Nebius Group NV (NBIS) 2013 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Yandex second quarter 2013 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, at which time (Operator Instructions). We advise you that only one question and one follow-up question should be asked. I must advise you the conference is being recorded today, on Thursday, July 25, 2013.

I'd now like to hand the conference over to your speaker today, Arkady Volozh. Please go ahead.

Yes, hello, thank you. Well, we wanted to clarify an earlier statement that the Company put out. We have since learnt that Ilya is in coma and on life support, although not showing any brain function. Our thoughts are with him at this time.

As you know, Ilya Segalovich and I founded Yandex more than 20 years ago. He served as Chief Technology Officer of Yandex and built up and inspired the incredible team of talented engineers, who are the backbone of the Company now.

Ilya also was a great philanthropist, contributing not only money but time and personal commitment to many in need, especially orphans in Moscow. More importantly, Ilya was a valuable personal friend.

I know that the strong technical team that Ilya helped to build, train, and motivate will continue with pride the work Ilya began.

I am currently with Ilya's family at this difficult time; I will, therefore, now turn the call over to Greg Abovsky, our Head of Investor Relations, who will update you on the business. And I will be speaking with you again in the near future. Thank you.

Thank you, Arkady. On behalf of the entire Yandex team, I'd like to extend our deepest condolences to the Segalovich family.

We'll now turn to a review of the second quarter. We distributed our earnings released earlier today. You can find a copy of the press release on the Company's Investor Relations website, as well as our newswire services.

Today, we also have on the call our CFO, Alexander Shulgin. Our call will be recorded, and the recording will be available on Yandex's IR website in a few hours.

We have put together a few supplementary slides, which are currently available on our IR website.

Now I'll quickly take you to 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 factor section of our Annual Report on Form 20F dated March 11, 2013 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 date in the future, we specifically disclaim any obligation to do so, even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we'll be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with US GAAP. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings release we issued today.

Now let me give you an update of our Q2 operational activities. We delivered yet another set of strong financial and operational results.

Over the past three months, a number of important developments have taken place in our business. Let me highlight some of the most important ones. We unveiled our vision for the new search platform called Islands; two, we released two mobile browsers for iPads and for Android phones; three, the developer build of Apple's iOS 7 features Yandex's search option; and, four, we signed an agreement with Mail.ru to power their paid search results.

Now, let's get into some of the details. Let me begin by mentioning our search share. According to LiveInternet, our share of searches on all platforms, including mobile, was 61.7% in Q2 of 2013, compared to 60.4% in Q2 of 2012; an increase of 1.3 percentage points year over year, and an increase of 0.1 percentage points sequentially.

Let me now spend a few minutes on the new search interface platform that we call Islands. Islands is a revolutionary new generation of interaction between search engines, publishers, and users. Even more, it represents a radical rethinking of what a search engine is and what it should do.

Historically, search engines were focused on moving users from queries to blue links that eventually led them to answers. Over time, search engines evolved to deliver more of the answers directly on the SERP. Think of maps, or Wikipedia information, or images that appear directly in the SERP and often represent the solution to the user query.

Many times, users are looking not just for answers but looking to take actions. They want to book an airplane ticket, reserve a hotel, or buy something online. Up until now, users were limited in how they could interact with the search engine, and could only interact with a search engine's own verticals.

Yandex is focused on creating a better user experience, and on working together with the entire web ecosystem, not just its own resources. So if you're a publisher, you'll be able to use our APIs to enable interactivity between your site and the user directly on our search platform.

Islands reduces the number of intermediary pages between the query and the end result, increasing users' productivity, and improving their overall web experience. Islands is also a new design language for all Yandex sites, including our mobile sites.

We began the roll-out of Islands a month ago, starting with Turkey, where we're already beginning to learn and iterate. Tomorrow, we plan to roll out the beta version of Islands in Russia, and we have hundreds of publishers who have signed up for this functionality.

While initially a desktop platform, Islands' functionality is even more relevant than mobile. Poor connection speeds, network latency issues, and small screen sizes make the progression from query to action more cumbersome in mobile devices than on desktop. Islands streamlines this path by allowing users to perform more actions directly in the SERP, without having to wait for intermediary pages to load.

We're very excited about Islands, and we think that this platform is completely unique.

Let me shift gears for a minute, and talk about our efforts in mobile in a bit more detail. In June, we released our mobile browser. Initial versions cover the iPad and Android phones. In a few months, we will also release versions for the iPhone, and for Android tablets. Once all four versions of the mobile browser are ready, we'll start more serious distribution efforts.

Yandex mobile browser has a umber of unique features that were designed to directly address the uniqueness of search and browsing on the respective mobile platforms; everything from the location of the search box on smartphones to the unique side-by-side browsing capability on tablets.

And we're also taking our learnings from the desktop browser and applying them to mobile; features such as tableau, data compression, and predictive URL input.

With our mobile browser, our goal is to create a unique and highly valued user experience that drives usage, and in turn distributes our search engine more widely.

We believe that there's a need for a very tight connection between the browser and the search engine, as the browser itself becomes simply the user interface to search. Thus, we feel very good about the investment we've been making in developing our browser platform over the last 1.5 years.

Continuing in mobile, let me discuss our efforts on Apple iOS. As you may have read, the developer version of Apple's iOS 7 gives the ability to choose Yandex as their default search engine in Russia, Ukraine, and Turkey for our users. This feature makes our search directly accessible from the smart box inside Safari. We all can't wait for Apple to release iOS 7 to consumers this fall.

As you can tell, we're beginning to feel much more confident about our position on mobile. We have a mobile browser; a number of leading mobile apps; good market share in Android; anticipated share gains in iOS; and many important relationships with smaller mobile platform owners.

Let me now spend a few minutes on the Mail.ru agreement. As you may have heard, beginning July 1, Yandex began to power Mail's paid search results. We're very excited about this development because it increases our total share of the contextual advertising market in Russia, and is obviously accretive to us on a net revenue and EBITDA basis. Alex will go through more details about the financial impact of Mail.ru in his remarks.

We've also had a number of smaller, but still important, product news. Let me quickly go through these. We introduced personalized search, which takes into account user interests in the current search session, to provide more tailored ranking of search results.

We launched Yandex.Music for Android. And by June, Yandex had actually processed 1 million orders since the beginning of the year, which is 5.5 times more than during a comparable period a year ago.

We also unveiled some pretty unique capabilities in Yandex.Mail. With the help of MatrixNet and fact extraction technologies, Yandex.Mail can now automatically sort incoming e-mail into a number of pre-set categories, such as ticket or hotel confirmations; meeting invitations; marketing offers, and so on.

It can then extract critical information from this communication stream to remind users about upcoming travel via text message; offer to register them for a flight; tell them about the weather in the city of their destination; or remind them about an upcoming appointment. This is a great example of our efforts dedicated to improving the lives of our users through the application of our unique technologies.

Finally, let me update you on our efforts in Turkey. While our search share there's still around 2.5%, we're proud that we have been able to build a strong local team, and we have excellent brand recognition. Unfortunately, we experienced a set-back with the political turmoil in the country, and we've had to delay some important product launches until the fall. We hope to update you further in the future.

With this, let me pas the mic to Alex Shulgin, our CFO.

Hello, everyone, this is Alex speaking. Today is a very sad day for all of us. We all regret very much the loss of our great co-founder and CTO Ilya Segalovich. I thank you all for joining us today.

In the second quarter of 2013, Yandex consolidated trading has increased 35% year on year to RUB9.2 billion.

Contextual or text-based advertising accounted for 88% of all total revenues in Q2, and continued to grow at a healthy pace of 35% year on year.

Yandex.com websites demonstrated 37% growth, and constituted 73% of all total revenue, while our advertising network contributed 15%.

Yandex advertising network grew 25% year on year, which is slower than our own [integrated] websites. As you will recall, we introduced a number of changes to our advertising system during the first quarter that primarily impacts our own integrated websites.

Display advertising accounted for 9% of our revenue in Q2, and grew 31% year on year. The remaining 3% of our revenue came from Yandex.Money, and other sources.

Our advertising network, TAC, grew 22%; slightly slower than our network revenues.

Distribution traffic position cost grew 40%; slightly faster than our own and operated revenue, which grew 37%.

The increase in distribution TAC as a percentage of own and operated revenue was very modest; up only 13 basis points year on year. Again, a very large portion of the increase in distribution TAC as a percentage of own and operated revenue was driven by our activities in Turkey.

Total TAC increased 28% year on year.

TAC's text-based revenue growth was driven by growth in paid clicks, which increased 29% year on year, and by growth in cost per click, which increased 5%.

As we mentioned in our Q1 call, we made several changes to our advertising system. We introduced a so-called thousand block, with up to four ads, shown on the bottom of the search result page. We also began to offer our advertisers a new, image-based ad format on Yandex ad network. Both changes were received extremely well by our advertisers, and led to significant increase in click flow rates.

Now turning to our cost structure. Our total operating costs and expenses, excluding traffic acquisition cost and depreciation and amortization expense, grew 33% in Q2. Excluding stock-based compensation and other non-cash items, our costs grew 32% in Q2.

As usual, personnel costs remain our largest cost item. In Q2, we added 326 employees, of which 184 were in product development. Our total personnel costs increased 32% year on year in Q2, and was 20% of revenue.

And our depreciation and amortization expense for the quarter increased 31%.

Our adjusted EBITDA grew 40% year on year, and our adjusted EBITDA margin was 47%; up 170 basis points year on year.

This quarter, the impact from foreign exchange effect on our net margins was a RUB35 million gain, primarily related to dollar-denominated liabilities and assets on our balance sheet, as ruble weakened from RUB31.1 as of March 31, 2013 to RUB32.7 as of June 30, 2013.

Our effective income tax rate for Q2 was 20.9%, compared to 21.7% in Q2 2012.

Adjusted net income, after adjusting for the effects of share-based compensation, foreign exchange gains and losses, and contingent compensation related to the acquisition of SPB Software grew 48%. Adjusted net income margin was 33%.

Our Q2 CapEx was RUB685 million, or 7.4% of revenue, compared with Q2 of last year when CapEx was 10.1% of revenue. In absolute amount, it stayed roughly flat year over year.

As we mentioned in our previous call, CapEx is not evenly spread across quarters, and we expect that CapEx as a percentage of revenue will be higher in Q3 and Q4 this year.

And turning to the balance sheet, we ended the quarter with around $940 million in cash and investments, not including the proceeds from Sberbank-Yandex.Money joint venture. Our cash is on deposits with [stock rated] Russian, Dutch, and German banks.

As you will recall, in March of this year we announced a share repurchase program. Under the program, we are looking to repurchase 12 million shares of our common stock. At our Annual Shareholder Meeting in May, we got approval to extend our share repurchase program until March 2014. Since the inception of this program, we have repurchased 4 million shares of our stock in the open market.

Subsequent to the quarter end, we completed the joint venture deal with Sberbank. Under the terms of this deal, Sberbank acquired 75% interest in Yandex.Money for approximately $60 million. The deal was completed on July 4, this year. And starting from Q3, we'll be recognizing our share of the joint venture earnings in the other Income line of our income statement.

And now, turning to the Mail.ru deal that Greg mentioned in his opening remarks. As you know, we're already powering many parts of Mail.ru with our contextual advertising. Now, starting on July 1, we are very pleased to be powering paid search results for Mail.ru as well. This partnership increase our total share of the contextual advertising market in Russia, and is accretive to us on net revenue and EBITDA basis.

Turning to guidance, we are pleased to raise our revenue growth outlook for the year from 30% to 35% that we previously provided to 34% to 38% now. This reflects good performance of our core business, as well as expected revenues from the Mail.ru deal. Again, this is on a like-for-like basis after removing Yandex.Money from our 2012 figures.

I would like to know that there is obviously traffic acquisition cost associated with a partner deal, such as this one; thus, one should expect some dilutive effect on our EBITDA margins because of this.

And now, I will turn the call over to the operator for the Q&A session.

(Operator Instructions). Lloyd Walmsley, Deutsche Bank.

Wondering if you can just give us a sense on the Mail.ru deal of what sort of acc. rates we should expect, and then what percentage of ads you'll be powering. Is it all of it? Or is Mail going to continue to power some of their own search ads?

And then a second, if I may. If you could just talk about some of the changes, timing and impact, that you have planned for the ad system later this year, and then for the Yandex.Marketplace. We'd love some color there. Thanks.

Hi, Lloyd. I will take your first question, and the second question will go to Greg. So talking about Mail.ru deal, obviously, we will not be able to disclose the commercial details of it. But what I could say is our increased revenue guidance, or full-year revenue guidance, of 34% to 38% includes both good, solid performance that we see for business in the remaining two quarters of the year, plus the incremental additional revenue that we generate from the Mail.ru deal.

Talking about some details of this deal, Mail.ru, as well you know, switches to their own proprietary search engine, but the old paid search results that will be displayed on the Mail.ru search result pages will come from Yandex, Yandex.Direct [advertising] system. And this starts July 1.

And I'll try to take the second half of your question, Lloyd. In terms of the changes that we're planning to the ad system, as you know, we're always tweaking with our ad system and making various improvements, both to the layout of the page, as well as to the click prediction mechanisms, and the mechanisms for our advertisers to deal with the system itself. Obviously, before those changes are made we cannot predict when and how effective those changes would be.

As far as Yandex.Market is concerned, Yandex.Market continues to grow at a very healthy pace, growing at a rate faster than our revenues overall. And as far as our plans to launch Yandex.Marketplace, those are on track as well, and will roll out gradually over the course of the next few quarters with first capabilities being launched later this year.

Okay, thank you, guys. And our condolences to your loss.

Thank you, Lloyd.

Edward Hill, Morgan Stanley.

I have two questions, please. Just, firstly, going back to the Mail deal. Mail do disclose a search revenue number, which last year in the first half -- well, certainly the first quarter this year. And if you sort of look at that and make some assumptions you could broadly get to around all of the revenue increase, around 4% in terms of Yandex's revenues.

I'm just trying to work out whether or not there's any underlying increase in the revenue guidance today, excluding the Mail deal, particularly at the top end of it, which is like a 3% raise. I just want to sort of clarify the strength of current trading really relative to where we were maybe a couple of months ago.

And the second question relates to the partner websites, which are clearly still under tracking the O&Os by around -- the gap's actually widened to around 13% in the second quarter.

I know there's significant technology change differences between the two revenue streams; would you expect the gap to narrow between the two as we go in the second half of the year? Or do you think the changes taking place within the O&O side means that the sort of 10-plus-% revenue gap will be there for the rest of this year, please? Thank you.

Hi, thank you very much for your questions. As you know, we don't really break out the mix of revenue contributions by line item, such as the mix from O&O versus the mix from partner.

Obviously, the changes that we implemented earlier in Q1 impact primarily our owned and operated sites, such as the southern block that we introduced, which has, as we've said, excellent click-through rates and delivers a lot of paid clicks for our advertisers. So we can't really say much more about that.

On the question of Mail.ru, obviously, it's up to them to really clarify exactly how much revenue they generate from search, or other contextual advertising methods.

Just to reiterate, our revenue increase reflects both good -- very good strength in our core business, as well as the contribution from the Mail.ru deal.

That's great. Can I just ask one final follow up, if I may, just on the iOS 7 change? Is there any structural reason why you think that the market share within Apple iOS 7 devices would not necessarily be as high as within the Android platform?

Thank you for the question. Look, under the current set-up in iOS, accessing Yandex.ru is fairly cumbersome for users. They can get to Yandex.ru either by typing it directly in their URL box, or by bookmarking our site. As you can imagine, that's a fairly cumbersome procedure, and I think it's a great testament to the power and strength of our brand and search engine that we still have about 35% market share on iOS today.

We expect that with the changes introduced with iOS 7 that our market share should strengthen there considerably, given that users will now be able to select Yandex as a default search engine in their smart box on Safari. And this applies, of course, both to iOS, as well as to desktop Safari versions.

Thanks very much. That's great.

Thanks, Ed.

Alexander Balakhnin, Goldman Sachs.

Two questions from me, if I may. First is on Turkey. So thank you for the update on the market share, but can you please clarify what would be the milestones for you when you make the decisions on whether you keep pushing in Turkey or withdraw from there? And can you probably give some information on how do you feel the audience uptake is taking place.

And my second question is we saw quite a substantial increase of the paid clicks as you are changing the design of the search results page. Should we expect probably a further acceleration of paid clicks towards the end of the year, so you will be able to give like a greater number of paid clicks to advertisers at cheaper prices, or that should be stabilizing pretty much at the trend we saw in the second quarter? Thank you.

Thank you, Alex. To take the first part of your question with respect to Turkey, look, as we mentioned, we have about 2.5% share of searches there. And we've built a fairly strong local team there that we're very happy with; we have excellent local brand recognition in the marketplace. But, obviously, there has been political turmoil there, which has dealt us a setback in terms of various activities that we had planned in terms of product releases, and so on.

We do anticipate growth there in market share in the second half, and we will continue to evaluate Turkey as a market for us.

With respect to your second question on paid clicks, that's a very good question. As you know, Mail.ru is a fairly large player in the Russian search market with about 8.5%, 8.6% market share, according to LiveInternet. The addition of the paid search results, which we're going to power on Mail, to our own base of properties will obviously increase the rate of paid clicks growth.

As you also know, paid clicks and CPCs are not mutually exclusive variables, and are not completely independent. A large increase in paid clicks has the near-term impact of dampening paid CPC growth, as you've witnessed this quarter when we had our paid clicks growth rate accelerate from Q1 to Q2. You also saw some moderation in cost per click.

Given that we now expect to see a fairly large acceleration in growth rate in paid clicks, you should, therefore, expect to see some softening trends in CPCs.

We believe though that overall, first of all, lower CPCs are excellent for our advertisers as they tend to improve their ROIs; and secondly, these effects tend to even themselves out fairly quickly. At the end of the day we will have a much larger share of the Russian contextual advertising market, which obviously is a huge positive for us.

Thanks, Greg. Just a quick follow up on the first question on Turkey. You used to have an internal target; if you don't reach a high single-digit market share you would reconsider the future of your expansion in Turkey. Is that still in place, or you are changing the way you think about this market?

No, this does not obviously change the way we think about the market. We approach our investments in a disciplined fashion, and obviously if we cannot make progress we will re-evaluate our investment there. But we are optimistic about our chances of increasing market share in Turkey.

Thank you.

Boris Vilidnitsky, Barclays.

First, my condolences, again, for the entire Yandex family. A quick question from me. First, on margins, you increased guidance for the full year on top line, but you maintained flat margin guidance for the full year despite the beat in the first half; just curious if you could expand again on where you might see the margin pressure in the second half.

Second, you obviously have a very healthy cash position right now. With the deal, we're looking at close to $1 billion. Again, other than the buyback program, which should roughly cover $300 million, maybe slightly more, what are the thoughts there? Thank you.

Hi, Boris, thank you for the questions. I will take the first one about margins. So, you are right, we had pretty high adjusted EBITDA margin in the first half of 2013, driven by improvements to our advertising system, and these improvements will have a favorable positive impact on our revenues going forward, we believe.

Now, our new contract with Mail.ru has obviously traffic acquisition costs associated with incremental revenue that it generates. It is still too early for us to tell exactly how much incremental revenue will generate out of this deal, but obviously the better we do for Mail.ru the better it is for our gross revenues and [ex-tax] revenues; and also, it's accretive on EBITDA and net income level in absolute terms. But the margin percentages will be depressed somewhat down by this deal.

Let me pick up the question on cash. You're quite correct, we do have a share buyback program in place. We announced a $12 million share buyback program back in March of 2013. We've currently executed a little over 4 million shares of that buyback program. At our AGM, we extended the buyback program [through to] March 2014, by which point we expect to complete the buyback program.

You're quite right, we do have a fair amount of cash on the balance sheet. It's a topic that obviously the Board continues to evaluate in terms of the best uses for that cash, and we will obviously inform you guys when, and if, the Board makes that decision.

Thank you.

Anastasia Obukhova.

Can I please ask two questions? First of all, are you going to -- or when are you going to launch online payments on Yandex.Market?

The second, do you see any kind of material participation or involvement in Russian eCommerce activity from classifieds, like [Arete], etc., or no? Thank you.

Hi, Anastasia, thank you very much for your questions. With respect to Yandex.Market, as we said, we're rolling out the functionality gradually over the course of a few quarters. The first functionality of Yandex.Marketplace will be in place by the end of the year and so you'll be able to experience it at that point.

With respect to your questions about classifieds, obviously, that is -- they're a very good client of ours, and we refer some traffic to them, and we get some traffic back from them, and we think that they're a good player in the marketplace. We're obviously very happy for that online commerce segment of the Russian economy to continue to grow, as that will obviously benefit our business greatly.

Thank you.

Boris Vilidnitsky, Barclays.

Yes, as there does seem very more questions, I wanted to know what -- could you give us an update on your share within mobile and Android? And you mentioned on iOS it was 35%, right?

Hi, Boris. Yes, thank you very much for your question. In terms of our market share in mobile, as you know, we've cautioned in the previous conference call that LiveInternet market share data for mobile operating systems, such iOS and Android, is somewhat unreliable. Lately, we also had some difficulty in measuring our market share internally.

Our latest assessment, however, is that on Android we have at least 47% to 48%, and probably as high as 50%; and on iOS, our market share remains around 35%.

Obviously, with respect to iOS, just to reiterate what I've said earlier, we're obviously very optimistic about an ability to increase that market share over the next few months when iOS 7 is rolled out and our users can select Yandex as a search option in the smart box on their iOS devices, as well as Safari on their desk top.

Got you. Thank you.

Thank you. That was the last question, please continue.

All right. Thank you very much to everyone for your participation on the call today. It's been a very emotional and difficult day for us all. Again, our condolences go out to Ilya Segalovich's family. And thank you all for your understanding. We will speak to you again in the fall for our Q3 2013 conference call.

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.