Nebius Group NV (NBIS) 2012 Q1 法說會逐字稿

Thank you for standing by and welcome to the Yandex Q1 2012 financial results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that the conference is being recorded today, Thursday, April 26, 2012. I'd now like to hand the conference over to your speaker today, Katya Zhukova. Please go ahead.

Hello, everyone, and welcome to Yandex's first-quarter 2012 earnings call. We distributed our earnings release earlier today. You can find a copy of the press release on the Company's Investor Relations website, as well as on Newswire Services. Today we have on the call our CEO, Arkady Volozh, and our CFO, Alexander Shulgin. Dmitry Barsukov, our Director of Corporate Finance, will be available during the Q&A session.

Our call will be recorded. The recording will be available on Yandex's Investor Relations website in a few hours. We also put together a few slides to supplement the story. These slides are currently available on our Investor Relations website. And now I will quickly take 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 and operating and financial review and prospects in our annual report on Form 20-F dated March 2, 2012 that is on file with the SEC and is available online.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Although we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we will be referring to some non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with US GAAP. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings release we issued today. And now I'm turning the call over to our Arkady Volozh.

Thank you, Katya, for the introduction and thank you all for joining us for a review of Q1 results. We are quite pleased with our first-quarter achievements. On the user front, we maintained and extended our market leadership and expanded the range of services around our core search platform. We advanced our technology vision in mobile and we saw significant growth in Turkey.

On the advertising front, we are focused on enhancing advertising return on investments and our internal data and analysis indicates that we are succeeding. But more on that later and I would like to share some data on Internet usage trends in Russia first.

Overall, Internet access and iteration trends are favorable for Yandex. I want to share a couple of key figures from the most recent study by the Public Opinion Foundation. One, there are now 57.8 million Internet users which makes Russia the largest Internet market in Europe and number six in the world by audience size. And two, those users represent only 49% penetration of population aged 18 and older, which is lower than many European countries and leaves a lot of room for growth in our whole market.

And now I am turning to our core search product and our favorite number of 60% market share in search. In the first quarter of the year we continued to enhance our search products and we believe that the highly differentiated user experience on Yandex is the reason that we continue to lead the market.

During Q1 we launched our People Finder, an important step in social search. Users in Russia can now view the public profiles of people with accounts on the most popular social networks. Our partnership with Twitter enabled our users to search public tweets in real time.

We also improved freshness of our search results. [Queries] on Yandex now return a group of links to the most current Web documents including links shared on Twitter, and graphically separated from other search results. Initiatives like these allowed us to enhance search quality and therefore users; value by measurably improving the freshness of our search results.

In Q1, we strengthened our share of searches across all platforms. According to Live Internet and other sources, in spite of a continuous increase in traffic going through the Chrome browser, which, as you know, promotes Google as the default search provider, Yandex nonetheless posted moderate share gains in March and into April. Our search traffic increased a healthy 36% year on year.

In mid-March we launched an advertising campaign focused on Russia, Ukraine, and Turkey that included television commercials, online and auto advertising, as well as the ads in subways, universities, and cinemas. Our objective was to reinforce our competitive position in search and increase brand awareness of Yandex and we believe it accomplished just that.

We continue to innovate around core search during Q1 with important investments in maps and mobile. In January we purchased a license for global digital maps from NavTech, a leading location content provider. This will help us to provide high quality responses to user queries related to any geography anywhere in the world.

We also integrated a crowd sourced public maps into our Yandex.Maps service as a means of ensuring a high degree of accuracy, freshness, and reliability. And probably the most important launch on the maps front in Q1 was Yandex Navigator, our free mobile application for car drivers currently available for Android and iOS-based devices.

The acquisition of SPB Software that closed in November of last year is already making an impact. Last quarter we launched Yandex.Shell, a mobile device skin with a customizable 3-D user interface featuring Yandex services like search, news, weather, and other services that offer instant answers to the time and location-based questions people ask from their mobile devices. These highly configurable mobile apps delivered a rich user experience for Android users and at the same time permits handset makers to differentiate their service offerings.

During the quarter we served over 179,000 advertising clients, both text-based and display, which represents a 40% increase over Q1 2011. We believe our focus on enhancing advertising return on investment is contributing to this growth and I want to pause for a moment to explain why we see the combination of lower CPC and higher click growth as a good thing.

Marketing campaigns are investments and returns are measured in a variety of ways including leads, sales, customer acquisitions, and other networks. Those returns occur when users click on ads on sites owned by Yandex and our partner sites. We can improve advertising ROI and attract new advertisers by both increasing returns and reducing their costs.

In Q1 2012, paid clicks grew 61% to Q1 2011 while CPC decreased 5% year-on-year. Accelerated growth in paid clicks returns resulted from initiatives designed to attract new advertisers and improve targeting. The decrease in CPC also comes as a result and a welcome result of these initiatives, increasing advertisers' ROI and making our offering more attractive vis-a-vis direct competition and other advertising media.

In March we also offered our clients a new advertising model, a real-time bidding system, or RTB, for display ads. This [option] for selling and buying ad impressions has been implemented to serve on websites in the Yandex advertising network.

In addition to the initiatives mentioned above, we opened a sales office in Lucerne, Switzerland to get closer to our fast-growing base of advertising clients in Europe. The office is headed by Bernard Lukey who formerly ran our [sports] on one of large Russia's largest and most successful online stores.

And last but certainly not least, I want to update you on our progress in Turkey. While it is too early to claim victory in this longtime game, we have seen in order of magnitude increase in traffic. Alexa has ranked Yandex among the top 25 most visited websites in Turkey. Since January, Yandex's daily audience almost doubled and reached 400,000 people in March 2012, according to Comp Score and we are encouraged by the progress.

All in all we are very pleased with our Q1 results. We are focused on maintaining our market leadership, continuing to develop new value-added services around our core search platform, and accelerating new technology innovations in mobile. We are on pace to deliver the 40% to 45% revenue guidance we laid out for 2012 and we believe that Yandex is still very early in its growth cycle, given the size of the opportunity in Russia and around the world.

I will now turn the call over to [Sasha] Shulgin, who will take you through our financials before we start taking your questions.

Thank you, Arkady. In the tough quarter 2012, Yandex's consolidated revenues increased 51% year-on-year to RUB5.9 million. Contextual or text-based advertising continues to be the main growth driver for us, growing at 53% year-on-year and accounting for 90% of total revenues. Yandex's own websites bring the bulk of text (technical difficulty) revenue accounting for 73% of total revenue, while ads on the Yandex ad network accounted for 17% of total revenue.

Yandex's advertising network grew 117% year-on-year due to the impact of the same factors that we highlighted in Q4. Improvements in the ad service technology on our partner network and the year-on-year effect from the addition of (inaudible) search to the partner network. Display advertising in Q1 grew slower than overall revenue, reflecting a return to a normalized growth pattern after a high Q1 2011 base.

I just wanted to remind you that in Q1 2011 our display revenue more than doubled year-on-year. During Q1 this year display revenue accounted for 7% of total and grew 28% year-on-year. The remaining 3% of (inaudible) operating revenues came from Yandex.Money and other sources.

Our traffic acquisition costs related to the partner network grew in line with revenue growth there, while distribution tax trails growth of owned and operated revenue, remaining approximately the same as a percentage of owned revenue. As a result our total [ex-tax] revenue increased 45% year-on-year.

Tax-based revenue was primarily driven by paid clicks, which increased 61% year-on-year. Accelerated growth in clicks was evident on our own advertising network sites alike. As Arkady mentioned earlier, we continue to see the beneficial impact of our advertising technology initiatives.

The decrease in average CPC makes our advertising more attractive to our customers. Reasonable CPC levels combined with new technological initiatives and precise targeting drives considerable paid click growth, which in turn drives our revenue growth. As anticipated in Q1, the effect of CPC declined year-on-year about 5% as both our own and partner websites saw accelerated paid click growth.

Our total operating costs, excluding traffic acquisition costs, share-based compensation, depreciation, and amortization expense and the $2.6 million in accrued compensation stemming from the acquisition of SPB Software included in personnel expense increased slightly faster than the revenue at 53% year-on-year. Growth of this cost in excess of revenue reflects our advertising campaign as well as an increase in legal and [audit] costs related to our status as a public company.

Our cost base was relatively flat with Q4 except for two factors. The first is the timing of the annual social tax and labor, the major part of which is concentrated in Q1 and considerably decreases in Q4. And the second is our advertising campaign. As discussed on our previous earnings call, we saw the slowdown of our hiring rate.

In Q1 2012 we added just 29 employees, bringing our total headcount to 3,341 as of end of March. As a result, in Q1 our personnel costs year-on-year growth at 43% was slightly below revenue growth. Our depreciation and amortization expense increased 75% with its growth rate in excess of revenue growth primarily due to recent additions of [thorough] farms and share-based compensation expense increased just 16%.

In general, Q1 is seasonally the smallest quarter in terms of revenue. At the same time, our cost base is much less, subject to seasonal fluctuations. As a result, Q1 margins are generally the lowest in the year. Accordingly in Q1 while adjusted EBITDA increased 38%, our adjusted EBITDA margin for the quarter was 40%, down from 44% in Q1 a year ago.

This quarter we saw a considerable ForEx effect on our net margins with a loss of RUB114 million primarily related to dollar denominated cash and term deposits held in Russia, reflecting a 9% strengthening of rubles during the quarter. We are in process of phasing out dollar denominated deposits held in Russia, which should help minimize the related ForEx and its effect on our P&L going forward.

Our effective income tax rate in Q1 was 21.5%, lower than Q1 last year, reflecting management's intention to continue to reinvest cash generated in Russia without upstreaming dividends to our parent holding company in the Netherlands. As a result, our net income increased 53% faster than operating income and our net income margin was 21%.

Adjusted net income stripped of the effect of share-based compensation, foreign exchange gains and losses, and the $2.6 million stemming from the acquisition of SPB Software, grew 38%. And adjusted net income margin was 26%.

Our Q1 CapEx was RUB800 million or 13% of revenue. CapEx is not usually evenly spread across quarters. We earlier guided that our CapEx for the full year would be returning to about 20% of revenue and this remains our intention.

And finally, turning to our balance sheet, we have the equivalent of $704 million in cash, cash equivalents, term deposits and other investments and debt instruments held in US dollars.

And finally, turning to our guidance, we reaffirm our full-year guidance, expecting our revenue growth for the full year 2012 to be in the range of 40% to 45% over full-year 2011. This forecast does not assume a major improvement in macroeconomic environment in our markets and reflects our best use of expected business trends as we see them today. I'll now turn the call over to the operator for the Q&A session.

(Operator Instructions). Edward Hill-Wood, Morgan Stanley.

Good afternoon, everybody. I have a couple questions. The first one just relates to the advertising number which you reported, which is up, obviously up, as you say, 40% year on year, but it's only up 3% quarter-on-quarter. And I was just wondering whether or not there's a seasonal impact there. I've looked historically and there does seem to be a much slower trend in Q1 relative to Q4, but I was wondering if there was anything specific and whether or not you'd expect that number to accelerate into Q2.

The second question just relates to your agreement with your distributors. I noted in your 20-F that it looks as though the Mozilla contract has been shifted out to December. Could you just comment on that please and why that wasn't negotiated on a longer-term basis if that is indeed correct?

And then finally, just on your margins, you obviously had the decline in margin year-on-year in this year, but it does look as though in 2011 that Q1 margin was unusually high relative to the full-year distribution. And if you go back previous years it looks as though there's been a sort of average 6% or 7% increase between Q1 and the full-year margin. Just looking at that, the run rate of your cost inflation, do you still think it's reasonable to assume broadly flat or even growing margins for this year? Those should be three questions, please.

Edward, thank you for the questions. Talking about number of advertisers, that's a historical pattern for Yandex and actually for all advertising industry here. Russia, while in Q4, we see high growth of advertisers and high sales of the small and medium enterprises. While Q1 historically is lowest in terms of number of advertiser growth, especially in the month of January. So that's the typical pattern and we are comfortable with advertiser growth this year.

Now talking about Mozilla, as you correctly mentioned, the agreement with Mozilla was renewed till the end of 2011 and we're in active discussions as of 2012. Yes, we're in active discussions with Mozilla to extend our cooperation with them, but we cannot connect on specific points. Maybe one item to mention here is that we've been recently added as the second search provider in Mozilla in Europe here. That's a sign of our cooperation.

And talking about margin, Q1 margin, as you correctly mentioned, Q1 last year was very high for us in terms of margin, unusually high due to high revenue growth of 65%. And one item to mention again here is display revenue growth last year was 120%. That's typical seasonality pattern for Yandex.

We believe that our Q1 margins are consistent with our [patience] for the full year. And talking about full-year, as we discussed our previous earnings call, our intention is to be approximately at the same level as last year in respect of adjusted net income and EBITDA margins.

But having said that, we continue to look for high growth investment opportunities as [funds grown] high-tech investment (inaudible) companies. Although there are no such plans at the moment, when and if these opportunities present themselves we will invest, which could have an impact on our margins.

Very clear. Thank you very much.

Lloyd Walmsley, Deutsche Bank Securities.

Thanks for taking the question. Just to add a few short ones on the competitive landscape, I'm wondering if you could give us an update on what you're seeing in terms of the competition both in terms of marketing as well as things the competition may be doing online in terms of downloads and converting users on search.

And then secondly on display, any difference in the competitive environment you're seeing in terms of display versus search. And then unrelatedly on paid click growth, just wondering how long you guys think you can sustain paid click growth in excess of SERP growth. And if you can elaborate a little bit on how much this is driven by MatrixNet improvements versus increasing coverage or other algorithmic changes you're making, that would be great.

Commenting on the condition in advertising, you know that we are not the largest online company which advertises here in this market. We run this ad campaign, which was -- which has been maybe the largest in our recent history, and we are very pleased with the results. But again, we compete with other players which advertise more heavily.

Maybe talking about paid click growth and search result pages growth, yes, we see high paid click growth of 61% in Q1 and it was also high in Q4. One important item which helps to drive this high paid click growth and we expect it to continue high for several quarters ahead is the technological improvement in the Yandex ad network, where we improve CTR advertising relevance in the partner ad network, which helps to drive high paid click growth.

There are also opportunities to increase relevance on search, so we expect we'll be able to maintain accelerated growth of paid clicks for our overall business.

Yes, the second question was for how long the text-based advertising will outpace the display rate?

Yes, exactly. Do you think that I guess the changes you're making to improve the relevance and add more advertisers can sustain that over the long term or the intermediate term?

It happens actually for a long time now when search advertising grows faster than display. From what we see this here, at least is it started yesterday, the tendency continues, but it's hard to predict the way it goes. What we've been thinking on the market is that Internet as a whole becomes more and more major media for all the traditional advertisers. Maybe there will be some shift moment when they all shift their display ads more massively than they do today.

Maybe also one item to add here, this is Alexander, the display advertising and contextual text-based advertising have different customer bases. Contextual is primarily for small and medium advertisers and for them it's not really an advertisement but a sales tool. So for them they have to advertise in order to have sales.

While display is for -- mostly used by bigger multinationals or big local companies. So given that there are different customer bases, the trends in this advertising media channels are sometimes slightly different. So for us, for Yandex, we saw contextual to grow faster than display for several years. At this point in time there is nothing that would suggest that this trend will reverse for Yandex.

Thanks.

Alex Balakhnin, Goldman Sachs.

Good afternoon. I have three questions, if I may. First is on CPC dynamics, so we noticed that the decline, the year-on-year year decline has slowed down in the first quarter. Do you think this trend will continue or you will use each and every opportunity to drive CPC down further?

My second question is on the SERP dynamics, not just for you but for the entire market. There were concerns that the overall search traffic slows down for Russia overall. What trends do you see here? Is the growth of market SERPs is the same as it was, say, last year?

And lastly on the dynamics of your display advertising, which was growing not as fast as is good, what was the sellout ratio in the first quarter and how advertisers reacted to the price increase for the year for some of your inventory?

And on the RTB system, what the initial uptake of the service do you see and what is the economics of this RTB when you place these for advertising on your advertising network website? Is it similar to the text-based or is it different? Thank you.

Thank you very much. This is Dmitry. I'll take the question about SERPs. Probably you were looking at the information on our live Internet to try to assess a SERP growth. And we should here maybe mention that live Internet is a great tool, but it is not really designed for that kind of measurement being based on counters and at times it can show faster growth than in reality, at times slower.

You just saw that Yandex's SERPs, as we reported, grew 36% year-on-year and (inaudible) in excess of what live Internet -- what one could count based on live Internet. Now on CPC, the decrease in CPC that you saw in Q1, as we mentioned, was a result of our conscious efforts and the factors that drove CPC down are likely to be in effect in Q2 as well and after that they again likely would be phasing out as year-on-year comparisons become more like-to-like.

Finally, about your question on display advertising, again, one thing to point out is very strong growth in display in Q1 last year and specifically about RTB. It has not had an impact on Q1 numbers and as we are rolling it out we are expecting to see effect. But again, it's likely to take some time for RTB to really show its impact.

And may I just have a quick follow-up on the first question? So from what you say, I'm not really referring to live Internet or anything. I just wanted to double check with you what you see. So from what you say you see pretty much as stable growth of overall search traffic in Russia as you saw last year? That's pretty much what you say, right?

As in Q4 last year more specifically.

But given the (multiple speakers) market share differences? Given the market share differences, the traffic has probably -- for the entire country, the traffic has probably even accelerated, right?

We see very strong growth in traffic. We see increase in the number of users. We see growing usage and adaption of the Internet. Nothing has changed in the game for us.

Thank you so much.

Gene Munster, Piper Jaffray.

Yes, good afternoon. Could you talk a little bit about where margin trends will be going forward I guess beyond kind of the June quarter? How should we think about margins? And I guess in particular as you think about market share, kind of the competitive dynamic, how is that going to potentially impact margins over the next two or three quarters? Thanks.

Gene, thank you for the question. We do not give guidance on margins, but what I could say is that we're happy with the Q1 margins and it's consistent with our expectations. Talking about full year again, having no guidance, what I could say is that our intention is to be broadly in line on the full-year level with the margins of last year.

But again, since we're looking for new opportunities to grow our business in terms of technological investments or geographical expansion mentioned in Turkey here, we're looking for opportunities. And when those opportunities present themselves, we will invest. Given that most of our investments are investments in people; this could have an impact on our P&L. But again, there are no such plans at the moment.

Okay, that's helpful. Then second is can you just talk a little bit about just general commentary on how things in Europe are and in Russia in particular in terms of the economy and how you see that kind of playing out over the next three months?

Talking about macroeconomic trends, here in Russia we see the Ministry of Economy and IMF provide the GDP growth forecast in the range of 3% to 4%. From the macroeconomic perspective, Russian economy remains very strong. Inflation is forecast to be in the range of 5% to 6%, which is I guess the lowest for several years.

Public debt to GDP ratio is very strong compared to Western Europe and many developed countries at 12% on the oil prices remain high. So from the macroeconomic perspective everything is fine and we see good advertising trends from our customers.

Okay great, thank you.

Mariya Kahn, Bank of America.

I just have a few questions, if I may. First of all, if you could tell me if SPB share expense is a one-off for this quarter or it's going to carry on throughout the coming quarters. Also I wanted to hear your thoughts on why you think we've seen nice improvement in your search share and Chrome in particular. What's driving that?

And also, if you could break down your paid click growth organic versus inorganic, i.e. if we strip out Rambler and other partner sites that you added, what would your paid click growth be? Would it be similar to the SERP growth? I'll leave it there, thank you.

This is Alexander, thank you for the question. Talking about SPB, SPB is in low-single-digits of [operating] expenses, so that's not that high. But one item to mention here is that part of the amount that was paid to SPB in the (inaudible) acquisition of the company is according to US GAAP is recorded in our personnel expense.

In Q1 particularly the amount was $2.6 million. So again, to reiterate, this amount was effectively a consideration paid for the company, but it's recorded in personnel expense because it's early to continue the employment of the senior management of the Company.

Let me comment on the Chrome. Yes, something important happened this quarter with our market share in Chrome. As your member, last year when Chrome was just launched, users -- there was -- Google users market share was larger than the Yandex users and it took our users some time to realize what happens.

And since we're kind of a landmark here it took them some time to realize how to get their Yandex back. And it looks like they realized it at last and they used options to change the defaults. And now our market share in Chrome is higher than Google's market share in Chrome, which is important for us.

So it's nothing to do with anything you did specifically? It's more that the users are changing preferences?

Of course we tried to tell them how to come out, the way to get Yandex back. When we see that they're using Yandex on Chrome we tried to explain to them how to change the defaults, but it's -- again, you cannot do much if they don't -- there is no natural push to your system.

Okay.

Talking about paid click growth, we do not publicly disclose the growth in paid clicks on the operated website network, because that's important [commercial] information. What I could say is that no single partner, including Rambler, has a material impact on our paid click growth. And the accelerated growth was primarily driven by improvements in technology, especially the relevance of the ads displayed on the websites.

One more question before I finish. What do you think about the Polish market? Would you potentially be interested in entering that market like you did with Turkey?

As we told you earlier, any market with no competition is in our field of interest because we believe that the choice we can bring to those markets, choice of using the search, is important for users. It doesn't depend on us or Google or somebody else. If users prefer having choice, then it's a niche for us. So any market with no choice is a potential target, but first we need to prove ourselves in Turkey.

Okay, thank you so much.

Alexei Gogolev, JPMorgan.

Good afternoon, Arkady. Just to elaborate a bit on your last comment about Turkey, previously you said that you were hoping that by the end of the year you may reach 1 million unique users and then you may consider starting monetization of that market. It appears that you may reach this 1 million threshold earlier, so would you consider launching monetization, say, in the middle of this year?

We reached 1 million searches, which is not 1 million server search users. Turkey has something like 150,000 daily searches, something in that range, so 5% to 10% of the market share would be something like 10 million to 15 million searches a day. And of course we need to grow there to start selling.

Okay, and with regards to the outlook on the Russian advertising market, are you seeing -- we're now four months into the year. Are you seeing any more upbeat -- kind of upbeat information about the market? Have you, for example, seen any greater inflow of large-scale advertisers, those that haven't done any online ads previously but now are switching to be online from traditional advertising?

Alexei, this is Alexander; I'll take your question. As we discussed, Q1 is seasonally the lowest quarter for the Russian advertising market and for Yandex, so it would be too early to say -- to comment on the full-year trends. We see that Q1 revenue growth was very good for us, in line with our experience, maybe exceeding a little bit, but it's too early to say. And that's why we remain on our guidance in the range of 40% to 45% as we -- as the same guidance that we gave in February of last year.

Talking about big customers coming, yes, we saw additional new big multinationals coming to advertise on (inaudible) on display. So the positive trend remains there in this respect.

Let me stipulate here a little bit. We have big mostly foreign advertisers in display and we have a lot of small businesses in search. And my stipulation is that maybe the foreign advertisers, having experienced some crisis effect on their markets, decreased their spending in Russia.

Whereas small Russian businesses who live here and feel the real economy here, they didn't cut their spending. But again, -- if that's the case, then I hope that by the end of the year the situation to change and the big advertisers will come to advertise to Yandex as well as to other medias. But again, it's just speculation.

Thank you.

David Reynolds, Jefferies.

Just one question for you on traffic acquisition costs. I think you reported in Q1 traffic acquisition costs were 18.7% of your search-based revenues. Could you perhaps just give some background on the trends you see in traffic acquisition costs and perhaps how you expect them to evolve across the rest of the year?

Thank you for the question. This is Alexander. Our traffic acquisition costs, they consist of two independent, I would say, elements. One is traffic acquisition costs related to our partner websites, which plays our advertising on their websites. This element of acquisition costs, which is the biggest part of all that, was growing virtually in line with our revenue coming from partner websites. That's one.

The second element is traffic (inaudible) costs related to distribution arrangements and that one was growing in line or slightly below the growth in owned and operated websites. So in combination, [tech] was growing slightly faster in rates than total revenue purely due to faster than average growth of partner revenue, so --.

Yes, that's great, thank you. And what about trends going forward? Would you anticipate that contribution increasing over time?

As Dmitry said, in Q3 last year we did a substantial improvement in ad relevance technology on the Yandex ad network and we expect that network to continue to grow at a faster rate until we start cycling that period when those improvements happen.

Therefore I guess [tech] as a percentage of revenue could be growing slightly a bit until there's some cycle in this period -- in Q3 approximately of this year. Talking about distribution tax, I guess, but it's difficult for us to comment. We expect to remain approximately the same as percentage of revenues as it is now.

That's great, thank you.

Anna Lepetukhina, Troika Dialog.

I have just one question. It is on the increase in revenues from Yandex partner network website. It is growing at more than 100% and as far as I understand is it driven by both the inclusion of Rambler and introduction of MatrixNet in the third quarter of last year? Is it possible to split this growth into components and kind of so we can understand where the growth will be in the second half of the year once kind of the slow base effect eliminates?

Anna, thank you for the question. This is Alexander. Well, it's kind of difficult to dissect our revenue growth by element and I think we'll be able to provide that guidance for you. I would refer you to our full-year revenue guidance of 40% to 45%. There are shifts between (inaudible) and search network, sometimes network grows fast, sometimes search grows faster, so it will be difficult for us to comment.

For our customers, we are talking from the customer perspective, what we care about is growth in paid clicks and cost per click and return on investment. They don't really care from what part of our system the click comes. So that's why we prefer to look on full revenue growth rather than by source.

Okay, thank you. And Can I have a follow-up question on the increase in employee headcount? In the first quarter it increased almost 25% year-on-year. Is it at a rate that we should expect for the whole year and extrapolate for the whole year? Or in the first quarter you increased the number of employee hires and you expect to do it for the whole year?

Talking about headcount, our preference is to look on personnel expense ratio to revenue, because we employ people who also outsource developing the cell technologies to third-party companies. So purely headcount is not really a metric to look at. And historically for Yandex personnel expense to revenue ratio was about 20% and we think it -- well, there is nothing that suggests this will change going forward.

Okay, thank you.

Anastasia Obukhova, VTB Capital.

This is Anastasia Obukhova from VTB. I have a few questions, if I may. Your (inaudible) has posted quite a modest growth of 28% despite the ad price increase of about 45% to 58% as of January. What was the main -- where the budget came from?

And the second one is (inaudible), which part of them -- of your year-on-year incremental increase came from advertising campaign undertaken in the first quarter? And which part is going from them, continuing expenses now related to your public listing, now professional fees, or did all this expense (inaudible) nothing in the first quarter a year ago?

And also how long will this ad campaign be undertaken and when? I was a (inaudible) I maybe overheard it. And also contingent payments, what is the ground of the fact that you may get them back in November 2013? So if -- meaning that your personnel may not achieve some [KPIs] or not.

And the last question, maybe your finance guy will help me, how you come to your EBITDA calculation. If I add up everything from the bottom line, according to your calculation and if I add up the contingent payments to personnel, I still miss some $1 million. I cannot complete. Thank you.

Thank you for the question. This is Alexander speaking. Talking about display, we would like again to point to the fact that display revenue was growing at 120% a year ago in Q1 2011. So we believe this is the main reason why display advertising was growing 20% this year simply due to the fact of high base.

The question about SG&A costs, as we mentioned during the call, I would better compare to Q4 last year. Our cost base was particularly flat compared to Q4 and the only two items that was standing out was in social tax, which is frontloaded into Q1, this is how it works in Russia. And the second is advertising campaign and advertising campaign is in SG&A expenses, so in a way that's one of the main reasons why SG&A was growing versus Q4.

Talking about advertising of Yandex services, yes we are on the campaign in Q1 and if we have opportunities to advertise our new services improved technologies to our users, we will do so because it's important for us to communicate what growth was done by Yandex. But I don't think I'll be able to quantify the cost amount at this point in time.

On structural personnel expense, that's, again, important commercial competitive information for us, so I will not be able to disclose that. Again, I would like to point to the fact that our personnel expense to revenue ratio was about 20% for several years and probably would be in the same ratio.

Can I ask a follow-up question then? So about again SG&A cost, you're saying that you have a more or less seamless structure, is higher in the fourth quarter, though in the fourth quarter '11 your SG&A went up by 29% year on year. And again, fourth quarter '10 didn't have this public listing cost, etc. and your third quarter '11 also indeed included the social tax payment and your personnel expanded by 25% year-on-year. And though the expenses grew up by 79%, that's why I just wanted to quantify the impact of recurring costs on -- wasn't really material. And how it will be continuing.

This is Dmitry Barsukov. I'm afraid we're not in a position to offer more detailed information because we live in a competitive world. I'm sorry about that.

Okay, please come back to me to your EBITDA calculation, because I just don't get how you come to the number you state [interest release] (inaudible).

It's a good question and we have reconciliation at the back of the press release. It's probably better if we take up this question off-line.

Yes, absolutely.

David Ferguson, Renaissance Capital.

Just two quick questions please. Firstly on the browser market, maybe just share your thoughts on how well you think browsers like Opera have responded to Chrome's growth over the last 12 months and the steps that they're taking to protect their market positions. What you I guess would like to see your browser -- main browsers do to protect their market position going forward. That's the first question.

And then secondly, on mobile and SPB, I guess the first product they've developed for you is the Yandex.Shell, so just maybe a little bit of color on that initial success in terms of downloads and then going forward how you see SPB's role evolving. That's it, thank you.

On the browser landscape, we currently stick to -- actually the browser question has two aspects. One is technical, another is distribution. On the technical aspect we do have our browser. We have an open source-based browser which people already use, but we don't want to distribute it and -- because we now currently count on our partners, which are currently Opera and Mozilla, which together account for almost [60]% market share in browsers. And so far we are successfully are partnering with them and we don't want to compete with our partners.

On SPB in mobile, SPB is our opportunity in the Android world. They will be -- there's a growing number of devices supporting Android and with an open platform as well. And we need our own product built on that open platform to be able to be distributed with hardware partners here in Russia and we have -- we've already shown some success in distributing it.

On the number of downloads and so on with SPB, we're pleased just to say that as soon as we -- if we launch just the first beta product, there is a product road map which we have for this year, but even with this early version which we launched by Barcelona Congress in February, we turned it -- we launched the free version and we increased the number of users by times. And maybe that's as much as we are ready to say at this stage.

Okay, that's great. Thank you very much.

Thank you. I would now like to hand the conference back to the management team for any closing remarks.

Okay, maybe we can try to -- it's been almost a year that we filed our first IPO prospectus. There were a lot of promises made and a lot of models built by analysts just to pay attention to what happened during this year. First of all, we sustained the market share and we are still at both like a 60% market share despite serious changes on the distribution front, complete change on the browser's market shares. Still we retained our basic 60% position in market share and search.

Also we grew faster than analysts expected last year and we continue to grow this year. As we expected, we just confirmed our growth rate of 40% to 45%. And finally, our Turkey launch will take -- it's too early. It will take a lot of time and effort, but the early results actually encourage us a lot. Thank you for participating in this call.

Thank you. That does conclude the Yandex earnings call. Thank you all for participating. You may now disconnect.