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Edited Transcript of YNDX earnings conference call or presentation 25-Apr-19 12:00pm GMT

Q1 2019 Yandex NV Earnings Call

SCHIPHOL May 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Yandex NV earnings conference call or presentation Thursday, April 25, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory Abovsky

Yandex N.V. - COO & CFO

* Katya Zhukova

Yandex N.V. - IR Director

* Mikhail Parakhin

Yandex LLC - Consultant

* Tigran Khudaverdyan

Yandex N.V. - Deputy CEO

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Conference Call Participants

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* Cesar Adrian Tiron

BofA Merrill Lynch, Research Division - Research Analyst

* Lloyd Wharton Walmsley

Deutsche Bank AG, Research Division - Research Analyst

* Maria Sukhanova

BCS Financial Group, Research Division - Research Analyst

* Maria Leonidovna Kahn

HSBC, Research Division - Senior Analyst of TMT

* Miriam Anuoluwapo Adisa

Morgan Stanley, Research Division - Equity Analyst

* Sebastian Cristian Patulea

Jefferies LLC, Research Division - Equity Analyst

* Sergey Libin

Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research

* Slava Degtyarev

Goldman Sachs Group Inc., Research Division - Analyst

* Ulyana Lenvalskaya

UBS Investment Bank, Research Division - Director and Analyst of Media & Technology

* Vladimir Bespalov

VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's first quarter 2019 financial results. (Operator Instructions) I must also advise you, your meeting is being recorded today on Thursday, the 25th of April 2019.

And I would now like to hand the meeting over to your host today. Please, go ahead.

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Katya Zhukova, Yandex N.V. - IR Director [2]

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Hello, everyone, and welcome to Yandex' first quarter 2019 earnings call. We distributed our earnings release earlier today. You can find this copy on our IR website as well as on Newswire services.

On the call today, we have Mikhail Parakhin, our Chief Technology Officer; Tigran Khudaverdyan, our Head of Yandex. Taxi; and Greg Abovsky, our Chief Operating and Chief Financial Officer; Arkady Volozh, our Chief Executive Officer; and Vadim Marchuk, our VP of Corporate Development, will be available on the Q&A session. The call will be recorded, the recording will be available on the IR website in a few hours. As usual, we've prepared a few supplementary slides, which are currently available on the IR website.

Now I will quickly walk you through the safe harbor statement. Various remarks that we make during this call about our future expectations, plans and prospects constitute forward-looking statements. Our actual results may differ materially from those indicated or suggested by these forward-looking statements. As a result of various important factors, including those discussed in the risk factors section of our annual report on Form-20F dated April 19, 2019, which is on file with the SEC and is available online. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Although we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we'll be referring to some non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with U.S. GAAP. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings release we issued today.

And now, I am turning the call over to Mikhail.

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Mikhail Parakhin, Yandex LLC - Consultant [3]

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Thank you, Katya, and hello, everyone. We've had a strong start in 2019. In Q1, our consolidated revenue excluding Yandex. Market grew 45% year-over-year. Revenues of Yandex properties excluding Yandex. Market increased 28% year-over-year. Revenues of Yandex ad network excluding Yandex. Market grew 15% year-over-year this quarter as a result of the growing contribution of small partners.

Search and Portal segment demonstrated strong performance in Q1. Revenue grew 26% year-on-year primarily driven by solid performance of Search, a result of ad tech improvements and continued Search share gains.

Record revenue growth rates of other Yandex properties were another driver of our core business revenue growth. Our experiments with direct on Yandex homepage contributed well to strong performance of Yandex. Properties in Q1, and added approximately 2 percentage points to the growth rate of Yandex. Properties revenues.

Turning to Search share trends. In March, our overall Search share continued to grow, 340 basis points compared with the year ago and reached 56.9% overall. Our Search share in desktop reached 68.5% in March, gaining 50 bps from December 2018 and 100 bps from a year ago. Our Search share on Android hit 51.6% (sic) [51.2%] in March, growing 210 basis points from December 2018 and 480 bps from a year ago. Our search share on iOS was 40.1% in March, up 10 bps compared to December 2018 and up 160 bps from a year ago. Our overall mobile search share averaged 49%, increasing 390 basis points year-on-year.

In Q1, mobile search traffic reached 51.8% of our total search traffic. Mobile revenues represented 44.6% of our search revenues. Revenue to traffic ratio demonstrated further improvement of 190 basis points compared to the previous quarter. Templates, which we've been rolling out since the end of last year were the main drivers of this improvement.

Now turning to products. To capitalize on growing consumption of online video, we recently launched a set of personalized dramatic video channels in Yandex.[Drive]. Over 20 channels devoted to music, your favorite TV shows, sports, humor, cooking and others are now available for our users.

Yandex. Drive is just one of the components of the video platform that we built. As of today, our users have access to hundreds of TV channels right from Yandex homepage, thousands of licensed movies on KinoPoisk and an access to KinoPoisk content right from Yandex' search result page. Although video currently accounts for small portion of our total advertising revenues, it's growing rapidly.

We are committed to substantial investment in our audio-visual platform in order to provide users with the range of services that cover all possible video consumption scenarios. But here in April, I told you that we've launched the transformation of our Yandex. Direct into a one-stop shop, which along with 10 base advertising, started one-banner ads on the platform. Yandex. Direct for banner ads allows advertisers to [beat] for placements in Yandex advertising network based on e-shows, efficient impressions, rather than using traditional CPA model. And provides a number of automated tools for managing display campaigns more effectively.

Starting from March 2019, we went forward and added an opportunity to manage video and outdoor campaigns right in Yandex. Direct. Outdoor is what I want to highlight. Approximately a year ago, we started selling digital outdoor based on OTS, or opportunity to see basis, allowing advertisers to pay for real traffic, not impressions.

Heading outdoor adoption to Yandex. Direct makes the set segment available for SMBs with any sides of the bunch. Although the penetration of digital billboards is currently insignificant, it grows rapidly. The total outdoor entertainment averaged 7.4% to the total ad market in Russia in 2018.

We believe that technological approach will revolutionize outdoor advertising segments in Russia in the long term.

With this, I'm turning the mic over to Tigran.

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO [4]

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Thank you, Mikhail, and hello, everyone. In Q1, we delivered another solid set of results. Our revenues grew 145% driven by a rise growth and continuing incentives optimization. Adjusted EBITDA loss of the Taxi segment was RUB 160 million in Q1, demonstrating slight improvement from Q4 2018. Adjusted EBITDA loss was a result of our investment in food delivery business and self-driving technology as we continued to demonstrate solid profitability in the ridesharing business in the Russian CIS.

In Q1, the number of rides were up 64% year-on-year, the slowdown from Q4 when the rides increased 112% year-over-year was the result of Uber integration in early February in 2018. JV grew faster than rides at high double digits as a result of average growth. Our gross commission revenue of our ride sharing business increased 99% year-on-year in Q1.

Turning to food delivery Yandex. Eats, our food delivery service, continued performing well. In March, Yandex. Eats gross revenue run rate was RUB 3.2 billion, which includes commission and delivery fee but does not include meal kit business. As of today we have over 9,000 restaurants connected to our platform across 24 cities.

In Q1, we introduced play delivery to be able to better balance demand and supply during peak hours without decrease in service quality. This also helps us to improve unit economics, particularly for orders with a lower basket size and commission fees. Since this launch, we haven't seen significant change in the cohort's behavior. Food delivery remains among our key areas of focus as we are confident in the great prospects of this business.

On self-driving technology. On the back of our success at CIS in Las Vegas where we demonstrated our self-driving car in a completely autonomous want without driver behind the wheel. We have signed an agreement with Hyundai Mobis, one of sizable automotive component manufacturer. Together, we plan to develop control systems for level 4, level 5 autonomous vehicles as an out-of-the-box solution for car manufacturers, taxi fleets and car-sharing services. In the first stage of our partnership, we will focus on creating driverless prototype based on Hyundai Sonata.

In 2019, we plan to launch 100 self-driving cars on the roads. Just recently, we received the permission to operate our self-driving cars on public roads in Israel. We are proud of the level of our self-driving technology development, which is usually supported by the company infrastructure. This allows us to be in top 5 autonomous vehicle technology globally.

With this, I'm handing the mic over to Greg.

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Gregory Abovsky, Yandex N.V. - COO & CFO [5]

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Thank you, Tigran. And thank you all for joining our call today. We had a strong quarter and a great start to the year. As Mikhail mentioned, our consolidated revenue excluding Yandex. Market, grew 45% year-on-year in Q1. Online advertising revenues excluding Yandex. Market increased 25% year-on-year. Revenues related to Taxi grew 145% year-on-year. Other revenues grew 325% year-on-year, primarily reflecting growth of Yandex. Drive.

Total TAC increased 24% year-on-year and amounted to 14.3% of total revenues, down 190 bps from Q1 of 2018 and down 160 bps sequentially.

Traffic acquisition costs related to partner advertising network grew 14% year-on-year. Traffic acquisition costs related to distribution partners increased 50% year-on-year as a result of continuing growth of Android. In Q1, distribution TAC averaged 8.2% of Yandex. Properties revenues, which is 30 basis points higher than in Q4.

Turning to our cost structure. In Q1, total OpEx excluding TAC and D&A grew 44% year-on-year. Excluding stock-based comp, operating expenses increased 45%. The increase reflected the growth of costs related to Taxi, primarily driven by B2B Taxi services that we've reported in gross basis and our food delivery business as well as costs related to the growing fleet of Yandex. Drive.

As of March 31, we had 8,629 employees, down 2% compared to December 31. This decrease mainly reflects headcount reclassification, which we continue to implement for certain support functions to ensure consistency in internal reporting. On a year-over-year basis, our headcount was 6% higher.

In Q1, our personnel cost demands 20% of total revenues. Stock based comp grew 30% year-on-year in Q1 and constituted 5.7% of revenues. D&A expense in Q1 increased 13% year-over-year.

Our consolidated adjusted EBITDA excluding Yandex. Market grew 37% year-on-year. This quarter, the impact from ForEx was a loss of RUB 279 million related to depreciation of the Russian ruble during Q1 from 69.5 to the dollar to 64.7 to the dollar.

Adjusted net income was up 36% year-on-year. Adjusted net income margin was 14.6%. Excluding Yandex. Market, adjusted net income was up 49% from Q1 2018. Our CapEx was 5% of total Q1 revenues.

On an annual basis, we expect our CapEx excluding new issue expenditures to be in the low teens as a percent of total revenues, same as what we've said previously.

Driven by the rapid growth of our business, we always consider potential changes to our segment structure and our financial disclosures. This would enable us to better reflect our view of the business and its development strategy.

Starting Q1, we introduced the following changes to the segment structure under which we report our quarterly financial results.

We moved Geolocation services and Yandex.Education from Search and Portal segment into the newly created Other Bets and Experiments category, while adding Yandex.Health, which were previously reported in experiments into the Search and Portal segment.

We renamed the Experiments into Other Bets and Experiments, which now includes Zen, Yandex.Drive, Geolocation, Yandex.Cloud and Yandex.Education.

Now, let me turn to the performance of our business units. Search and Portal revenue grew 26% year-on-year in Q1 under the new structure. This is in line with a 26% growth posted in Q4 2018. Sales of hardware devices contributed approximately 1 percentage point to revenue growth rate in Q1.

Adjusted EBITDA of Search and Portal grew 22% year-on-year in Q1 and its adjusted EBITDA margin was 47.4%, down 150 bps compared with Q1 of 2018, reflecting primarily the sales of stations and phones. Excluding IoT, adjusted EBITDA of Search and Portal was 48.4%.

On an annual basis, we anticipate adjusted EBITDA margin of Search and Portal to be 100 to 150 bps lower compared to 2018 due to investments in IoT. Excluding IoT, we expect adjusted EBITDA margin of Search and Portal to be roughly flat compared to 2018 levels.

Turning to Classifieds. Revenue Classifieds business grew 57% year-on-year in Q1, mainly driven by revenues from listing fees and VAS, which grew 94% year-on-year. Adjusted EBITDA of Classifieds was negative RUB 328 million, primarily due to investments in advertising and marketing.

Turning to Media Services. In Q1, Media Services revenue grew 74% year-on-year, mainly driven by subscription services and video advertising as a result of the continuing integration of (inaudible) into Yandex' ecosystem. Commissions from ticket sales also contributed to Media Services revenue growth, though to a lesser extent. Media services' adjusted EBITDA loss was RUB 440 million on the back of increasing content investments.

On Other Bets and Experiments. In Q1, revenues of other Bets and Experiments primarily represented by Yandex. Drive, Zen, geo-services and Cloud reached RUB 2.5 billion and grew 218% year-on-year, primarily driven by Yandex. Drive, Zen and geo services.

Adjusted EBITDA loss of other Bets and Experiments was RUB 1.2 billion, primarily reflecting our investments in Yandex. Drive and Yandex. Cloud. We're continually seeing great momentum in our car-sharing service. Yandex. Drive became the first service in the world to offer up-front pricing, leveraging our expertise in navigation and real-time traffic information. Recently, we also expanded our cargo segment into Saint Petersburg.

On regional expansion, we announced Yandex. Drive launch in Kazan, one of the largest cities in Russia. As of today, Drive's fleet stands at 9,500 cars, while the number of rides completed stands at about 16.5 million rides since launch. It's also worth mentioning that despite rapid car fleet growth, our utilization rate has held steady proving that there's further room to grow and we're far from saturation.

Zen continues gaining traction. In Q1, we introduced a new machine learning based recommendation algorithm called Alpha Centauri. As a result of this new tech improvement, the time spent per day grew 20%. Zen continued to invest in its publisher content platform. In March, for the first time, clicks to Zen's publisher content exceeded clicks to our show sites. In addition to Opera, we expanded our partnerships with browsers, integrating Zen into the start page of Coc Coc. Coc Coc is one of the most popular web browsers in Vietnam, serving about 24 million users monthly.

This is our first platform integration into Southeast Asia. In March, Zen's annualized revenue run rate was RUB 6.6 billion, growing 59% year-on-year. Our geo-location services has been developing very rapidly. On the previous earnings call, we talked about the opportunity to refuel a car through Yandex. Navigator app without getting out of your car. It's worth mentioning that since the launch of this feature in December 2018, users have spent over RUB 1 billion pumping gas with Yandex. Fuel. On the logistics side, we continue developing our routing B2B platform, expanding the list of customers. Recently, we added Sberbank, Baltica and Inconos to Yandex' routing platform. However, as of today, the main monetization model of our geo services is still advertising. In Q1, geo services doubled its revenues again.

Getting back to corporate matters. We ended the quarter with approximately RUB 73.6 billion in cash and cash equivalents, which is approximately $1.1 billion at the exchange rate as of March 31. This includes the cash of Yandex. Taxi, which amounted to RUB 26.2 billion.

Turning to guidance. Based on our recent strong performance, we're increasing the outlook for our Search and Portal business and it expects to grow in the range of 19% to 21% year-over-year in 2019. Excluding Yandex. Market from 2018 results, we now increase the outlook for our consolidated revenues and expect it to grow 30% to 34% in 2019 compared with 2018 levels.

With this, I'm turning the mic over to the operator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from the line of Ulyana Lenvalskaya from UBS.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [2]

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Congratulations on strong numbers. My first question will be on this segment reporting change. Greg, what is the logic in kind of shifting this education and health from Search into Experiments, can you elaborate a bit?

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Gregory Abovsky, Yandex N.V. - COO & CFO [3]

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Ulyana, it's Greg. The logic was the following: Yandex. Health is more and more integrated into the search portal and has really become just another vertical within Yandex. Search segment, whether it's the search app or our site. With respect to education here, we are slightly more optimistic about its prospects and are really viewing it as a potential platform in which we can build the education platform for the country both in terms of lower schools, in terms of after school training, in terms of more professional training, and we see different opportunities to expand that and so that's -- that was kind of the fundamental logic. And with respect to geo-location services, that's also growing rapidly. And to segment that, we kind of don't want the results of that segment to distort the results of Search and Portal.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [4]

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And can you please comment on the EBITDA guidance in other than Search segments, i.e. Taxi, Classifieds and Media.

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Gregory Abovsky, Yandex N.V. - COO & CFO [5]

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So I would say that broadly speaking, I would say, our guidance hasn't really changed from what we've talked about previously on the Q4 '18 earnings call. The real change, I would say is with respect to Taxi where we feel quite good about the performance of the ridesharing business and we think that, that should be profitable throughout the year. The magnitude of the investment into each segment, I think, will vary based on the competitive situation. And I think we have sort of a lot of firepower to invest aggressively in that business. And I think some of the latest rounds of financing in the self-driving space and at the same time, the pace of innovation that we're able to drive makes us very excited about that. What I should say is we are on track to have approximately 100 self-driving vehicles. We expect to report more concrete milestones about miles driven and things like that over the course of the year. And so we think that we can have a real gem with the self-driving segment. And the only other change, I would say, outside of Taxi is that I think increasingly, we are happy with the strategy progression at Media Services and we look to invest slightly more in content than we previously thought but those are sort of things at the margin.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [6]

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So just to confirm on Taxi, you still expect a loss for the year or not?

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Gregory Abovsky, Yandex N.V. - COO & CFO [7]

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So if you're talking about the Taxi segment itself, I think that will depend on the magnitude of investments into each segment. If you're speaking about the specific ridesharing business, we're confident that ridesharing business right, Yandex. Taxi ridesharing business will be profitable over the course of -- in 2019. And I should reiterate, once again, that it was also profitable in Q1. And so if you'd look at the public comps out there of ridesharing business, I think this is probably the only one of any scale that is handsomely profitable in its markets.

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Operator [8]

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Your next question is from the line of Cesar Tiron from Bank of America.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [9]

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I have 2 questions. The first one is on online advertising. You clearly seem to be getting market share, how far do you believe online advertising grew in Q1 in Russia? And what do you think best explains this market share gain in Q1 and also potentially, in Q4 last year? Second, getting back to Taxi, can you please give us some color on the progression of the ride-hailing margins? Do singles increased in Q1 versus Q4? And also can you please elaborate a little bit on how much you spent on food delivery in Q1? It looks like your main competitor spent about RUB 3 billion in Q1 in terms of cash OpEx? Is yours higher or lower than this?

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Mikhail Parakhin, Yandex LLC - Consultant [10]

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Mikhail here. I'll take the first one, and maybe Greg will take the second one. So on -- specifically, growth of online advertising markets. Well, we think we are sort of growing within the bounds of how the whole market is growing. Of course, there's a bit of agility from quarter-to-quarter, there are always some headwinds. But broadly speaking, if you look at our performance here for the last few quarters, it's been fairly consistent. So probably, that's how the market grows. When -- in terms of what drove the improvement, well, you might have noticed that we continue improve monetization of our mobile share and this time again to reiterate did grow another 190 basis points on back of 320 basis points sequential improvement in Q4. So -- it's of course, Ad Tech improvement, it's our new visual representation effects, things for like templates that we've been talking about for quite a while. This time, there have been 2 very successful ones: one called callouts and the other ones are called toggle ads. So yes, they kind of combination of factors, I guess.

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Gregory Abovsky, Yandex N.V. - COO & CFO [11]

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Cesar, it's Greg. On the question of ride-hailing margins, the -- I can confirm that they've improved sequentially. On the question of each -- the magnitude of the investment, obviously, for competitive reasons, I wouldn't want to go into it other than to say that they -- in the grand scheme of things, they weren't as large as the numbers you were throwing around. They were considerably lower than that.

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Operator [12]

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Your next question is from the line of Miriam Adisa of Morgan Stanley.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [13]

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Two questions for me. Sorry if I missed it, but could you provide the GMV run rate for Taxi for -- in the model or the quarter? And then also on Taxi, how should we think about the progression of commissions and also prices, particularly in Moscow and St. Petersburg, in light of a new competitor entering those markets? And then my second question is on Yandex. Plus. If you could just talk about the take up effects of this, in light of the fact that you're -- you've been adding the new products to that service over the last couple of months.

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Gregory Abovsky, Yandex N.V. - COO & CFO [14]

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So let me take the question of pricing and competitive position. We haven't really made any significant changes to our pricing or commissions of either in Moscow or St Petersburg. We're very happy with kind of the way that things are and what we're seeing in that market. We haven't updated the GMV run rate. But just to remind folks, the last time we gave it was of December run rate, and that was about RUB 4.2 billion.

And then onto your second question about Yandex. Plus, that service has been growing very nicely, there's quite a number subscribers. And just the other day, we announced a partnership with 2 of Russia's leading banks, Tinkoff Credit Systems as well as Alfa-Bank. And we launched a co-branded Yandex. Plus credit and debit cards with 2 of those banks, and it's a fairly unique product in the market in that it offers you extremely generous cash back on a number of Yandex services, 15 services to be exact, making our products much, much cheaper than anybody else's for anyone who is a subscriber. And obviously, the subscription price itself is actually refunded back to you to the extent you have certain minimum spending requirements on that card.

So, so far, over the 2 days since we launched, we've seen absolutely tremendous response for that product, and we're very excited about it. So I think Yandex. Plus is a really, really good product. It really ties people into the entire Yandex ecosystem. And gives them even more reason to use more and more of our services, whether it's food where you can also now have 5% cash back if you use these co-branded debit or credit products, or Yandex. Taxi which offers 10% cash back. And obviously, these are funded by our partners.

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Operator [15]

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Your next question is from the line of Slava Degtyarev of Goldman Sachs.

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Slava Degtyarev, Goldman Sachs Group Inc., Research Division - Analyst [16]

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A couple of questions on Taxi. So firstly, on the Taxi revenue growth, should we expect a place of deceleration higher compared to the previous quarter given the base effect for order and the fact that you increased the take rate starting from Q2 last year? So do you think it's going to be a sizeable schedule for you in the coming quarters where you see some offset in factors potentially? And secondly, presumably, you have looked at the prospectus of Uber and Lyft. Maybe there are any comments that you can share on some of that, the rate of financial metrics, how Yandex. Taxi looks versus the U.S. deals that you command.

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Gregory Abovsky, Yandex N.V. - COO & CFO [17]

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So in terms of growth rates, yes, we should expect a slowdown in Q2 and further -- and going forward, I still think that this is going to be a rapidly growing business. I think it meets a real need for consumers, and it offers much better value than owning a car. I think between public transportation, car sharing, ride sharing, anything in the sharing space, if you will, is more economical. And I think more people will shift towards it. But numbers are getting quite large now, I think we posted very -- a very nice quarter this past quarter, and it'll get harder and harder to compound at those rates. That having been said like -- just to reiterate it one more time, we do expect that this segment will continue growing nicely.

And then on the question of the prospectuses. Look, I think it makes us feel really good about our business, just to reiterate again. Here, you have a business which grew its top line 145% in Q1 where the core ridesharing business is profitable, even if you include all of our expansion markets. And if you focus just on the Russian market, it's very profitable. And we have a massive ecosystem behind this ridesharing business which makes the value proposition to consumers even more attractive.

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Operator [18]

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Your next question is from the line of Lloyd Walmsley of Deutsche Bank.

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Lloyd Wharton Walmsley, Deutsche Bank AG, Research Division - Research Analyst [19]

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Wondering, Greg, where do you see long-term margins in the Taxi business? Is there any mix that shared out margins in more mature regions that might give us a sense for where long-term margins could get in that business? And then second one, if I can, just can you give us an update on how you're thinking about a potential IPO to the Taxi segment, what the timing might be there and any hurdles -- any of these hurdles to getting something done there?

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Gregory Abovsky, Yandex N.V. - COO & CFO [20]

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So look, on margins, I don't really think I want to go out there and tell you what our margins are going to be going forward. But as I said before, we think that margins in this business should be high. This is a marketplace business which should exhibit excellent margins. It's that sort of one way of approaching it.

The second way of thinking about it is the marginal cost of a marginal ride, which, as you can imagine, is quite low. And that also tends to contribute to fairly high long-term EBITDA margins.

On the question of timing and what -- how we're thinking about it, look, we think that it's definitely something that we're considering. We haven't made a decision yet on timing. We do want to get this business ready, so it's in a position at which point, we can sort of just press the button when the timing is right. But I think we're very happy with what we've achieved. We've recently brought on a CFO for the Taxi segment, someone who has fairly extensive finance experience. And so I think we feel really good and at some point, we'll make a decision on timing.

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Operator [21]

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Your next question is from the line of Maria Kahn of HSBC.

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [22]

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Congratulations on great set of numbers. I've got a couple of questions. One, on your Uber Russia brand and how that's differently positioned than your Yandex. Taxi brand. And second, very much on your freight business that you launched, is it just a pure cargo service or is there a broader aspiration similar to Uber Freight?

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO [23]

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This is Tigran, CEO of Yandex. Taxi. So related to the Uber positioning, we are -- so we launched last quarter, several experiments. And one of them for -- is Uber night experiment when we drop prices for night rides for our customers and promote that on TV companies and on Internet, and we immediately see a big impact on the share of the Uber rides in our business. So we are experimenting here but more or less, Uber customers are more -- so Uber customers in Russia on other -- on our markets are more young, more young people.

To the cargo business, I think probably, there -- it could just put it on the Yandex. Drive cargo which is launched I think a quarter before. Yes. And in Yandex. Taxi, we haven't launched any cargo service already. Probably Greg can add something about cargo and Drive.

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Gregory Abovsky, Yandex N.V. - COO & CFO [24]

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Yes. On the cargo segment, as you know, we launched initially this in partnership with IKEA. It now has been a very successful launch in Moscow, and we are following that up with another launch in St. Petersburg now.

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [25]

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Greg, just to follow up, and Tigran. I thought on news about something in the Yandex. Taxi segment where the drivers can just pick up a truck and drive it away. Is that part of Drive or is it part of Taxi? I was a bit confused about that.

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Gregory Abovsky, Yandex N.V. - COO & CFO [26]

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That's part of Taxi, but there's not enough updates about it as of yet. We'll sort of update you over the course of the year as this business develops.

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Operator [27]

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Your next question is from the line of Sebastian Patulea of Jefferies.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division - Equity Analyst [28]

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I've got 2, please. The first one is regarding your self-driving business, and another detriment that it find a decree to allow autonomous vehicle testing on the streets of Moscow and [Tatarstan]. Can you please tell us about your first steps in this direction? How big would you like to go with this experiment here? You mentioned 100 cars. What would be displayed between Israel and Moscow, all of them going forward? And I believe some companies already announced, they will start to think self-driving vehicles on -- in these 2 regions. And would you ask for outside capital to share some of these risks as some of your peers are doing such as [weigh on] Uber.

And the second question is you're going Turkey and Yandex. The Russian direct investment fund is planning various deals and Internet projects in Turkey, and they specifically mentioned Yandex as a key beneficiary. And the fund agreement was signed in the presence of Turkish President Erdogan and Russian's President, Sir Putin, which talks briefly about its importance. So was Yandex part of the initial discussions? And if you were, can you please share more details regarding the nature of this project?

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO [29]

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Let me take the first question, this is Tigran, related to the self-driving. Of course, one of the key challenge for this year always to increase the fleet size to the -- up to the 100 vehicles. The goal is to gather as much data as it possible by increasing the number of the vehicles. We have a very pretty good relationship with the regulators, with the government in Russia. And as you know, something like 6 months ago, regulators allow us to make experiments then -- on the public roads seen in Russia, and we may use this opportunity. Also, we've got a license to operate in Israel, also on public roads, and we will -- we are going to have several vehicles, a few vehicles seen in Tel Aviv.

Related to the additional investment, I think we do not expect any significant increase in investment this year in self-driving technology. And the team is more focused on technology side. On technology side, that's it.

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Gregory Abovsky, Yandex N.V. - COO & CFO [30]

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On the question of Turkey. Yes, so as you know, we do have a presence in Turkey. Our presence there is around Yandex. Navigator, which is a very popular app there, as well as Search, which is still present, although our market share is quite a low. So that's a small segment of our business that we do have. As far as government statements, I think that, that's something that I will leave to speculation around that.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division - Equity Analyst [31]

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And if I can follow up, please. Were you guys involved in any of the initial discussions? Or is this the first time that you heard about it was in the press?

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Gregory Abovsky, Yandex N.V. - COO & CFO [32]

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I think again as I would say that, yes, this is something that we really don't want to comment on since we're not involved.

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Operator [33]

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Your next question is from the line of Vladimir Bespalov of VTB Capital.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [34]

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Congratulations for the very good numbers. My first questions will be again on Taxi business. First, I would like to ask about the B2B segment and how big is the impact from this segment, especially given that the revenue recognition from this segment in the Taxi business is quite different. Maybe you could comment on this. And the other one on the Taxi business is about food delivery. It feels this part of the business is getting bigger and bigger. Are you considering, like separating it into a separate vertical? And at some point, especially given that potentially, you might have a night view of taxi and it would make probably this business look better from the profitability perspective. And one more question that I have is on Yandex. Market. You didn't show anything in your review from Yandex. Market apart from the share in net losses. And based on that, I estimate that the full quarter loss of that business was about RUB 1.4 billion. Could you please update what is going on there, how you see this business developing and your partnership with Sberbank council?

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Gregory Abovsky, Yandex N.V. - COO & CFO [35]

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Let me try to take those. On the taxi B2B segment, this has been extremely successful segment for us. We recognize revenues in this segment, I think similar to the way that Lyft and Uber recognizes revenues there, which is we recognize them on a gross basis, means the entire GMV of the ride gets booked as GAAP revenues. And then the cost of the ride, cost of goods sold, is essentially the -- whatever we pay out to the driver, less our commission, right? And so that's the B2B segment. It's growing rapidly for us, it's doing great. I think we have, I don't know, over 5,000, I want to say, corporate clients, and I think revenue growth rates there are close to 200%.

With respect to food delivery business, it is something that we are considering breaking out in more detail over time, especially as it continues to grow. Food grew close to 1,000% year-over-year for us in Q1. So it's a rapidly growing segment, and it might make sense to provide more disclosure around it.

Finally, on your question around Yandex. Market. In this instance, this is a segment that we did not consolidate, right? And therefore, starting with this year, we made a decision to only report it based on our proportional ownership of that segment in the other income line. And so going forward, you should expect to see that disclosure into the extent of the Yandex. Market team will provide disclosures from time to time in conferences or such. That's something that they will provide as they feel comfortable.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division - Equity Analyst [36]

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Okay. But on the B2B segment, again, given that the -- you effectively book GMV going forward to the comparison could be distorted a little bit because we will not be comparing apples-to-apples, right? And this will inflate the growth for your Taxi business, for the revenues. So are you going to provide this to line separately just to give us a better understanding of what is driving the revenue trends for the Taxi business?

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Gregory Abovsky, Yandex N.V. - COO & CFO [37]

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Sure. Again, this is consistent with the representation of these segments for all of our public competitors or soon to be public competitors. And this is the requirements of U.S. GAAP, right? This is relatively small segment for us. Even though it's rapidly growing, as I said, it's still relatively small. The overall growth that we posted is a function of the growth of the core ridesharing platform.

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Operator [38]

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Your next question is from the line of Maria Sukhanova of BCS.

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Maria Sukhanova, BCS Financial Group, Research Division - Research Analyst [39]

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I have 3 questions. First, on ad revenue. Have you noticed any change in the growth rate throughout the quarter? I'm asking because your competitor this morning said that they've noticed very like slow start of the year, slow growth. Relatively, our vendor was in exploration. I wonder if you're seeing the same. Second, on your new headquarter cost, are you ready to share with us any data points on that, like what do you expect for this year and onwards? And if not, when do you think you'll be ready to share with us? And third question, on Yandex. Station, the smart speakers. Judging by the data, it seems like you've sold like 20,000 smart speakers in this quarter, either around or like is it close to reality? And if you could share with us and [music] insights that you see in these smart speakers, like what people use it for? Who are these people? Are they wealthy or not? Anything like that would be very interesting.

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Gregory Abovsky, Yandex N.V. - COO & CFO [40]

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I'll take the second question. I'll pass it over to Misha for first -- your first and your third question. Look, we're not providing any updates on HQ. Costs, we will provide when we will actually start construction and get all the permits in place and so on. But as we've said before, we expect this to be a very attractive use of capital from the point of view of our shareholders, and we're excited about the possibility of building sort of a world-class technology company headquarters in the heart of Moscow. Let me pass it on to Misha.

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Unidentified Company Representative, [41]

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So on that market again first. As I said previously, there are always headwinds. And in some situations, performance-based advertising performs better and in other situation, display-based advertising performs better. Our mix, as you know, is very heavily skewed towards performance-based. I would say, it was pretty flat, pretty uneventful for us last few quarters. We didn't see too much fluctuation but of course, the mix keep changing, and you can -- I don't think you should read too much into short-term volatility.

On Alice, well, I'm going to go in here and say that 20,000 is very low. With actually -- it's way too conservative number. On the demographics, what we see, actually, the different -- the slices of people. There are, of course, sort of first adopters and urbanites that go for more expensive versions. We had some bundled deals with the cheaper speakers that were bought by all kinds of people. We see very similar trends in terms of the usage with the rest of the world, with the exception of video and general conversation compared to other examples of smart speakers you might know about. We have compared to a larger proportion of video, credits on video consumption because we -- our main -- a flagman sort of flagship speaker has an HDMI output and can stream video. And also, a bit unique among big players is that we have this conversation mode, and we have very long session sometimes.

In general, I would say, maybe it felt that the sessions are just people sort of chatting and complaining and joking and cursing and things like that. So we're trying to interact it as if it were a human being. Of course, kids are very good with it. Kids use it -- tend to use more than adults. Adults tend to have more sort of transactional thinking or turn on, turn off, play that, that's good, that's not good. Kids are much more creative and ask many more questions.

So broadly, similar to what you see in the United States with certain specific is that we have video output. So streaming is much more heavily used and also conversation mode.

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Operator [42]

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And your last question is from the line of Sergey Libin of Raiffeisen Bank.

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Sergey Libin, Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research [43]

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A short clarification question, please. On your Search and Portal revenue growth guidance, is it inclusive or exclusive of Internet of Things? And another short one, did you spend any cash this quarter on share buybacks?

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Gregory Abovsky, Yandex N.V. - COO & CFO [44]

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On Search and Portal, it is inclusive of devices, IoT. And you should be able to more or less back into what it is without them, assuming that these are basically sold at 0 or slight negative margin. And we've obviously given you guidance around what we expect margins to be, excluding IoT. And then in terms of share buybacks, no, we haven't used the cash on hand to buy back shares. Both the share balance -- the cash balances have built, both at Taxi and that Yandex proper.

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Operator [45]

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And there are no further questions at this time. Please continue.

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Katya Zhukova, Yandex N.V. - IR Director [46]

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Thank you all for joining our call today. Our next earnings call will take place as usual in late July 2019, and we hope to hear you all there. Please feel free to reach out with any questions that may occur. Thank you. Goodbye.

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Operator [47]

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That concludes the presentation today. Thank you for participating. You may now disconnect.