Nebius Group NV (NBIS) 2016 Q2 法說會逐字稿

Good day and welcome to Yandex second-quarter 2016 financial results conference call. Today's call is being recorded.

At this time, I would like to hand the call over to Katya Zhukova. Please go ahead.

Hello, everyone, and welcome to Yandex's second-quarter 2016 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 the newswire service.

On the call today, we have Alexander Shulgin, our Chief Operating Officer; Greg Greg Abovsky, our Chief Financial Officer; as well as Mikhail Parakhin, our Chief Technology Officer. Arkady Volozh, our Chief Executive Officer, will join the Q&A session.

The call will be recorded. The recording will be available on our IR website in a few hours.

We have also put together a few supplementary slides currently available on our IR website.

And now I will quickly walk you through the Safe Harbor statement. Various remarks that will 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 this forward-looking statement 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 21, 2016, 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 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 those 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. Those 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 am turning the call over to Alexander.

Thank you, Katya, and hello, everyone. Thank you for joining our second-quarter earnings call.

We delivered another solid set of results in Q2 with revenues up 30%, ex (inaudible) revenues up 33%, and adjusted EBITDA up 40%. Adjusted EBITDA margin in our core business strengthened 290 basis points compared to Q1 2016 and reached 41.9%.

In Q2, we saw continued stabilization in the overall economic environment. We also made significant advances in the advertising technology, which allowed us to improve our targeting capabilities, and we improved maintenance on smartphones.

As a result of the antitrust case in Russia, we were able to sign a number of distribution agreements with various OEMs for preinstallation on Android devices.

Our search in Russia averaged to 57% in Q2, down 60 basis points compared to Q1. The decrease was driven by seasonality, limitation of our distribution activities in Google Chrome, and a decrease of our search in Ireland iOS. Share on iOS is continuing to decline for reasons we have discussed previously. However, in the recent weeks, we gained approximately 200 basis points on Android as certain models of smartphones with Yandex services preinstalled have already been shipped into the Russian market and became available in retail stores.

As of today, there is only one update regarding the antitrust case in Russia. The next hearing is scheduled for August 16.

The Yandex proudly continued to strengthen its position on desktop as well as in mobile. Its share on desktop has reached 19.5%. Its total share in the overall search traffic, including desktop and mobile, is around 17%. Growth of Yandex product was supported by Zen, our personalized content recommendation seat, which we fully rolled out in Russia in June. The product provides intelligent content discovery feed based on users interest and demographic profile. The product relies on the later developments in the artificial intelligence search.

Interestingly, average time spent per user on Zen is comparable with global social networks. Zen also creates additional advertising inventory and has already started to generate revenues.

Now, turning to segments. I am very excited with how our business units have been progressing. Taxi is actively penetrating new regions. The growth rate in (inaudible) accelerated in Q2 compared with Q1 2016. The regional cities ex (inaudible) now generate almost a quarter of all rights.

We are now in 25 cities in Russia, as well as in Yerevan, Armenia, and Minsk, Belarus.

The Yandex market continued to benefit from product improvements, strong e-commerce trends and increased marketing activities. In Q2, we transferred 20 categories of growth into the CPM model. As a result of this transaction, we saw retailers increase the level of recent models in the Yandex market.

Currently, we have 10% of all merchants working with us under the CPA model. We have also increased our take rate from 1% to 2%.

Order (inaudible) continues to strengthen its position in Moscow, Saint Pete and in Russian regions. In June, we opened our first certification center in Moscow that will allow our sellers to get independent technical opinion on their costs and highlight their listings with it certified by order to reassign.

In Q2, nonadvertising revenues of classifieds (inaudible) real estate, travel, and jobs grew 70%. As I mentioned earlier, we significantly increased monetization of smartphones in Q2.

With this, I will hand the microphone over to Mikhail Parakhim, our Chief Technology Officer, who will walk you through improvements in advertising technology, including with respect to mobile monetization that we made during Q2. Mikhail, please go ahead.

Thank you for the introduction, and hello, everyone. In Q2, 27% of our queries came from mobile, and monetization for mobile devices was up 150 basis points, generating 22% of our search revenue. This growth was driven by significant increase in monetization of smartphones due to a number of changes we made in head layout, VCG formulas for smartphones, as well as by significant advancements in targeting technology.

In Q2, we conducted a number of experiments with ad content and layout on smartphones, putting more relevant information in the ad. This is out of an increased number of paid clicks, but lowered their average quality.

To maximize the value of these clicks for our advertisers, we adjusted parameters which we use when picking ads to be shown in our priority ad block. As a result of these adjustments, revenues so far have significantly increased, as did the average click quota for the advertiser.

We also made significant advancements in our targeting capabilities. We improved the quality of click prediction and the conversion probability formula and added new factors to our targeting technology. The fact that we are now allocating more servers to analyze user data allows us to expand our targeting capacity.

All these changes reflect our new philosophy aimed at optimizing total economic value of an ad. VCG stimulates advertisers to set unbiased bids and allows us to compute the total value we are providing to the advertisers.

Since not all clicks are created equal, it might be better to drive fewer higher value clicks than a larger volume of the low-quality ones.

Now turning to another high-growth segment, Yandex Advertising Network. We are benefiting from the increase in inventory that our advertisers continue allocating to Yandex.Direct, improvement in targeting, which I mentioned, about replacement of old-fashioned text-based blocks by the more effective programmatic advertising formats, as well as by improvements in targeting algorithms.

We are also enjoying strong growth in our mobile ad network as a result of increasing inventory and improved targeting.

In addition to smarter, the mobile supply site platform that joined our RTB ad exchange in early 2016, we now work with three more sizable SSPs: mobile, interactive, and [more packs].

We also enjoy increases in mobile in entering our existing Yandex Advertising Network partners.

Finally, I would like to highlight the recent launch of Yandex.Audience, a service which helps advertisers target new clients more effectively by creating and analyzing segments based on their existing client data. Now advertisers can upload their regular clients' email addresses, phone numbers, or mobile device IDs into Yandex.Audience, and you'll create look-alike audiences for them.

Overall, we still see significant potential in improving our advertising technology and do not expect the fountain to run dry in the foreseeable future.

With this, I turn the microphone over to Greg.

Thank you and thank you all for joining our call today. We delivered another solid set of results. Our consolidated revenues grew 30% year on year and reached RUB18 billion. Online advertising revenues accounted for 96% of total revenues in Q2 and increased 28% year on year.

The Yandex website, which includes our text-based and display revenues, grew 24% year on year. Our ad network, which includes revenues from text-based and display partner networks, grew 37% year on year, benefiting from increased inventory that our advertisers allocated to Yandex.Direct, both in desktop as well as mobile, from an improvement of our targeting capabilities and increased quality of ad selection algorithms that Mikhail discussed recently.

Ad network comprised 26.3% of total revenues in the quarter. Contribution of ad network revenues to total revenues increased by approximately 150 basis points compared to Q2 of last year.

In Q2, we saw growth of ad budgets across all advertising categories. Revenues from the travel segment continued to be soft as were consumer electronics and home appliances. The most rapidly growing ad categories were real estate, apparel, and FMCG with approximately 40% growth rate in each.

Auto and financial services grew in line with overall growth. Other revenues grew 106%, primarily driven by the growth of Yandex.Taxi. Other revenues comprised 4% of total revenues in Q2, up 150 basis points compared to Q2 of 2015.

Traffic acquisition costs related to the partner advertising network grew 25%, slower than ad network revenues due to changes in our partner mix and improvement of revenue-sharing terms with some of our partners.

As a result, Q2 (technical difficulty) partner TAC comprised 55.7% of our ad network revenues, down from 61.2% a year ago and down from 56.3% in Q1 of 2016.

Traffic acquisition costs related to the distribution partners were flat year on year, and it constituted 7.3% of advertising revenues from Yandex sites compared to 9% a year earlier and 7.8% in Q1 of 2016. As a result of these factors, total TAC grew 18% year on year and constituted 19.7% of total revenues, 200 basis points lower compared with Q2 of last year and 90 basis points lower than a quarter earlier.

Peak clicks grew 13%, while cost per click increased 14%.

Turning to our cost structure, total OpEx, excluding TAC and G&A, grew 27% in Q2. Excluding stock-based comp, expenses grew 25%. Growth is primarily driven by growth in advertising and marketing expenses for our business units such as Taxi, e-commerce, and classifieds, in that order.

Personnel costs still remain the largest cost item. In Q2, our headcount was up 2% compared with both June 30 of last year, as well as March 31 of this year. In Q2, our personnel costs constituted 21% of revenues, down 2 percentage points from Q1.

Stock-based comp increased 48%. The stock-based comp growth rates were driven by new grants and Forex.

G&A expense for the quarter increased 24%. G&A grew slower than in previous quarters, reflecting lower investments in new servers in Q2.

Our adjusted EBITDA increased 40% year on year, due to a shift of some of our expenses towards Q3. As a result, our consolidated adjusted EBITDA margin was 37.5%, up 290 basis points from the previous year.

This quarter the impact from Forex was a loss of RUB958 million related to dollar-denominated assets and liabilities on our balance sheet, following the appreciation of the ruble from [RUB67.6] on March 31 to [RUB64.3] on June 30.

Adjusted net income was up 40%, and adjusted net income margin was 21.7%. Our CapEx was EUB2.5 billion or 14% of Q2 revenues, up from 9% in Q1 of this year. The peak of our server purchases fell on June, while other capital expenditures related to purchases of equipment for our (inaudible) DC, as well as the (inaudible) DC which is under construction.

Turning to performance of business units. Search and portal revenues were up 26% due to a number of factors, including CPC increase, which was driven by [ECG] implementation September 2015, better macro, as well as technological improvements, and ad layout changes that Mikhail discussed earlier.

Adjusted EBITDA search and portal grew 41% in Q2 and reached 41.9%, up 290 basis points from Q1. Revenues of Yandex.Market were up 46%. The growth was driven by improved consumer demand, compared to a year earlier. Increased traffic coming from search, as well as advertising and marketing support. Adjusted EBITDA of Yandex.Market decreased 21% year on year, and its adjusted EBITDA margin was 30% in Q2 compared to 36% in Q1, as a result of increased advertising and marketing activity, as well as hiring.

Revenues of Yandex.Taxi, were up 172%. The growth was driven by the addition of new cities and an increase in the number of rides. As we have discussed in the past, we are making significant investments in Yandex.Taxi, including advertising and hiring of additional personnel.

In Q2, adjusted EBITDA of Yandex.Taxi was negative RUB153 million.

Revenues of classifieds grew 48%, driven by growth of [IVAS] and listing revenues at Auto.ru and other verticals. Adjusted EBITDA classifieds was RUB23 million down 66% from Q2 of last year. The main driver of the decline in EBITDA was growth in advertising and marketing activities as we continue to invest for growth.

We are continuing investments in our experimental businesses, represented by our media services, Yandex Turkey, YGF, and Discovery. These revenues grew 63%, driven by growth across all the lines. These businesses continue to be a drag on our overall margins, however. The magnitude of the EBITDA drag from these businesses declined, however, as the EBITDA loss decreased by RUB250 million year over year.

Now, getting back to corporate matters. We did not buy back any convertible bonds during Q2. Just to remind you, since the inception of the buyback program, we have repurchased approximately [292 million] face value of the bonds. We ended the quarter with approximately $979 million in cash and equivalents.

Now, turning to guidance. Based on current trading conditions, we increased our revenue guidance for 2016 from the 15% to 19% range provided previously to 19% to 22%.

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

(Operator Instructions) Lloyd Walmsley, Deutsche Bank.

Thank you. Two, if I may. First, it looks like a lot of the strength in the quarter came from the network side with the two-year growth stack accelerating a bit, while the O&O side, while strong, was a little bit of a deceleration. Wondering if you can just parse out what the big drivers are between those two?

And then, second, you have got a lot of monetization initiatives underway. Mikhail outlined several of them. Wondering if you can just give us some color on how much you think those will help in the second half and some color on the cadence of the launches? It looks like custom audiences and the look-alike targeting was just launched. So the impact is largely on the comb, but if you can just talk about the timing and potential impact of some of that, that would be great.

Hey, Lloyd. It is Greg. I will take the first question, and I will hand it over to Mikhail for the second question.

So just on -- in terms of the breakdown of revenue growth between the network side, as well as the O&O side, what I would say is, look, the network side is definitely getting a lot of benefit from better targeting that we are putting to use there, and I think that Mikhail will highlight some of those as he has in his prepared remarks as well as we are putting sort of more computing power behind our factors analysis.

On the O&O side, I think it is mostly just business as usual, a question of certain cadence as to where some of those advances lie. Furthermore, I would say the network side definitely is getting a benefit from the growth of our mobile network, as Mikhail talked about, and that is definitely helping to accelerate growth there, more so than on the O&O side at this point.

I will hand it over to Mikhail.

Yes. Just as we said previously, advertising network is growing faster than search, and that has been going on for a while. We do have significant potential there, still in improving targeting technology, as well as in search, by the way, too.

The specific data is harder to predict. As you know, shipping technologies is kind of an unpredictable business. But we do believe we still have quite a few bullets left. Not a one single server bullet, but quite a few bullets left in the second half of the year where we think we will try to get, of course, checked off (technical difficulty) difficult comps compared to last year VCG launch. And you might expect some technological improvements from us second half of the year.

Thanks, guys. Nice quarter.

Edward Hill-Wood, Morgan Stanley.

I have two questions based on the guidance, please. The full-year guidance being raised, it still implies a very sharp slowdown in growth in the second half of the year. I was just wondering if you could just comment on how you are seeing trading at the moment through the summer period and when you might be seeing that sort of scale of slowdown or whatnot you are factoring in a sort of degree of conservatism for later on in the year as the comps get tougher?

And, secondly, I was wondering if you could just update us on your previous guidance of margins declining around 300 basis points for the full year, including investing in new projects, whether or not that still stands as a reasonable base case? Thank you.

This is Greg. I Will try to take those two. On the first question, and what is implied by our guidance, well, clearly, our guidance implies a slowdown, which reflects our conservatism. It implies the fact that the macro environment sort of means uncertain. I think you are seeing stability. I don't think you are seeing real inflection of growth. I think that what we have had is we had kind of rapid declines, which were taken over by slowing down the rate of decline to stability. I don't think we are seeing growth yet.

And in terms of trading conditions, I think they are generally similar and in line with the previous quarters. And, obviously, the comps, as you said, do get tougher. The VCG auction, we will anniversary that in September 1. The rebate approval anniversary on September 1, as you know. And so all of those taken together lead us to where we are vis-a-vis guidance.

But, again, just to remind you, we started off the year at the 12% to 18% range, and we are now at 19% to 22%. So it has been quite a lot of moving up, helped by obviously strong results.

On the question of margins, yes, I did talk about 300 basis points last year -- I'm sorry, the last call. It appears that it should be a touch better than that. I am guessing we will probably decline 200 basis points or so on a year-over-year basis. We are stepping up aggressively -- more aggressively than even before on our business units. Again, in that order that I talked about on the call, it is Yandex.Taxi, it is market second, it is classifieds third in terms of the volume investment they are taking. But all those taken together are starting to sort of roll into the base now, and we are getting much more aggressive on them. And so I do think that we will manage to spend the excess revenue that we generate by plowing back into the business and investing for growth.

That's great. Could I just clarify on the first point, so the current trading conditions through the summer are brought in line with previous quarter, and the conservatism relates to future potential trends.

That is correct.

Alex Balakhnin, Goldman Sachs.

Yes. Two questions from me, if I may. One is, you mentioned some Android deals, which helps you improve the market share from the end of June. Could you please elaborate on that? What is the magnitude of the market share improvements you see, maybe some (inaudible). And also on the partners, who do you partner with? Are those B brands or maybe some A brands as well, and how do they really do with (inaudible) and so on?

Where do you appear on the front screen or there are some hybrid solutions? That is my first question.

The second question, the decline in the experiment process, does that reflect the scale down of Turkey, or it hasn't started yet? What really drives this sequential decline in the experiment process you have? Thank you.

Thank you for the questions. I will start with a broader perspective on our search market share, including Android as well. So we think we are positive about market share. We do not expect any dramatic changes to it. Our share on iOS most likely will continue to decline for the reasons that we just described before in our previous calls.

On Android, our market share started to grow as a result of our distribution deals, and I will speak about this in a minute. As the (inaudible) will continue, of course, but (inaudible) market share on Android created depends on the results of the current and (inaudible) legal process that FAS has with Google and also depends on practical implementation of the FAS once hopefully the court takes position of FAS in this case.

On desktop, we think we know how to maintain and hopefully increase our share. So all-in-all, we are positive about market share, and just a reminder, it also depends on the reality of growth of mobile traffic and our share in mobile.

Going to distribution deals, on Android, we have several deals currently with big and small OEMs manufacturers on some specific models. I think for competitive reasons, I wouldn't like to specifically name those companies, but we already see that is helping us to increase our market share.

Yes. On the question of experiments, yes, it is primarily the ramp down of advertising and distribution costs in Turkey that is driving that year-over-year savings.

Yes. Thanks. That's very helpful. And just to follow up on the first question, so those agreements, can you provide us some details? They do appear on the front screen, or it is the second screen installations that usually your search books appear on the screens? Like any details of that kind will be helpful. And, also, you mentioned iOS market share is declining. Can you provide the numbers which you normally disclose? So I guess Android is still (inaudible). What is the iOS now?

So maybe, briefly overview on the situation on Android, and it is also FAS case. So what we believe what happens currently is that following the favorable decision of FAS, in the antitrust case regarding Google distribution practice on Android, we believe that Google has loosened some of its express (inaudible) against Yandex with respect to Android OEMs. And we are now able to make several deals and hopefully more by bringing our services on [plus 1] or [minus 1] screen.

So we are not yet placing our service on the default home screen with some several exceptions, which I will leave open.

At the same time, the core practice of [Rogo], which used up preferences for its product on Android devices, seems to be still in force. And to remind, these practices are bundling of Google must have Go Play app store with search, browse, and (inaudible) apps and requirement for OEMs to place Google search and services on the default home screen and to set all search exit points pointing to Google.

And certain important items that Google used -- is still doing to obtain preferred position is a distinction of placing of content of their products on the devices, including search.

So, as I said currently, we believe what happens if that Google loosens its tight grip on OEMs (inaudible) place in our products on [minus 1], [plus 1], and hopefully once the FAS gets implemented, we will be able to place our products on the default home screen.

Cesar Tiron, Merrill Lynch.

Two questions from my side. On the handset manufacturer deals that you've signed, can you picture how they work? I understand you might not want to go into all the details, but is it just basically pay an installation fee and and then pay a revenue sharing fee?

And then the second question would be on Turkey. Do you still think that you need to be in Turkey, and do you believe that you can continue to reduce operating expenses in Turkey this year? Thank you so much.

I will try to answer this in the formal way, that we expect tech on mobile devices to be roughly similar to the tech on desktop. So mobile tech will be growing along with additional traffic of growth, but as a percentage of revenues, we don't think it will have a material change versus current situation.

That is with the new -- that is once the deals are activated. Right?

Yes. Exactly.

On Turkey -- it is Arkady. Maybe I can just add a couple of words. Yes, we are still in Turkey with our products. We continue improving our products and quality, and we are completely committed to Turkish audience users. At the same time, even worse than in Russia, we face very harsh conditions in the distribution, and that is why we decided for now to cut our costs on marketing distribution et. al. So we are still there with our products. But we try not to spend too much waiting for the distribution to change.

Vladimir Bespalov, VTB Capital.

Congratulations on the very good results. I have a couple of questions. First is on Yandex.Taxi. Given that you target like big cities in Russia and the former Soviet Union and you are present in more than 20, right now, how long would it take to cover all these cities you are playing in your strategy? And maybe once you completed your expansion and rollout of this service, what would be the normal margins for these businesses in your view and to what market share on the addressable market -- regional markets you are targeting for Yandex.Taxi?

And the second question is on real estate. Could you provide us an update how the year is going, are you going to complete it like scheduled in October and things like this? Thank you.

It is Greg. Let me take both of those. On the Taxi side, so we are currently in 25 cities in Russia. We are also in Minsk and Belarus and in Yerevan and Armenia. And just today we launched service in Kazakhstan and [Elmonte]. Our plan in terms of rolling out to more cities is still a fairly aggressive one. We see market opportunity in many, many more cities in Russia. It appears that the service works and works well in cities of even a few hundred thousand people.

Beyond Russia, we are also looking at some of the neighboring republics, and so far we have done -- we have launched in Armenia and Belarus and Kazakhstan. And I think some of the other former Soviet republics are also quite interesting markets. So we see sort of plenty of opportunity for expansion.

In terms of margins and market share, very hard to answer those, obviously. It very much depends on the size of the city, the competitiveness of the market and so on. In some of our more established markets, we are seeing very healthy margins. But, at the same time, we are continuing to invest aggressively in building out new cities.

And the way to think about it, actually, our rides, as we talked about in the prepared remarks, the number of rides is growing much quicker than the amount of revenues, just from an accounting standpoint. So that is something that should work its way through over time as well.

In terms of market share, look, we're clearly aiming to be market leaders. We would like to be a number one or number two position in every market that we play in.

And then, on the real estate front, look, the deal is scheduled for closing in early November of 2016. We are obviously monitoring the situation and seeing developments out there in terms of exchange rates, in terms of Moscow real estate prices and so on. But we do have an option to walk away from the deal without any material penalties.

And given the stock appreciation, are you considering an option like this, or can you enter -- altar the terms of the deal given the price of increase in dollar terms?

So, sure. So, Vladimir, as I was saying, look, the factors that play into the decision are obviously things like the exchange rate, things like the rental rates for comparable real estate, things like cap rates, things like our own stock price. All of those factor into the decision in totality, and the fact that we do have an option to walk away without any material penalties is obviously something that allows us to consider all of our options.

Thank you. That's clear.

Mitch Mitchell, BCS.

Congratulations on the very good results today. Two questions.

One, Greg, you just mentioned that part of the reason for the strong margins in the second quarter was the result of shifting some expenses forward in the third quarter. I wonder if you could just give us a bit more color on that.

And then, on Taxi, I just wanted to ask, thinking about growth, you have said that rides are growing faster than revenue. Are we -- are you growing in terms of geographical expansion and attracting a number of drivers? Are you still accelerating your growth at this point, or is there more of a plan that you are following and that is driving how growth is going? Thank you.

It's Greg, again. So, on margins, if you take what I said about margins on a full-year basis, which currently our view is that they should decline approximately 200 basis points year on year and you combine that with the fact that our margins were up in Q2 and Q1 on a year-over-year basis, that would imply that margins in Q3 and Q4 should be down on a year-over-year basis, right, just to make the full year work. So that is what I would say.

Yes, we have had some marketing spend that was postponed from Q2 to Q3, just because the products were not ready or the launches for Yandex.Taxi were a little bit later than planned or whatnot. So that is on margins.

On Taxi, so we are seeing, I would say, very healthy growth in the more established cities. What we are seeing is very strong acceleration in a number of rides in the regions. So the regions, I think, make up something like a quarter of all of our rides now, and those are accelerating exponentially.

Okay. But based on --

And -- sorry, just to finish that thought. And the reason the rides are growing even faster than revenues is because, in some of the brand-new cities, we are not collecting any meaningful revenues.

Okay. And that was my follow-up question. So you are operating in 25 cities, but you are not necessarily generating revenue in 25 cities.

That's correct. So we operate in 25 cities in Russia and, as of today, another three outside of Russia, and we are collecting revenues in, call it, half of those cities.

Great. Thank you very much.

(Operator Instructions) Alexander Vengranovich, Otkritie Capital.

Yes. Two questions from my side. First, on your take on potential implications from the recent (inaudible) terrorist package (inaudible). I haven't seen any comments from your side regarding the potential impact from your CapEx and operating expenses. Has anything changed from your side? What is your latest view on whether, based on the current state of the (inaudible) and based on your predictions, what sort of impact you could expect? Is there any potential option to (inaudible) that impact and how it looks like physically for you?

And the second question is on your classifieds business out of that. So basically it has been growing quite rapidly, and we see improving results there. But, at some stage, it looks like I would expect that there will be more competition in that market. Can you -- if you please, the competition, which just like puts more pressure on your margins than that business, do you think you could participate in some market consolidation there? And, from your point of view, whether you would like to be a consolidator in the market or do you think it is better to dispose that business at some stage, and you don't think it is complementary to your main portal and search business? Thank you.

This is Alexander Shulgin. On data storage law, of course, we know that telecom operators, for example, they estimate substantial impact on their CapEx from implementation of this law, which becomes fully inactive from July 1, 2018.

However, we, Yandex, are in a different business model. So for us, we don't know exactly what the impact will be, but we don't think it will be significant specifically for Yandex. This is not to comment on telecom operators business. They know the situation much better than we do. So for us, we don't think it will be significant.

On the classifieds, potential [LNA] or business combination deals, we are open to different opportunities, and indeed, there is a way to increase market capitalization of the company by doing a combination or disposing of a matter. This is, of course, something which we will be willing to consider, but there is nothing currently being in the works.

We are committed to growing Auto.ru. It is doing very well in most (inaudible). It is gaining share in the regions. And we will be supporting it with efforts, advertising investments and so on.

Okay. Thank you.

Alex Balakhnin, Goldman Sachs.

Yes. I am just trying to reconcile the revenue guidance increase year to date from 12% to 18% to 19% to 22% with just 100 basis points difference in your margin outlook, which implies that year to date and probably even from April until now, you plan to spend RUB2.5 billion to RUB3 billion more in terms of costs. And I was just wondering if that is the case where do you -- what's the allocation of those costs versus what the expectations you had in April? If you can provide some comment, that would be helpful. Because it seems that you plan to spend quite a lot on tax yield already in April, same as (inaudible) and so on. If anything, so far, we see the policy of trends in the spending in your verticals. I mean, less than we thought. So if you can provide some comments how this margin outlook works that would be helpful.

It is Greg. I am obviously not going to comment on the exact figures, but to give you a general sense, you are absolutely right. Most of the spend that we are doing this year is going into Taxi. A lot of the increase that you've seen from higher revenue based without a commensurate expansion of margins is because at the same time as overall revenues have grown as our guidance -- the top end of our guidance went from 18% to 19% to 22%, all of that has been accompanied by increased commitment to the Taxi business. And some of that hasn't even been reflected in the numbers yet and which is why the margin compression in Q3 and Q4 will be there, whereas it actually didn't have a chance to flow through yet in Q1 and Q2. That is basically it, right?

And so as the revenue guidance has ticked up, so has investment. And investment is primarily going into Taxi and, to a smaller extent, into market classifieds and the core search business.

Thanks. That is helpful. Obviously, Taxi does really well. I was just wondering to what extent -- well, the cost basis Taxi last year was RUB800 million. Can it increase fivefold, sixfold, to account for that for the full year?

It should increase meaningfully.

Right. Okay. Thanks.

Sergey Libin, Raiffeisenbank.

I am not the first one to ask, but could you please disclose some numbers which you normally provide such as share on iOS, Android, and then maybe the evolution of your share on desktop and in Turkey, please?

And, secondly, I was just wondering that with RUB1 billion in cash now and not buying out the convertibles, have you thought of any other type of cash distribution, maybe share buybacks or dividends or something like that? Could you also speak on that, please? Thank you.

On market share, on Android, our market share is right around 40% as of Q2. On iOS it is right around 43%. On desktop it is around 64%. And as far as uses of cash, so I think the economic environment is still reasonably unstable in that doing something aggressive on the cash front seems, whether it is share buyback or dividends, seems a bit premature. The board is of the view -- and this is obviously a board decision -- that we should continue to monitor the situation and see how the landscape evolves. I mean, it is amazing, I guess, how much the landscape has changed if you take in totality the last 24 months. We have sort of gone from full-on crisis mode to -- from stability to crisis to what looks like stability again. And we are obviously all hopeful here that stability will turn into growth, but we are not seeing that yet. Until we see that, I don't think you should expect us to do something meaningful vis-a-vis the cash balance either for buybacks, share buybacks or for instituting a dividend.

Okay. Understood.

Svetlana Sukhanova, Sberbank.

A small follow-up question for me. Can you please kindly deliberate why stock is down so significantly, both on distribution and on the network?

Sure. I will take on the partner side because that is easier. On the partner side, it is down due to mix and due to more favorable splits in our favor. As we are able -- essentially, the way it works is that the partners of ours, they don't think about splits per se. They think about the net amount of revenues that we generate for them. And so to the extent that we generate more revenues, then they are happy. And as long as we keep doing that, we can also see our overall rates decline because they only care about the final ruble amount, not the split.

And so partner, I think I've answered. On the distribution front, frankly, it just reflects a lack of distribution partners, both on desktop and on mobile. On desktop, most of our distribution partners have been replaced with our own browser, which is growing considerably and currently has approximately 20% market share on the desktop. And on mobile, the picture is clear. It is what it is, and that is being primarily addressed in the antitrust case against Google vis-a-vis Android, and in iOS the problem is as Sasha described.

But, if I may a quick follow-up on distribution, you mentioned earlier that mobile tech is roughly the same as -- essentially revenues as a desktop tech. Did I get it right?

Yes. So the question is, do you have partners you can pay TAC to in order to grow your market share? And on Android, the primary challenge has been that we have been essentially just simply pushed out of a platform.

Very clear. Thank you very much.

Cesar Tiron, Merrill Lynch.

Yes. The question is on Yandex.Taxi and all the incremental money that you are planning on spending. Have there been any changes in the competitive behavior of Uber or yet that you have noticed in the past months, weeks? Not sure, for example, subsidizing rides, stuff like that, I mean those two companies have raised quite a significant amount of capital in the past couple of months. And is there any changes, do you think, to the strategy in Russia? Thank you.

It is Greg. I think it is hard to monitor what everybody does, and it is obviously better questions for them as to what their strategy is vis-a-vis the Russian market, given their recent fund-raising. I think we are just sort of focused on execution. I think we are doing better in some regions. I think we could be doing better in others. There is room for improvement. But, overall, I think everybody is just focused on growing market share, on getting more users in their platform and building loyalty vis-a-vis those users and in expanding the footprint. So -- and that is what we are doing as well.

Is there a subsidy -- so do you guys subsidize rights, not for drivers, but for end-users?

We certainly incentivize users to trial our services. When we launched launch new cities, we usually launch them with aggressive pricing, which we tend to maintain over time, and we obviously subsidize drivers to create the network effect in newly launched cities.

Thank you. Very clear.

Mitch Mitchell, BCS.

I wonder if we could just go back to Yandex.Market. We haven't talked very much about that, and just, again, if you can uld walk us through what is driving the growth there and what the potential is for changes in the trend going forward. Have we seen any of the impact of the change of the shift to the CPA model on the higher take rate yet, or have those changes come so late they are still ahead of us to see what the effect is there? Thanks.

This is Alexander Shulgin. On Yandex.Market we are focused across several fronts on improving the quality of our products, so people are more happy with it and make more orders when visiting the website. A number of users with a substantial investment, they are advertising in promotional Yandex market. And also, a long-term strategic focus for us is transition to CPA. As I said, it is about 10% of notions who are working on the CPA model. The take rate increase is not -- was done recently, so it is yet to be seen in the results. And, as I said, the key priority for us is to increase the number of merchants and (inaudible) on CPA only. We believe that is a very important project at the current date.

Great. Thank you.

Thank you. If there are no further questions at this time, I will hand back the call to Katya Zhukova for any additional or closing remarks. Thank you.

Hello, everyone, again. Thank you very much for joining our Q2 2016 earnings call. Please feel free to reach out to us with any questions you may have. And the next call will be held in late October. Thank you. Bye-bye.

Thank you. Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.