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Edited Transcript of YNDX earnings conference call or presentation 27-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Yandex NV Earnings Call

SCHIPHOL May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Yandex NV earnings conference call or presentation Thursday, April 27, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Shulgin

Yandex N.V. - COO

* Arkady Volozh

Yandex N.V. - Founder, CEO and Executive Director

* Gregory Abovsky

Yandex N.V. - CFO

* Katya Zhukova

* Mikhail Parakhin

Yandex LLC - CTO

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Conference Call Participants

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* Brady Martin

Citigroup Inc, Research Division - Director

* Cesar Adrian Tiron

BofA Merrill Lynch, Research Division - Research Analyst

* Lloyd Wharton Walmsley

Deutsche Bank AG, Research Division - Research Analyst

* Miriam Anuoluwapo Adisa

Morgan Stanley, Research Division - Equity Analyst

* Mitch Mitchell

BCS Financial Group, Research Division - Media and Industrials Senior Analyst

* Olga Bystrova

Crédit Suisse AG, Research Division - Director and Senior Equity Research Analyst

* Sergey Libin

Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research

* Stanislav Kondratyev

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Ulyana Lenvalskaya

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

* Vladimir Bespalov

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

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Presentation

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Katya Zhukova, [1]

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Hello, everyone, and welcome to Yandex's First Quarter 2017 Earnings Call. We distributed our earnings release earlier today. You can find a copy of the press release on the company's IR website and on Newswire services. On the call today, we have Alexander Shulgin, our Chief Operating Officer; Greg Abovsky, our Chief Financial Officer; and Mikhail Parakhin, our Chief Technology Officer. Arkady Volozh, our Chief Executive Officer, will be available on the Q&A session. The call will be recorded. The recording will be available on our IR website in a few hours. As usual, we've prepared a few slides supplementary to the story that are currently available on the IR website.

Now I will quickly cover 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 20-F, dated March 21, 2017, 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'm turning the call over to Alexander.

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Alexander Shulgin, Yandex N.V. - COO [2]

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Thank you, Katya, and hello, everyone. Thank you for joining our first quarter 2017 earnings call. We started the year with a solid set of results across all our segments, with revenues up 25% and ex-TAC revenues up 28% year-over-year. These growth rates were mainly driven by strong performance of online advertising, especially on Yandex's own and operated properties. This was driven by improvements in our advertising technologies and by the stabilizing economic environment.

With a strong growth in ad budgets across a number of our key ad categories, including auto, real estate, financials and B2B. First, let me highlight the historic settlement between Yandex, Google and FAS that was announced 10 days ago. On April 17, Russia's Federal Antimonopoly Service, Google and Yandex signed the settlement agreement that will significantly open up the Android platform to competition. We see the settlement in 3 distinct parts: first of all, it affects current and future contracts between Google and device manufacturers with respect to preinstallation; secondly, it offers choice on existing Android devices; and thirdly, it affects new devices that will ship into Russia.

Now let me go through these points in more detail. As part of this settlement, Google will waive requirements in exclusivity and priority placements of its own apps on Android devices and will eliminate restrictions for preinstallation of third-party apps, including on the home screens. The settlement also states that Google will stop requiring preinstallation of Google Search as the sole search service on Android. And going forward, Google will not include into its contracts with device manufacturers clauses that conflict with this settlement. And they will provide equal access for third parties to include their search engines into the choice screen. For us, this means that OEMs are no longer restricted from preinstallation of Yandex apps on home screens of their devices.

For existing devices that are currently into market, Google will develop a new version of mobile Chrome browser, which will display choice screen, prompting a user to select their default search engine for the Chrome browser. This choice screen will be displayed upon the first launch of the updated Chrome browser, which will roll out in the next few months.

And then on new devices. A few months later, Google will replace its Google search widget that appears on the default home screen with a newly developed Chrome search widget. When a user taps on this new Chrome search widget for the first time or uses the Chrome browser for the first time, the user will be presented with a choice screen requesting them to select their default search engine. And Yandex will be shown as one of the search options on this choice screen. This default search setting will apply both to the Chrome search widget and the Chrome browser.

All in all, we anticipate that this settlement will restore competition to the market and will give us an equal opportunity to reach users through the search engine choice screen. It also enables us to continue cooperating with device manufacturers on the preinstallation of our apps on Android devices, including installation on the home screen. This could be our Yandex. Browser or Yandex. Maps or our new search app. We expect the settlement agreement to positively impact our market share on Android, though the impact will be skewed to the second half of the year.

While we are on the search share topic, let me provide you with our user stats. As of Q1 2017, our overall search share in Russia totaled to 55.4% and was flat compared to Q4 level. Our best estimate of our search share on Android devices in Q1 is 38%, up from 37% a quarter earlier. Our best estimate of our search share on iOS devices is 41% in Q1, unchanged compared to a quarter earlier.

Mobile traffic constituted 53% of our total search traffic in Q1, while mobile revenues constituted 26% of our search revenues, up 130 basis points versus Q4 of last year.

Now let me update you on performance of our segments. Revenues of Search and Portal grew 23%, benefiting from strong growth on our own and operated properties such as them. I'm also extremely excited about the performance of Yandex. Taxi, which continued to scale up in Q1. We added a number of cities since the last call in February. Currently, the service is available in 69 cities, each is over 100,000 population across Russia, Ukraine, Armenia, Georgia, Kazakhstan and Belarus. The growth rate in the number of rides continued to accelerate.

In Q1, rides grew 484% year-over-year. As I mentioned on the last call, in late 2016, Yandex. Taxi rolled out a number of technological improvements, many of which leverage our market-leading Yandex. Maps and Yandex. Navigator products. We implemented surge price in Moscow in September 2016. We also introduced forward dispatch, which significantly increased our order completion rates. More recently, we launched upfront pricing, whereby a user sees a fixed price for his ride, taking into account his destination, current and predicted traffic conditions and current supply and demand balance. We also launched smart pickup points, a feature that saves user's travel time and reduces their fares. Here is how it works. We analyze all the possible routes for the select destination, current and projected traffic conditions, and the number and location of available taxis. Simultaneously, we'll calculate if there is a better pickup point for the passenger, so that their taxi can reach them faster and continue on efficient path to the destination. As a result, the app shows how much money and time a user can save by walking to a more efficient pickup point. For instance, a passenger may cross a street and turn a corner and save, for example, 5 minutes of their trip time and save, for example, RUB 100 on their fare. The product is based on the Yandex. Maps data that provides previous run routes, including sidewalks, underpasses, footbridges and other pedestrian areas to show the user how to reach the pickup point.

All these launches allowed us to significantly improve utilization of the fleet. To give you a sense, number of rides per travel in Moscow region increased approximately 15% compared to September 2016 levels, even while the number of drivers on the platform increased significantly. Let me just provide you a couple of more important metrics for this business. On GAAP basis, Yandex. Taxi revenues grew 75% in Q1. However, on a gross basis, before subtracting marketing costs and minimum fare guarantees from our commission revenues, Yandex. Taxi revenues grew 197% year-over-year in Q1. We see tremendous opportunities for the ride-on-demand companies to increase their presence and to expand the market itself by providing users with cheap and effective ways to get around. We believe that our technological expertise and unique product offering, backed up by our state-of-the-art maps and navigation, will allow us to offer services that could potentially change dynamics of car ownership and public transport usage.

Now turning to Yandex. Market and Classifieds. Yandex. Market posted 24% revenue growth in Q1. The share of the take rate-based orders remained at approximately 13% in Q1, while our effective take rate slightly increased to approximately 3%. In Q1, we strengthened the Yandex. Market team, and we'll update you on the progress of this business unit on our next quarterly call.

I am also excited with the progress we're seeing in Classifieds. In Q1, revenues grew 54%, driven by growth of nonadvertising revenues. With substantial increase in number of calls generated from Auto.ru to dealerships, and as a result, widens the gap with Avito transport section in this metric. Auto.ru currently generates 2x as many calls to dealers than Avito does in Moscow and 50% more calls in St. Pete. According to an independent third-party evaluation, Auto.ru currently holds 64% share in the number of calls generated from auto classifieds to dealers in Moscow and 56% share in St. Pete. We're also narrowing the gap with Avito in the regions. All in all, I am very excited with the solid start to 2017 across all of our operating segments.

With this, let me please hand the microphone over to our CTO, Mikhail Parakhin. Mikhail, please go ahead.

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Mikhail Parakhin, Yandex LLC - CTO [3]

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Thank you, Sasha, and hello, everyone. As Sasha mentioned before, we delivered solid set of results in Q1 2017, with Search and Portal revenue growth of 23% year-over-year. This growth was primarily driven by our own properties as a result of ad tech improvement and product launches that we rolled out during the previous 12 months. During several past calls, I was talking about a significant improvement in our broad match capabilities both in search and in ad network, aimed to cover users' implicit interest and to enhance advertisers' reach with high-quality clicks. As you know, we've been gradually rolling out broad match since mid-2016.

Earlier this year, we expanded it even further. You might remember that in Q4, we rolled out Palekh, a new search algorithm, which is based on large-scale deep neural networks. It allowed our search technology to understand user intent behind the query rather than just treat it as a sequence of words, and the result is significant increase in the quality of long-tail search queries, which constitutes approximately 30% of all our search traffic. In early 2017, we applied this large-scale deep neural network approach to our ad-matching algorithms, including broad match, which allowed us to even better align ads to user intent. This further improved the relevance of our search apps, and as a result, overall relevance of our search engine result pages.

In a way, it's win-win-win situation. Advertisers get more conversions at a lower cost, consumers see higher quality search result pages, and we collect higher revenues. During the recent months, we significantly improved Yandex's audiences. Our reach of client and localized targeting tool, which now allows cross-platform integration. Now advertisers can integrate their display and search-out campaigns to target potential customers who have already seen the advertisers' display banners or video ads. As a result, advertisers get an effective tool to present their brands across all advertising channels and improve customer flow through the sales funnel.

Turning to video. After the launch of priority placement for video apps on Yandex video websites in Q3 2016, we continued experimenting with various other solutions for video advertising market. In Q1, we began running video advertising on a number of our streaming video products, such as broadcast TV, KinoPoisk, and so on. Just in a month after the test mode launch, revenues generated by this initiative reached 1/3 of our video advertising revenues.

Now switching from advertising to search products. Just recently, we launched our new search app, where we started integrating all of Yandex's must-have services in one place. These include search, weather, news, maps, public transport, business directory and so on. After the launch of this integrated app, we saw 40% growth in daily audience, while searching activity within this app increased 25%. Just recently, we integrated 2 more services into our mobile search app: our Zen content recommendation service and the new service called Yandex. Collections. Yandex. Collections is a media collection and sharing service that serves as a sort of a catalog of ideas. Collections aggregate content from the internet as well as user-generated content and allow users to share things they like with their friends. While it is still in test mode, we're already seeing progress in usage, improvement in retention rate and increased traffic. We believe that this new product will enhance the social component of our search.

With this, I turn the microphone over to Greg.

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Gregory Abovsky, Yandex N.V. - CFO [4]

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Thank you, Mikhail, and thank you all for joining our call today. In Q1, we delivered another solid set of results. Our consolidated revenue grew 25% year-on-year and reached RUB 20.7 billion. Online advertising revenues accounted for 94% of total revenues in Q1 and increased 23% year-on-year. Yandex properties' revenue grew 26% year-on-year in Q1, driven by a number of ad tech implementations that Mikhail discussed a few minutes earlier as well as by rapid revenue growth of Yandex's own properties, primarily Zen.

Revenues from our Ad Network grew 17% and comprised 25% of the total revenues in the quarter. Share of Ad Network as a percentage of total revenue was approximately flat compared to Q4 of 2016. In terms of ad budgets across different advertising categories, we saw strong growth in auto, real estate, B2B and finance.

Growth rates in travel segment, apparel and consumer electronics continued to be soft. Other revenues grew 77%, primarily driven by the growth of the Yandex. Taxi, which constitutes the bulk of the other revenue line in consolidated revenues. Traffic acquisition cost related to the partner advertising network grew 16% and our partner TAC comprised 56.1% of our Ad Network revenues in Q1. Traffic acquisition costs related to distribution partners increased 16% year-on-year and constituted 7.2% of advertising revenues from Yandex properties. This is 60 basis points lower than Q1 of last year and roughly flat compared with Q4 of 2016, adjusted for a one-off payment in existing distribution partner. Total TAC grew 16% year-on-year and constituted 19.1% of total revenues, 150 basis points lower than Q1 of last year and 20 basis points lower compared to Q4.

Paid clicks grew 12%, while cost per click increased 10%.

Turning to our cost structure. Total OpEx, excluding TAC and G&A, grew 32% year-on-year. Excluding stock-based comp, expenses grew 35%. Growth was primary driven by the growth in advertising and marketing expenses, primarily related to the Yandex. Taxi and new hires. In Q1, our headcount was up 19% compared with March 31 of last year and up 3% from December 31 of last year. In Q1, our personnel costs constituted 23% of revenues. Stock-based comp increased 8% in Q1 and constituted 4.6% of revenues, down from 5.4% a year ago. Decline in stock-based comp as a percent of revenues was primarily driven by the appreciation of the Russian ruble. G&A expense for the quarter increased 3%. As in Q4 of last year, the growth was driven by our investments in servers and data centers in 2016 and early 2017, but was partially offset by the lower G&A from our Finnish data center due to strengthening of the ruble.

Our consolidated adjusted EBITDA increased 19% year-on-year, and our consolidated adjusted EBITDA margin was 33.3%, down 170 basis points from a year ago. Decline in EBITDA margin reflects our investments in new businesses and hiring engineering talent. Yandex. Taxi was the main area of investment in terms of our business units. Excluding both revenues and losses of Yandex. Taxi from our consolidated results, our consolidated EBITDA margin would have been 760 basis points higher. This quarter, the impact from ForEx was a loss of RUB 2.2 billion related to the dollar-denominated assets and liabilities on our balance sheet following the appreciation of the ruble from RUB 60.7 on December 31 to RUB 56.4 on March 31.

Net income was down 23%, primarily due to ForEx and increase in SG&A, and net income margin was 4%. Adjusted net income was up 18% in Q1, and adjusted net income margin was 18.2%. Our CapEx was RUB 3.9 billion or 19% of our Q1 revenues, primarily due to server and network deliveries related to the Vladimir data center that got shifted from Q4 of last year to Q1 of this year. We continued to expect that our CapEx to sales ratio will be in the mid-teens in 2017.

Turning to the performance of our business units. Search and Portal revenues were up 23%, driven by a number of ad tech implementations and the growth of Zen. Adjusted EBITDA of Search Portal grew 35% in Q1, and its adjusted EBITDA margin reached 42.7%. Revenues of Yandex. Market were up 24%, roughly in line with Q4 growth. Our adjusted EBITDA margin of Yandex. Market was 43% in Q1.

Turning to Yandex. Taxi. Revenues of Yandex. Taxi were up 75% year-on-year in Q1. The slowdown of reported revenue growth rates in Q1 of this year compared with prior quarters was driven by the introduction of lower tariffs and the implementation of minimum fare guarantees on a wider scale.

To remind you, we use contra revenue approach to book Yandex. Taxi revenues, and this approach negatively impacts reported revenue growth. On a gross basis, before subtracting marketing costs and minimum fare guarantees from our commissions revenue, Yandex. Taxi commissions revenue grew 197% in Q1 compared to a year ago. As a result of our increased investment in this business, adjusted EBITDA of Yandex. Taxi in Q1 was negative RUB 1.2 billion. Revenues of Classifieds business grew 54% year-on-year in Q1, primarily supported by the growth of nonadvertising revenues of Auto.ru, driven by the growth of the business in Moscow, St. Pete and the start of urbanization in the regions.

Adjusted EBITDA of Classifieds was RUB 4 million in Q1. We're also making investments in our experimental businesses, represented by Media Services, Yandex. Türkiye, YDF and Discovery, which includes Yandex Launcher and Yandex Zen international products.

In Q1, revenues of Experiments grew 76%, primarily driven by the growth of Media Services, while the magnitude of investments in this segment continued to decrease.

Getting back to corporate matters now. In Q1, we repurchased $8 million face value of our convertible bonds for approximately $7.7 million. Since the inception of the program, we bought back approximately $369 million face value of the bonds. As of today, we have approximately $321 million of the bonds that remain outstanding. We ended the quarter with approximately RUB 61 billion in cash and equivalents, which is approximately $1.1 billion at the exchange rate as of March 31. As you remember, in the last call, I told you that we're exploring hedging options for our U.S. dollar-denominated lease commitments related to our Moscow headquarters. In March 2017, we designated $103 million of deposits with a third-party bank as a hedging instrument for the period ending December 31, 2018. Essentially, the program covers our rent commitments from Q2 of this year through the end of 2018. This hedging program will effectively immunize our P&L from the impact of currency fluctuations on our headquarters lease agreement.

Now turning to guidance. Based on the solid start of the year, we increased our revenue guidance and now expect our ruble-based revenue to grow in the range of 17% to 20% in the full year 2017 compared to 2016. At this point, we exclude from our guidance any incremental revenues that we may get as a result of search share gains on Android as a result of the recently signed settlement agreement.

And with this, let me turn the call 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) We will take our first question today from Lloyd Walmsley from Deutsche Bank.

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Lloyd Wharton Walmsley, Deutsche Bank AG, Research Division - Research Analyst [2]

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If I can, one for Mikhail and one for Greg, I guess, relatedly -- related questions. Mikhail, is the impact of broad match fully deployed at this point? Or are you still rolling out elements such as they can continue to be at tailwind to the O&O search growth? And related for Greg, you all delivered an acceleration of 6 percentage points on core Yandex website revenue on a 9-point more difficult comp and the comps actually get easier for the remainder of the year. So we understand your general approach to guidance is conservative. But is there any reason that we may not be aware of that you can't sustain growth rates like this for the rest of the year in O&O search?

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Mikhail Parakhin, Yandex LLC - CTO [3]

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Mikhail here. So I guess, I'll take the first question. All right. So -- of course, the work is never finished, and we constantly tweak the algorithms, and we constantly roll out new improvements. Technologically, we believe we shipped the bulk of the stuff that we were going to ship, and it sort of propagated through the system. We still see the adoption rates going up, meaning like people actually have to actively choose that setting, and there's still sort of adoption going on. But technologically again, we think the bulk of the stuff is in there already.

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Gregory Abovsky, Yandex N.V. - CFO [4]

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Thanks, Mikhail. Lloyd, on guidance, I think, unfortunately, I won't have anything really new to say on that. As you know, we are -- aim to be conservative. We are early in the year. We still have 3 quarters ahead of us. The business continues to operate well. There is no, I think, real changes to the business. I think, as I commented in the prepared remarks, we see really good performance from sort of the key bellwhether categories, such as autos and financials and real estate. So from that standpoint, I think we feel pretty good. Yes, I mean, I think, guidance and performance speak for themselves.

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Operator [5]

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We will now go to our next question from Slava Kondratyev from Goldman Sachs.

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Stanislav Kondratyev, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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A couple of questions there on my side. First one is on Taxi. So following the recent price decreases or the fixed price introductions in April, would you expect the amount of loss in Taxi business to widen in the second quarter of the year? So what would be your thoughts on that? And the second question is, can you, please, elaborate a bit more on the margin bit in this segment in the first quarter? So what were the major drivers for the margin improvement? And do you see the upside risk for your full-year expectations on the roughly flat margin guidance that you provided with the full-year results call?

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

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Slava, it's Greg. Let me take the first question and probably the second one as well. On Taxi, clearly the environment is extremely competitive both in Moscow and in many other cities. We have been aiming to lower our price both in terms of greater discounting as well as introduction of upfront pricing, which we kind of rolled out a couple of weeks ago. I think the net impact of that is that it does slow down the pace of GAAP-based revenue growth within Taxi. However, as we rolled out upfront pricing, I think we saw really good performance and really good response from the consumer segment with respect to that. And I feel like we're pretty pumped up to invest strongly behind the segment kind of going forward. So yes, upfront pricing helps us; yes, consumer is responding; yes, cohorts are improving. And on top of that, the market does remain fairly competitive, and we are looking to invest for growth. With respect to margin, on the previous calls, I've only spoken about margins for the Search Portal segment, as you know. I'm not going to update that guidance, but what I will say is if to the extent that we see margin upside, we will look to invest a portion of that in hiring talent in the 3 key areas. Those are in machine learning, in mobile and also in voice technologies. And on top of that, we're also potentially going to use some of that excess margin from the operating leverage in the Search Portal business to sort of prime the pump in terms of increasing our market share in mobile on the back of this landmark antitrust element.

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Operator [8]

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We will now go to our next question today from Miriam Adisa from Morgan Stanley.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [9]

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Just 2 questions for me. And firstly, on the cold-start revenue growth, given the fact that you've accelerated into Q4? And could you just let us know how you're trending versus the market? And if you're seeing that continue to 2Q? And then also on Yandex Zen's contribution to the cold-start revenue, I know in the last quarter, you gave us a number, you said RUB 1.5 billion run rate. I'm just wondering if you could update us on that number. And then also, on the browser market share, because I imagine that would be linked to Yandex Zen penetration as well, if you could just give us an update on the browser market share as well. And then my second question is on Yandex. Taxi. This -- and given the fact that you mentioned you have significant improvements in tech and in the utilization rate, just wondering how this has impacted your plans for monetization in most cities outside of Moscow and Saint Petersburg.

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Gregory Abovsky, Yandex N.V. - CFO [10]

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Let me see if I can try to answer all of them, because there were quite a number of questions in there. In terms of browser share, over on desktop, our browser share is about 23% today versus about 21% a quarter ago. On mobile, it's about 12% versus about 11% a quarter ago. Certainly, getting higher browser share does help us grow Yandex Zen revenue. In terms of run rate, it's closer to RUB 1.8 billion versus where we were at the end of Q4. So up about 20% from a run-rate basis or so. Your other questions were on Taxi, if I remember correctly. Look, the impact of technology there is tremendous. And we think we are uniquely positioned there. Because I think we're actually probably the only player in the world, which combines the ownership of the map and navigation along with...

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Arkady Volozh, Yandex N.V. - Founder, CEO and Executive Director [11]

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Machine learning.

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Gregory Abovsky, Yandex N.V. - CFO [12]

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And machine learning -- thank you, Arkady, along with the on-demand ridesharing business. So what we're able to do because of that is -- are things like upfront pricing. It's things like forward dispatch, it's things like smart pickup points, which I think are actually quite unique. I had a chance to test them out this weekend, and they really do save you quite a bit of time and quite a bit of money. And so I think that they will certainly help get utilization rates even higher for that segment. Is there something else that I missed that you asked? I apologize.

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

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Just trends in Q2 so far in the advertising...

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

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Sure, and as I mentioned on the question from Lloyd, I would say there is no real changes in the core trends between this quarter and previous quarters. And I think the overall core search performance is quite good.

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Operator [15]

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We will go now to our next question today from Cesar Tiron from Bank of America.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [16]

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Yes, 2 questions. First, can you please discuss the price changes that occurred in Taxi in the past few weeks? And if you believe that the industry is moving more toward a price-based type of competition? Or if you're seeing that those promotions would be limited in time? And then second, how long do you think it will take you to announce your first agreements with OEMs to distribute Yandex Search on Android?

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

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Cesar. On Taxi, look, it's a -- I think price is not the only aspect of competition, although it's a very significant one. The other ones are clearly ETAs. The other aspect of that is also kind of quality of the products if what shows up to pick you up is a rickety old lada, I'm not sure you're going to be very excited about getting into it. So those things do matter. How long will intense competition last? I'm not sure. But obviously, we're prepared to invest pretty aggressively in this segment. We feel like we continue to have very high market share, and we would like to increase it if possible over time. And I'll hand it over to Alexander to answer your question about preinstalls.

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Alexander Shulgin, Yandex N.V. - COO [18]

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Cesar, this is Alexander speaking. So first of all, we already have a number of distribution deals with key manufacturers in OEM space, companies like Samsung, Huawei, LG and other guys. Now this FAS, Google and Yandex settlement, the key difference here is it opens up an opportunity for us to place our products including Yandex Search, Yandex search apps, Yandex. Browser on the default home screen of those devices. That's a big change, because, of course, placement of the first screen makes the difference. Like on few devices where Yandex is preinstalled turns a better position of our market share from those devices is close to 50% and sometimes more. So it's an excellent opportunity for us. So we're discussing better placement terms with OEMs as we speak now. But as you know, with all business negotiations, it's difficult to make projections. So -- but we internally, we aim to see devices in retail with our better placement by the end of this year.

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Operator [19]

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(Operator Instructions) We will now take our next question from Ulyana Lenvalskaya from UBS.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media and Technology [20]

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Given that even with cash burn at Taxi, your net cash position is growing on a quarterly basis. Would you consider some cash distribution to shareholders kind of higher probability at this stage?

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Gregory Abovsky, Yandex N.V. - CFO [21]

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I think I'll just say what I said before, that is a decision that's made at the board level, but clearly, we do feel increasingly confident about the overall economic backdrop, which is obviously reflected in things like our increased appetite for investment in Taxi, in our hiring decisions and so on. But overall, I do believe that we are at a better position, we have a strong balance sheet and we just hedged out 2 years' worth of our office lease expense. And so yes, I think the board would feel more confident about making the cash distribution decision now than it has before.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media and Technology [22]

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And the second question would be on Turkey, because we didn't speak for a while. Are you kind of exiting the market? Or what's the current position?

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Gregory Abovsky, Yandex N.V. - CFO [23]

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Look, our position on Turkey is that we've kind of ramped down the level of spend there pretty significantly. We're still present in the market. We're still serving the Turkish consumers. But clearly, it's not as big of a spend category as it was for us previously.

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Operator [24]

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We'll now go to our next question from Olga Bystrova from Crédit Suisse.

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Olga Bystrova, Crédit Suisse AG, Research Division - Director and Senior Equity Research Analyst [25]

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First of all, I wanted to ask you about navigation app and the maps potential -- additional monetization plans that have been reported in the press. Can you maybe talk a little bit about what are your plans there in details and how you think it would impact your revenues going forward for the Search and Portal segment if possible? And the second question is on sort of follow-up on margins. You sort of answered that question, but I just want to ask you in maybe a different way. You now have a bit more visibility on or at least we have numbers for the Taxi losses. We also have some profitability in other segments, including Classifieds profitability, et cetera. And we also have FAS agreement, which, despite strong margins in the first quarter, may have implications with additional costs going forward. How -- I mean, how do you see your previous flat core business margin expectation impacted by, I guess, by FAS settlement? And given your current visibility on Taxi losses, how do you see margins develop going forward?

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

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Olga, let me answer the second part of the question first. Look, I feel like there's not much more I can provide beyond what I said already, which is, yes, there's inherent operating leverage in the core search business. Yes, we showed that operating leverage in Q1. We potentially would show it again in '17. But do we have areas that we feel are right for investment? As I mentioned on the back of the antitrust deal, we think there is opportunity to accelerate our mobile share gains. And secondly is on the personnel front, because at the end of the day, we're not a manufacturing company. All of our revenues and users, all of that comes from products that we built inside. And so we always want to invest for talent when we think the opportunity is right. And we think this is a great opportunity to add talent in those 3 key areas that I mentioned. On your question about navigation, so you probably read that we are looking to create 2 separate versions of our navigation product. We are obviously -- we'll always have a consumer navigation product, Yandex. Navigator, that will always be free, potentially supported by advertising or whatnot. On the other hand, we also want to enhance the quality of the product that we provide for professional users. These could be trucking companies, logistics providers or they could be couriers or they could be other taxi companies other than Yandex. Taxi. And the goal is to invest into this product and to start monetizing it by selling subscription revenues or transactional-based revenues where we charge third parties a small fee for each navigate or route that they draw. Obviously, this is a desire -- this reflects a desire by the company to enhance the quality of the product that would provide to 2 segments of the audience, both to the professional segment and to the consumer segment. And it is also to impose upon them a monetization model, which is most appropriate to each.

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Olga Bystrova, Crédit Suisse AG, Research Division - Director and Senior Equity Research Analyst [27]

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Okay. That's very good. Just maybe a clarification on -- and I'm sorry, I'm picking on the profitability issue. Let's say if you do have operating leverage in Search and Portal business and you only need part of that to invest in mobile. I guess, what I want to ask is, would your goal be to keep margins flat? Or would you actually be willing to let them increase, decrease, depending on the investment opportunity, just to understand what is your sort of -- where your threshold lies?

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Gregory Abovsky, Yandex N.V. - CFO [28]

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Yes. You said it right, our goal is to invest where we think is most appropriate. We don't have a corporate goal of keeping margins flat or keeping -- or getting margins up or getting margins down. Obviously, it's kind of an outlook that we have that over time we'd love margins to go up, obviously. But each independent investment decision is made in its own -- try to stand on its own 2 legs, if you will.

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Operator [29]

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And now we'll take a question from Brady Martin from Citibank.

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Brady Martin, Citigroup Inc, Research Division - Director [30]

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Two questions. First is just whether you can comment on this Kommersant article yesterday saying that you're seeking investment -- outside investment to the Taxi business. The second question, just more clarification on the timing of this FAS opportunity. If I understand correctly as it was outlined at the beginning of the call, there is choice button on the next version of Chrome, which has more -- seems like more like a one-off opportunity, I guess, whenever that version comes out, a chance to convince customers to switch to Yandex. And then there's more of a longer-term like for new devices. That's not really one-off. I mean, you would have some ability to invest there, but kind of going forward. So on the one-off opportunity, is this something that really like just impacts Q2? Or is this something that you think will go Q2, Q3? I mean, just in terms of the timing, not the magnitude.

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Gregory Abovsky, Yandex N.V. - CFO [31]

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Brady, I'll take the first part of the question, and Alex will take the second part of the question. With respect to the Kommersant article and basically the article speculated that Yandex may have hired JP Morgan to help us raise outside capital for Yandex. Taxi. Obviously, I'm not going to comment on the article, and it's not our position to comment on rumors in the press. But I will just echo what I said in the Q3 earnings call, which is that as we think about the opportunity in front of Yandex. Taxi, and we think about both the capital that we have on the balance sheet as well as the opportunity to bring in outside capital, we think that it does make sense, and it's in the best interest of our shareholders to potentially attract outside capital to accelerate the growth and the level of investment in that business. And let me hand it over to Sasha.

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Alexander Shulgin, Yandex N.V. - COO [32]

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This is Alexander speaking. So first of all, just to remind what the settlement agreement is, it's a 3-party agreement between FAS, Google and Yandex. What I could say the terms are confidential, so I cannot elaborate a lot on this. But I could say that it's a long-term agreement, which makes us confident about our outlook in the future. And also, it is extremely attractive agreement for us from strategic and commercial standpoint. What will happen going forward is that in the next few months, Google will display a choice screen there, which we believe is a right for the user. This choice screen dialogue will be displayed in Chrome browser on existing devices. When the user taps on one of the [reconcile] like Google or Yandex, it defaults your change you set for the Chrome browser. Then on the new devices in Chrome browser, there'll be the same choice screen dialogue. And also, the Google search app widget will be replaced with a Chrome widget, which when a user taps on it, will open Chrome and will display the same search engine dialogue, which is set at one time both for Chrome browser and for the search widget. So all in all, on new devices, which will appear in trade in a few months from now, the Google search widget will be adjustable, so that a default search engine could be changed to Google, Yandex or other search engine if there will be one in this choice dialogue. So...

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Brady Martin, Citigroup Inc, Research Division - Director [33]

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It's clear. My question is the impact -- like I assume this is a great opportunity for you to try to reach out to the existing install based on Android and convince people to switch to set Yandex as the default. So you would have some investment in the marketing or something ahead of that. Is this -- my question is really maybe you're not ready to estimate the size, but I'm asking about the timing. I mean, is this something we primarily would see as some kind of one-off impact in Q2? Or is this something that we would see in later quarters of the year?

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Alexander Shulgin, Yandex N.V. - COO [34]

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It will take several months to get this solution implemented. So I think the impact will be more visible closer to the end of the year. But due to confidentiality reasons, I will not be able to give you specific time.

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Operator [35]

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We'll now go to our next question from Vladimir Bespalov from VTB Capital.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, and Chemicals [36]

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My first question would be on the trend in your cost per click, because this looks like pretty robust despite the slow inflation. So what do you see going forward? How much of pricing power do see you have? And in your guidance, how much you've built in like the continued increase in the cost per click? And how much volume do you see? And the second question would be probably on a couple of strategic potential areas of development. One is related to the remote health care services and the legislation which is being changed. And the other one is your preparation with video content producers like TV channels, film studios and the reports that we saw in some media on this front. So could you comment whether you see opportunities in these areas and how the things can develop?

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Mikhail Parakhin, Yandex LLC - CTO [37]

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This is Mikhail. I guess, I will take 2 of those 3, and Sasha will take the one about the medicine. So about the CPC, I tried to stress previously that CPC is really not the thing you should be looking at, because there's always multiple components there. There is overall growth of traffic, which tends to suppress CPC, but still brings more revenue. There is actually a component of redistributing CPCs in changing environment with advertisers that -- on average, thanks to increased CPC. There is also our technological progress where we try to make it so that it's more efficient and cheaper, the conversions are cheaper, right, which actually might increase or decrease CPC. So as I was explaining before like we try not to look at CPC here as really an indication of where we're going, because you really have to look deeper. And right now what we're seeing is that traffic is growing, especially in our own properties. We see that like we were making conversions cheaper in the ad network for the advertisers. So I think we are -- because previously there was a bit of a disparity between search and ad network. Search was cheaper essentially. So now we think they're collided so that, that thing has, I think, played out. And so it's kind of hard to say, and to a large degree, not really interesting question to think about whether CPC is going up or down. I think you have to look, in general, in the economics of the whole system. On our collaboration with TV companies, as you probably know, we've rolled out on our main page on mobile and desktop this new service where you can watch some of the TV channels right there. We keep sending up more channels. Our ad network -- like most of them are monetized by our ad network and the monetization there is growing fairly rapidly. So we see fairly positive trends there. We do consider in multiple ways we can enhance our collaboration or increase the speed of growth of our ad network. Right now, I don't think we have anything that we are ready to disclose yet. Sasha?

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Alexander Shulgin, Yandex N.V. - COO [38]

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And on our medicine project, this is one of our experimental projects, which was launched in beta phase recently. So the ultimate goal of this initiative is to provide functionality to connect people in the videos with physicians and thus create better service and more accessible medical service for people. So I don't think this experiment will be visible in our financials anytime soon. But I think long term, it's a very important and potentially attractive product for Yandex to have. We very much welcome any changes in regulations that allows better and easy implementation of IT technologies in medicine area. So yes, there are some changes that potentially would make telemedicine in Russia fully legal and which is a very good and attractive opportunity both for Yandex and for actually all other players in this area from IT side.

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Operator [39]

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We now have a question from Mitch Mitchell from BCS.

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Mitch Mitchell, BCS Financial Group, Research Division - Media and Industrials Senior Analyst [40]

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If I could, I'd like to ask for 2 data points and then one question. The data point, if possible, can you tell us -- in the prepared remarks, you gave us a year-on-year number for growth of Yandex. Taxi rides. Can you tell us what it was quarter-on-quarter sort of first quarter versus fourth quarter last year? That's the first data point. And the second data point, which I don't think you've ever given before, but just curious, can you tell us what percentage of your ad revenues come from video segment? And then the question is fairly large one. I know we've just got a ruling here in Russia on the case against Google. I mean, that's a Russia-specific ruling, but I wonder if that problem and that issue, if there are any larger implications for other countries? Is the partnership with Google an opportunity there to expand that into other countries? I read a press report that you tried to initiate a similar kind of anticompetitive investigation in Turkey. I'm not sure if that's true. If you can maybe comment on that for us, that's great.

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Gregory Abovsky, Yandex N.V. - CFO [41]

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On your first question, I wasn't sure exactly what you asked. You asked what is the growth in the number of rides Q1 '17 versus Q4 '16? Is that what you were asking?

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Mitch Mitchell, BCS Financial Group, Research Division - Media and Industrials Senior Analyst [42]

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Yes, exactly.

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Gregory Abovsky, Yandex N.V. - CFO [43]

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I don't have that handy, but it was up sequentially despite the seasonality. As you know, there's massive seasonality in Q4, but it was still up, I would guess, nicely double digits up sequentially.

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Operator [44]

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We now have a question from Sergey Libin from Raiffeisen Bank.

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Sergey Libin, Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research [45]

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Could you probably answer the previous question, like on a percentage of advertising from video, as it hasn't been answered?

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Gregory Abovsky, Yandex N.V. - CFO [46]

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Yes. Sorry, we got cut off there. On video, it is less than 1% today. So it's a very small segment for us still, but rapidly growing. And on other opportunities on partnerships with Google, obviously, we're exploring other opportunities that -- where we see a potential to cooperate and work together. But go ahead, sir, what were your questions?

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Sergey Libin, Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research [47]

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Yes. My question was about the agreement with several corporate users for discounts for your partner taxi companies. So are you paying anything for that? Or is it just kind of a discount that is provided for high volume?

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Gregory Abovsky, Yandex N.V. - CFO [48]

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There is small. This is just discounts based on volumes.

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Sergey Libin, Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research [49]

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Okay. And secondly, just would you assume that the possibility to make agreements to install Yandex applications on the first screen would significantly increase the distribution TAC? Or is it more of revenue sharing and shouldn't increase the upfront payments on distribution?

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Gregory Abovsky, Yandex N.V. - CFO [50]

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Yes. So it depends on the actual agreements we end up signing with OEMs. We -- even for second screens, we have a combination of both [rusher] deals, which would hit our distribution TAC line as well as cost per install deals, which would hit our marketing line. It just depends on the terms you're able to strike and sort of the allocation of risks between the 2 parties, do people want certainty or do they want potential for upside?

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Operator [51]

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Thank you. As we have no further questions, I would like to turn the conference back over to you for any additional or closing remarks.

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Katya Zhukova, [52]

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It's Katya Zhukova speaking. Thank you all for joining our call today. Please feel free to reach out to me or our -- ask our e-mail address in case you're having any additional questions. We'll be happy to host you on our next earnings announcement in late July 2017. Thanks, again, and bye.