Russia’s leading social media platform VK has been expanding fast, but at a cost

Russia’s leading social media platform VK has been expanding fast, but at a cost
While other Russian social media companies have been selling off assets and coping with sanctions, Russia's biggest platform VK has been on a buying binge. / bne IntelliNews
By bne IntelliNews March 27, 2023

Russia’s leading social media platform VK has taken advantage of the crisis to snap up assets and expand its business in 2022, but at a cost. Faced with some big M&A bills and poorly performing acquisitions, the company has taken a significant financial hit to its balance sheet.

“VKontakte continued to strengthen its leading position among Russian social networks: the average monthly active users in October-December 2022 grew by 9.6% on the year to a record of 79.5mn users. The global average audience of VKontakte in October-December 2022 reached a record high of 101.7mn monthly active users, while the average daily active users in Russia grew by 8.9% compared to October-December 2021, to a record of 51.1mn users,” VK said in a statement.

While other online businesses have been hurt by sanctions like search engine Yandex and online bank Tinkoff. VK has the backing of the Kremlin, which has been using it to increase its control over the internet by proxy.

Formerly owned by Russian tycoon Alisher Usmanov, he sold his stake in December 2021 to state-run insurer Sogaz, which is part-owned by a long-time ally of President Vladimir Putin, banker Yuri Kovalchuk, whom Putin has publicly called a personal friend.

Later Vladimir Kiriyenko became the CEO of VK; he is the son of former Prime Minister Sergei Kiriyenko, who currently serves as the first deputy head of the presidential administration.

VK, originally known as Vkontakte (“In contact” and the Russian analogy to Facebook), was founded in 2006 and has since grown to become one of the most popular social media platforms in Russia and other parts of the world. The platform boasts over 500mn registered users and has been a significant player in the social media space for many years.

After going on an acquisition binge as other internet companies were forced to dump assets or break their businesses up thanks to sanctions, the company's financial performance took a hit.

VK’s revenue grew by 19% in 2022 to RUB97.8bn ($1.3bn) thanks to a 29% rise of online advertising sales to RUB56.9bn. The adjusted EBITDA gained 8.9% to RUB20bn with an EBITDA margin of 20.4%, according to the company’s financial statement.

VK’s personnel costs widened to RUB38.8bn in 2022 from RUB27.9bn a year earlier, and its total operating expenses grew to RUB83bn from RUB65.7bn.

BCS analysts expect VK’s revenue to expand by an 8% compound annual growth rate (CAGR) in 2023–2026 to RUB133bn in 2026, including RUB81bn from online advertising with a 9% CAGR; RUB12bn from EdTech with a 2% CAGR; and RUB20bn from internet value-added services with a 5% CAGR, Prime reports.

VK’s operating costs will grow in 2023-2026 with a 7% CAGR to RUB107bn in 2026 with an average EBITDA margin of 21.9% and adjusted EBITDA of RUB32bn in 2026 with a 12% CAGR in 2023-2026, according to BCS analysts.

“The key economic risk, from our point of view, is return on investment on the new initiatives. For an economically tangible scale and the provision of high-quality services, large resources may be required, which can negatively affect margins in the short and medium term,” BCS’ Konstantin Belov said in a note.

VK sold some non-core assets in 2022 such as the services of ride sharing and food delivery and through signing of several large deals, including an asset swap with Yandex, strengthened its footing in the segment of media and content, focusing on business in this industry. Among its deals VK bought news services Dzen and News from Yandex, which it took in exchange for the food delivery service Delivery Club.

With over 500mn registered users, the platform has a significant audience that it can leverage for growth. Additionally, VK has been expanding its services beyond social media and has ventured into areas such as e-commerce and gaming.

Another growth point for VK is its focus on user engagement. The platform has a range of features designed to keep users engaged and active on the site, such as groups, communities, and messaging. VK has also been investing in AI and machine learning technologies to improve user engagement and provide a more personalised experience.

Furthermore, VK is well-positioned to benefit from the increasing popularity of social media platforms in emerging markets. With a significant presence in Russia and other parts of Eastern Europe, VK is well placed to capture the growing demand for social media in these regions.