & Company.
I have one on Games and one small follow-up on Communications and Social as well. So the first one, you mentioned that you had marketing model adjustments and efficiency improvements in the Games segment in 2021. And I was just wondering if you are capable of sustaining circa 20% level of margin in 2022, assuming you will have 5 or 8 launches. That's my first question.
And the second one, just to follow up on Slava's question on margin. Boris mentioned that you would probably continue to see margins closer to current level going forward. And the current level is it third quarter 2021 or broadly 2021?
Yes, Fedor here. I think I can take these 2. So with respect to the games margins. So currently, we are in the middle of the budgeting for the next year. So we can't really give any specific comments on the '22 margin.
And as you know, in general, the gaming margin is basically a function of the games mix and also of the timing of the new launches. However, we would like to reiterate the guidance that we gave for the gaming margin when we promised to double it from the 2018 level in 2022. So that promise still stands. So I would say for now, you could probably target that level. As for the C&S margin, we actually meant that it will probably -- for this year, it will not be worse than for the total of the last year, which hopefully was the low point for the percentage margin of the Communications and Social segment. Hopefully, it will increase going forward.
But for that, we will need to -- the investments that we have made into Social to pay off. So on the timing of that, I don't think we can give any more details.
And yes, I think to be more specific on the games margin for 2022, I think right now, we can safely assure that we will achieve the RUB 10 billion in EBITDA in 2022 from Games, which is basically the number behind the number I just gave.
All right. And one moment. It looks like Boris' line is rejoining. We're just waiting for him to actually come back here, one second.
Operator, we can continue for now.
All right. We'll move on to -- our next question will be from Anna Kupriyanova with Gazprombank again.
It will be on [indiscernible] margins. You mentioned that you are seeing potential region breakeven on EBITDA. Can you please tell me more details about that?
Well, generally, you saw an improvement in margin. You saw improvement in EBITDA margin as a percent of burn. We see the trend to continue for the Russian business for e-books and GeekBrains. As we said before, the business is fundamentally unit economic quality. So generally, all of its investments see positive ROI.
The guys invest a lot in the courses and the products. Again, we see most of these investments bring a lot of multiple investment. So we think that -- we don't want to be overly bullish.
But again, first, as you remember, they already were profitable last year, and there are many periods when they were profitable, just is a testament to the profitability of the business model. So this year, they were investing it deep in growth. You see this investment rate quarter-on-quarter. I think they have a good chance of being positive either in Q4 or in Q1 next year.
And next, we'll go to Sebastian Patulea with Jefferies.
I've got a question on Games, please. Given the Games segment has become quite sizable, should we expect a big impact on growth when new mobile games are launched? And could you quantify the potential impact of mobile games you currently have in the pipeline?
Sorry, could you please repeat the second part of the question, quantify the what part of mobile games?
Yes. So the first one -- sorry?
Yes, yes. You mentioned the part regarding the mobile, repeat the part regarding the mobile games, please?
Yes. I was saying that the mobile game segment has become quite sizable. And I'm asking if a single mobile launch would actually have a big impact on growth?
And the second part of the question was, you clearly have a pipeline of mobile games that you're planning to launch. And if in any way you can give us some sort of hint on the size and how this could impact the growth for the segment?
Well, obviously, games are a huge part of our revenue. It's the second -- well, it competes with advertising to become the first single largest revenue component. So of course, new gaming launches, they can have a huge impact on our revenue.
So of course, mobile is a very, very big driver of our gaming revenue. So 75% of our gaming revenue is now mobile. So of course, if we execute well on our gaming strategy next year, that can give a quite significant uptick in not just gaming revenue, but in the group revenue. So it concerns both -- I wouldn't single out mobile or PC title. It can happen with any title.
So we have titles like War Robots, which generate like more than 100, 100, maybe, I don't know. With current ruble to dollar rate, like $130 million, probably. So yes, 1, 2 gaming, successful gaming launches can significantly improve the growth profile.
And again, as your -- for your second question, mobile is a huge proportion of our current revenue, but we are still bullish on all the segments. So what we try to do is we still have kind of a certain proportion of launches on desktop and on console. And we also try to launch as many franchises as possible. So generally, if we have a successful title on one platform, we probably try to port it to another platform as well.
Looks like we have one more question in the queue. We'll take that from Vladimir Bespalov with VTB Capital.
So I have kind of technical. First on CapEx. I see a significant increase in CapEx during the 9 months of this year versus last year. Maybe could you comment what is behind, what should we expect for the full year. And the other also technical is on debt, what is the ceiling for you in terms of leveraging the company because you have got quite a lot.
Where would you stop, I would say.
Yes. Thank you for the questions, Fedor here. I think I can take both. So on CapEx, so basically, we have always guided to kind of a long-term 10% revenue benchmark. But we have always said that actually can fluctuate in any specific year or quarter. So this year, it will probably be higher than that, mostly driven by some content investments and into -- and also by a new data center construction. But longer term, we don't see the current level of CapEx as a percentage of revenue as kind of sustainable. We think that the longer-term target of 10% of revenue still stands.
However, with this [indiscernible] that it can actually fluctuate up or down in any given specific year.
With respect to the debt, we are currently pretty comfortable with the current leverage levels. And we are pretty safe in terms of our debt covenants, our financial covenants with respect to debt-to-EBITDA levels. We would say that we will probably not be comfortable with debt to EBITDA staying at above 2 for a prolonged period of time, even though it can potentially go above 2 for a short period of time. So that, I think, is our longer-term thinking about leverage.
And next, we'll go to Anna Kurbatova with Alfa-Bank.
Yes. Could you give us some more color on your remarks in the press release with regards to the prospects of payments and [indiscernible] JVs. So you reassess the probability, the current structure. So please give us some more color on what's going on with those JVs.
Anna, this is Vladimir Gabrielyan speaking. As we had a launch update in our documents, and now it's passed, so we do not consider the deal as highly probable. But anyway, we are still looking for opportunities on this topic.
Okay. So does it mean so that you break your plans with your partners like Megaphone, Alibaba-led group, hence you will be looking for new partners? Or it's just about changing your potential deal terms with the same partners?
It's closed -- I mean we would not -- we cannot, at this stage, disclose the exact mechanics, but it's inching towards the second deal, second part of the deal. So now we are approaching a technical deadline, so with no conclusion yet. At the same time, we will continue to explore this opportunity with at least most of the current partners of the deal.
Okay. It looks like we have no further questions at this time. So I'd like to turn it back to our speakers for any additional or closing remarks.
Thank you, everyone, for joining us today for this results call. If we didn't cover all of your questions or you have other follow-ups, feel free to contact us at the IR team. Again, thank you very much, and have a great rest of the day. Goodbye.