for the six months ended 30 September 2016
COMMENTARY
Naspers had a strong six months to 30 September 2016. Operating performance, mainly driven by continued performance from the ecommerce
businesses and Tencent, is encouraging. As part of regular portfolio reviews, four notable transactions were concluded by the date of this report.
In Poland the agreed sale of the Allegro business for US$3.25bn realises a solid return on investment. The merger of the ibibo platform
with MakeMyTrip creates a leading business in the Indian travel segment. The acquisition of Citrus Pay drives consolidation in the Indian
online payments space, while the consolidation with Wallapop gives mobile-only classifieds platform, letgo, increased scale in the United States
(US). The video-entertainment segment experienced weak African currencies. However, the team delivered a pleasing return to subscriber growth,
with subscribers closing at 11m.
Currency has again had a significant impact. Unlike the earnings effect of falling currencies on the video-entertainment segment, in ecommerce
this impact is diffused by the group's diverse geographic spread and the fact that costs are mainly incurred in local currencies. Where relevant
in this report, we have adjusted amounts and percentages for the effects of foreign currency moves as well as acquisitions and disposals.
Such adjustments (pro forma financial information) are quoted in brackets after the equivalent metrics reported under International Financial
Reporting Standards (IFRS). A reconciliation of pro forma financial information to the equivalent IFRS metrics is provided in note 15 of this
condensed consolidated interim report.
Tencent and the ecommerce businesses, excluding currency impacts, accelerated our revenue growth. Revenues were US$6.8bn on an economic-
interest basis, growing 16%. Excluding the impact of currency translation, and acquisitions and disposals, growth was 27%. In ecommerce, the
classifieds operations, ibibo, Allegro and eMAG, all improved topline growth and earnings as a result of increased scale. PayU delivered
good results across its portfolio in Eastern Europe, India and Latin America. Core headline earnings, which the board believes to be the best
measure of sustainable operating performance, was US$914m - up 31% on the prior period.
The following financial commentary and segmental reviews were prepared on an economic-interest basis (including consolidated subsidiaries
and a proportionate consolidation of associated companies and joint ventures) unless otherwise stated.
FINANCIAL REVIEW
On a consolidated basis, revenue declined marginally by 1% (up 11%), largely due to the effects of currency translation. Disposals concluded in
the first six months of the year, notably the Czech ecommerce units, Netretail and Heureka, also reduced year-on-year revenue growth.
Consolidated development spend increased 38% (42%) year on year to US$387m as new growth initiatives were pursued. This includes
letgo, predominantly operating in the US, building the hotel offering in the Indian travel business and our subscription video-on-demand
unit, ShowMax, launched in August 2015. Development spend on these new initiatives totalled US$188m. Across the rest of the portfolio,
development spend declined by US$40m, as the ecommerce businesses, particularly classifieds, increased scale and profitability.
Trading profit increased 21% (42%) to US$1.5bn, boosted by the group's share of Tencent's trading profit. Trading profit was further boosted by
a contraction in losses of etail assets and increased profitability in Allegro. A lower opening subscriber base in sub-Saharan Africa, coupled with
the effects of foreign exchange, saw video-entertainment trading profits decline some 43% (14%) to US$226m.
IFRS operating profit declined from a positive US$67m to a negative US$30m, mainly due to currency weakness in the video-entertainment
segment and increased development spend to pursue growth initiatives.
The group's share of equity-accounted results increased 44% year on year to US$912m and includes once-off gains of US$206m and impairment
losses of US$145m. Once-off gains relate primarily to dilutions of Tencent's interest in certain of its associates, and gains arising on disposals of
other investees and impairment losses relate to writedowns by Tencent of certain of its investments. The contribution to core headline earnings
by associates and joint ventures was up 47% to US$1.1bn after adjusting for these non-recurring items.
Net interest expense on borrowings was down 18% to US$74m after the repayment of the group's revolving credit facility. On 30 September 2016
net gearing stood at 13%.
Lower profitability of the sub-Saharan Africa video-entertainment business and higher consolidated development spend were the main causes
of a marginal US$1m consolidated free cash outflow.
The company's external auditor has not reviewed or reported on forecasts included in this condensed consolidated interim report.
SEGMENTAL REVIEW
Internet
Ecommerce businesses and Tencent contributed to strong growth in the internet segment with revenues of US$4.9bn - up 30% (40%) year on
year. After adjusting for the impact of currency translation and acquisitions and disposals, it is 12% better than last year's growth. Trading profits
increased 54% (71%) on the back of Tencent's performance as well as contraction of losses in many of the ecommerce businesses. The internet
segment now contributes 72% of group revenues measured on an economic-interest basis, up from 64% a year ago.
Tencent
Tencent continues to expand its ecosystem with excellent revenue and user growth recorded in the social network, online games, digital
content, advertising as well as payment platforms. Revenues were RMB67.7bn for the period, up 48% year on year.
Tencent's social networks business grew revenues through growth in mobile games and payments, and a solid 24% increase in subscribers to
its digital content subscription services. Online media platform traffic and advertising revenue continue to lift with most traffic, representing
about 80% of revenue, now generated on mobile platforms.
Tencent implemented several strategic initiatives to advance its ecosystem and improve entertainment content for users. Tencent invested in
Supercell, the Finnish-based mobile game studio, thereby expanding its upstream presence in the global game industry. QQ Music was merged
with China Music Corporation to create a more useful online music platform. Tencent also boosted its online video offerings via
investments in content.
During the reporting period, Tencent made good progress in building its mobile ecosystem by growing monthly active Weixin/WeChat users
by 34%. It also improved Weixin/WeChat's enterprise communications products, expanded its cloud services capabilities and simplified its
payment solutions for merchant transactions.
Mail.ru
Despite continued challenges to the Russian economy, Mail.ru revenues grew 11% year on year to RUB18.8bn. Advertising revenue, especially
that of mobile, grew as a result of higher mobile audiences and advertising inventory as well as the implementation of new advertising
technologies. The social network VK grew engagement and audiences, however, online games and internet value-added services revenues
were weaker.
Ecommerce
Volatility of emerging-market currencies reduced performance when translated to US dollars. Ecommerce businesses are growing rapidly,
with revenues increasing 14% (24%) to US$1.4bn. Trading losses declined to US$292m, a 1% (14%) improvement on the prior year. Higher
development spend on new opportunities was offset by growth in established businesses. Within this portfolio, the group now has 23 profitable
businesses - up from 18 a year ago.
Classifieds revenue grew 115% (76%) year on year, driven by strong performances across the portfolio and boosted in particular by Avito.
Excluding the investments in letgo, trading losses (and thus development spend) reduced across the classifieds portfolio as we grew and gained
market share. Solid results were evident, particularly in monetising markets.
Avito performed ahead of expectations and improved its presense in Russian ecommerce.
In May 2016 the US operations of letgo merged with the local component of Wallapop. Shareholders collectively injected US$100m into the
merged business to accelerate growth. Results to date are encouraging and further substantial investment will follow.
Growth in car, and in some markets, real estate verticals, coupled with the launch of mobile apps, combined to strengthen classifieds.
Etail revenues grew 3% (16%), powered by assets in Central and Eastern Europe (CEE), where online penetration is rising. Growth was lower in
etail associates, as third-party sales (where we book a take rate only) continued to grow faster than first-party sales. There was also a reduction
in subsidies and a focus on improving gross margins.
In CEE, the consolidated etail platform eMAG performed well, growing revenues year on year by 33%. Romania is approaching sustained profitability.
Amazon, on the back of heavy investment, closed the gap on Flipkart by taking significant share from Snapdeal in the Indian etail
segment. Flipkart nevertheless maintains its firm lead on the mobile app. Recent strategic initiatives delivered healthy numbers over the peak
Diwali sales period. In the Middle East, Souq continued to gain share in Saudi Arabia and Egypt, while remaining the market leader in the
United Arab Emirates.
Allegro, the marketplace platform in Poland, grew revenue by 30% to US$193m. In October 2016 the group announced the sale of Allegro and
Ceneo for US$3.25bn. The transaction is subject to regulatory approval and is expected to close in 2017.
ibibo, the Indian travel business, had an excellent six months with revenue increasing 68% (75%) to US$67m. This was fuelled by growth in hotel
room nights and a profitable air-travel business. After the reporting period the group entered into a transaction to merge ibibo with MakeMyTrip
Limited. The merger will result in a combined business that provides a one-stop shop for Indian travellers. Through a jointly owned holding
company (91% held by Naspers and 9% by Tencent), the group will have a 40% stake in the merged business as its single largest shareholder.
The group's payments business, PayU, performed well across all operating regions. Revenue grew 22% (29%) year on year to US$83m on the
same cost base. This was achieved through improved operating leverage which, in turn, was driven by transaction volumes and ticket-size
improvements. In India, PayU acquired a controlling interest in Citrus Pay after the reporting period. This will see PayU becoming a leading
payment service provider in India.
We are now identifying new pockets of long-term growth for the group in one entity, Naspers Ventures. Ventures invested in three early-stage
educational technology companies: Udemy, an online marketplace for learning; Codecademy, a leading online interactive coding platform; and
Brainly, a social learning network. Each company focuses on a different section of the education market and has an innovative approach to
increasing the utility and value of education.
Movile, the leading Latin American mobile services platform, continues to grow its offline-to-online businesses. Brazilian online food-delivery
business, iFood, expanded successfully into Mexico, Brazil and Colombia. After growing revenues by some 211% year on year, the business
turned profitable during this reporting period.
Video entertainment
Action taken in response to a weaker macroeconomic backdrop yielded positive results with the direct-to-home (DTH) business recording positive growth,
adding some 591 968 subscribers. This is an improvement on the decline of 164 300 subscribers for the same period in the previous year. The DTT business
also added 149 875 subscribers. The total customer base closed at 11m on 30 September 2016.
The segment reported revenues of US$1.6bn, down 8% (up 6%) on the prior year. Trading profit declined by 43% year on year to US$226m. As the group bills
in local currencies, the continued weakness of currencies and economies in many African countries resulted in lower US dollar revenues. A sizeable portion
of content costs are US dollar-denominated which, coupled with the reduction in revenues and our investment in ShowMax, impacted trading profit.
Constrictions in foreign exchange availability in Nigeria, Angola and Mozambique have resulted in cash balances of US$202m being trapped in these countries.
These balances remain exposed to further currency depreciation.
Development spend was US$40m, down marginally year on year. This was attributable to the decrease in spend as a result of the completion
of the digital terrestrial television (DTT) rollout, offset by new investments to scale ShowMax.
ShowMax is growing steadily in a very competitive environment. It is available on all major platforms and can now be accessed through
connected Explora devices. ShowMax was also launched in a number of sub-Saharan markets.
Our focus remains on providing the best quality local and international content while managing costs, improving customer service and
retaining subscribers in an environment where there is intensifying competition from global players such as Amazon, Netflix, Apple and Google.
DStv Catch Up was made available to Compact customers, as well as a decoder payment plan, which boosted the uptake of our personal video
recorders (PVRs). Connecting the PVR to the internet delivers a better user experience. The 'TV everywhere' product, DStv Now, is showing
good levels of adoption across all platforms.
Management continues to engage regulators and participate in a number of regulatory reviews in various markets.
Media
Revenue in the media segment declined 13% (1%), with trading profit down 25% (31%). Although Media24 continues to face the effects
of structural declines in its traditional print business, revenue performance of its ecommerce initiatives was positive, benefiting from fresh
product offerings.
Prospects
In the second half of the financial year we hope to deliver revenue growth and scale the more established ecommerce businesses. The group
will continue to invest in long-term opportunities such as letgo, and seek further promising models within the internet segment. We expect
to accelerate letgo's development spend to further strengthen its position in the US classifieds market. In African video entertainment, a
tough environment at present, we aim to grow DTH customers by offering increased value and reducing costs to counter the impact of falling
currencies. Earnings and cash flows in this segment will continue to be constrained in the foreseeable future.
Preparation of the condensed consolidated interim report
The preparation of the condensed consolidated interim report was supervised by the financial director, Basil Sgourdos CA(SA). These results
were made public on 25 November 2016.
On behalf of the board
Koos Bekker Bob van Dijk
Chair Chief executive
Cape Town
25 November 2016
