On Friday Rambler published its FY08 unaudited trading update, which highlighted a “halt in profitability improvement in 4Q08 due to adverse macroeconomic conditions.” The trading update revealed a 60% y-o-y increase in consolidated revenue to approximately USD 110 mn, with display and context advertising each contributing about 44% of sales. The company also pointed to a 5% y-o-y drop in sales in 4Q08 and a negative EBITDA margin. The trading update failed to provide operating and net profit.

The company has already moved to cut costs in 2009, including through a 15% staff reduction and the elimination of non-core activities. Despite these efforts, Rambler's revenues look destined to fall flat or slightly improve this year in RUB terms, with profitability likely to show only minor improvement from 2008 levels. With the RUB still losing ground against the USD and likely to continue until 2H09, the prospects for the company's USD-denominated financials don't look promising.

Despite the financial crisis, the online advertising market in Russia remains a dynamically growing segment which will continue to exhibit explosive growth for the next several years. However, barriers to entry are substantially lower than in other industries and competition is growing. The Rambler search engine continues to hemorrhage audience share and the company has since summer 2008 been refocusing its business with an emphasis on content production and portal operation.

The Federal Antimonopoly Service's decision to block the sale of subsidiary Begun to Google in October of last year now looks particularly troubling. When the deal was announced in July 2008, the deal's sale price looked low. However, with market conditions now very different, Rambler Media finds itself with a 51% stake in an asset it can't sell (at least not for any reasonable price).

Conclusion

While Rambler Media maintains a strong balance sheet and an ample cash position, the financial crisis has taken a heavy toll on the company's fair equity value. Rambler's stock price on the LSE has reacted accordingly (down 93% YTD to USD 2.0). There is undoubtedly value in Rambler at these levels. However, with liquidity in the company's stock virtually nonexistent, the company continuing to hemorrhage audience share, and future prospects uncertain, we prefer exposure to other players on Russia's IT/Media scene. CTC Media is vastly more liquid, priced at similar levels, and better sheltered from the financial crisis. For the truly courageous, Armada presents a very attractive speculative opportunity, though the company's USD 11 mn market cap (previously in excess of USD 300 mn) makes building a substantial position difficult.