VK stuck between rising debts and growing revenues

VK stuck between rising debts and growing revenues
VK wants to be Russia's new kid on the internet block. Its revenues are growing, but its debt is rising even faster. / bne IntelliNews
By Ben Aris in Berlin March 22, 2024

Russia’s answer to Facebook is on a roll as the online market has been rocked to its core by sanctions. But its debt is growing even faster as the company goes on a wild shopping spree to consolidate its position as the new top internet dog in Russia.

At the end of 2023 VK’s revenue was up by almost 40%, to RUB132.7bn ($1.5bn), Kommersant reports. One of the drivers of growth in the holding is advertising integration into content of its own production.

But VK’s debt burden is growing even faster, climbing by 41.8% to RUB139bn by the end of last year. Analysts note an increase in the debt-to-equity ratio, which “noticeably reduces the level of financial autonomy.”

The break-up of other major players like previous RuNet champion Yandex has created a land grab bonanza as those companies and owners affected sell up or restructure their portfolios to reduce their exposure to being targeted by either the Kremlin or Office of Foreign Assets Control (OFAC).

The company's annual revenue amounted to RUB132.7bn in 2023, according to its IFRS accounts, reports Kommersant, an increase of 36%. The bulk of the revenue, RUB84.6bn, came from the social platforms and media content (which includes VKontakte, Odnoklassniki, Zen and Novosti, as well as streaming services under the VK brand), followed by ecosystem services (mail and cloud Mail.ru, RuStore, VK Play).

VK said revenue from online advertising is the main source of growth for last year, noting that revenue from advertising integrations into its own and partner content increased 2.5-fold. VK told Kommersant that since September 2023, when VK Video launched a separate application, the volume of native advertising amounted to more than RUB1bn.

At the same time, the company's net loss increased 8.7-fold, to RUB34bn ($375mn) in 2023. Adjusted EBITDA for the entire group amounted to RUB0.5bn.

Driving the losses is VK’s rapidly growing spending as it attempts to capture the new market shares that are on offer in numerous niches. The amount of agency fees and expenses on media content in 2023 increased by 69%, to RUB40.6bn. In total, VK spent RUB13.1bn on increasing intangible assets (software development, creation and acquisition of content), of which RUB2.1bn was spent specifically on video content. In 2022, that spending was about RUB7.5bn, and expenses for video content were not specified. VK’s costs for video content are on a par with the production of films and TV series for online services according to experts as it attempts to build up loyalties to its various online video content platforms.

All this active investments has seen the company's debt load soar. VK's net debt excluding leasing increased over the year from RUB85bn to RUB139bn, according to Kirill Panarin, head of the consumer and TMT sectors department at Russian investment bank Renaissance Capital. VK confirmed to Kommersant that the company is “in an active investment phase,” but added the holding is planning to end that in 2024.

“After that the company intends to increase EBITDA and cash flow growth, which will provide additional resources to reduce the debt burden,” VK told Kommersant.

But despite the increase, VK’s debt-to-equity ratio at 1.91 is not excessive, but it remains exposed to a working capital shortfall. “The projected cash flow from operations for 2024 will not cover the shortfall,” VK told Kommersant.