Strictly private & confidential
Tvigle: Unique opportunity to capitalize on explosive growth in Russia’s emerging online video market through industry leader
Investor Presentation
May 10, 2013 Contents
Section 1 Unique Russian online video market opportunity 5
Section 2 Multidimensional business on the cutting edge of modern video 10 technology and media
Section 3 Growth targets and high operating efficiency 17
Section 4 Key conclusions for investors 22
APPENDIX
A Company details
2 Executive summary
Opportunity to enter emerging online in-stream advertising segment through investment in leading Russian online video portal
• Tvigle, the pioneer and leader in online video in Russia, is seeking an equity investment to help fund its exceptional growth potential • The CEO and founder has scaled the business, established a top-tier management team and developed a strategy to create a highly profitable leader in a rapidly developing market • Tvigle’s unique strategy has allowed the Company to grow its viewer base to more than 10 million Unique Monthly Viewers (“UVM”) and generate advertising revenue of $10 million gross* (2012) to significantly outperform Tvigle’s peers in terms of return on invested capital • The platform has significant operational leverage as online video emerges as a mass medium in Russia; – Russia’s internet audience has become the largest in Europe (55 mln. users) and is starting to actively watch content online – Each acquired Tvigle viewer will view content longer over time, driving revenue growth as the site’s user base expands – Russia’s viewer audience is converting from utilizing pirated content as legal avenues provide a much better user experience and government agencies and content providers intensify enforcement – As Tvigle grows its advertising revenue, it will gain additional leverage over advertising intermediaries and achieve a higher “percentage” of advertising spend (CPM) • Since 2011, online advertising revenue has grown 40%, demonstrating that advertisers are starting to shift a greater share of their “brand” budgets to online sources. Management expects the in-stream video advertising market to grow 100% and reach approx. $200 million in 2014. By merely maintaining its current market share in this growing environment, Tvigle will grow revenue to $40 million by 2014 and $190 million by 2017. • Tvigle has a unique video distribution model based on syndication of content through partner sites and related advertising revenue sharing arrangements. The Company has built relationships with more than 7,000 partner sites, creating a broad audience reach. • Tvigle has developed a “smart” content strategy focused on understanding users’ preferences and customizing video content to specific audience segments (i.e. women, teenagers). This allows the Company to monetize efficiently the content and differentiate from its competitors that spend significant dollars on expensive and rapidly aging video catalogues. • The Company is seeking a $20 million investment to further enhance its leadership position and execute on its identified growth strategy
* Hereinafter “Gross revenue’” or revenue “in client money” refers to Revenue before media agency commission (CPM-based) and “Net revenue” – to revenue net of media agency commission (Net CPM-based)
3 Summary Tvigle investment case
Key drivers of Tvigle’s success
Explosive online video market growth Proven market leadership and technological advancement Online video advertising is the fastest growing segment of the rapidly With proven leadership in both audience and monetization, Tvigle is expanding online advertising market in Russia with high unreleased uniquely positioned to capitalize on the market’s explosive growth monetization potential Unique content Partnership Industry 300 100 strategy network leading team 82 250 66 80 20.00 In-stream Tvigle 200 15.00 viewers 53 60 advertising, 150 42 USD mln. 10.00 34 270 Total viewers 27 40 Online video 5.00 (incl. 100 180
audience, mln. mln.UMV partners) 20 - 50 100 IVI (TNS)*
10 20 45 audience, Monthly 0 0 Jul-11 Jul-12 Jan-11 Jan-12 Mar-11 Mar-12 Sep-11 Nov-11 Sep-12 Nov-12
2010 2011 2012 2013 2014 2015 May-11 May-12
Comprehensive strategy of transition to an online model Efficient operating model and proven investment case
Tvigle is a unique multidimensional platform combining several synergetic Tvigle’s tremendous 2012 growth proves the sustainability of its model. models on the cutting edge of online video technology and media and goes Continued growth, coupled with an efficient operating structure, will drive far beyond online video on demand financial scalability.
140.0 43% 46% 48% 60% Syndication 38% 120.0 36% 31% of content 28% 26% 40% High 100.0 17% operating Tvigle.ru Access to 80.0 20% leverage cheap traffic -5% 60.0 116.6 0% Connected -24% Tvigle platform Partner sites 40.0 -28% 77.0 devices -20% 20.0 4.6 9.9 21.0 42.0 0.0 -40% Video Opportunity 2012B 2013F 2014F 2015F 2016F 2017F to cross-sell publishing Net revenue, mln. USD Gross profit margin EBITDA margin
4 Section 1
Unique Russian online video market opportunity Russian online video: initial steps to a booming market
Growth of online video audience in Russia, 2010-2015 Key drivers of Russian online video market growth
88% • 90 90% With the largest internet audience in Europe (55 mln. users in 2011) CAGR: 25% 80 80% 85% actively seeking new online experiences, Russia is one of the fastest 70 Online video 74% 80% growing online video markets in the world 60 audience, 75% mln. 50 68% • Although television remains the key medium for professional 70% 40 63% 82 Share of total content, Russians are switching to online properties for time 65% 30 60% 66 Russian 53 flexibility and search convenience 20 42 60% internet 34 audience, % 10 27 55% • Tvigle focuses on AVOD (video free for viewer containing ads) 0 50% business model due to 2010 2011 2012 2013 2014 2015 – High quality and competition from Russian free-to-air television Source: POF, J’Son & Partners, ComScore Video Metrix – Consumers unwillingness to pay for content “Lessons” from the booming US online video market • As US market proved, users’ conversion to online video is a TV audience is starting Video viewership growth fundamental trend with a lot of unreleased monetization potential: outpaces ad spend to convert online – Growth of video online audience and engagement substantially -0.6% $6,000 600 outpaces the growth of ad spend even on mature markets 2010 $5,000 500 44.6 44.3 50.0 $4,000 400 – The next wave of TV viewers shifting online will drive even more 40.0 2011 $3,000 300 explosive market growth 30.0 $2,000 200 20.0 +73% $1,000 100 • Russia has a very sophisticated internet audience that rapidly 10.0 1.3 2.3 $- 0 0.0 2006 2008 2010 adopts new technologies and media consumption hours watched hours watched Ad spend online per year, $mln. on TV online Videos watched per year, bln.
Source: ComScore Video Metrix
Russia is a fast growing internet audience, with 55 mln. users rapidly converting to online video As other mature markets have shown, users’ shift to watching video online is a fundamental trend with a lot of unreleased monetization potential
Section 1: Unique Russian online video market opportunity 6 In-stream: fastest growing online advertising segment with 2x annual growth rate
In-stream advertising market vs. online advertising growth Opportunity to benefit from arising in-stream advertising market
4,500 4,250 300 • In-stream advertising is expanding to follow the rapid growth in 4,000 3,500 250 3,500 270 online video viewership 3,000 2,700 200 • Total The market started developing actively in 2010 and is already the 2,500 1,950 180 150 Online fastest growing segment of online advertising with a 100% annual 2,000 advertsing 1,420 growth rate 1,500 100 In-stream advertising 1,000 100 • The major contributors to this growth are: 50 500 45 – Growing internet penetration (15% CAGR) and users’ - 0 20 2011 2012 2013 2014 2015 engagement is leading to an increase in online advertising spend
Source: UBS, J’Son & Partners, Management estimation – Advertisers’ switch from traditional media (print and TV) to online, which ensures nationwide reach but remains significantly cheaper Russian advertising market split by media, 2010 - 2015 – Formation of online video portal as a new medium for Outdoor Other 7.5 bln. 10% 2% professional content broadcasting, making it more attractive for Outdoor Other Radio USD 13% 3% 5% advertisers as compared to other online properties Radio – Gradual conversion from static formats of online advertising to in- 5% TV stream, enabling higher growth as compared to both display and TV Internet Internet 51% 55% 11% 22% context advertising segments Print • Management expects in-stream ad revenue in Russia to grow by 13% Print 10% 100% annually and reach $200 mln*. by 2014, up from $45 mln. in 2010: $7 bln. 2015: $15 bln. 2012
Source: ZenithOptimedia, Video International : * In client money :
Following the growth of online video viewership, the emerging in-stream advertising market has become the fastest developing segment of online advertising. Driven by advertisers’ conversion from traditional media and static online formats, the market is expected to grow by 100% annually to reach $200 mln. in 2014
Section 1: Unique Russian online video market opportunity 7 Proven platform to capitalize on the market growth
Tvigle and partners’ audience, UMV mln. Proven market leadership
18.00 • Tvigle pioneered professional online video broadcasting in Russia in 16.00 Tvigle 2007. Since then, it has remained the leader in both monthly reach 14.00 viewers and advertising revenue, substantially outperforming its competitors. 12.00 10.00 Total viewers • To grow its viewer audience, Tvigle has adopted a unique (incl. 8.00 partners) partnership/syndication model that allows it to broadcast its content 6.00 from multiple online sources 4.00 IVI (TNS)* 2.00 • This syndication model is difficult to replicate, creates additional - barriers to entry for the competitors and allows for further audience Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 expansion without need for costly traffic acquisition Source: Google Analytics • * TNS statistics is not consistent due to the change in methodology in Mar’12 Tvigle is recognized as a premium ad space provider, which is due in part to its focus on 25-35 y.o. women – the most attractive Audience growth drives monetization development segment for advertisers. This enables the Company to maintain on 2x growth average 40% higher advertising prices as compared to its peers. 15 15 2.5x growth Monthly average 11.26 • UMV (Tvigle and 10.1 The success of the Company’s business model and strategy is 10 10 Partners) evident in the tremendous growth Tvigle experienced in 2012, in 4.59 4.59 4.49 3.75 which audience increased 2x and revenue grew 2.5x from 2011 5 2.59 5 1.75 • Tvigle has a market share of 20-25%. Based on the industry's 0 0 growth rates and conservatively assuming the Company merely 2011 2012 2011 2012 Tvigle audience mln. Net revenue, mln. USD maintains its current share, management is forecasting Tvigle will Total audience mln. Gross revenue, mln. USD reach over $40 million in gross revenue by 2014 Source: Google Analytics, Management accounts * Hereinafter rolls refer to short advertising commercials demonstrated before, during or after the video stream
As the market leader in in-stream advertising with a rapidly increasing internet audience, Tvigle is uniquely positioned to capitalize on the pending growth in the market and capture the benefit from its high monetization potential
Section 1: Unique Russian online video market opportunity 8 Piracy: previous market challenge is now a growth opportunities
Different angles to online video market growth in Russia Opportunity for explosive market growth
• 20% Current market Piracy is currently one of the key market challenges in online video Market monetization 2015 optimistic, development space to both internet properties and content providers as only 5% in bubble size directions 15% (client money, 750 of content is downloaded from legal sources in Russia mln. USD) • Tvigle effectively addresses this problem through focusing on the 10% 2015 Basis for conservative, Management free for user AVOD distribution model and adjusting its content Less Less predictable 2012 250 assumptions 5% strategy towards premier and most relevant video for its users • Simultaneous, there is strong evidences that piracy will decline Sharelegal of content Highly predictable 0% significantly in the next 2-3 years: 0 20 40 60 80 100 Online video viewers, mln. – Government policies and content holders are increasingly Source: Industry reviews. ComScore, Management assumptions focused on reducing illegal content online (particularly due to Russia joining WTO in 2012)* Key market growth drivers for legal content providers – Russian viewers are steadily adopting the idea of Growth in micropayments for high quality content and a better user Highly online video predictable experience audience • Management’s current growth projections conservatively assume Key Share of legal legal content remains only 5% of the market growth Uncertain content + drivers • As demonstrated in the top left chart, the anticipated shifts in this
Monetization markets:New dynamic provide significant upside to the forecast (advertising Predictable connecteddevices budgets)
* The examples of some government efforts to outtake to offset piracy issues in Russia are provided in Appendix, see p. 33
Management’s current growth projections are based on the very conservative assumption that legal content remains at a mere 5% of the total online video market. However, recent advancements in enforcement by the government and content providers dictate that legal content providers to expand the market even more than is currently expected.
Section 1: Unique Russian online video market opportunity 9 Section 2
Multidimensional business on the cutting edge of modern video technology and media Multidimensional business on the edge of video technology and media
Main pillars of Tvigle business
Tvigle.ru Content Syndication strategy • Main portal site focused on and based on broadcasting high-quality customization Access to cheap deep viewer content for online viewers of content traffic for Tvigle and knowledge with advertising rolls uncapped audience growth Revenue 2012: 2.4 m Connected devices Revenue 2015: 17.9 m Partner sites
• New fast growing segment of • Content syndication platform mobile devices and digital TV Tvigle platform that allows Tvigle to • Opportunity to monetize paid broadcast its contents in models (SVOD/TVOD) users’ habitual environments
Revenue 2012: - Revenue 2012: 1.8 m Revenue 2015: 1.2 m Video publishing Revenue 2015: 20.4 m
• Industry Unique cloud service for mid- sized TV channels and other leading team video intensive media Opportunity to cross-sell with unique video publishing among expertise partners and convert video Revenue 2012: 0.4 m publishing clients into Revenue 2015: 2.0 m partners
Tvigle uniquely combined technology and media expertise to develop a differentiated online video paradigm across a number of market applications
Section 2: Multidimensional business on the cutting edge of modern video technology and media 11 Outstanding content based on in-depth understanding of the market
State of Russian online video space in Russia and its implication in Tvigle’s content strategy
Current state of Russian market – Tvigle content strategy: Implications for online VoD players “Digital communism” Relevant content bundling • Any type of online video content is • Strong consumption pattern: “only the • The key principles of Tvigle content currently available newest, only the best” strategy are: ‒ Immediately (fresh, high-profile • Low profitability of pay model due to ‒ Audience segmentation US/UK product is typically available limited amount of viewers ready to pay (channelization) in less than a week) for the content ‒ Limited catalogue (“we do not have ‒ In high quality • Limited to no efficiency of catalogue everything, but all that we have you ‒ Through multiple sources (Torrents, model due to viewers preference of fresh will like”) numerous free VOD sites, VK) content over old catalogue video* ‒ Product bundling per collections (core ‒ FREE OF CHARGE • No exclusive contracts: any type of content, selected premier product, • The content landscape is very content is available through multiple complimentary long tail*) fragmented and content providers are sources regardless of exclusivity terms • Tvigle bundles contents that is relevant not willing to provide exclusive rights to with content providers for viewers rather than investing Hollywood majors or Russian distributors resources in a massive catalogue which significantly drives ROI Split of content UK, 5% Business model implication on RoI Representative content providers providers by origin US/UK Syndication majors Russia, 45% USA, Independent 40% European studios Growing in Catalogue popularity among Popular TV audience Europe, Pay models AVoD Russian 10% content
* By long tail / catalogue video – is a common term used for the content which is watched long after release. It has been proven that only a small portion of that content (“classics”) is competitive in terms of popularity with short tail premier content
Based on a deep understanding of the current online video market and viewers’ consumption pattern, Tvigle has developed a unique content strategy focused on bundling the contents that is the most relevant for viewers
Section 2: Multidimensional business on the cutting edge of modern video technology and media 12 Unique syndication (partnership) model
Partners monthly audience and net revenue, 2012-2017 Partnership network model
50 More than 7,000 27.5 30 25.9 • registered 23.0 Tvigle has a unique model of video distribution though partner sites 40 partners 25 18.7 #, mln • It broadcasts video (provided by Tvigle and its partners) though USD, mln USD, 20 30 14.7 partner sites and shares the revenue from advertising rolls 11.2 46.7 15 20 – 75% of Net CPM on the content provided by Tvigle 34.1 10 – 50% of Net CPM on the partners’ content 10 20.4 5 1.8 5.2 10.8 - 0 • Tvigle has more than 7,000 registered partners (e.g. social 2012 2013 2014 2015 2016 2017 networks, specialized online video portals and large media
Advertising revenue from partner sites (USD, mln) Partners audience, UMVs mln. publishers), of which about 250 are the most active traffic providers • Source: Management accounts This syndication model allows Tvigle to reach viewers in their digital environment, providing access to incremental traffic generation Partnership network overview • With the continued expansion of its contents library and increasing • Tvigle partnership network includes various content-intensive negotiating power, Tvigle will further increase its share of contents site, including social networks, online cinema theaters and on the partners’ sites, further driving its share of advertising revenue entertainment media publishers and average CPM rates Examples of Tvigle partner sites • Tvigle’s partnership model is unique in the space and provides a key competitive advantage over the Company’s competitors, which rely exclusively on their own branded portal
Source: Company Information
Tvigle’s difficult to replicate Partnership network enables the Company to target a segmented audience and generate “cheap” traffic
Section 2: Multidimensional business on the cutting edge of modern video technology and media 13 New market opportunity: broadcasting though connected devices
Growth in connected device audience and net revenue stream New market opportunity for broadcasting Tvigle’s content
12,000 3,988 4,500 • Following tremendous growth of mobile internet penetration in 4,000 10,000 Russia (over 2x annual growth rate) Tvigle is developing its platform 3,500 for mobile devices (smartphones and tablets) 8,000 2,525 3,000 2,500 – Tvigle apps are available for free download in all major mobile 6,000 10,705 2,000 application stores k. USD k. 1,387 k UMV, 4,000 1,500 657 1,000 2,000 276 4,511 500 • Management views the development of digital television in Russia 278 1,173 - 53 - as an important business opportunity: 2013 2014 2015 2016 2017 Revenue, k. USD UMV,k – Tvigle has signed contracts with all major digital TV sets and set- top box producers for pre-installment of the Tvigle application Source: Management accounts: and revenue sharing from broadcasted content and advertising Smartphone and tablet sales dynamics in Russia – The partnership model will be implemented and begin generating
16 Mobile internet growth: 15 2 revenue in 2013 14 115% CAGR in 2008- 11.8 – Digital TV has inherently lower levels of piracy, allowing for more 12 2011 1.5 opportunities with SVOD/TVOD Smartphones, 10 mln. 8.6 1.23 8 1 1.02 Tablet PCs, Tvigle connected devices partners 6 3.9 mln. 0.74 4 0.5 1.9 2 0.4 0 0.005 0 2009 2010 2011 2012 Е 2013 Е : Source: MTS, J’Son & Partners
Tvigle is actively developing its platform for connected devices (e.g. smartphones, tablets, TV sets, set-top boxes) and will begin generating related revenue in 2013 Connected devices naturally have lower levels of piracy, allowing for greater SVOD/TVOD monetization
Section 2: Multidimensional business on the cutting edge of modern video technology and media 14 Highly synergistic, complementary business unit: video publishing
Revenue projection from video publishing services B2B Cloud services – Video Publishing
4,000 3,734 3,500 • Tvigle provides B2B video publishing service that enables clients 2,833 3,000 (digital media) to use their platform and infrastructure to maintain 2,500 1,995 video content on their sites 2,000 $ thds $ 1,500 1,206 • The implementation of the video platform can be costly for the 1,000 468 clients to do on their own but doesn’t require significant resources 500 for Tvigle - 2013 2014 2015 2016 2017 • Tvigle charges a fixed price for maintaining the video platform that is driven by the amount of content on the clients’ sites Tvigle Video publishing clients
Examples of Tvigle VP clients • Management believes that this market has significant growth potential as a lot of digital media and other content-intensive sites are looking to optimize their video platform costs • This also allows Tvigle to cooperate with video publisher clients to High growing Opportunity cross-sell its advertising rolls and convert video publisher clients market niche to cross-sell into partners
Mid size TV cannels Tvigle partner sites • Currently, Tvigle is the only provider of these services in Russia (looking for online (sharing advertising platform) revenue)
Source: Management accounts Source: Management accounts
Tvigle is actively developing new business units that have high revenue growth potential but don’t require significant investment
Section 2: Multidimensional business on the cutting edge of modern video technology and media 15 Experienced team with unique digital and media expertise
Market-leading Management team with unique industry expertise and entrepreneurial culture
Egor Yakovlev, Founder and CEO Anastasia Byalobzhetzkaya, Content Manager • Founded Tvigle Media in 2007 • Joined Tvigle in March 2012 • Responsible for overall strategy and business • 12 years experience as a content manager at development CTC-Media, one of Russia’s major TV holdings • Previously Sales and Marketing director at Amedia, • Member of Russian Television academy, on of top 5 Russian TV and Media production Company the top specialist in TV planning in Russia • General Director at software developer Computerra • Degree (with honors) from Moscow Linguistic with expertise in IT/Computer print & online publishing University sector
Evgenia Gavrilova, CFO Andrei Bashalov, VP Development • Joined Tvigle in 2011 • Joined Tvigle in 2012, currently provide strategic advice on commercial development • Deputy CFO and Financial Controller at Continental Finance Group (telecom & communications sector) • General Director at Maxima Communications Group (advertising & communications sector) • Senior Audit at Deloitte CIS • CCO at Channel One Russia, CIS Sales • Bachelor from MGIMO, masters from ICN Ecole de Director at Walt Disney Company Management (France), ACA • Advanced masters from Strathclyde University (Glasgow, Scotland)
In 2012 Egor positioned the Company for the next level of growth by forming an experienced management team that combines TV and IT expertise
Section 2: Multidimensional business on the cutting edge of modern video technology and media 16 Section 3
Growth targets and high operating efficiency Key revenue growth drivers
Overall net revenue growth projection 2012-2015 Management’s expectations for key revenue drivers
45.00 75.28 • Management expects that net revenue (after media agency 40.00 CAGR 95% commission) will increase by approximately 100% annually to reach 35.00 Gross revenue /CPM before media $41mln. by 2015 ($75 mln. in gross revenue) 30.00 20.40 agency • 25.00 40.86 commission/ The extensive growth will be fueled by several major drivers: 20.00 Other formats / services – Audience growth. The # UMV will increase to 32 mln. vs. current 15.00 21.75 10.84 Partner sites 10 mln. (incl. 20 mln. from partners and 700k from connected 10.00 10.1 17.90 5.16 Connected devices devices) 5.00 8.39 1.78 4.11 Video advertisement - 2.43 – Higher user engagement. Viewers on both Tvigle and partner 2012 2013 2014 2015 sites will watch more streams and spend more time watching.
Source: management accounts Besides the proportion of LV * enabling for mid rolls will increase from 12% to 18% on Tvigle and from 0 to 10% on partner sites Net revenue bridge 2012 - 2015 – Growth in rolls sales-out/utilization ratio. The increase in demand 45.0 2.9 40.9 Net effect of key revenue 3.9 of in-stream advertising will drive Tvigle sales-out ratio and 40.0 9.1 35.0 drivers, $mln. increase utilization of rolls from 35% to 50% on Tvigle’s and from 30.0 9.4 25% to 50% on partners’ sites 25.0 – Decrease in media agency commission. Currently, effective CPM 20.0 11.0 Decrease in media 15.0 agency commission rate amounts to only 40% of total client money. With the growth 10.0 4.6 from 60% to 50% and maturation of in-stream advertising market, media agency 5.0 commissions will decrease from 60% to 50% - Net revenue, Audience Higher users Higher Decrease New revenue Net revenue, – New business units. Connected devices, B2B services and 2012 growth engagement utilization agency streams 2015 rates commission SVOD will provide an additional $3mln. of revenue) Source: Management accounts * LV refers to long video (typically more than 20 mins length) which unlike short video (SV) can contain mid rolls – advertising rolls appearing during the video stream Management forecasted turnover will grow by 100% annually to reach $75mln. gross ($41 mln. net) revenue in 2015 These expectations are based on conservative growth in audience and user engagement as well as reasonable assumptions in changes in the market environment (increase in rolls utilization and decrease in agency commissions)
Section 3: Growth targets and high operating efficiency 18 Scale will drive growth in profitability
Gross profit , operating cash flow and net profit, $mln. Scalability of the business
60.00 55.7 • • Positive growth profit Tvigle’s business model is based on high operating leverage which 50.00 • Tvigle will achieve operating ensures economies of scale as the audience grows (indirect 40.00 breakeven in 2015 35.3 36.5 expenses are minimal as compared to revenue growth) Gross profit 30.00 23.7 • As Tvigle achieves advertising volume, its bargaining power with 20.2 18.2 EBITDA 20.00 13.7 media and selling agencies will improve and its share of advertising 7.5 Net profit 10.00 7.0 CPM increases, which will significantly improve its gross margin 1.7 2.8 2.1 - • Tvigle is particularly efficient in managing content acquisition costs -1.1 -1.1 -2.5 -2.7 (10.00) -5.0 -4.9 (the major part of fixed costs structure), which are significantly less 2012 2013 2014 2015 2016 2017 than those of its peers Source: management accounts • Tvigle is close to achieving operating breakeven and expects Margin analysis positive EBITDA in 2015. It already has a positive gross profit and is currently investing all of its operating cash flow in marketing and 80.0% Investment in personnel to maintain its growth. 60.0% traffic Economy • 40.0% of scale Management expects EBITDA margin to reach 26% by 2016, which will be primarily driven: 20.0% 0.0% – Gradual increase in margin through relatively cheaper traffic 2012 2013 2014 2015 2016 2017 acquisition and decrease in intermediaries’ commissions -20.0% -40.0% Gross margin – Significant economies of scale in marketing and G&A expenses EBITDA margin -60.0% • Tvigle’s operating efficiencies provide for an optimal usage of Net profit margin -80.0% Net revenue as % of gross revenue invested capital and balanced growth driven primarily by a proven business model and deep understanding of main industry trends
Source: Management accounts
High financial scalability and growth of the business ensures a positive cash flow profile by 2015
Section 3: Growth targets and high operating efficiency 19 High operating efficiency addressing fast growth of the Company
Key operating expenses Operating efficiency sourcing aggressive business growth
Operations expansion: Normalized expenses: • Tvigle has a very efficient operating model oriented on fast investment into growth more mature phase development of the business and high profitability in the future: – Currently, Tvigle spends 23% of its net revenue on traffic 60% 140% 128% acquisition and marketing (investment in audience growth) 124% – Management estimates that ongoing marketing spend to 120% 50% Operating 49% 105% maintain market share will be 6-10% of revenue once the break-even 45% Company reaches a more mature phase 100% 40% 83% – Approximately ½ of the Company’s current personnel expense is 36% 74% 80% dedicated to business development (building new platforms, 69% 30% software, products & functionality) 60% 24% • On a normalized basis, Tvigle is already a profitable Company, but 19% 20% 17% is investing its operating cash flow to catch up with the market’s 15% 15% 16% 13% 17% 40% explosive growth and maintain market leadership 14% 10% 10% 10% • 9% 20% Management targets 23-30% EBITDA margin*. The market will still 6% 6% 6% be in a growth stage in 2016 and management therefore expects to 4% 2% 2% 2% 0% 0% continue investing in the Company’s growth 2012 2013 2014 2015 2016 2017 • This efficient operating model and high profitability potential of the Online advertising (traffic acquisition) as % of net revenue Content expenses (royalties) as % of net revenue business distinguishes Tvigle among its peers in the online video Marketing expenses as % of net revenue market G&A (incl. personnel) expenses as % of revenue Total operating expenses as % of revenue
Source: Management accounts * More details on how the projections of key operating expenses affect the EBITDA margin and investment requirements are provided in the Appendix, p.32 On the normalized basis, Tvigle is already a profitable Company but invests its operating cash flow to grow its leadership in the explosively growing market and to develop new technologies Management expects 23-30% EBITDA margins when the Company reaches scale
Section 3: Growth targets and high operating efficiency 20 Investments requirement to achieve $75 mln. turnover
Major investment needs in 2013-2015* Description of major investment needs*
• Tvigle requires $20 mln. investment to achieve its growth targets: Total investment needs ≈≈≈ 13% Investment in content • The invested amount will be primarily used to: $20 mln. – Fund CapEx (acquisition of content rights, fixed assets and Investment in fixed 15% assets and soft software) - $12 mln. over 3 years 52% Personnel expenses – Marketing and personnel expenses in 2013/2014 (45% of cash deficiency cover will be used for marketing and 55% for personnel expenses ) – $5-7 mln. 20% Online advertising & marketing – In 2015, part of the operating cash flow will be used to invest in content (75%) and fixed & software assets (25%)
Source: Management accounts Note: Please, see more information in Appendix * More detailed description is provided in the Appendix, p.29
Traffic generation model Content acquisition costs
Direct (free): Fixed fee for 1-2 year 7% Tvigle.ru period Search engines and Royalty: % of Net CPM Traffic 38% Content referral (quasi-free) less selling agency (Tvigle rights commission audience) Combined scheme: Fixed Indirect (paid): 55% license fee + royalty Campaigns (recoupment provision)
Source: Operations, September’ 2012
Tvigle requires a $20 million investment to increase the Company’s turnover (gross profit) from $10 to $75 million and make the Company cash flow positive
Section 3: Growth targets and high operating efficiency 21 Section 4
Key conclusions for investors Conclusions: Key investment highlights
Russia has Europe’s largest internet audience (55 mln. users) that is rapidly converting into online Opportunity to video viewers (currently 70% of Russian internet users are watching video online) capture explosive In-stream advertising that emerged in the past 1-2 years is becoming the fastest growing online ad market growth market segment with 2x annual growth
Tvigle is a unique online video platform that integrates 4 high-synergy business units: professional video portal, partner sites network, connected devices and cloud video publishing service Market leadership Tvigle has the leading position in Russian market both in terms of audience (over 10 mln. UMV incl. partner sites) and monetization (budget 2012 revenue of $10 mln.) Its 20-25% market share makes uniquely positions Tvigle to capitalize on the market’s growth
Unique syndication Tvigle is the only online video portal which has an extensive partnership network, including over 7,000 model registered sites that enable the Company to broadcast its content in each viewer’s online environment
Russian online TV is much less dependent on US/UK film and TV majors and local content providers Content strategy due to diverse audience tastes and significantly lower licensing fees and know-how Based on industry know-how, Tvigle has established an outstanding content strategy using a content customization approach that ensures efficient use of available content and higher audience reach
Tvigle’s business model is based on high operating leverage, which ensures strong economies of scale High operating with the growth in audience leverage and efficiency The Company is close to operating break-even (forecasted in 2015), with expected 26% EBITDA margins in 2016
Tvigle has a top-tier management team consisting of professionals with a unique combination of media Strong management & digital experience team Transparent corporate structure includes board memberships from private equity shareholders and a large Russian media group
Section 4: Key conclusions for investors 23 Key risk-mitigation strategies
Key investor concerns about the market and Tvigle mitigation strategies to approach them
Typical perception Actual risk level Mitigation strategies
High level of internet piracy in Russia raises Focus on AVOD business model questions about sustainability of business High Joint government and market players efforts to decrease model based on users’ unwillingness to pay (but an availability of non-licensed content Piracy for any type of online content opportunity) Current Tvigle forecast is based on conservative view of the market and the Company can grow even faster as levels of piracy go down
Western experience shows that access Russian content market is very fragmented with much affiliation with major content providers is less dependency on US/UK content majors Content critical to reach operating profitability Medium to The content prices growth for online properties is capped providers price Low as they already reached a level close to TV-channels pressure Tvigle provides a balanced mix which includes high- quality premier content, rare independent providers’ and popular Russian video
Potential threat of Russian TV majors with Currently Russian TV channels are far behind Tvigle in Competition extensive content budgets to capture online Medium to the development of online paradigm. Given the state TV market ownership in these companies, they will be quite slow to with TV majors Low implement any new strategy Content differentiation and catch-up model
Online TV market requires significant initial Tvigle created a clear differentiation strategy allowing for investments in contents and traffic which higher monetization and efficiency “The winner may result in one leading (best-funded) ‒ Syndication of content through partner sites Low takes it all” player capturing the whole market providing access to cheap traffic acquisition ‒ Customized content channels vs. expensive and rapidly aging catalogues
Introduction of new access platforms for Tvigle is actively developing a connected device online content can disturb online TV market business stream and already agreed on cooperation with New devices and provide access to new players Low major digital TV players Connected devices may allow for SVOD/TVOD business model application due to naturally lower level of piracy
Section 4: Key conclusions for investors 24 Proven investment case for potential investors
Public peers multiples for relevant market sub-segments Attractive exit opportunities for potential investors
Industry median EV/Sales EV/EBITDA • With proven market leadership and a highly efficient operating model, Tvigle is uniquely positioned to capitalize on the market’s Online video on demand 5.65 x 14.70 x explosive growth Russian Internet companies 8.85 x 19.95 x • The Company has significant room for capitalization growth and is Internet portals 4.50 x 11.40 x expected to become cash-positive by 2015, providing high IRR and Internet value-added services 4.25 x 20.30 x attractive exit opportunities for potential investors Online media 6.00 x nm • In 5 years, Tvigle will reach scale and have a convincing pre-IPO Median 5.65 x 17. 35 story and/or will become an attractive acquisition target for a strategic investors such as: Source: Capital IQ – Large media groups (incl. TV holdings) looking for leadership in a EBITDA growth projections, mln. USD new large online video market – Technology companies (particularly, telecom) for which Tvigle 70.0 63.1 Conservative 20% could serve as a platform and be a high-synergetic asset 60.0 growth expectations 52.5 – International consolidators of VOD / online TV markets looking 50.0 43.8 for entry into Russia, which boasts by far the largest internet 36.5 40.0 audience in Europe 30.0 20.2 – Internet majors searching for new monetization opportunities 20.0 7.0 • Capitalization will be triggered mainly by online video market 10.0 development, profitability growth and the success of new 0.0 2015F 2016F 2017F 2018E 2019E 2020E technologies / business models introduced by Tvigle
Source: Management accounts
With proven leadership in an explosively growing market, as well as an efficient operating model, Tvigle is well-positioned to provide a high IRR with attractive exit opportunities for potential investors
Section 4: Key conclusions for investors 25 Appendix A
Company details Institutional investors
Shareholder's structure Investor support and expertise
Media 3 Media Group / Strategic partner Private Pavel individuals* • One of the leading Russian media groups actively Cherkashin 7.47% developing digital portfolio (angel Alianz investor) Rosno • Strategic partner and series B investor for Tvigle since 11.58% 27.07% 2011
Allianz Investments VC and PE fund • Investment arm of Allianz insurance in Russia with over $800 mln. portfolio of assets • Egor Provided series A investments for Tvigle in 2008/2009 Yakovlev and plan to exit due to the closure of the fund (CEO) 26.61% Pavel Cherkashin (Vestor.IN) , Front page holding Entrepreneur, private investor (Media 3) • One of the most reputable Russian serial entrepreneur 27.27% and venture capitalist with over 15 years of IT/Internet experience * Current and former employees of the Company having received shares as a part of their compensation program • Seed stage investor in Tvigle
Source: Management
Tvigle has reputable investors on the Board that bring to the Company strategic business development, corporate finance and media expertise
Appendix A: Company details 27 Role model: Lessons from booming US online video market
Digital media significantly outpaces TV advertising growth Online video ad is growing 3x faster than online ad on average
73.05 8.00 60.0% 80.00 68.54 69.91 50.0% 64.54 66.45 70.00 60.66 52.1% 40.0% 50.0% 60.00 55.25 6.00 47.77 51.95 43.1% 50.00 42.50 39.6% 35.9% 40.0% 37.31 30.0% 34.3% 40.00 31.99 4.00 30.0% 7.11 30.00 20.0% 26.0% 5.64 20.0% 20.00 16.6% 10.0% 2.00 13.9% 4.20 12.4% 10.00 3.09 8.8% 10.0% 1.42 2.16 6.4% 0.00 0.0% 0.00 0.0% 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016
TV, bln. USD Digital, bln. USD Online video ad spend, bln. USD Online video ad growth, % TV share of ad market, % Digital share of ad market, % Overall online ad growth, %
Source: Emarketer Source: Emarketer
63% of publishers believe that in-stream ads will generate the ½ of the Internet population are online TV viewers most revenue among the other online sources in 2012
120.0 70.0% Search, 1% 61.2% 62.8% Other, 2% 54.3% 58.5% Which type of 100.0 57.0% 60.0% Mobile, 6% 49.0% 45.0% online ads will 43.6% 50.0% In-banner 80.0 38.0% 42.0% generate the most 33.0% 40.0% video, 9% 60.0 28.0% revenue in 2012? 97.1 30.0% 40.0 83.0 91.0 73.3 20.0% 50.9 61.9 In-banner 20.0 10.0% display, 19% 0.0 0.0% 2011 2012 2013 2014 2015 2016 In-stream Online TV viewers, mln. % of internet users video (pre- roll, mid-roll), % of online video viewers 63% Source: Emarketer Source: Emarketer
28 Tvigle content strategy in work: well-balanced content portfolio
Content providers by origin, split by # of titles and views Content portfolio by category, # of views (mln.)
Comedy, Drama series, Titles Views Young Adults, 21.36 3.14 11.10 UK, USA, Other USA, UK, Other 2.2% 3.1% 1.5% Music, 2.54 Europe, Europe, 2.6% Family, 43.89 12.4% 9.5% Lifestyle, 0.33
Russia, Russia, Kids, 82.39 Features, 82.3% 86.4% 11.07
Source: Management accounts Source: Management accounts
Net revenue split by category Gross profit as % of revenue, by category
Young Adults Comedy 14% 6% Drama series Young Adults 69% Music 11% Music 75% 2% Lifestyle 76% Kids 33% Kids Features 64% 15% Family 62% Drama series 47% Features Family Comedy 59% 9% 43% 0% 20% 40% 60% 80% Source: Management accounts Source: Management accounts Note: Net revenue refers to advertising rolls revenue net of agency commissions Note: Gross profit refers to Net revenue reduced by the amount of Minimum guarantee and royalties paid on video item
29 KPI projections: Tvigle audience characteristics
Tvigle monthly average audience projection, UMV k User engagement - share of LV, %
60,000 60% 51% 53% 47% 49% 50,000 50% 45% 3,285 40% 40% 40,000 1,895 Connected devices 27% 986 26,777 30% 24% 30,000 24,513 Partner sites 18% 454 20% 15% 20,383 12% 12% 20,000 Tvigle.ru 172 16,472 20% 10% 15% 12,780 10,000 18,768 8% 10% 12,611 15,714 0% 9,530 5% 5,952 2012 2013 2014 2015 2016 2017 - 2013 2014 2015 2016 2017 Tvigle.ru Partner sites Connected devices
Source: Management accounts Source: Management accounts
Comments
• Media space, i.e. maximum amount of advertising rolls which could be demonstrated on the site is one of the key parameters defining potential revenue growth in online advertising business • It is primarily driven by the growth of audience (UMV) and user engagement, particularly # of streams watched on average and split between long and short video streams (as long video streams allow for additional mid-rolls in the course of stream broadcasting) • Management expects that Tvigle, its partnership network and connected devices will demonstrate a robust audience and user engagement growth based on users’ habitual adoption of watching video online and increasing loyalty
Appendix A: Company details 30 KPI projections: online advertising pricing
CPM rate dynamics, RUR CPM rate decomposition
1,200 70%
1,000 60% 60% 60% 55% 800 50% CPM Net CPM Net CPM - % 50% 48% 45% 600 40% Advertiser 1 Site 1 975 400 887 852 826 810 30% Media Selling 715 793 Advertiser 2 Site 2 651 625 606 594 582 agency agency 22% 23% 22% 200 20% 19% 20% 17% Advertiser 3 Site 3 - 10% 2012 2013 2014 2015 2016 2017
Tvigle.ru Partner sites Media agency commission, % Selling agency commission, %
Source: Management accounts
Comments
• Another important element of the revenue equation is CPM rate – the online advertising price applied to the amount of views of specific advertising roll (or sold media space on the aggregated basis) • Management expects that in accordance with general industry trends, CPM rates will gradually decrease as the market becomes more mature and the audience grows • In the meantime net CPM after the deduction of media agency and selling house commissions will remain flat or even slightly increase as intermediaries’ commissions decrease reconfirming the growing bargaining power of online video properties (the same trend is currently visible in more mature internet markets, such as search)
Appendix A: Company details 31 Recent government efforts to offset content piracy problems in Russia
• Russia has joined WTO in August 2012. One of the legal consequences of this in the area of intellectual property is the instant adoption of Agreement on Trade-Related Aspects of Intellectual Property Rights , which sets the minimum international standards of intellectual property rights recognition and protection • The authorities are currently developing the joint register of intellectual property in the Internet. According to the government expectations in case of successful implementation of this project the amount of illegal movie content and further music and books in the Internet will be minimized • In the end of October 2012 the working group engaging in the development of initiatives aiming to prevent illegal film distribution in the Internet presented the report introducing new measurements to offset piracy: – Create the open to public register of digital movies which will be fulfilled by content right owners on a voluntary basis and will enable information intermediaries to check the legal status of the content prior to their upload on web-resources – On the legislative level oblige information intermediaries (internet providers, domain name owners, web-sites and social networks administrators) – to track (on their own initiative or upon the written request of content right holders) the content uploaded by users on their resources and in terms of its legalness, checking with the data of joint register – Instantly block access to the pirate content and prohibit its further distribution in case of written notification of the content rights owner about the violation of his intellectual property rights – Prohibit indexation of the information about sites containing illegal content by search engines • Currently one of the issues of content protection in the Internet is the liability of service providers for distributing illegal content in the Internet. This particularly concerns Internet sites which provide their users an opportunity to upload the content on their own sites (e.g. Vkontakte). Previously such content providers appealed to the opinion that the whole liability for uploading illegal content should be taken by the users of the site – private individuals • In the beginning of November the Superior Arbitration Court of Russian Federation refused to revise previous decisions on the lawsuits of CJSC “SBA Music Publishing” and CJSC “SBA Production” (the demandants which are exclusive content rights owners) to LLC “Vkontakte” (the defendant which is the Internet site which allowed users to upload their own content on its web-site). This decision has nailed down the final victory of the demandants against Vkontakte. • The above mentioned demonstrates that the judicial practice has established the position which allows to bring to responsibility the Internet sites for the content uploaded on their web-sites by their users
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