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Edited Transcript of YNDX earnings conference call or presentation 26-Jul-19 12:00pm GMT

Q2 2019 Yandex NV Earnings Call

SCHIPHOL Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Yandex NV earnings conference call or presentation Friday, July 26, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory Abovsky

Yandex N.V. - COO & CFO

* Katya Zhukova

Yandex N.V. - IR Director

* Tigran Khudaverdyan

Yandex N.V. - Deputy CEO & Director

* Vadim Marchuk

Yandex N.V. - VP of Corporate Development

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Conference Call Participants

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* Catherine T O'Neill

Citigroup Inc, Research Division - Director, VP and Analyst

* Cesar Adrian Tiron

BofA Merrill Lynch, Research Division - Research Analyst

* Igor Goncharov

Gazprombank (Joint Stock Company), Research Division - Analyst

* Lloyd Wharton Walmsley

Deutsche Bank AG, Research Division - Research Analyst

* Maria Leonidovna Kahn

HSBC, Research Division - Senior Analyst of TMT

* Miriam Anuoluwapo Adisa

Morgan Stanley, Research Division - Equity Analyst

* Sebastian Cristian Patulea

Jefferies LLC, Research Division - Equity Analyst

* Slava Degtyarev

Goldman Sachs Group Inc., Research Division - Analyst

* Ulyana Lenvalskaya

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

* Vladimir Bespalov

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

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Yandex Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today on Friday, the 26th of July, 2019. And I would now like to hand the conference over to your first speaker today, Katya Zhukova. Please, go ahead.

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

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Hello, everyone, and welcome to Yandex' Second Quarter 2019 Earnings Call. We distributed our earnings release earlier today. You can find its copy on our IR website as well as on Newswire services.

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

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

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

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Thank you, Katya, and hello, everyone. Thank you for joining our second quarter 2019 earnings call. This is my first call in the Deputy CEO role, and I'm very excited to report a terrific set of results. In Q2, we delivered consolidated revenue growth of 41% year-over-year on ex market basis. This is the fifth quarter in a row when Yandex demonstrated growth rates above 40%. The growth was driven by solid performance in our core business despite advertising market being more challenging this year. However, we expect to continue seeing solid growth in online ad projects as a result of shift towards online. Search and Portal revenues increased 21% year-on-year driven by Yandex properties. This is a solid result despite tougher comps.

On search share trends. In June, our overall search share was 56.9%, up 130 basis points compared with a year ago. Our search share on Android hit 52.6% in June, including 19 basis points from March 2019 and 460 bps from June of 2018. In Q2, for the first time, our overall mobile search share surpassed 50%, and in June, averaged 50.1%, growing 400 basis points year-on-year. We expect further share gains on mobile. But as we have said many times before, it's logical to assume that the pace of gains will moderate.

Now turning to Alice, our voice assistant. Our main focus is building products that are designed to help people in their daily lives. Alice is exactly this type of product. It helps user beyond search on a growing number of platforms. I'm excited to highlight that we've recently signed an agreement with Renault, Nissan and LADA for Yandex. Auto, our in-car infotainment system. According to this partnership, Yandex. Auto will ship in 2 million vehicles of Russia's best-selling brands. Beyond cars, to make user experience even better, we have recently introduced smart home integration into Alice. Now users can easily control tens of thousands of devices and appliances from leading manufacturers with just their voice. We also continue working to integrate our assistant into partner devices. Alice is now powering smart speakers sold by LG and Elari. We are excited with the prospects of voice assistant across the world and we are committed to invest in its development going forward.

Turning to Taxi. This segment delivered robust results with 117% year-on-year revenue growth, reflecting strong performance of our ridesharing business on the back of rides growth, incentives optimization and our corporate taxi service. Another tremendous news is that in Q2 2019, the whole Taxi segment turned profitable. Its adjusted EBITDA was RUB 423 million. The profitability of the ridesharing segment offset our investment in food delivery and self-driving. In Q2, the number of rides increased 49% year-on-year. The ride growth continued to be solid in mature cities like Moscow and St. Pete. The growth in the regions was also very impressive. We believe that deeper focus in the regions will allow us to significantly improve the quality of taxi services there in to just high standards of safety and security and to continue providing affordable rides for regional users. At the same time, on the back of better utilization rates driven by our technology, we can deliver higher income for drivers. Our recently announced transaction with the Vezet Group will accelerate our penetration into the regions.

Let me now quickly walk you through the key aspects of our transaction with Vezet. We agreed to acquire IP and call centers of Vezet Group in Russia. After the due completion, the current Vezet shareholders will receive up to 3.6% of issued share capital of MLU in new shares, together with up to $71.5 million in cash. The deal requires the Federal Antimonopoly Service approval. We expect to close the deal by the end of 2019. We're very excited with this deal and truly believe that this transaction will help us to continue to develop the regional market, delivering our world-class technologies to our users and drivers.

Turning to food tech. The Yandex. Eats, our food delivery service, continued performing very well. As of today, Yandex. Eats is connected to 11,000 restaurants and is available in 24 cities. Yandex. Eats' revenues in Q2 increased over 600% year-over-year. On the previous earnings call, we talked about the introduction of delivery fees. We see that this experiment pays off as it considerably improves unit economics of our food delivery business without a material impact on our pace of growth. Introduction of delivery fees together with logistics optimization allowed us to make very significant improvements in our unit economics.

Now to autonomous vehicles. In Q2, we further advanced in developing our self-driving technology. Few recent achievements include: the launch of an R&D center in Israel, where we also have a license for operations; and the completion of integration of our self-driving technology in new Hyundai Sonata. Just think of it. On the last call, I mentioned that we signed a memorandum of understanding with Hyundai Mobis. The 2 companies were able to create and present a prototype of a driverless car based on Sonata in just 5 weeks. Quite an achievement, I think.

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

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

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Thank you, Tigran, and thank you all for joining our call today. We had a strong quarter as our consolidated revenue excluding Yandex. Market grew 41% year-on-year in Q2. Online advertising revenues excluding Yandex. Market increased 21% year-on-year. Total TAC grew 18% year-on-year and amounted to 13.5% of total revenues, down 240 bps from Q2 of 2018 and down 80 bps sequentially. Traffic acquisition costs related to partner advertising network increased 11% year-on-year. Traffic acquisition costs related to distribution partners grew 39% year-on-year due to the continued growth of Android.

In Q2, distribution TAC averaged 7.8% of Yandex Properties revenues, which is 40 basis points lower compared to Q1.

Turning to our cost structure. In Q2, total OpEx excluding TAC and G&A grew 42% year-on-year. Excluding stock-based comp, operating expenses increased 41%, in line with our revenue growth rates. The increase is mainly driven by cost related to Taxi, primarily due to corporate taxi services and costs associated with our food delivery business as well as by costs related to Drive. As of June 30, we had 9,005 employees, up 4% compared to March 31, primarily driven by Taxi as well as new hires in our experimental businesses.

On a year-over-year basis, our head count was 9% higher. In Q2, our personnel costs amounted to 18% of total revenues. D&A expense in Q2 increased 28% year-on-year. The growth acceleration mainly reflects our investments in servers and data center equipment, costs related to land lease of the Korston site, which we acquired in December 2018 for our Moscow headquarters as well as purchase of office equipment.

Our consolidated adjusted EBITDA excluding Yandex. Market grew 48% year-on-year. This quarter, the impact from ForEx was a loss of RUB 270 million related to the appreciation of the Russian ruble during Q2 from 64.7 to the dollar to 63.1 to the dollar. Adjusted net income in Q2 was up 16% year-over-year. Adjusted net income margin was 14.1%. Excluding our share of the losses of Yandex. Market, adjusted net income was up 31% from Q2 2018.

Our CapEx was 19% of total Q2 revenues. As we've previously said, in 2019 we expect our CapEx, excluding new issue expenditures, to be in the low teens as a percent of total revenues.

Now I'm turning to the performance of our business units. Search and Portal demonstrated solid growth despite tougher comps. This quarter, Search and Portal revenues grew 21.4% year-on-year. Adjusted EBITDA of Search and Portal grew 18% year-on-year in Q2 and its adjusted EBITDA margin was 47.3%., down 140 bps compared with Q2 2018, reflecting mainly video content costs as well as sales of our devices. Excluding IoT, adjusted EBITDA margin of Search and Portal was 48%, down 80 bps from Q2 2018. We continue to anticipate that our adjusted EBITDA margin of Search and Portal business for the full year 2019 to be 100 to perhaps 150 basis points lower compared to the previous year primarily as a result of our ongoing investments in IoT. Excluding IoT, we continue to expect that adjusted EBITDA margin of Search and Portal business will be roughly flat compared to 2018 levels.

Now turning to Classifieds. Revenue of Classifieds business grew 42% year-on-year in Q2. This quarter, the growth rates were -- mainly reflected the revenues from listing fees and value-added services, which increased 98% year-on-year. Adjusted EBITDA of Classifieds was RUB 265 million.

Onto Media Services. In Q2, Media Services revenues grew 122% year-on-year primarily driven by the growth of our subscription service and video advertising, reflecting integration of KinoPoisk into Yandex' ecosystem and the growth of the video content inventory. Media Services' adjusted EBITDA loss was RUB 438 million, in line with Q1, reflecting our investment in our content library as well as in advertising and marketing. In Q2, Yandex. Music demonstrated a rapidly growing number of subscribers, over 2 million as of today. While subscription revenues grew 141% year-over-year. KinoPoisk continues building up its content library and its subscription base. Video consumption in Russia is gaining traction. We consider further investments in video as an important part of our long-term strategy.

Turning to Other Bets and Experiments. In Q2, revenues of Other Bets and Experiments represented by Yandex. Drive, Zen, geo services, Cloud and Education reached RUB 3.4 billion and increased 203% year-on-year. The revenue growth primarily reflects strong performance of our Yandex. Drive, Zen and geo services. Adjusted EBITDA loss of Other Bets and Experiments was RUB 0.9 billion primarily as a result of our investments in Cloud and Drive. Yandex. Drive, which is now the largest contributor to the Other Bets and Experiments revenues line, continues strengthening its market positions. In Q2, we expanded our car-sharing service to Kazan. Our total fleet is now 11,500 cars and the number of rides completed has exceeded 26 million since launch.

Turning to Zen. Zen continues developing as a social platform, adding new features and increasing user engagement. We believe that Zen could become a true alternative to social networks with significant content base, user account, likes and comments. Users spend over 30 minutes daily in Zen, which is comparable to social networks. As of today, we're very much focused on developing a publisher platform, improving the content quality as well as increasing the portion of short videos and other entertaining formats on the platform. In Q2, Zen's annualized revenue run rate was RUB 6.9 billion. This is a growth rate of 63% year-on-year. Our geolocation services demonstrated solid results in Q2, doubling revenues year-on-year for the seventh consecutive quarter. In particular, revenues from local-based advertising grew 4x as a result of the growing portion of SMB clients on maps and on navigator. The development of the service ecosystem for drivers is one of our key focus areas. Tigran already mentioned our long-term partnership with Renault, Nissan and AVTOVAZ within the context of Yandex. Auto.

Now getting back to corporate matters. We ended the quarter with approximately RUB 75 billion in cash and cash equivalents, excluding the balances of Yandex. Market. This is approximately $1.2 billion of the exchange rate as of June 30. This includes the cash of Yandex. Taxi, which amounted to about $400 million as of June 30.

Turning to guidance. Based on the recent solid performance of our businesses, we're increasing the outlook for a consolidated revenue on an ex Yandex. Market basis and now expect it to grow 32% to 36% year-over-year.

Also we reiterate the outlook for our Search and Portal business and expect it to grow in the range of 19% to 21% year-over-year in 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Cesar Tiron of Bank of America.

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

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Congrats on the numbers. I have two questions, please. The first one is on the core search business. We saw a bit of deceleration in the CPC growth on a year-on-year basis. Can you please elaborate on that? And then the second question would be on Taxi. If you could please get back to the Vezet acquisition, probably tell us if you expected the Mail. Ru, Sberbank partnership when you made that acquisition? And also probably tell us a little bit of how you thought about this acquisition versus building this facility of call centers organically?

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

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Cesar, it's Greg. Let me try to take your first question on core search. So with respect to the decel in CPCs, we've consistently said that our primary focus is driving higher returns on investments for our advertisers. So to that end, if we can drive more traffic to our advertising clients through more paid clicks, we will always make that trade-off versus increasing prices. And the way that we do that is by increasing relevance and targeting our advertisements, which is, in the end results, in higher-paid clicks and, therefore, can hold back the competitive pressure of CPCs. So I think we're very happy to see those trends. I think if you are asking broader sort of questions around the trends in the business, I would say that the Search and Portal business is in excellent shape. While the main numbers were a bit soft and we saw May growth of only about 17%, we're seeing very strong growth in July and we also expect that on kind of a 2-year stack basis that our rate of growth should be constant throughout the year. So I think that kind of speaks for the pace of technology innovation that takes place in the Search and Portal business.

With respect to Vezet, I think that as we thought about the opportunity presented to us. We saw that there was a large untapped opportunity of bringing, sort of, safety and security and using our cutting-edge technologies in the regions. The acquisition of the IP and call centers from Vezet allows us to roll out, sort of, our kind of cutting-edge technologies and improving kind of safety and security in the regions at a much faster pace than if we were to do it on our own. So I think we are excited by that acquisition.

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Operator [4]

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And your next question 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 [5]

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Congratulations on the strong quarter. My questions will be first on Taxi. Could you please disclose current GMV run rate, if possible? And also comment on the contribution of corporate to the total at the moment?

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Gregory Abovsky, Yandex N.V. - COO & CFO [6]

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Sure. So on Corporate Taxi, or B2B Taxi, we don't typically disclose it but I'm sort of happy to provide you the numbers. At the end of the day, there's not a huge difference in terms of the growth rates of revenues with B2B or without B2B. Just as a reminder, our Taxi segment revenues increased 117% in Q2 with B2B included. If you were to strip out B2B from both Q2 of 2019 and Q2 of 2018, our revenues of the Taxi segment would have grown 110%. So not a huge difference there. At the same time, I would say we're very excited about the opportunity presented by B2B. We think this is an excellent product for corporate clients to use for their employees and this is -- the segment has been growing very nicely for us.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [7]

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And the total GMV, Greg?

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Gregory Abovsky, Yandex N.V. - COO & CFO [8]

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These are just metrics that we've disclosed consistently. The last time we disclosed it was back in December, at which point it was RUB 4.2 billion.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [9]

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Okay. And at this point in time, can you comment on the potential contribution of Vezet to rides and GMV?

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

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I think it's too early to speak about that. The deal is still pending as you know. But I think we're very excited about the opportunity that it presents to expand Yandex' ecosystem into the regions.

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

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Okay. And my second question will be on the car sharing, Drive. Do you see currently any cannibalization of taxi ride -- rides by the car sharing? And if so would it make sense to potentially include Drive into the Taxi segment, for instance?

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

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Sure. That's an excellent question and it's one that we think about a lot. I think the opportunity that the sharing economy represents is getting more and more people to abandon fully or partially car ownership and to shift to a sharing economy. And so there will be times when they will choose to use car sharing, hopefully Yandex. Drive, and there will be times when they'll choose to use ridesharing, hopefully Yandex. Taxi. Could there be sort of cannibalization between the two? Sure, I mean they are all modes of transportation, and in that sense, I think car ownership also cannibalizes Yandex. Taxi. And I think over time, it might make sense to have these businesses more closely linked. However, our goal is to overall get more and more people to abandon car ownership and to shift to a sharing economy.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [13]

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And the third one, not a question but Cesar's question, I think you didn't really respond. What is the potential impact of Sberbank and Mail's JV you think on Taxi?

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

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I'm sorry. I guess I didn't hear that question. I wasn't trying to avoid it. Look, I think the announced term sheets between Sberbank and Mail, I think it's a very positive development, I think in terms of food delivery competition. I think the market is very much nascent today, right? There's a very little usage that occurs today for a typical Russian consumer for food delivery. And the fact that this market is so nascent is proved by the fact that we saw our share of this market grow from 0%, right, 18 months ago, to around 50% today. So we were able to come in to the market and take 50% of the market in 18 months. And I think we did this extremely efficiently from a cost perspective and in terms of returns on investment. And I think that the Sberbank and Mail JV will just expand this market. Now if you look at Taxi, look, I think we have a great track record on technologies and innovation. And while we can't ignore the importance of capital, as in any competition there are different ways of winning, it's not always about capital. I think competition drives sort of any business forward. It gives consumers more choice. And it hopefully, again, kind of accelerates that shift in terms of expanding the market and substituting car ownership for sharing economy. Our focus is on quality of service, on technology and on security and safety. And I think in terms of that we're sort of way ahead of everyone else in ensuring that both sides of the marketplace feel safe and secure and are happy with our service, which is of very high quality. And finally, I think you can't underestimate the importance of the ecosystem that we bring to bear, which is the fact that all of our products are united under one ecosystem, which is consistent and seamless as you move from one service to the other. So I think we're very excited about the developments in this market. We feel that we have a very strong position, and I think we're very excited by the potential for market expansion that this introduces.

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Operator [15]

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And your next question comes from the line of Slava Degtyarev of Goldman Sachs.

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

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A couple of questions. Firstly, how do you envisage path of profitability of Taxi? Q2 was quite strong despite weak seasonality in ride-hailing. Were there any one-offs maybe you expect accelerated investments into the self-driving, international expansion for the food delivery in the coming quarters? And secondly, the level of investments into the experiments declined Q-on-Q. Can you elaborate on that? Is there any seasonality here? Should we expect a pickup in the coming quarters?

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

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Slava, so profitability of Taxi. As we said in the past, our Taxi segment really encompasses a number of sort of different businesses with different underlying dynamics: you have the ridesharing business in Russia, sort of the core business; you have our international markets, of which we are currently present in 17 other countries outside of Russia; you have food tech business, which includes both food delivery as well as meal kits; and you have the autonomous business, which I think has great promise as Tigran talked about in his prepared remarks. And in Q2, we didn't have any one-offs but what we did have is sort of very strong operating performance of the core ridesharing business, which was able to offset the investments that we're making in autonomous, in food tech and in international expansion. And so I think that we will continue to make investments at a pace that we think is appropriate going forward and those will obviously be driven by a whole host of things, things like timing in terms of investments in autonomous, timing in terms of international expansion and obviously, other market dynamics. But we feel that we're in a very strong position with a great technology stack and excellent team. And I think it's just going to evolve over time.

And then with respect to experiments, also I think no one-offs. What that shows is the improved unit economics of the Yandex. Drive business. Nice growth that we're seeing in geo. As I mentioned, their revenues increased pretty dramatically year-on-year, and this has been a consistent story now for a number of quarters. And finally, we're getting -- we're starting to see some very early traction in cloud business. I think as we've said, cloud is kind of a long-term opportunity that we see. I think we are investing for the long term with cloud. But we are very excited about it.

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Operator [18]

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And your next question comes from the line of Masha Kahn from HSBC.

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [19]

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Congrats on the great quarter. I have a question around your food delivery economics. You said they improved significantly. Could you give us a little bit more color around kind of the order density? How much the unit economics improved delivery fees, anything you could give us some color on? And the second question is on Drive. Are you seeing the path to profitability there? Has that improved? If you could give us some color there as well. And on Zen, if you could provide us a run rate for that, that would be great too.

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

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Sure. So in terms of improved unit economics in food, they definitely improved. What we saw is, we saw improved revenue growth. So we grew 13% quarter-on-quarter in Q2 and sort of the run rate of our Eats business excluding meal kits is now RUB 3.3 billion as of June, which I think is a very nice improvement. What else can I say about it? We're seeing definitely benefits from higher density. We're also seeing benefits from adding more QSRs onto the platform. As you recall, we had McDonald's on the platform historically. We've recently added Burger King to the platform. We've also recently added Subway to the platform. And we are in -- we currently have 11,000 restaurants on the platform and we are in 24 cities primarily with an own delivery model. So I think from a food delivery standpoint, I think we feel really, really good about where we are.

Turning to the Drive business and path to profitability. We definitely see a path to profitability in this business. We saw very good trends in unit economics there. And based on those trends that we're seeing, we are looking to accelerate the pace of our investments there.

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [21]

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And, Greg, can you comment on Zen as well?

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Gregory Abovsky, Yandex N.V. - COO & CFO [22]

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Oh, I'm sorry, yes, on Zen. On Zen, what we saw is that we have a revenue run rate of RUB 6.9 billion based on Q2 numbers and the revenues grew 63% year-on-year. In terms of MAU and DAU, currently, DAU is RUB 10.6 million and MAU is -- one second, Katya is pulling it up. She'll get back to you on the MAU number.

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Operator [23]

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And your next question comes from the line of Lloyd Walmsley of Deutsche Bank.

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Lloyd Wharton Walmsley, Deutsche Bank AG, Research Division - Research Analyst [24]

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Hopping around calls this morning, so sorry if this has already been asked. But can you just give us a sense for how the ad business is looking kind of into the third quarter? Going back to last quarter, there were some real promising new products. You talked about Yandex. Direct on the home page and templates. So wondering if you can just help us think about how that -- those products may help and how the digital environment is shaping up for the second half. And then a second one if I can. Just on the Taxi business, as you push into the regions, can you talk about how the product is used differently? And then aside from just having to invest to stimulate adoption, are there any structural differences in unit economics or long-term contribution margins in these markets differently than, say, Moscow and St. Pete?

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Gregory Abovsky, Yandex N.V. - COO & CFO [25]

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Sure. Lloyd, so on the ad business, what you missed and I'll just quickly kind of repeat it is, I think the ad business is in good shape. I think while the environment is a bit softer overall, it's in good shape. And what we expect is that we expect revenue growth to be fairly flat from a 2-year stack perspective throughout the year. We saw weakness in May due to the long May holidays. And in May, our Search and Portal business grew only 17%. And now we're sort of in the low to mid-20s in July. So I'd say, overall, the environment is okay, a bit softer than before but okay. And we feel confident that we'll be able to deliver sort of a constant 2-year stack over the course of the year. And obviously, things like templates that you talked about or bid correction are all the things that help drive that for us as a company.

On Taxi and regions. So the main difference, obviously, is that the average checks are lower, frequency is a little bit higher. Net-net, you're probably making less rubles per ride. But overall, I'd say from an LTV standpoint, they're more or less comparable. And Tigran is going to add a few more observations on that market.

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO & Director [26]

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Yes. So the significant difference between what we see into capitals in Russian region is that the quality of public transportation is significantly lower. So -- even there are some cities where you cannot find a bus after 10 p.m. So that is why in some cities, ridesharing is a key part of transportation in the city, and this is -- and apparently that drives the frequency of the users in that city.

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Operator [27]

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And your next question comes from the line of Miriam Adisa of Morgan Stanley.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [28]

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Two questions from me. Firstly on Taxi. With the ride growth being 50%. This is first quarter that we're seeing a proper like-for-like growth. Could you talk about what we should expect for the rest of the year? And what is essentially a normalized level of growth for Taxi now? How fast are you growing in Moscow and Petersburg versus regions? And then secondly, on the Media Services business, could you talk a bit more about the drivers behind the acceleration in growth there? You mentioned the uplift in music subscriptions and you also mentioned perhaps the number of subs on Yandex. Plus as well. Any other drivers of growth there?

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

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Miriam, it's Greg again. On Taxi ride growth. Yes. So we saw rides growth of 49% in Q2 of '19, and I think the interesting thing is if you looked at Q1 of '19 on a like-for-like basis, so essentially adding in Uber on a full year basis in Q1 of '18, you would have seen 53% growth in rides in Q1. So about 4 points of decel from Q1 to Q2 on a like-for-like basis. In terms of sort of our expectations going forward, we do expect that, that rate of growth is going to slow down somewhat but at a modest pace or similar to what you have seen thus far in the year, if you did on a like-for-like basis. And then in terms of drivers of growth for Media Services. So certainly, it has been the rollout of Yandex. Plus subscription, which is going quite well, which unifies our ecosystem together. It offers a bunch of benefits to consumers from streaming music to streaming video with KinoPoisk to discounts on Taxi and on Drive and other benefits, such as free shipping on Beru or free online cloud storage with Yandex. Disk. And finally, we've also kind of rolled out a cobranded debit and credit card offerings with Tinkoff Bank and Alfa-Bank. So those Yandex. Plus cobranded cards are also driving additional subscription and usage of all of our products.

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Operator [30]

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

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

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I've got three, please. First one is regarding Yandex. Taxi. And it has been reported in the media that you've started reviewing ride prices for consumers and increasing the commission for drivers in some regions, which we can also see in the numbers today. How likely is it that the overnight emergence of a large $1 billion capitalized competitor will stop you from rising prices? As we've seen in other markets this time, online ride-hailing players are running on 10% commissions and still struggling to gain market share from 25% to 30% commission guide. That will be the first one. The second one is still regarding Taxi. Sberbank is highly incentivized economically to make the Mail. Ru and Citymobil JV work. However, Sberbank's CEO is also on your Board and sometimes he's not actively taking part, at least overhearing some strategy discussions and learnings regarding Yandex. Taxi. How will this relationship work? And lastly, can you please segment the rides growth according to growth due to the -- due to new city expansion and growth coming from existing markets?

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

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Sebastian, so I would say on Yandex. Taxi, the way to think about pricing is, as I've said many times before, our ultimate focus is on getting consumers to abandon car ownership and shift to a sharing economy. So we're not interested in increasing prices. If anything else, what we'd like to do is make ridesharing more affordable for our consumers while at the same time delivering fair wages, if you will, fair earnings to our driver partners, which we think is extremely important. And that kind of is an outflow of the efficiencies that we build into our technology platform. In fact, if you looked at pricing, since the Uber combination, they have been constant, right, constant since the combination with Uber closed, which is pretty remarkable I think, right? You would think that here, there is a massive price increase and the landscape is going to completely change. But the reality is, we want to make rides more affordable while delivering fair earnings to our drivers. In terms of conflicts, as you can imagine, there's always times when you will have conflicts of interest on the Board. And in those instances, what you have is you expect to have Board members recuse themselves from discussions around sensitive topics, and I think our case is no exception. And finally, with respect to growth of new markets versus existing markets, both are a contributor but we're continuing to see very, very strong growth in our core markets.

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Operator [33]

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

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

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Congratulations on good numbers. First, a very technical one. Could you provide the growth rate for Taxi growth revenues in the second quarter? Then the second is also pretty technical. Could you please comment a little bit on the slowdown that we see in your advertising network revenues? What happened in the second quarter? Was it one-off? And one more technical on the Classifieds business. We see a good improvement in the margin of this business, but my assumption was, and to your comments before, were that you will reinvest all returns into the development of this business. So how should we look at this 20% EBITDA margin that you recorded in this second quarter and going forward? Plus, one more other question on the headquarters. I just want to ask you, do you have a Plan B? Because the current lease expires in 2021. And it looks like you haven't started building a new one. So what will be the solution if you fail to complete the new headquarters before the end of 2021?

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

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Vladimir, so on ad network trends, I think that overall, it's the same impact. Driving the ad network is driving the Search and Portal business overall. So there isn't anything specific with respect to the ad network business there, which is different from the rest of the Search and Portal business. With respect to Classifieds, we're seeing obviously very, very good growth in that business on the advertising side, kind of, the core business of Classifieds. As we said in the prepared remarks, growth is excellent. We do expect to continue to invest in the Classifieds business. What we see is we're taking -- continuing to take significant share from other players in the market, and our plan is to continue to do so going forward into the second half of this year and into 2020 and so on because we just feel like really good about the business that we have there. I think we've kind of cracked the puzzle there. Finally, with respect to Korston or alternatives and Plan Bs for our facilities, we're certainly working on alternatives and we're looking at other sites that we're planning potentially to lease to kind of hold us over in the interim period if we are not able to start construction appropriately. In fact, we're looking at plans B, C, D and E. So that's kind of under control. And finally, I think on your question about gross commission revenue, in Q2, we saw gross commission revenue which kind of exceeded rides growth by about 10 percentage points.

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Operator [36]

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And your next question comes from the line of Catherine O'Neill of Citi.

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Catherine T O'Neill, Citigroup Inc, Research Division - Director, VP and Analyst [37]

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I've got a couple of questions. One, just going back to the cloud business which you seem to be very enthusiastic about. So I just wondered if you could talk about the competitive landscape in cloud and perhaps, a bit more detail about how you see the opportunity evolving and the revenue model there? And then on the Taxi business, you mentioned you're in 17 other markets. Are there any particular markets where you're seeing the most potential? And do you have ambitions to push into any more or are you bedding them where you have right now?

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Gregory Abovsky, Yandex N.V. - COO & CFO [38]

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Catherine, on the cloud market, in terms of the competitive landscape, I'd say sort of we're the clear leaders from a technology standpoint in this market. Obviously, you have players like Microsoft and Amazon who are much further along. But currently, they are not offering products here in Russia. The reason that we're excited about this business is that we believe in the underlying trends that drive people to move their test and development as well as their production systems from an on-premise setup to a cloud-based setup because we can do that much more efficiently than any enterprise. If we look at the data center footprint that we have, we're probably the only player in Russia with web-scale data centers able to accommodate loads of almost any size. And I think the ability to take the technology that was developed for Yandex' owned services where we serve 0.25 billion queries per day in real time without downtimes and being able to offer similar technologies to our consumers is what makes us excited about it. And that market may develop slower than it has developed in U.S. or Europe, but it will develop. It's just a question of when not if and the pace of that transition.

And then with respect to markets that we're excited about outside of Russia. The service is doing very well in places like Kazakhstan and Uzbekistan and it's doing very well in places like Africa. So there is a lot of opportunity there. It's doing really well in Israel, it's doing really well in Romania. So there's definitely potential for Yandex. Taxi outside of just our core Russian market.

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Operator [39]

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Your next question comes from the line of Igor Goncharov of Gazprombank.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Analyst [40]

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Congratulations for the results. Just a quick question. One of your competitors stated that they have a veto right on -- in relation to Taxi, the veto right on disposal of the Vezet assets. Do you consider this as a risk for completion of the deal with Vezet?

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Vadim Marchuk, Yandex N.V. - VP of Corporate Development [41]

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Igor, this is Vadim speaking. Let me take this one. So look, I think we previously stated that we do not believe it is appropriate for us to comment on the relationship between the other 2 companies. What we can say is that in their official statement, Vezet has already said that it does not violate the terms of the convertible loan and intends to comply and -- to comply with their agreement with Mail. Ru Group.

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Operator [42]

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And you have a follow-up question from the line of Ulyana Lenvalskaya of UBS.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [43]

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My follow-up will be on regulatory environment in Taxi segment. We're seeing some news and discussions locally before. Do you have any view on how the environment is evolving?

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO & Director [44]

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Ulyana, may I take it? This is Tigran. So there are constant conversations around the world around various approaches to regulation on the newly created ridesharing businesses in the world. And we believe that there are 3 fundamental things that are important for all the stakeholders: Number one is earnings for drivers. Drivers need to earn a sufficient amount to support them as well as their families. Number two is safety and security on the platform, which means more returning fatigue, driving styles, numbers of hours worked, making sure that aggressive passengers, aggressive drivers are removed from the platform. And number three, the affordability of these platforms for our customers. We do believe that there is a fundamental shift taking place around the world where people moving from car ownership to sharing economy, as Greg several times mentioned today. And these services are already considerably cheaper than car ownership. And we -- and it will become even more affordable as people continue to shift to sharing economy. So we are working along all that -- these directions and discussing that with regulators to ensure that we create a stable, sustainable and profitable business model.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [45]

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And if I may, another one on Taxi. Can you -- like more strategic one. Can you comment on the logic on the markets selection when you go somewhere internationally? Like, I understand the benefit of having ecosystem in Russian-speaking communities of people knowing Yandex. But how do you decide on other like completely new markets, and what's the competitive advantage of Yandex there?

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO & Director [46]

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Yes. It's again Tigran. So I think it more or less is obvious how -- that we are a market leader on -- in all CIS countries today. And of course -- so it is the -- probably the hardest and the biggest question how to choose the next countries. And here, I think -- so our way of how we are thinking here is the following. We have 2 key competitive advantages. First is technologies, which we have in ridesharing. The second is the Yandex. Maps. So we are able to draw local Yandex. Maps. We are able to have our own mapping routing in country. And the third, quality of the countries also which is very important is competitive landscape there. So when, for example, the countries that we choose before, we think that all our

(technical difficulty)

Yes. Sorry, there is something wrong with connection. I took another phone. Do you hear me?

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [47]

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Yes, we do now.

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Operator [48]

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We can hear you, sir. Please go ahead.

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO & Director [49]

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Sorry again. So all that together, technologies, our Yandex. Maps technologies, navigation, improved efficiency on the market. And so we are choosing countries when the impact could be significant and, of course, competitive landscape is important.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [50]

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Okay. And technically, just to confirm, all that international expansion is within Taxi business, which is owned together with Uber, right?

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Tigran Khudaverdyan, Yandex N.V. - Deputy CEO & Director [51]

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Yes. Yes. You're right.

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Operator [52]

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Thank you. That was your last question. I will now hand the conference back to Katya Zhukova for closing remarks. Please go ahead.

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Katya Zhukova, Yandex N.V. - IR Director [53]

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First of all, I wanted to follow up on Masha Kahn's question about the Zen's monthly audience. It was 46 million users in June. All in all, we are very grateful that you joined our call today. We are looking forward to follow up with you, either in person or by phone, or on our Q3 call in October. Goodbye.

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Operator [54]

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Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating and you may now disconnect.