Nebius Group NV (NBIS) 2012 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Yandex second quarter 2012 earnings 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 this conference is being recorded today, Tuesday the 31st of July 2012.

I would now like to hand the conference over to your speaker today, Katya Zhukova. Please go ahead.

Hello, everyone, and welcome to Yandex's second quarter 2012 earnings call. Our earnings release was distributed earlier today. You can find a copy on the Company's investor relations website as well as the newswire services.

Today, we have our CEO, Arkady Volozh, our CTO, Ilya Segalovich and our CFO, Alexander Shulgin. Dmitry Barsukov, our Director of Corporate Finance, will be available during the Q&A session.

This call is being recorded. The recording will be available on our Investor Relations website later today. As usual, we have put together a few slides to supplement this story. These slides are currently available on our IR website. And now, let me cover the Safe Harbor.

Various remarks that we make during this call about our future expectations, plans and process constitute forward-looking statements. Our actual results may differ materially from those indicated or suggested by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our annual report on Form 20-F dated March 2, 2012, which is on file with the SEC and is available online.

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

During this call, we will be referring to certain 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 before I turn the call over to Arkady, I would like to give you a quick update about usage trends in the Russian Internet. This spring monthly Internet penetration reached 51% or nearly 60 million people according to the Public Opinion Foundation. This is an increase of 2 million people from the previous quarter measurement. 77% of them use the Internet on a daily basis. This recent data shows that Internet usage in Russia follows the growth trajectory forecasted by the Public Opinion Foundation back in 2011. This forecast calls for the Internet to reach 71% Internet penetration by the end of 2014.

And now I am turning the call over to Arkady Volozh.

Thanks, Katya. And I will start with a high level overview, including discussion of our shipments for the quarter and the competitive landscape. And then Ilya will give you more detail on products and services and Sasha will deal down into our financials. After that we'll take your questions.

Well, first of all, we delivered another strong quarter with 50% top line growth and more than that we're expanding our profitability margin. And we confirm our full-year guidance of 40% to 45% year-on-year growth.

On our position as the (inaudible) in Russia remains unquestionable. Despite change in web browser shares and evolving consumer behavior on mobile versus desktop usage, we firmly hold the 60% leadership position on the Russian market. And let me further (inaudible) on this important point.

A year ago, Google Chrome browser was on the rise and we felt pressure. But cross adoption rate slowed down at the end of 2011. At the same time, over this period we grew our share of searches in Chrome from 41% to 46%. Today our share of searches in Chrome is even higher than those on Google, despite the fact that Google is the default search provider in Chrome and it's not easy to change that default.

In addition to our success in Chrome, we grew our share of searches in all other major browsers, including Mozilla, Opera and Internet Explorer. We made it happen by concentrating efforts primarily on the product. Distribution is of course important but its importance sometimes is overestimated. For example, as we informed the investor and analyst community in June, my view of sub-distributing Yandex as default search starting from version 13, which became available for download about two weeks ago.

Those of you who have been watching our share of searches may have noticed that although more than 60% of Firefox 13 users already switched to the new version of the browser, this had a negligible impact on our shares of searches.

On a related note, I'm happy to inform you that our relationship with Opera continues as before and we are looking to further extend the scope of our partnership.

On mobile devices, our share of searches on Android devices also grew, increasing from 32% in the early 2012 to its current 36%. In addition to our default position on some (inaudible) operating systems, we also expanded our relationship with Microsoft and are actively seeking to build partners with all other major mobile players.

In summary, we have been quite successful in holding our leadership position in the rapidly developing and evolving search market and I am confident that we'll continue to do so going forward.

Now changing topics. An important milestone in our development is the creation of a comprehensive international search index, which I am proud to say we now have. As far as we know, today there are just three search engines in the world with such an index, including Google, Bing and now Yandex. With tens of billions of index pages, it is comparable in size with those of Google and Bing and this is a formidable competitive advantage for Yandex and sets the stage for some interesting moves in the future.

And we continue to expand our presence in Turkey building our user base and offering quality search and other services to our Turkish users. Just recently we added strong local business leadership to our Turkish operations. And I am proud that Mehmet Ali Yalcindag, a prominent Turkish media manager and former CEO of Dogan Media Holding, joined us to take a leadership position with Yandex in Turkey.

All in all, we are very pleased with our (inaudible) performance, which is a direct result of our market leadership, innovation and the quality of our services. And here I pass the microphone to Ilya Segalovich who will take you through our most important product and development.

Thank you, Arkady. I want to start with the core of our business search. We continue to improve our search technology and the most that was going on inside was not always visible to our users, even those who use our search everyday.

The improvements include relevancy responses for the long terms periods, response time and user interface. Our team was working on the bottom areas for freshness and (inaudible) search.

On the user interface side we improved search position and started to provide direct answers to these requests in the search suggestion list right next to the credit. For example, the credit related to a fact or a figure or a euro. The user improvement -- that improvement is also personalization. Where a user issues the second search query in a session, our suggestion leads adjust based on the topic of the first query and that improves visibility of the search position. These functionalities are available both on the desktop search and the in the mobile versions from that screen (inaudible).

And our mobile search application with status of the (inaudible) recognized user intent and give the answers in the appropriate representation, be it a map or whether forecast or current news or (inaudible).

On the desktop distribution front, as Arkady has already mentioned, we reached an agreement with our partners at Opera to extend our existing business arrangement on mobile and desktop. At the same time, we seek to further expand the scope of our preparations. This past quarter we started a new distribution product, Yandex Elements for Mozilla and Internet Explorer. Elements merge the search and address bars as well as add a graphic thumbnail tab and shortcuts to the browser to create more useful tools and services. In fact, we enhanced the browser capabilities without creating the new toolbars.

In mobile and maps we continue to execute our strategy to boost our presence on mobile devices, rollout several new products, particularly for the Android platform. This helped us to increase our share of searches on Android by 4% points in the second quarter.

Big improvements have been made in mobile search in terms of what users did in distribution as I mentioned before. In mobile distribution we reached an agreement with Microsoft and from now on Yandex will be the default search engine (inaudible) worldwide on all Windows phone based devices officially sold in Russia, the CIS and in Turkey. Just to remind you that this will be the second platform after Samsung's Bada where Yandex is the default in Russia.

Also during the second quarter a new version of Opera Mini with pre-installed Yandex search was released, further strengthening our position on each phone.

Mobile of course is not the only (inaudible) for browsing and search. We also implemented a number of improvements to our Yandex MOPs, mobile app, the biggest of them being the addition of public transportation to the routing option.

I will finish my comments on mobile by mentioning the launch of another very popular service, Yandex.Taxi. It was first offered on mobile platforms last year and last quarter became available for desktop. There, the usage of our taxi booking service doubled over the quarter.

And talking about the cloud services, cloud services continue to gain importance worldwide. Last quarter we launched two of them. The first cloud service launched in Q2 is Yandex.Disk, which serves as a bridge between mobile and desktop and it allows users to work with their documents from anywhere they have access to the Internet. It is connected with the Yandex.Mail application on a number of mobile platforms. We were the first in our peer group to introduce this service. It was quite warmly received, particularly by our Turkish users.

The second is the Yandex.Music application for (inaudible). We give our users ability to listen to millions of tracks on their iPhones. In doing so became the only streaming music application with such a large database of legal music in Russia. This is the important milestone for us as we are testing a new business model and started to charge users for the convenience of having access to such a huge music library from their mobile device. Our web version remains free.

Then talking about advertising. During this quarter we served just below 200,000 advertising clients both text based and display, which represents 34% increase over Q2 2011. Important to know that this spring we surpassed Russia's leading TV -- all the Russian -- all leading TV channels in terms of the audience. This rate of Internet profile as a deciding medium, particularly for medium and large advertising clients.

Together with digital communications group VivaKi, we rolled up a new tool for targeting display at digital at Digital Eye. Digital Eye enables advertisers to differentiate specific segments of the web user audience, depending on the amount of time they spend in front of their (inaudible). The new-targeted advertising product is based on Yandex's proprietary Crypta technology and according to some industry analysts about 30% of Russian Internet audience watches television less than one hour per day. Digital Eye gives advertisers an opportunity to specifically target this part of those Internet audience that advertisers would have missed through their television ads.

And a couple of words about Turkey. From a technology perspective, our Q2 launches in Turkey included search (inaudible) that (inaudible) search, searching over Turkish Twitter, Yandex.Disk, online games catalog and the Yandex.Maps API. That we believe will help us to offer Turkish companies our maps for use on their website. (Inaudible) to launch another ad campaign in Turkey to support the development of our business in this market.

And now I will turn the call over to Sasha Shulgin who will take you through our financials before we take your question.

Thank you, Ilya. In the second quarter 2012, Yandex's consolidated revenues increased 50% year-on-year to RUB6.8 million. Contextual or text-based advertising continues to be the main growth driver for us, growing at 50% year-on-year and accounting for 89% of total revenues. Yandex's own websites bring the bulk of text-based revenue accounting for 72% of total revenue, while ads on the Yandex ad network accounted for 17% of total revenue.

Yandex's advertising network grew 93% year-on-year. This accelerated growth in partner revenue is primarily explained by two factors. Improvements in the ad service launch and addition of Rambler search to the partner network. All these changes were introduced in Q3 2011. Display advertising in Q3 accelerated to the (inaudible) from Q1, returning to its historic goals pattern, going slightly behind contextual. During Q2, display revenue demonstrated a 23% year-on-year growth rate. Display advertising accounted for 9% of total revenue. The remaining 2% of operating revenues came from Yandex.Money and other sources.

Our traffic acquisition costs related to the partner network grew in line with the revenue growth, while distribution TAC growth was slightly ahead of owned and operated revenue, remaining approximately the same as percentage of owned revenue compared to Q1 2012. As a result our total ex-TAC revenue increased 45% year-on-year.

Tax-based revenue was primarily driven by paid clicks, which increased 62% year-on-year. Accelerated growth in clicks came as an expected result of our technology initiatives (inaudible) used in Q3 2011. We are very pleased by the growth in paid clicks, which is a key metric driver of revenue. We strive to grow paid clicks while keeping CPC low to their customer growth. As anticipated in Q2, the effect of CPC declined year-on-year about 7%. On a sequential basis however, we saw an increase in the second CPC from Q1 2012 of about 18%, which is consistent with what we saw in Q1 2011 on a sequential basis.

As we cycle the full-year, the technology initiatives were introduced in Q3 2011, we expect to see normalized growth patterns, what with paid click growing slightly slower than overall revenue, which CPC would grow at low single-digit rates.

Our total operating costs, excluding traffic acquisition costs, grew 35% slower than revenue. Just to remind, in Q2 a year ago, we grew considerable market and (inaudible) related costs, as well as a relatively high percentage rate expense due to aggressive hiring. This past quarter we maintained a normalized level of marketing legal costs and proceeded with disciplined hiring, adding 133 employees during the quarter, bringing total headcount to just under 3,500 employees.

Our depreciation and amortization expense for the quarter increased 63%. With this growth rate in excess of revenue growth rate, primarily due to last year's forward investment in server farms and related equipment. Accordingly, in Q2 our adjusted EBITDA increased 60% and our adjusted EBITDA margin for the quarter was 45%, up from 42% a year ago -- in Q2 a year ago.

This quarter we saw a small ForEx effect on our net margins with a RUB52 million gain, primarily related to dollar denominated cash and term deposits held in Russia, reflecting a 12% strengthening of dollar during the quarter. By the end of June, we almost fully phased out any dollar denominated holdings in Russia, so ForEx effect going forward will be very minimal.

On a related note, considerable volatility in Russian ruble exchange rate in Q2 affected some analysts estimate and the way [consensus quotas] was reported for the quarter. As a reminder, since we report in rubles, we translate our quarterly financials, including the P&L, into US dollars at the quarter end exchange rate. That was approximately 32.8 at June 30, 2012.

Some Russian companies that used to report in US dollars have placed their income statement at the average exchange rate for the quarter. In Q2 2012, the average exchange rate was approximately RUB31 for one dollar. Analysts, particularly those who cover several Russian companies, including Yandex, may choose to apply average exchange rate approach to all companies. These differences may made a result in incontinuity with our translation and analyst estimates as well as among the results of different companies in this sector. Therefore, we urge you to pay special attention to the exchange rate underlying any dollar-based number for the quarter.

Our effective income tax rate in Q2 was 21.7%, 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 76% faster than operating income and our net income margin was 29%.

Adjusted net income after correcting for the effects of share-based compensation, foreign exchange gains and losses, and the $1.68 million of contingent compensation related to the acquisition of SPB Software, grew 64%. And our adjusted net income margin was 30%.

Our Q2 CapEx was RUB700 million or 10% of revenue. Please note that our CapEx is not usually evenly spread across quarters. We earlier guided that our CapEx would return to our typical historic level of (inaudible) to 20%. This year most likely our CapEx will be even below our normal level of 20%.

Talking about our balance sheet, we have the equivalent of $742 million in cash, cash equivalents, term deposits and other investments and debt instruments. On this amount, approximately half is held in US dollars in the Netherlands and the other half is held in Russia in rubles and is invested in term deposits.

And finally, turning to guidance. Given the dynamics that we see in the market and our performance year to date, we are confirming our full-year guidance, expecting our revenue growth for the full year 2012 to be in the 40% to 45% range over full-year 2011. This forecast does not assume any major shifts in macroeconomic environment in our markets and reflects our best use of expected business trends as we see them today.

I will now turn the call over to the operator for the Q&A session. Thank you.

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

If I may, I'll ask two. Firstly, just on revenue guidance, in order to level your revenue guidance you need to do somewhere between sort of 30% and 40% or just 40% growth in the second half of the year. I know you're not going to commit to anything right now, but I was wondering if you could tell us or give us an indication if you're expecting this third quarter to be over 40% revenue growth?

Secondly, on international expansion you mentioned back in February that you were looking to potentially leverage the index and work with international technology companies. You mentioned it again, Arkady, on the call just earlier. I was wondering if you could just elaborate a little bit on what specifically you're talking about and whether or not there's any sort of timeframe or scope of the sort of conversations you might be having with people? Thank you.

Sasha will answer the first question.

First of all, I would say that we're absolutely optimistic about the outlook for the full-year, having six months of the year behind us with 50% year-on-year revenue growth. Under historic performance on key business metrics is just basically growth and not the growth of number of customers. Yet we now think that it would be prudent on our side to be cautious about the full-year guidance and keep it on the same level as announced last quarter, considering the volatility and the global macroeconomic trend.

And also one specific item that's related to Yandex that in Q3 was (inaudible) comparable to last year, since we will be factoring in the period when substantial improvements in the ad technologies resulted in high growth of partner revenue network -- partner network revenue.

Considering all this, we think it will be more appropriate for us to keep the guidance unchanged and to deliver on it in Q3 and Q4, which are by the way, historically our two biggest quarters in the year.

Talking about the second question, of the international index. This is Arkady. We can see it with international companies are now local markets first of all. And talking about Russia, Ukraine, Turkey, we (inaudible) this against companies providing service with global indexes. And of course we need to provide a competitive product. So first of all, we need to have global index to compute on equal terms on our existing local markets or any new markets, which could (inaudible).

In another (inaudible) quarter rise from the fact that yesterday in the world there were just fewer companies and not all of them have index of this size, of this caliber, so we may see any other opportunities coming from any potential partnerships, which we may have anywhere in the world.

Can I just come back to the first question? I understand your reluctance to give formal guidance or within the quarters, but maybe you could just tell me if there's been any change in dynamic in the business in the short-term since the end of June without necessarily having to comment on the future?

Well, unfortunately I cannot provide you exact figures, but what I could say is that we are absolutely comfortable with the performance of the business in this period. So we see no negative [terms].

(Operator instructions) Lloyd Walmsley, Deutsche Bank.

I was wondering if you could just, following up on the outlook, can you comment at all on what you're hearing from advertisers in terms of tone? Are you seeing any shift, any increased caution in the ad markets in general and in particular around digital ad buyers? And then if you could just comment on your kind of margin outlook for the year.

This is Alexander. Lloyd, thank you for the question. I would like to point out the fact that, as you know, just how digital advertising growth has accelerated in Q2, resulting into its typical growth of slightly (inaudible). So we see like positive attitude of our customers and continued growth and increase of number of customers. So nothing negative in the business.

And then in terms of just margin guidance for the year? Any change there?

Well, first of all the margin the first half of the year was very strong. And we had solid revenue growth in those good (inaudible). But our policy, as you know, is not to provide the margin guidance. So what I could say in broad terms that our intention is to be around last year's level on the full-year margin, (inaudible) the metrics.

But having said that, we are constantly looking for a new (inaudible) and to expand our (inaudible) in terms of products and in terms of our share in the markets where we operate. So when the opportunity to invest presents itself, it could have an impact on the margins since in our business we expense in this period when incurred of product development costs and also promotion costs. But having said that, we also see a very good (inaudible) from the business and (inaudible) about the financial performance for the full year.

Alex Balakhnin, Goldman Sachs.

I have a question on your distribution partners. One part of that question is it reasonable to expect that following the termination of the agreement with Mozilla you will have a sequential decline of your -- or at least like full (inaudible) decline of your distribution expenses?

And my second question is on your -- second part of first question, is on your agreement with Opera. Is it completely the same? I mean both at duration and financially or there are some changes, probably you'll expand your partnership across the products or probably across the geographies. If you could share any more granularity on this contract it would be really helpful. Thank you.

This is Arkady. Thanks, Alex, for the question. On Mozilla issue, I would encourage it a little bit. The condition started two weeks ago and now we have more than half of all the users already switch to the new version of browser where Google is default, not Yandex. And if you follow our numbers on any counting system, like (inaudible) or something, you may see that yes, we lost a tiny market share, which is 0.3%, 0.4% currently. We expect it to be another something like this, but it doesn't change the model as you can see. Our model is to become the number one player with 60% plus or minus market share. And this way in this model then everything else is fine. And this change of the solution again in my view doesn't change the model. That's the key for us.

But in terms of the course, the expanses you had related to Mozilla. So now you don't have a contract. You have the same market share, but am I correct that you don't have to pay for it?

It is correct. We don't need to pay for this part of the solution.

So we may have a like-for-like decline of distribution costs potentially in the first quarter?

It's difficult to comment on that. What -- and this is Sasha, Alexander. What I could say is that we do not expect any negative impacts on other acquisition costs related to Mozilla's contract. The payments that were attributed to Mozilla will decline, but we're also looking for new distribution channels, so but I could say yes. As I said before we expect no negative impact on that.

And also talking about Opera, yes we (inaudible). (Inaudible) authorize the current distribution agreement, we do not disclose exactly the choice of the deals, but again we expect no negative impact on (inaudible) costs from this (inaudible).

And strategically I appreciate you can't share the financial terms, but does it cover only Russia or you have a broad agreement or probably a bigger presence on order browsers or anything like that?

We can't comment in this context beyond the normal distribution terms, which have basically been used and otherwise it's not (inaudible) on contracted (inaudible) we can't disclose that.

Gene Munster, Piper Jaffray.

If you could talk a little about the penetration of the advertisers right now. I know you have about 200,000. Any idea how many small businesses you could ultimately add to the platform? And separately, is it becoming more expensive to add these advertisers, these small advertisers going forward? Thank you.

This is Arkady. Thank you for the question, Gene. Yes, we count we have 200,000 or so and the total number of small businesses in Russia and which we have here is something like in the range of 1 million. There are different measurements, but it's in the range of this 1 million small businesses, which (inaudible). (Inaudible) is our potential -- the maximum potential addressable audience of the advertisers on the Russian market.

Gene, maybe I could add. This is Alexander. That the priority for us is not only because the number of customers, but also to provide them advertising technologies so that to grow that business and to increase revenue per customer, that's also a very important objective for our commercial team.

Agreed. And then just how about just the cost of adding the incremental customers? Is that changing?

Since it's all about the (inaudible), the incremental cost per customer is second because it's a declining cost. So it's -- this is what the system was designed for, to serve a big number of online (inaudible) customers with automatic (inaudible). The bigger one they also use our internal sales team or advertising agencies to manage their Company. And we also have connections with big advertising systems, which are available in the market to manage the huge companies.

Mariya Kahn, Bank of America.

I was curious to get some color on your Android market share. You managed to grow it quite significantly. If you could elaborate what product helped you grow it and whether there's any opportunity for sort of distribution Android devices for you. Thank you.

It's a combination of factors and it's -- we attribute the increase of our market share mostly to the quarter search. And also we want (inaudible) covered and we launched 11 new products, which bring new audiences to our portal. And that's how we grow our market share mostly. Distribution also helps, but yes, the products itself helps, that's the key.

Anna Lepetukhina, Troika Dialog.

My question relates to mobile applications, mobile services. You now have an extensive lease over these services and you've launched new ones like Yandex.Taxi. I'm just wondering about monetizing all these services because if Yandex (inaudible) in place for a long time and all these services are quite popular. Do you manage to monetize and do you plan to monetize them in the short term? Thank you.

Ilya is taking the question.

Yes, there are some particular money position models that we are now trying to explore, such as Yandex.Taxi. And of course it's quite an interesting thing when we are trying to come offline, like we're trying to aggregate offline businesses in online world.

But basically our strategy in mobile is to develop to best experience. As soon as we have the best experience in terms of applications and the basic set of applications that connect people to the cloud, be it search or mail or maps, having that best experience and the biggest audience somehow we'll go on with that in the future kind of money position (inaudible) mobile.

Of course, it is not monetizable directly for sale, like it is -- like the regular world, but this is a strategic, a very important area where we want to be the best. (Inaudible)

Our quarter's model is search advertising. And the other services, the minimum value from any other service we have is getting audience and bringing more audience to search. Each new application helps us generate more searches and leads to innovation. But of course we also use those services to play with new models, like when Yandex.Music this quarter, where we just introduced monthly fees and Yandex.Taxi where we plan to introduce commissions from the taxi (inaudible) in the next quarter or so. But the main registration comes from driving traffic to search.

Olga Bystrova, Credit Suisse.

I wanted to talk a little bit about Turkey and your CapEx. You're obviously running CapEx significantly below your previous suggestions. You're saying you might have it below 18%, 20% (inaudible) this year. Is that somehow related to your investment in Turkey or you just overestimated CapEx in the beginning of the year?

And sort of an adjacent question is how -- can you give us some numbers on your Turkey business already? What is -- how much revenues you have been generating, what is the market share there and whether it's meeting or beating or lagging your expectations? Thank you very much.

Sasha's taking the first part.

Our CapEx for -- so as you know, last year we implemented an accelerated capital investment program, well when our CapEx was about 20% of revenue. And this year we see opportunities to improve efficiency of our data centers and therefore we think that it is possible that our CapEx will be below 20% of revenue.

But on the longer time scale, we still think that the normal level of CapEx for Yandex over several years is high teens or 20%. But in this particular year, we see opportunities to reduce CapEx results at any point during our long-term goal perspective.

And then this is Arkady. I would add that you saw CapEx expansion last year and that expansion actually included what you see today, which is our Turkish products as well as our global index. It's all included in the CapEx, which has been invested a year ago. And our current margins, increased margins include all of course of Turkey and international index and the rest. And we improved our margins given the side effect of we are going into this additional projects, which are not related to our primary market.

Talking about our Turkish success, it's too early. We have said previously we will be ready to discuss this only closer to the end of the year. All in all, we launch services there I'd say weekly and the audience is growing. You can take the third party measurements, some of them are available from (inaudible) or somebody else. But it's -- we're in the very, very early stages of any S-curve or whatever it is there. It's too early to say about the results. It could be -- and depending on how we grow there, it could be fast, it could be slow. We will be able to elaborate more on this maybe in our Q4 call.

Alexander [Vengren], Pritchard Capital.

I have two questions actually regarding your CPC and number for the (inaudible). For the first you thought in the second quarter cost per click increased quarter over quarter by around 18%. I'm just wondering what was the reason for that?

And second question is what was the primary reason for a substantial increase in the total number of advertisers in your second quarter in comparison to the first quarter this year? Thank you.

This is again Alexander Shulgin. So once you could see the increase, sequential increase over Q1, there's a difficult seasonal trend that we see over several years in a row. Q1, as you know, is a low season, it's a low business season. In Russia therefore, CPCs would tend to go down after a very active Q4. And then they start to grow again in Q2.

And exactly the same reason is for acceleration of the advertiser growth. It's simply the most busy businesses in search. That's a trend that we are seeing over several years.

What this tells you about CPC increase is that, as you know, we made substantial improvements to our technologies in Q3, which accelerated revenue growth, especially in the partner ad network. And that has very high impact on paid click growth, while CPC was slightly down. But now we see that CPC is going up on a sequential basis, which is (inaudible) as well.

David Ferguson, Renaissance Capital.

Just to follow up on the question about mobile. Maybe you can give us a bit of a high-level picture on how advertisers in Russia are thinking about advertising on mobile search. Do any advertisers come to you and take mobile only, for example? What do you think are the best formats for monetization on mobile and things like Click to Call?

And then going forward, as mobile becomes more important in the mid-term, what impact will that have on things like cost to click number of paid clicks and so on? That's it, thank you.

This is again Alexander speaking. So on mobile, what I could say is that traffic coming from mobile devices is still very small as a percentage of our total traffic. It's about 10%, which would give also traffic from tablet devices where user experience is the same as on network devices.

So talking about advertiser interest, we see that the CPC is slightly less, but not substantially, slightly lower than on desktop devices. And in our long-term plan to develop special applications for the mobile devices when the traffic becomes substantial. But again, it would a be simple (inaudible) speculation on my side. As to say what and how we do it impacts our customers. And they're still so small. But it's important, like using special kind of products for the advertiser. For mobile devices it is important for us and we're working on this (inaudible) front. But it's not a short-term issue.

Anastasia Obukhova, VTB Capital.

It's a kind of somewhat similar question. I was wondering where do you estimate your share in the mobile Internet search? And which technologies maybe operating system you are planning to maybe to develop to capture the potential upsize for mobile Internet growth.

And if I might, a follow-up question on your partnership to utilize your search index, if I may. You were mentioning it since the first quarter conference call and now you're bidding that you're working for (inaudible) partnership. And were there any (inaudible) results that you can share with us in the search (inaudible) partnership? Thank you.

I'm talking about mobile shares and everything about mobile. First of all, yes, mobile is still -- is too small and it's just growing. It's a new (inaudible). From what you see in our numbers for the last several quarters, our market share is growing in all the mobile platforms, both those where we default and those who have not default. That's the (inaudible) side.

The second issue is that whether or not the mobile market will be diversified, will be explained between different platforms. And as we see it now, yes it will be as we see now there will be at least two of them and hope for maybe three of them, including -- two of them is (inaudible) and Honduras and the third, which is Microsoft may (inaudible) maybe later this year or next year.

So the platforms will be -- there will be different platforms. And from you see in our partnerships, we manage to make arrangements with different platform owners. And fortunately for us, not all the platforms belong to our direct competitors. And even more -- less than half of the market share belongs to our main competitor and the majority of the market share will be available for partnership for us.

So improving our market share on all the platforms and also partnering with our non-competitors I think it's our approach to the growing mobile. But again, mobile is too small to talk about right now.

And the partnership you mean only in the mobile context. You were talking about the partnership agreement.

You saw how we performed on the desktop partnership and our market share different platforms and in desktop. And in mobile we just signed up with Samsung provider, we signed up with Microsoft. We're working with other platform owners and we expect (inaudible).

Alex Balakhnin, Goldman Sachs.

I had a question on your view on this split on revenues in the end of the year. What I'm trying to understand is obviously the year-on-year market share differential of Yandex, like a change of market share, will be minor. And I suspect that may contribute to probably some acceleration of the paid clicks you or an (inaudible) network is able to generate. Do you think that will lead to a lower share of [botless] revenues? Or you will use this opportunity to grab higher market share overall?

This is Alexander. Thank you for the question. If I understand your question correctly, you talk about the split between (inaudible) on the operated revenue and partner (inaudible), right?

Yes, basically. In the first half your share of all in all revenues was relatively low because your market share over year-on-year declined, right, in search. When there will be no such a year-on-year effect in the second half or less effect in the second half, should we expect a lower contribution of advertising network to your revenues as you were able to capture more revenues yourself? Like more advertising demands yourself?

Yes, I think it will be difficult for me to provide any color beyond our revenue guidance for the full total consolidated revenue of 40% to 45% for the full year. But maybe one element, which probably could help in your analysis is just a reminder that in Q3 we made a promise to the advertising technologies, which accelerated revenue growth and partner network. And now starting this Q3 it will be factored in that period, which could have an impact on the growth rate in the (inaudible).

But it would be probably inappropriate for us to dissect our revenue guidance into classes or types of revenue.

Olga Bystrova, Credit Suisse.

I have one conceptual question for you. You obviously have two private equity shareholders in your shareholder structure. How do you view your relationship with them? Do you think there is a potential increase in overhang coming into the market, particularly with you delivering very strong results recently?

And if I may ask also, just a very quick clarifying question on the difference between adjusted EBITDA and what would be reported EBITDA. On my calculations the difference is about [RUB]129 million and I just wanted to confirm that this is the only difference attributed to SPB Software costs acquisition or there is something else -- some other costs are included in that difference. Thank you very much.

This is Alexander speaking. So talking about your first question. We can't comment on the plans of our shareholders obviously. So this question would probably be directed to the shareholders themselves.

Probably one data point that is available publicly is that [Tiger], they pulled some of their shareholding in Q1 and this was reported in the Q1 financial reports. But other than that, we cannot comment on the shareholder plans.

Talking about the reconciliation of reported EBITDA and suggested EBITDA is provided in our press release in the back of the press release. So if you would have questions there, I would be happy to take it off line.

Anna Lepetukhina, Troika Dialog.

I have one more question. I just wanted to hear your view on drivers behind revenues growth because as far as I see right now, the growth is driven by number of paid clicks. My question is for how long do you think this growth can continue? And once we're to see a slowdown, where the cost of click can actually grow versus the potential for CPC to grow.

And also, what is the relationship between search queries and number of paid clicks? Because there is a slowdown in the growth in search queries. Is there some relationship and correlation between those two terms? Thank you.

This is Alexander. So talking about the growth revenue behind our total revenue. We used to report to the effect that any growth in paid clicks and CPC, while in effect the way we view our revenue is like the amount of money that our customers are willing to spend to support their advertising campaign. The system works with an auction as you know, and when we're able to provide additional traffic for the customers, CPC would obviously go down. When the traffic becomes more in demand or like less available, then CPC goes up. So the customers they do, they advertise on (inaudible) in terms of return on investment rather than number of paid clicks that they are buying.

So I guess it's absolutely we will not be able to comment on our (inaudible) in the paid click road. And the other item, it's a slightly wrong way to work on the revenue growth.

The gross revenue driven by growth of (inaudible) Internet. Number of users online and then the advertisers, minus the (inaudible) the (inaudible) of the Internet users. So given the fact that Internet audience goes at the higher rate and there was some gap between the growth of the audience and growth of Internet ad spend, we see very high opportunities to growth of our revenues for the several years ahead.

Can I just clarify? So basically you recommend and you think that it's better to look and more appropriate to look at average budget per advertiser and the opportunity to increase this budget per advertiser and get a number of advertisers rather than paid clicks and CPC, which is a derivative of these two factors.

Yes, maybe this would be another way to look at it, yes. But the growth of number of customers and spend per customer.

There are no more questions at this time. That does conclude our conference for today. Thank you for participating. You may all disconnect.