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Edited Transcript of YNDX earnings conference call or presentation 28-Apr-20 12:00pm GMT

Q1 2020 Yandex NV Earnings Call

SCHIPHOL May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Yandex NV earnings conference call or presentation Tuesday, April 28, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniil Shuleyko

Yandex N.V. - CEO of Yandex.Taxi

* Gregory Abovsky

Yandex N.V. - CFO & COO

* Katya Zhukova;Director of Investor Relations

* Tigran Khudaverdyan

Yandex N.V. - Deputy CEO & Director

* Yevgeny Senderov

Yandex.Taxi - CFO

* Yulia Gerasimova

Yandex N.V. - Head of IR

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Conference Call Participants

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* Anna Kupriyanova

Gazprombank (Joint-stock Company) - Analyst

* Anna Kurbatova

Joint Stock Company Alfa-Bank, Research Division - Senior Analyst

* 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

* Miriam Anuoluwapo Adisa

Morgan Stanley, Research Division - Equity Analyst

* Sebastian Cristian Patulea

Jefferies LLC, Research Division - Equity 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

* Vyacheslav Degtyarev

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2020 financial results. (Operator Instructions) I must also advise you the call is being recorded today, Tuesday, the 28th of April 2020.

I would now like to hand the conference over to the Head of Investor Relations today, Yulia Gerasimova. Please go ahead.

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Yulia Gerasimova, Yandex N.V. - Head of IR [2]

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Hello, everyone, and welcome to Yandex's First Quarter 2020 Earnings Call. We distributed our earnings release earlier today. You can find a copy on our IR website as well as on newswire services.

On the call today, we have Tigran Khudaverdyan, our Deputy Chief Executive Officer; Daniil Shuleyko, our Chief Executive Officer of Yandex. Taxi; and Greg Abovsky, our Chief Operating and Chief Financial Officer. Arkady Volozh, our Founder and Chief Executive Officer; Vadim Marchuk, our VP of Corporate Development; and Yevgeny Senderov, Chief Financial Officer of Yandex. Taxi, will be available on the Q&A session.

The call will be recorded, and 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 website.

Now I will quickly walk you through the safe harbor statement. The 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 the impact of the ongoing COVID-19 pandemic as well as those discussed in the Risk Factors section of our annual report on Form 20-F dated April 2, 2020, 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 the call, we'll be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with U.S. GAAP. A reconciliation of 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 Tigran.

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO & Director [3]

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Thank you, Yulia, and thank you for joining our call today.

The first quarter started well for us. All of our businesses demonstrated solid performance up until mid-March when we started to see an adverse impact from COVID outbreak. Since then, our top priority has been the well-being of our staff, our partners and our users. While some of our businesses, such as advertising and the ride-hailing have been significantly hit by the stricter social distancing measures introduced by the authorities, the demand for FoodTech, e-commerce, education and Media Services has materially increased.

So let me turn to a brief overview in Q1 trends before we discuss our COVID-related initiatives. Search and Portal segment was growing well and ahead of our internal expectations in January and February. Importantly, we enjoyed very strong Search share gains both on mobile and desktop. In March, we reached a record 55.9% share on Android, growing 130 basis points from December and 430 bps from March 2019. Our overall share continued to grow strongly and approached 60% in April. Search core growth has materially accelerated in April to 40%, 45% year-on-year from single digit in the end of February. Importantly, the key driver for this was the growth of a young audience up to 24 years old. Its share in search traffic increased by 28% compared to February while the share of school children increased by 56%. The traffic of school audience itself almost doubled for the same period.

In Q1, our mobile search traffic was 59% of our total search traffic. Mobile revenues represented 50.4% of our Search revenues. It was the first quarter with mobile search revenues exceeding that on desktop.

Turning to Zen. We continued to see strong user growth with 14.6 million daily active users in March while in April, Zen daily active users increased further to over 16 million users. In terms of engagement, total time spend grew 56% year-on-year in March while in April, growth has accelerated to almost 90%.

In Media Services, the total number of subscribers reached 4.3 million in March and continued to grow further in April. The number of monthly viewing subscribers on the KinoPoisk HD platform has exceeded 1.5 million.

Now let me walk you through our key action points in response to the COVID outbreak. Firstly, Yandex is an important source of accurate and reliable information for our users, including all relevant data on COVID. Among numerous public information initiatives, we have introduced the self-isolation real-time index available on Yandex's main page. This index shows the degree of social distancing in different cities by comparing anonymized data on urban activity against a normalized date before the pandemic. The index is currently available in 570 cities in Russia as well as in 8 other countries.

Secondly, our platforms such our Yandex. Taxi, Yandex. Eats or Yandex. Lavka provide earnings for hundreds of thousands of drivers and couriers. For example, we have invested significantly in expanding delivery service as well as our food delivery platforms.

Third, distance learning. We launched Yandex School as a platform combining all our new and existing educational projects, including a full-scale online school for 5-11 grade in 15 different subjects. In April, Yandex. Textbook's daily active users increased 8x compared to mid-March and exceeded 1 million users.

And last but not least, our social initiative, Helping Hand. With this project, we transport doctors and deliver medicines, provide coronavirus testing kits and distribute essential goods. We have contributed RUB 250 million for this project. Overall, we have committed around RUB 1.5 billion across various initiatives, including support fund for taxi drivers and couriers, advertising credits to small and medium businesses and our educational efforts. The full list of measures and initiatives is much longer. Our own teams are working really hard introducing new features and services. Frankly, I think we have never seen initiatives and improvements being implemented at such a rapid pace.

Looking beyond the pandemic, our key priority is to ensure sustainable long-term growth, and I believe that we will emerge from this crisis stronger than ever. The current downturn, coupled with the change in consumer behavior, provides us with a number of attractive long-term opportunities across many verticals. In our core advertising business, we expect to benefit from accelerating shift from traditional advertising to online, higher consumption of streaming video in Media Services and digital content in Zen. As [corporates], we think their operating models to include more remote work scenarios will benefit from faster adoption of cloud services. There are also a lot of attractive opportunities in ride-hailing and FoodTech.

And with this, I'm turning the mic over to Daniil.

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Daniil Shuleyko, Yandex N.V. - CEO of Yandex.Taxi [4]

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Thank you, Tigran, and hello, everyone.

We started the year in Taxi with solid performance across all our metrics. Rides grew 40% year-over-year in Q1 with January and February growing ahead of our internal projections. We started seeing a slowdown in the second half of March due to the spread of COVID-19. While in early March, we were doing nearly 5 million rides per day, towards the end of March, this number decreased significantly and adversely affected Q1 growth rates.

The official lockdown in Moscow started March 30, so we will see a much greater impact on our business in Q2. In Moscow, ride-hailing was affected severely. Moscow GMV has declined approximately 60% year-on-year April to date and around 70% compared to early March. Our total ride-hailing GMV declined less than in Moscow as regions are typically a few weeks behind Moscow in terms of COVID-19 impact. We made significant investments to protect drivers and couriers. We have provided hundreds of thousands of masks, a huge supply of sanitizers and intensified car disinfection.

We established a RUB 500 million fund to support drivers and couriers who have been affected currently. The team is working hard to provide new income opportunities for drivers, including deliveries. We provide transportation services to doctors, deliver COVID tests and meal sets to clinics and senior citizens.

We've launched a number of partnerships with large retail companies, including Leroy Merlin, [Just Commute], Tele2, Azbuka Vkusa and [Vkusvill] in order to help them make deliveries to their users in a timely manner.

On the FoodTech front, we have enjoyed significant growth in demand. The inflow of new restaurants through our platform has significantly increased, and we simplified the onboarding process for new restaurants. As of today, over 20,000 restaurants are connected to our platform. In order to support local restaurants really connected to our platform, we eliminated conditions for that.

Grocery delivery has become an essential part of people's lives these days, and they have clearly benefited from having our hyperlocal convenience store delivery model, Lavka. As of today, we have over 100 drugstores in Moscow and St. Petersburg from which our couriers deliver within 10 to 15 minutes despite the significant growth in demand.

Recently, we expanded the service coverage by connecting taxi drivers to Lavka. Now it's available to approximately 2/3 of the Moscow population and over half of the people in St. Petersburg. So far, the number of users of our FoodTech services grew 73% compared to early March, and this is 130% increase year-on-year.

The recently launched [Supera] has contributed to this growth. In recent days, Lavka exceeded 1/3 of its orders from [Supera.]

All in all, we see multiple opportunities down the road. The crisis clearly demonstrate that we are one of the most unique companies in the world with unrivaled combination of logistics, technology and supply of drivers and couriers to instantly become an essential part of people's lives.

With this, I'm turning the mic over to Greg, who will walk you through the financials.

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

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Thank you, Daniil, and thank you all for joining our first quarter earnings call today. You've seen the press release with all our key financial numbers, so I won't be repeating them. Instead, let me focus on the performance and current trends across our business units.

Search and Portal. Search and Portal delivered solid results despite tough comps and the COVID-19 impact starting from mid-March. Revenue ex TAC increased 14% while adjusted EBITDA margin came to 48.7%, up 130 basis points year-over-year. Given the strictly enforced lockdown policies across the country and its impact on business activity, our ex-TAC Search and Portal revenue decline in April is in the high-teens territory on a month-to-date basis. This was driven by a combination of factors such as decrease in ad budgets, pressure on CPC dynamics and lower share of commercial search queries. Importantly, our search queries in April are growing at the fastest pace in 5 years, and clicks growth is accelerating. The dynamic of ex-TAC search revenue in the last several days has recovered to a high single-digit decline. Sector-wise, IT and telecom, food and grocery delivery, health care and home garden have performed relatively better while travel, apparel, real estate and auto are under more pressure.

That said, I wanted to stress a few things. First of all, the decline is clearly driven by external factors, which are largely outside of our control. Before COVID, our Jan and Feb revenue growth on an ex-TAC basis was in the high-teens territory. Secondly, our main goal now is to grow our market share and user base so that when the economy rebounds, we can convert it into revenue growth. And our progress here is impressive, especially with the younger audience. Overall, the revenue dynamic for the full year will depend on the duration and severity of lockdown measures and the economic impact as well as the speed of the recovery, all of which are hard to predict at this stage.

A couple of words about the cost structure of our Search and Portal business. The fixed costs account for around half of the total cash costs in the Search and Portal segment where personnel is the largest component. The variable part includes TAC and cost of sales.

Moving to Taxi. Taxi revenues increased by 50% year-on-year primarily driven by 40% growth in the number of rides, continued optimization of incentives in the ride-hailing business as well as the rapid development of FoodTech services. We have managed to expand our adjusted EBITDA margin, excluding self-driving cars, to 7.6% on the back of improving profitability in ride-hailing, offset by our investments in Lavka and the overall weakness that we saw in late March.

In ride-hailing, variable costs represent approximately 2/3 of our total costs including incentives, while the remaining part is fixed and consists of personnel costs, rent, certain advertising and marketing as well as other operational expenses. We see opportunities to optimize costs, including advertising and marketing, supply acquisition costs and certain overheads.

In Yandex. Eats, we saw further improvement in the unit economics primarily as a result of increased density of orders. We've continued investing in Lavka while being mindful of the impact of this business on total Taxi EBITDA.

Turning to other businesses. Media Services demonstrated very strong revenue growth of 95% year-on-year with improved adjusted EBITDA margin both on a year-over-year and quarter-over-quarter basis. In Q1, subscription-based revenues of Media Services grew 152% year-on-year, and we see strong trends continuing in April. We continue investing in the business as planned and are focusing on the retention of new users.

Our Classifieds revenue increased 35% in Q1. The growth in the first 2 months was very strong. However, we saw a material slowdown in late March after auto dealerships were ordered to close, which obviously has a very meaningful impact on this business unit. While the pressure on Classifieds revenue continued in April, the traffic in our platform remains solid. We see the formation of deferred demand, which we plan to monetize as soon as the business activity starts to rebound.

Finally, on to Other Bets and Experiments. Our revenues almost doubled year-over-year driven by the growth of Yandex. Drive, Geo and Zen. Yandex. Drive, Cloud and Geo were also the key drivers of our adjusted EBITDA loss of RUB 1.9 billion.

As Tigran mentioned, Zen continues to perform strongly in April while our car-sharing business has taken a hit, especially after car-sharing services were suspended in Moscow and St. Petersburg on April 13. With Yandex. Drive, we're now focusing on optimizing our lease agreements and the size of the fleet in order to reduce the burn rate.

Guidance. Given the difficulty in predicting how long the pandemic will persist and uncertainty about its effects on the economy and our businesses, we're unable at this time to reliably quantify the impact of the COVID-19 outbreak on our future financial results. As such, we're withdrawing our 2020 guidance, which we provided on February 14, 2020.

Now what are we doing to mitigate the COVID-19 impact on our performance? We developed various stress tests that helped us to define priorities, and these priorities include investments in the businesses with increased activity and higher social importance in the current environment as well as strategic projects to strengthen the company's position in the long term. After onboarding around 1,300 new employees in 2019 and another 333 people in Q1 2020, we have decided to slow down the pace of hiring given the current circumstances. Partially, this is because of the difficulties in integrating and training new people while we all work remotely. But we also want to ensure that we're appropriately sized when coming into 2021. That being said, we may continue adding headcount in certain limited strategic areas and look for opportunities to redeploy our personnel resources to support in-demand functions and our strategic priorities. We've also made a decision to forfeit cash bonuses for top management in 2020. On top of that, top management has accepted a voluntary pay cut. We're cutting nonessential marketing expenses and exercising rigorous control of our overheads. We believe these initiatives will help us to reduce the adverse impact of the pandemic and the macro headwinds on our 2020 EBITDA.

In conclusion, I wanted to remind you that our balance sheet is strong. We currently have RUB 2.5 billion in cash, including RUB 390 million on the Taxi balance sheet. More than 2/3 of this cash is in U.S. dollars. All of our debt is long term and matures in 2025. We're confident that our strong liquidity position will help us to withstand the challenges of the current situation while also providing us with flexibility to continue investing into long-term strategic projects.

With this, I'm turning the mic 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) The first question we have today comes from the line of Cesar Tiron from Bank of America.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [2]

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So I have two. I'll just ask the first one. Just wanted to check if you could explain the significant increase in market share over the past couple of weeks. I think the last reported blended market share is about 59%. What is the key driver? And do you see market share still increasing even without the help of regulation?

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

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Cesar, it's Greg. Can you hear me?

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [4]

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Yes.

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

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Perfect. So I think the main drivers for the growth of market share is just that we've become the de facto standard for getting a lot of knowledge and information about coronavirus as well as providing a lot of various options for entertainment and things like that. We've launched a number of initiatives that give people a lot more information about it. And I think relative to our competition, the breadth of information is much richer and much more tailored to the local content -- context. Things that we launched around education and such are also important in terms of driving the younger audience, as we talked about in the prepared remarks. And so the younger audience which historically has kind of probably skewed away from us towards the competition has now shifted their usage onto Yandex, which is great.

And remember, pre-installation did not have an impact on this market share gains. All of these market share gains are organic and driven by the quality of our search products and the vitality of our platform. The pre-installation has now been postponed to January 2021 and so hopefully, will have impact on 2021 results. But obviously, we're extremely happy by very strong market share gains on Android, on desktop. On desktop, in fact, in April, our market share is now in excess of 70%. And our market share on Android in April, it's 56%. All of these are -- I think are quite impressive metrics.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [6]

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Greg, can I please ask just another one? Just wanted to check what is the impact of the shutdown of Drive, which I understand is for regulatory reasons. On the 2Q Experiments EBITDA, is it as simple as assuming there's no revenue, but you still would have to pay for the leasing of the cars? Or how is this going to work?

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

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That's a great question. So we have been able to renegotiate our leasing contracts to essentially offset the effects of the shutdown of the Yandex. Drive and other car-sharing companies in Moscow. As a result of that, you're absolutely right that we will not have the revenue to go with it, but also our cost base will be significantly reduced. It's -- I think it's too early to quantify exactly the impact, but we feel relatively comfortable about this not being just a total black hole into which money will disappear. On top of that, I think we talked about in the last quarterly call, we've already taken steps to optimize the size of the fleet to align better with the demand for the service. And I think generally, we will still lose money in the Yandex. Drive segment in Q2. It's not like we were able to completely defer all of our lease payments, but it will not be the black hole that I mentioned.

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Operator [8]

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The next question today comes 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 [9]

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My first question will be on the core business. Could you please provide more color on the categories and the performance inside advertising? Particularly, what factors are driving this recovery you've mentioned over the past couple of days? And if you can disclose what is the contribution of SMBs to revenue at the moment.

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

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Sure. Ulyana, it's Greg. Let me try to answer those. So on -- I'll take your second question first just because it's easy. Our SMBs represent approximately half of our advertising revenues. And what's interesting is over the last few weeks, we actually don't see a meaningful difference in the performance of SMB segment compared to the large enterprise segment within the advertising business. The important thing to keep in mind is that for SMBs, Yandex, Yandex. Search, Yandex Advertising Network represents oftentimes the only sales channel that these businesses have. And as we've seen in previous economic contractions, this is the last thing that people turn off. Hopefully, that answers the second part of the question.

On to the first part of the question, across categories, what I said in the prepared remarks is, obviously, we're seeing strength in sectors like IT and telecom, e-com, home and garden. What's under pressure is things you would expect: things such as travel, things such as auto. Remember, auto dealerships have been ordered a shutdown I think almost a month ago. And so as you would expect, advertising there has declined pretty precipitously. Apparel has been another -- again, not a huge surprise, another category that's been under pressure.

In terms of what we're seeing in terms of trends and what's leading us to actually see -- potentially see green shoots, as I've said, performance over the course of April has been tracking up and to the right from the initial shock. We're seeing better performance out of finance and insurance. We're seeing better performance out of home and garden. We're seeing better performance out of B2B. What has basically flatlined at -- almost disappeared is a category such as travel. Eating out as a category is basically flat. It's not getting worse, but it's not improving. Things like health care is improving. IT and telecom is improving. Building and repair services are slightly improving. Hopefully, that's enough color.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [11]

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Yes. Great. And my second question will be on Taxi. The GMV trends you provided is quite useful. But could you first comment on the take rate, particularly the incentive? How does it change in Moscow and across the business?

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

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Yes. I'll let Daniil take that one.

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Daniil Shuleyko, Yandex N.V. - CEO of Yandex.Taxi [13]

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This is Daniil. Can you hear me?

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [14]

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Yes. Yes. Go ahead.

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Daniil Shuleyko, Yandex N.V. - CEO of Yandex.Taxi [15]

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Yes. My key. So let's go ahead. Look, our gross take rate is significantly below our global peers right now. For example, our blended effective take rate in Q1 was below 10%. We repaid a substantial part of our growth commission to drivers in the form of different types of incentives. Overall, in 2019, earnings of partners of our ride-hailing platform totaled to RUB 250 billion, while in Q1 it was approximately RUB 75 billion.

Our main priority these days is to make sure that hundreds of thousands of drivers and couriers earning on our ride platform feel safe. We're also doing everything we can to provide an additional income opportunity. So we are investing hundreds of millions of rubles in this effort, and this is just a part of what we are doing overall to support our drivers. Our team has also been working extremely hard to find new way to provide drivers with additional rides. So we're creating and launching new services. As I mentioned before, we launched a different type of partnership with big players on this market. Also, just a couple of hours ago, we announced our new partnership with Ozon for their last-mile delivery, and we believe this is another big thing for us. So right now, we're delivering tests, medical professions and a different bunch of everything.

And for financial terms, if you look at everything that we are doing together, it goes beyond what we -- the impact of reduction of commission. We believe that creating new income opportunities is much, much more effective and sustainable way to support our drivers and society rather than just simply reducing the commission.

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Operator [16]

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The next question today comes from the line of Vyacheslav Degtyarev from Goldman Sachs.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [17]

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Yes. The first question is on Search margins. They were quite strong in Q1...

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Katya Zhukova;Director of Investor Relations, [18]

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Slava, sorry.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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Yes?

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Katya Zhukova;Director of Investor Relations, [20]

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Just -- it's Katya Zhukova speaking. Just give us a second. We have some technical difficulties.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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Absolutely.

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Katya Zhukova;Director of Investor Relations, [22]

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We're reconnecting. Okay. Please go ahead.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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Yes. So my first question was on Search margins. They were quite strong in Q1. I'm wondering how much of that was affected by the one-off factors, if any or there is any elements of the Q4 margin weakness. And basically, how sustainable are those margins would be if there was no COVID impact for the full year?

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

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Slava, it's Greg. Let me try to take that. So I wouldn't -- in terms of one-offs, obviously, the decision that top management has made to forgo cash bonuses as well as to voluntarily cut their salaries will have an impact, a positive impact on margins throughout the year as you obviously start to accrue for them from January 1. The other positive impact is on the back of TAC, and this is some distribution TACs specifically. And if you remember, this is something that we talked about on the Q4 earnings call where we said we expect to see benefits from distribution TAC in 2020, and you're starting to see that come through.

Other things that are -- will be offsetting that will be investments and things like content and so on both within the search portal segment. Remember, we have content in search portal as well where we show videos in Yandex. Live service.

With respect to margins overall, I think it's just very much a function of revenues, and it's -- they're very hard to predict at this point. And obviously, we're trying to do everything we can to reprioritize projects, to cut costs where we think it's prudent to do so and to reallocate our investments towards things that we think we have the highest returns for our shareholders.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Okay. And second from me, can you describe competitive strengths across different business units? Maybe you have observed any market share opportunities across certain subsegments. And generally, would you envisage the crisis to create such opportunities? Can you elaborate on that, please?

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

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Sure, Slava. I think -- I hope it will prove to be a real blessing in disguise. We're seeing incredible strength in terms of gaining share in just about every vertical in which we compete. We gained share in ride-sharing in Q1. We've done very well in food delivery. We've had a lot of success with our hyperlocal grocery initiative, Yandex. Lavka. And we've also gained considerable share in Search, as I talked about.

And then if you look at something like the newsfeed product, Yandex. Zen, clearly, that's growing incredibly strongly. And last week, we were teasing with 17 million daily average users, which is up quite a lot since December. And the trends there are very strong. So I think while obviously, it's hard to predict how everything will shake out, we will certainly face headwinds with respect to advertising revenue and other things. I think that this will -- this crisis will really demonstrate the strength of the platform that we've built.

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Operator [27]

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(Operator Instructions) We -- I will open the line of Vladimir Bespalov from VTB Capital.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [28]

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Congratulations for the number. First of all, I wanted to ask you, what is the revenue run rate for Zen? In March, you usually provide these numbers. And I would like also to maybe clarify on the advertising trends. Correct me if I'm wrong, but as far as I understood correct, you mentioned that you see some improvements in clicks. But what about pricing? And what about the general revenue trend? If we look at the April situation, how this develops right now?

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Gregory Abovsky, Yandex N.V. - CFO & COO [29]

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Vladimir, on Zen -- so Zen run rate was down a bit compared to December. The annual revenue run rate was around RUB 8 billion in March compared to RUB 8.8 billion in December. And that's obviously on the back of the impact from COVID-19 while the engagement trends have been extremely solid. Total time spent was up 56% in March. And in April, this growth accelerated to 90%. And then people are spending in April almost 13 million hours per day with Yandex. Zen.

And then with respect to clicks and CPCs, obviously, what we're seeing is that while paid clicks growth is rapid, CPCs did decline. And that trend will likely continue with CPCs, which is just the result of overall advertising being weaker this year than it was last year and having kind of a full month impact of that as opposed to just the 2 weeks that we saw in Q1 or so.

But what's important to keep in mind is that I think today, Search is bar none the highest ROI platform for advertisers. And as a result of that, the trends that we're seeing in Search, which is recovering faster than other forms of advertising, I think is what's driving that. It's the highest ROI platform for advertisers, both for large enterprise clients as well as for SMBs that's why they keep turning to it.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [30]

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Okay. But you couldn't comment on the revenue trends right at the moment. It's not that clear for advertising.

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

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Well, it's just what I've said in the prepared remarks, which is in April, overall advertising saw a high-teens decline. And then if you look at the last few weeks, the decline, especially in Search, has now been reduced to high-single-digit decline. In fact, there are some days when we're seeing flattish to slightly positive advertising trends on Search in April.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [32]

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Okay. Maybe I have missed that. And one more question on ride-hailing business. The partnerships that you have currently with many retailers, e-commerce players and things like this, are these partnerships and business models built on these partnerships sustainable for the development of this business going forward after the lockdown period is over? Do you see like fresh opportunities in this area? And what is the profitability of this business, maybe potentially if not the current one?

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Daniil Shuleyko, Yandex N.V. - CEO of Yandex.Taxi [33]

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Vladimir, it's Daniil. So look, we see that the trend overall in the sector will change. So the people will start to buy online much more often than it was before. That's why we believe that this is a sustainable business model for us in a long-term perspective. For example, we are right now optimizing our cost structure for the delivery to (inaudible), in some cases, the choice #1 in terms of cost perspective for the companies with whom we signed the partnership deals.

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Operator [34]

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The next question today comes from the line of Miriam Adisa from Morgan Stanley.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [35]

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Greg, just drawing on what you just said now about Search being the highest ROI platform for advertisers, just wondering how you're thinking about Search growth as you move out of lockdown and potentially into a recession. There's a lot of talk that digital could decline this year for the first time. Would you agree with that assessment? And how are you thinking about how Search grows in a recessionary environment perhaps compared to 2015 because obviously now it's of higher share of the market. So just wondering how you're thinking about how the business performs in that environment.

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Gregory Abovsky, Yandex N.V. - CFO & COO [36]

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Miriam, I wish I had a crystal ball. I don't. I don't know how digital advertising will perform. I think it's certainly possible that digital advertising will be down in 2020. But first of all, digital advertising still offers one of the highest ROI opportunities for advertisers. And I think that advertisers will keep turning to it ahead of other forms of advertising.

Now obviously, this crisis is different from 2009. It's different from 2015. Digital is much larger as a percentage of total pie. So there's not a secular tailwind as much of a secular tailwind behind it. Plus you'll have the combination of COVID and GDP contraction from lower oil prices and weaker ruble. So all we're trying to do and all we're focusing on is delivering high ROI to our advertisers, delivering click, high-quality clicks to our advertisers, developing new ad formats for our advertisers and getting them the best tools that we can to go after their audiences. Now whether or not Search will be down or not, too early to tell. Whether or not digital advertising will be down or not, too early to tell. But we're certainly modeling all sorts of scenarios. And so when we do run various simulations and scenarios, we do think that it's possible for it to be down.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [37]

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Okay. That's clear. And then my second question, just on the Taxi margin for the core ride-hailing and food delivery. Just wondering how we should think about the sequential margin progression for the second quarter given I guess you have a larger impact from Lavka.

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Yevgeny Senderov, Yandex.Taxi - CFO [38]

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Miriam, it's Yevgeny. So let's talk about ride-hailing first. In Q1, we had very solid growth. But going forward, our base case scenario sort of assumes the peak of decline in rides in the second quarter. And again, I also don't have a crystal ball like Greg, but we see some gradual recovery in the third and fourth quarter. As we mentioned earlier, in ride-hailing, variable costs are 2/3 of our total costs, including incentives. And in terms of fixed expenses, when we're looking at our business in the next quarter and through the rest of the year, we've made significant cost cuts primarily in advertising and marketing, but also in the supply acquisition costs and certain other operational costs. And we are deprioritizing or deferring certain projects that are not essential at this point.

Obviously, we'll have significant additional costs related to the pandemic, including our RUB 500 million fund to support drivers, and also expenses related to the purchase of various masks and disinfectants, costs related to the transport of medical personnel and COVID tests that we're doing and also support the new restaurants where we're waiving commissions to new restaurants and have certain initiatives.

So it's difficult to make any projections at this point. But if we play around with numbers, in case we have a 60% year-over-year decline in ride-hailing GMV in the second quarter, we have -- most likely, we'll post an EBITDA loss in ride-hailing that particular quarter. In case our consolidated ride-hailing GMV is down 40% in the second quarter, I think we're going to be breakeven with the current cost structure. And that's a cost structure that is geared to rapid recovery and regaining the volumes post-quarantine.

So if we compare second half of 2020 to the first half, we expect the ride-hailing business to be profitable on annual basis. And if you look at Taxi overall, of course, it will -- overall kind of results will depend on our investments in self-driving cars and the rapidly growing FoodTech business, so we will continue to invest aggressively in our Eats business. We see some improvement in unit economics. And it's an area of focus for us, unit economics of Eats business. So for the year, we expect a significant improvement in the EBITDA loss margin of our Yandex. Eats towards the end of the year.

And Lavka, our hyperlocal delivery business, is in an investment stage. We have grown Lavka significantly from 50 stores at the end of last year to over 100 stores currently, as already was mentioned I think. But our average daily orders grow -- grew 350% versus the end of -- versus December of last year, and GMV grew this year 550%. And when it comes to Lavka, we will continue evaluating growth opportunities, and sort of the intensity of investments will be a function of our success in that format for the rest of the year. And we will continue to invest in SBC because we believe it's a strategically important area of investment for us, for the company.

And the one thing I would like to mention was already mentioned, but to highlight that, we have a very strong balance sheet. We have $393 million. Most of it is in -- actually in U.S. dollars. So we think we're in great shape to go through the current situation and very well positioned to continue growth once we push past it.

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Operator [39]

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The next question today comes from the line Sebastian Patulea from Jefferies.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division - Equity Analyst [40]

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So I'll ask two, please. Firstly, it appears that during installation, users are turning away from small smartphone screens and more towards larger ones, such as laptops and desktop PC. Is this the kind of behavior you're seeing as well in April? And should we expect some margin tailwind from that effect as a result?

And secondly, between March and June this year, Yandex will appear in the default search engine selection window in Estonia, [Poland,] Latvia, Lithuania and Poland. Can you please talk a bit about the initial results of this action and some of the trends you're seeing here?

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

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Sebastian, in terms of the mix of desktops versus mobile devices, I would say it hasn't changed dramatically. I'd say the mix has changed a little bit in between the days, right, where, for example, on weekends, we're seeing slightly more desktops than we ordinarily do. But I would say it's not a huge change. So I wouldn't build into your models a huge impact from it one way or the other.

And if you look at where we're tracking in terms of the percentage of search queries, which are coming from mobile, those are still up in Q1, right? In Q4, approximately 57.5% of our search traffic came from mobile. In Q1, it was 59%.

And then with respect to the European Union choice screen, that will apply to new devices. So if you recall, this is similar to how it worked with the antitrust element in Russia. It impacts new devices. So it takes quite a long time for the amount of devices which contain the choice screen to actually penetrate into the installed base. So it's something that will take a while to show up in the data.

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Operator [42]

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The next question today comes from the line of Lloyd Walmsley from Deutsche Bank.

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Lloyd Wharton Walmsley, Deutsche Bank AG, Research Division - Research Analyst [43]

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Two I guess both for Greg. Greg, I know you don't explicitly break out search versus display anymore. But can you give us a sense for how core search trends look relative to display? And then the second one would just be on the FX move. I think you guys have moved the lease volatility off the P&L to the cash flow statement. But what -- should we expect any changes in personnel costs around the currency weakness given the kind of global competition for talent? Anything you can share there would be helpful.

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

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Lloyd, so you're right that we don't break it out. But I can just to give you some color. Display is certainly getting hit much more than contextual advertising, the performance advertising. The reason for that is most of the purchasers of display advertising are large enterprises, and those tend to react quickest in most -- in the most severe form to external events. And so we -- that was down more than other forms of advertising in Q1, and we expect it to get worse in Q2.

And then with respect to your second question, just remind me what it was again. I'm sorry.

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Lloyd Wharton Walmsley, Deutsche Bank AG, Research Division - Research Analyst [45]

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Yes. The FX impact to kind of personnel costs or other areas we should be keeping an eye on.

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

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Oh, right, and then also immigration. So given that most countries are shutdown with COVID right now, so far, we're not seeing meaningful impact from FX devaluation. The way that FX will impact our P&L are not as great now as they were back during the last crisis. We hope that we've learned some of our lessons then. The impact will come in the cash flow statement where the share repurchases are still U.S. dollar denominated, and we still need those servers as we continue to invest in our various platforms. So for now, we are reprioritizing our CapEx and we are attempting to optimize it in such a way such that the ruble-denominated amount for aggregate CapEx in 2020 isn't significantly different from our initial budgeting under the previous FX regime.

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Operator [47]

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The next question today comes from the line of Anna Kupriyanova from Gazprombank.

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Anna Kupriyanova, Gazprombank (Joint-stock Company) - Analyst [48]

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My question is kind of regarding your online advertising. As far as I see, your TAC cost share of Yandex properties online advertising has declined. It's now about 11%. If this trend is sustainable. Also, my question is regarding share of Yandex properties and online advertising, if I can assume that it is going to be on the same level as we see now in first quarter '20.

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Gregory Abovsky, Yandex N.V. - CFO & COO [49]

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Anna, on the TAC front, we certainly do expect that distribution TAC should be a bit of a tailwind as we talked about in the Q4 earnings call where we said that we expect that distribution TAC will grow materially slower in 2021 versus -- sorry, in 2020 versus 2019. So that kind of answers the question on distribution TAC. On partner TAC, it's still TBD. We are working with our advertising network partners, and we are trying to find what the optimum point is there, but it's certainly possible that will reduce as well.

And then finally, your last question was about -- remind me.

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Anna Kupriyanova, Gazprombank (Joint-stock Company) - Analyst [50]

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Share of Yandex properties and online.

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Gregory Abovsky, Yandex N.V. - CFO & COO [51]

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Right. So we are certainly hoping that we will get more traffic and we set more revenues out of our properties. We're investing quite a lot into them. I think the quality of our properties is going up. We are integrating them better into our products. For example, the way we've integrated Zen, I think much better into the Search app and the Yandex home page. And so our expectation is that Yandex properties should grow well and should continue to increase slightly as a percentage of total.

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Anna Kupriyanova, Gazprombank (Joint-stock Company) - Analyst [52]

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And as a very quick follow-up question regarding your buyback of shares. Any changes in plans for buyback? Please update us.

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Gregory Abovsky, Yandex N.V. - CFO & COO [53]

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Sure. So to date, we've bought back 4.5 million shares, and we've spent around half of the $300 million buyback program. Our sort of decision between buybacks and investments in the business sort of will depend on whatever brings the highest return to shareholders. And so right now, there's kind of no specific update. But we will be -- I expect that we would be buying shares back from time to time at attractive prices that we've done before.

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Operator [54]

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The next question today comes from the line of Maria Sukhanova from BCS.

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Maria Sukhanova, BCS Financial Group, Research Division - Research Analyst [55]

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Yes. I wanted to ask about your M&A activity. I wonder now with macro weakness whether we should expect from you accelerating your M&A activity, especially considering your cash pile on the balance sheet.

And also, second one on Lavka. With the boost in orders that you've seen recently, are there any locations that are already profitable or something -- or in economics needs to improve further for the locations to become profitable?

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Gregory Abovsky, Yandex N.V. - CFO & COO [56]

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Sure, Maria. Yevgeny will answer about Lavka, and I'll try to answer about M&A activity. So obviously, having about $2.5 billion of dry powder is extremely helpful in this environment because it provides us with strategic flexibility to do deals opportunistically. And so we are looking at various assets out there and evaluating them. But it's a question of how strategic are they, is the price attractive and is this the highest return to our shareholders.

Yevgeny, maybe you can answer some of the questions on Lavka.

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Yevgeny Senderov, Yandex.Taxi - CFO [57]

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Yes. Maria, well, I wouldn't give you an exact number, but yes, we do have locations that are sort of pre-overheads EBITDA contribution positive. But we're -- just to point out that not only we're growing the top line at Lavka, but we're very focused on improving the margin picture, and that's actually improving month to month and maybe even week to week. So yes, our goal is to have of course EBITDA-profitable stores. And we've seen significant progress towards that.

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Operator [58]

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The next question today comes from Anna Kurbatova from Alfa-Bank.

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Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division - Senior Analyst [59]

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I have two questions. First of all, about self-driving cars and the media investments, so both projects or business lines are in active investment stage. So I wonder whether you, in current conditions, tend to stick to your initial investment pace in self-driving cars and media content, particularly video, or you have also made or are going to make some kind of budget adjustments in Q2 or going forward.

The second question is on Yandex. Market. It would be great to understand to have any indications from you whether you have negotiated with your partner. And also any adjustments in the Yandex. Market budget for this year? So any trends and developments at Yandex. Market?

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO & Director [60]

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It's Tigran. May I take this -- Greg, you want?

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Gregory Abovsky, Yandex N.V. - CFO & COO [61]

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No. No. It's okay. Because you cut off Anna.

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO & Director [62]

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Yes. Sorry. May I take this. Sorry, Anna. Okay. May I take that question about SDC and Media Services? So on Media Services side, we are going to continue to invest in content. And in the service, we see that, especially during this COVID situation, it became significantly more attractive than ever. And this is -- this service is one of the beneficiary of that situation -- the situation. On SDC, we're still committed to develop this technology. So we more or less planning to continue to increase the size of the fleet and team size. So -- and dependent on how revenues -- what revenues we will see from all our business and how our situation will be by the end of the year, probably we will adjust our plans. But this is long-term investment and we believe that in long term, we will be able to provide full level 5 self-driving technology.

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Gregory Abovsky, Yandex N.V. - CFO & COO [63]

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And then on -- obviously, in Media Services, I think it's been a great beneficiary of this pandemic plus we've had some content, original content that we developed ourselves, which was released on the platform fairly recently, and it's performing extraordinarily well. And we're very happy with that. And I think that Media Services, as part of this big Yandex. Plus ecosystem, is a very important strategic asset for us.

And finally, in the Yandex. Market, again, it's another massive beneficiary of the tailwind from the pandemic, and so we're continuing to invest in e-commerce. And obviously, we're also investing in Yandex. Lavka, which is outside of the joint venture. This was specifically carved out from the joint venture as a hyperlocal convenience store model. In there, we're seeing incredible demand. As I said, sales in Lavka grew about 550% from December to April.

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Operator [64]

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The last question we have today comes from the line of Vladimir Bespalov from VTB Capital.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [65]

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I would like to ask you about the structural price in your ride-hailing business. How it differs from global peers if we look at your peers? And whether this structure will be helpful to fast recovery in ride-hailing once the lockdown measures are lifted here? Or else, how do you see the situation here?

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Gregory Abovsky, Yandex N.V. - CFO & COO [66]

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Sure. Well, if you actually compare with our global peers, I think, first of all, we have a relatively small portion of rides to the airports. So in Moscow, it's mid-single digits and very low single digits in Russia overall. And of course, I'm talking about pre-COVID situation. We do not have pool services that are not currently used -- that are offered by Uber and our competitors. And then just to say, know that right now, we had -- before quarantine restrictions, we had a very rapid growth in usage of our premium tariffs, which are currently restricted. So overall, with a small portion of airport rides, return of the premium tariffs, I think we're very well positioned to recover once the lockdown restrictions are withdrawn. And also, I want to highlight that as in any other business, core riders of hailing who use the service frequently generate substantial portion of the GMV. And once the quarantine restrictions will relax, we see -- we will see the majority of these riders resume to their normal usage pattern. So it's basically...

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Operator [67]

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No further questions. Yulia, would you like to conclude?

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Yulia Gerasimova, Yandex N.V. - Head of IR [68]

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Yes. Thank you very much. Thank you, everyone, for joining our call today. If you have any further questions, please contact the IR team. We'll be happy to help you. And thank you very much. Bye-bye.

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Operator [69]

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Thank you. That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.