Nebius Group NV (NBIS) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2016 financial results conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Katya Zhukova.

Hello, everyone, and welcome to Yandex's third-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 and on newswire services.

On the call today we have Alexander Shulgin, our Chief Operating Officer; Greg Abovsky, our Chief Financial Officer; and Mikhail Parakhin, our Chief Technology Officer. The call will be recorded, with the recording available on our IR website in a couple of hours. We've also prepared a few supplementary slides, currently available on the IR website.

Now I will quickly walk you through the Safe Harbor statement. Various remarks that we make during this call about our future expectations, plans, and prospects constitute forward-looking statements. Our actual results may differ materially from those indicated or suggested by these forward-looking statements as a result of various important factors including those discussed in the risk factors section of our annual report on Form 20-F dated March 21, 2016, which is on the 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're specifically disclaiming 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. 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.

Now, I'm turning the call over to Alexander.

Thank you, Katya, and hello, everyone. Thank you for joining our third-quarter earnings call. Q3 was another strong quarter for us, with revenues up 25%, Ex-TAC revenues up 28%, and adjusted EBITDA margin of 36% despite our increased investment in our core products and in our business units.

In Q3 we saw continued stabilization in the overall economic environment. Monthly year-on-year inflation figures improved throughout the quarter and so did growth in retail sales. We're looking at advertising categories in a bit more detail, trial and consumer electronics categories showed the weakened [Tanarex] grown at low single digits, while other ad categories, including order and financial services, grew in the high teens to low 20%s year on year.

Our search and portal segment benefited from overall [economic] stabilization and a number of new ad [tech] initiatives. I'll let Mikhail discussed this in more detail in a few minutes. Our business units are steadily gaining share in our overall revenue structure. Yandex Taxi is actively being traded in new geographies.

In Q3 we launched a service in Georgia, Armenia, and Kasakhstan. And rest of the Yandex Taxi launch in Kiev, Ukraine. Overall Yandex Taxi is now present in 40 cities across Russia and five neighboring countries.

Yandex Taxi has tremendous potential. We will continue to aggressively invest in this business unit going forward.

Another exciting business opportunity for us is Yandex Market. In late September we accelerated the transition to a take-rate based marketplace model. We shifted a large portion of our product categories to a take-rate only in Moscow.

Today approximately 11% of all orders on Yandex Market are take-rate based. In the near future we are planning to add new categories to marketplace model in Moscow and will begin to transition Russian regions to a take-rate based model next year. In general, e-commerce in Russia is still in its infancy, but offers enormous potential. We will continue to invest in Yandex Market to go after this opportunity.

Turning to Classifieds, we have continued to demonstrate solid revenue growth while introducing new products, such as the spare parts category that was launched recently.

In Auto.ru we recently changed the pricing model for rates and fees for auto dealers, resulting in good acceleration of revenue growth from value-added services. And our real estate vertical is enjoying solid growth, driven by new construction and increased traffic to our desktop and mobile sites.

Now let me spend a few minutes discussing our search share. In Q3 our overall search share averaged 55.9%, compared with 57% in the previous quarter. On desktop, which constituted 70% of our search traffic in Q3, our search share is steady at 64%.

On mobile, which constituted 30% of search traffic in Q3, our overall search share is in the low 40%s. As you know, the difference is mainly due to limited distribution of [park images] on Android and iOS mobile platforms. With respect to Android specifically, as we noted on the Q2 call we started gaining share on Android in late June and July, driven by gains in smartphones.

In September however, these gains on Android were partially offset by gains made by Google's search app. Market shares on mobile platforms are notoriously noisy, and our current best estimate is that our share on Android is around 38%. Going forward, further progress on Android depends on a number factors, such as our ability to provide high-quality mobile services and our ability to gain mobile traffic through installations and mobile operators.

Another important factor is implementation of the FAS program. To update you on our progress in distribution, in Q3 we added a few more distribution deals to those which we mentioned on our Q2 call. This devices with our services being installed, I expect it to ship in November/December this year. All in all we expect positive impact from these activities on our share on Android devices over the next six to 12 months.

Now a quick update on the antitrust case. Last year FAS issued its unprecedented decision and prescription to Google to cease their competitive practices. This decision was upheld by the court of first instance and subsequently by the court of appeal.

In August FAS rodent came into force. However, Google has not implemented the FAS prescription. As a result FAS open administrative investigation concerning Google's noncompliance with the ruling. We are close to the [main tour] in the investigation and will update you as it evolves.

Now turning to an announcement that we made in early September concerning our decision to walk away from the agreement to acquire our Moscow headquarters. Greg will go into more detail, but we feel good about our decision and are currently evaluating our options after our current lease expires in 2021. Now let me hand the microphone over to Mikhail Parakhin who will cover Ex-TAC in more detail. Mikhail, please go ahead.

Thank you, Sasha, and hello, everyone. In our Q2 call I spoke about our philosophy of maximizing the total economic value of the ad for our advertisers by calling out less relevant ads. In Q3 we greatly improved our broad based capabilities, both on Yandex Search and in our advertising network.

In September we began to automatically display ads for [quays] containing synonyms for all keywords. Subsequently we combined our search technology and our expertise in language parsing new networks to match indirect information that we have about users with their search queries to cover their unspoken interests.

This feature is extremely helpful for advertisers who want to significantly broaden their reach through search advertising. On the ad network side, we launched relevance-match technology where we show ads to users based on their look alike group statistics. As a result of these implementations, we managed to dramatically increase conversion rate of ads on search and in that network while decreasing the bounce rate.

These launches also allowed us to grow the number of paid clicks while simultaneously reducing ad coverage on search, which I mentioned in our Q2 call. The combination of these releases should help us offset the comping effect from the introduction of VCG auction in September of last year. Another feature we introduced in the ad network front in Q3 was bit correction.

During the Q2 call, I spoke about the significant improvement in our relevancy forecast that allowed us to predict the quality of a potential click. In case the formula suggests that traffic from our ad network partner to an advertiser's site is not of high enough quality, bit correction either dramatically reduces advertiser's bit or chooses not to show the ad at all. While this reduces our potential revenue, it significantly increases advertisers' trust and loyalty and motivates our publisher partners to focus on improving the quality of their traffic.

Turning to mobile, in Q3 mobile traffic constituted 30% of our total search traffic versus 27% a quarter earlier. Mobile revenues reached 24% of our search revenues compared to 22% a quarter earlier.

Including the revenue from our mobile ad network, mobile now generates 27% of all tech-based revenues. In Q3 monetization of smartphones improved compared to Q2 levels, thanks to adjustments to VCG formulas for small screen devices and changes we made in ad layout in June 2016.

Outside of search, in Q3 we started our experiments with monetization of the Yandex navigator. This is an early stage project yet, but we see interest from a number of offline businesses to be promoted within Yandex Maps and our navigator. In addition to these more significant releases, in the past 12 months there were a number of smaller ones, such as private marketplace, a tool for private deals between advertisers and publishers; priority placement for reader ads on Yandex reader website; CPI ads for promoting mobile applications; smart banner performance ads with dynamic content personalized to individual users; and Yandex Audience, our reach your client and look alike targeting tool.

While those products did not materially contribute to the revenue in Q3, in aggregate they already reached approximately RUB800 million revenue run rate. With this, I turn the microphone over to Greg.

Thank you, Mikhail, and thank you all for joining our call today. We delivered another solid set of results. Our consolidated revenues grew 25% year on year and reached RUB19.3 billion. Online advertising revenues accounted for 96% of total revenues in Q3, and increased 22% year on year.

Yandex websites, which include our text-based and display revenues, grew 21% year on year. Our ad network grew 27% year on year and comprised 26% of total revenues in the quarter. Yandex ad network revenue growth was driven by an increase in inventory that our advertisers allocated to Yandex direct on desktop and on mobile, as well as the result of the addition of new partners and improvements of our targeting capabilities and increased quality of ad selection algos that we implemented a quarter earlier.

In Q3 we saw growth of ad budgets across all advertising categories. However, as expected revenues from travel segment and consumer electronics continued to be soft. The most rapidly growing ad categories were real estate, apparel, eating out, and FMCG. Auto also grew nicely, up around 25% year on year this quarter.

Other revenues grew 130%, primarily driven by the growth of Yandex Taxi. Traffic acquisition costs related to the partner advertising network grew 19%, slower than ad network revenues. The mean factors remain the same as in previous quarters, a change in our partner mix and improvement of revenue-sharing terms with some of our partners.

As a result, in Q3 our partner tack comprised 55.5% of our ad network revenues, down from 59.3% a year ago and slightly down from 55.7% in Q2. Traffic acquisition costs related to the distribution partners increased 1% year on year and constituted 7.1% of advertising revenues from Yandex site, compared to 8.5% a year earlier and 7.3% in Q2.

Total TAC grew 14% year on year and constituted 19.3% of total revenues, 200 basis points lower compared with Q3 of last year and 40 basis points lower than a quarter before. Peak clicks grew 12%, while cost per click increased 10% year on year.

Turning to our cost structure, total OpEx, excluding TAC and D&A, grew 40% in Q3. Excluding stock-based comp, expenses grew 42%. Growth was primarily driven by growth in advertising and marketing expenses in our businesses such as tax, e-commerce, and classifieds, salary increases implemented in early 2016 and new hires.

Personnel costs still remain the largest cost item. In Q3 our headcount was up 9% compared with September 30 of last year, and up 6% from June 30 of this year. In Q3 our personnel costs constituted 20% of revenues.

Stock-based comp increased 17% and constituted 4.1% of revenues. In Q3 the growth rate of stock-based comp declined significantly, as ForEx stabilized compared to the previous year.

G&A expense for the quarter increased 16%. Our adjusted EBITDA increased 14% year on year. Growth rates of our consolidated adjusted EBITDA slowed down compared to previous quarters because of sharp increases in advertising and marketing expenses, mainly devoted to our business units, growth of salaries in early 2016, and new hires.

To remind you, we are actively investing in search, Yandex browser, and our business units, specifically in Yandex Taxi. Our consolidated adjusted EBITDA margin was 35.7% in Q3. Just to give you a sense of the magnitude of the investment we are making in Yandex Taxi, if one were to exclude both revenues and losses of Yandex Taxi from our consolidated results, our adjusted EBITDA margin would have been 40.2%, 450 basis points higher.

This quarter the impact from ForEx was a loss of RUB432 million related to dollar-denominated assets and liabilities on our balance sheet, following the appreciation of the ruble from 64.3% on June 30 to 63.2% on September 30. Adjusted net income was up 8%, and adjusted net income margin was 19.7%.

Our CapEx was RUB2.8 billion, or 14% of Q3 revenues, in line with Q2. We continue to expect CapEx as a percent of revenue to be in the mid-teens on an annual basis.

Turning to the performance of our business units, search and portal revenues were up 21%, driven by growth of our own websites and the advertising network. On September 1 we anniversaried the launch of VCG auction. However, September revenues were only partly impacted by this anniversary as the full uptake of the new bidding took some time to roll out in 2015.

Adjusted EBITDA insertion portal grew 24% in Q3, and its adjusted EBITDA margin reached 42.8%, up 90 bps from Q2. Revenues of Yandex Market were up 45%.

In Q3 adjusted EBITDA of Yandex Market decreased 11% year on year, and its adjusted EBITDA margin was 32% in Q3 as a result of increased advertising and marketing activity as well as hiring. As Sasha mentioned before, we expect that in the short term the transition to a take-rate based model will slow down the revenue growth rates of Yandex Market. We're willing to make these investments as we believe that e-commerce opportunity is significant and that a marketplace-based model will deliver significant benefits to us in the future.

Turning to Yandex Taxi. Revenues of Yandex Taxi were up 151%. The growth was driven by the addition of new geographies and an increasing number of rides. In late September, we significantly lowered Yandex Taxi tariffs in Moscow and reduced surge pricing. At the same time we began guaranteeing minimum checks to Taxi drivers.

As a result, the average check in Moscow declined, while growth in the number of rides accelerated. These new tariffs had a limited impact on Q3 results, but will be more material going forward. Specifically under US GAAP, these minimum guarantees reduce the revenue that we book from Yandex Taxi in those regions where we have turned on monetization.

So going forward the revenue growth of Yandex Taxi will slow down as this new Moscow tariff is absorbed, holding all else equal. This change has a very limited impact on G&V growth rates or the long term prospects of this business. As we've discussed in the past, we will continue to make significant investments in Yandex Taxi. In Q3, adjusted EBITDA of Yandex Taxi was negative RUB633 million.

Revenues at Classifieds business grew 45%, supported among other factors by a change in the pricing model, and as a result growth of non-advertising revenues on Auto.ru. Adjusted EBITDA of Classifieds was RUB26 million, down 69% from Q3 of last year. The main driver of the decline in EBITDA was growth in advertising and marketing activities as we continued to invest for growth.

We're also making investments in our experimental businesses represented by Media Services Yandex Turkey, YDF, and Discovery. These revenues grew 98% primarily driven by the growth in Media Services and in Discovery.

Now getting back to corporate matters. As Sasha said a few minutes earlier, in September we executed the option to terminate the agreement to acquire our Moscow headquarters. The decision was made due to a combination of factors, including improving macroeconomic conditions, stabilization of exchange rates, and other factors.

The termination fee and reimbursement of the seller's expenses is capped at RUB45 million, or approximately $725,000 at current exchange rates. In Q3 we resumed our convertible bond buyback program and repurchased another 4.6 million face value of the bonds, followed by additional repurchases made in October. Since the inception of the program, we've bought back approximately 320 million face value of the bonds.

We ended the quarter with approximately RUB66 billion in cash and equivalents, which is approximately $1.05 billion using the exchange rates as of September 30.

Now, turning to guidance. We are increasing our revenue guidance for 2016 from the 19% to 22% range provided previously to 22% to 24% revenue growth on a year-over-year basis.

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

Thank you.

(Operator Instructions)

We take the first question now from Alex Balakhnin from Goldman Sachs.

Good afternoon. Congratulations on good results. Two questions from me, one is on your revenue guidance. It looks like it implies between 6% and 12% revenue growth in the fourth quarter. Do you think this is the steady-state growth rate you will be delivering going forward?

And will you as a Management team be happy with that type of growth rate? While I appreciate the roll out was great throughout September, but maybe what growth rate you saw in the very end of September and maybe beginning of October as we are three weeks into the month?

My second question is on your 350 new hires. It looks like that was cue to the product development, but can you probably elaborate what projects got those new headcount and whether you expect to continue hiring with that run rate? Thank you.

Hello Alex, it's Greg. I will take the first part of the question and then Sasha will try to answer the second part. On the question of revenue guidance, it obviously depends on what assumptions you want to make.

Look, our guidance is and historically has been conservative, and we feel pretty good about the guidance that we've put out today. We do not see a significant slowdown in terms of our business, and it continues to be growing nicely. Both September and October are demonstrating similar pace of growth.

I guess I'm not going to get into the exact detail of what month over -- year-over-year growth looks like for September versus October, but they are fairly comparable, like I said. As far as next year, obviously we're not going to put out a guidance for next year right now. We will do that on the Q4 earnings call in February. We expect the general trends to continue, and we see good traction from a number of products that Mikhail's team has introduced on the advertising technologies front, as well as in a variety of business units.

I will hand it over to Sasha to answer the second part of your question.

This is Alexander. On the headcount, first of all we are excited about the opportunities that we see to grow all business. That's in business units, Taxi, Market, and also in ad tack and search.

Our headcount for the last eight quarters, as you probably noticed, was more or less flat plus/minus 100 people up or down [be front with] the quarter. Now we see good opportunities to grow our business. Revenue is performing well and Market, Taxi, and ad tank have very high potential.

Headcount is allocated between those units as I mentioned, but also some goes to commercial function and to admin services to support the growth. So a major part goes to business units, a small part goes to core business, ad tack source, and admin functions.

Edward Hill-Wood, Morgan Stanley.

Good afternoon, everyone. My question revolves around Yandex Taxi. You've obviously ramped up investments in the business in Q3, and you're going to do in Q4 as well. Could you perhaps give us an idea of the payback you're seeing on that in terms of traction, in terms any metrics you can give us in terms of market share, right values, right growth, anything to indicate that you are in fact gaining traction over particularly Uber and getting the marketplace.

And secondly going forward, as the level of investment increases and the disparity with the growth in the core business margin becomes more extreme, do you think it makes sense potentially to look at ways of externalizing that investment? Thank you.

Ed, it's Greg. I'll try to answer your question. As you can appreciate, there's probably a lot of sensitive information that I cannot disclose about the exact metrics of the business or the paybacks or things like that. I will give you one interesting tidbit that will give you a sense as to why we feel as good about the business as we do, and why we are going to be investing more and more capital into this business going forward. And that is just the acceleration that we're seeing and the pace of growth in the number of rides.

Just in the last four months, the growth accelerated by 100%. So if you took the rate of growth of rides, call it five months ago or four months ago versus today, that pace of growth is now 100 percentage points faster than before.

As we think about longer term, does this thing need external capital? I think the answer is potentially yes. We want to do whatever is in the best interest of our shareholders, and as we continue to gain traction with this business, we will look to fund it both on balance sheet and potentially off balance sheet.

We have over RUB1 billion of cash on the balance sheet, and we tend to generate a fair amount of cash as we go along. We see this as a very large strategic opportunity that we are going to keep pursuing. Hopefully this answers your question.

It does, Greg. Maybe a follow up on that in terms of the margin. You haven't taken the opportunity to update us on potentially where you might see the margin for the full year. On the last call you said it could be down a couple hundred basis point. Given that the margins are up in the first nine months, you'd have to see a very significant decline in Q4 margins, depending on which revenue metrics you use, even though you are investing heavily in Taxi. I was wondering if you could just update us whether or not as with revenue guidance it's possible that the margin guidance could be potentially conservative? Thank you.

Sure. I assume you're asking us about consolidated EBITDA margins for the business as a whole, including Taxi and the other business units. On that basis, as you recall early on the year we assumed that margins could compress as much as 300 basis points. On the last call I was saying probably some of the incremental revenue growth that we're generating will allow the margins to compress a bit less, call it 200 basis points.

I think from where we stand now, margins might be down but only slightly, call it a rounding error as we do plow some of the incremental margin into growth -- into incremental margin generation. But it doesn't seem it will continue to take up significant investments.

As you heard me in the prepared remarks, just in Q3 Taxi alone dragged down our consolidated margins by 450 basis points. Where we are today, we expect margins for the year to be down call it a hair as we continue to invest.

Lloyd Walmsley, Deutsche Bank.

Thanks. Wondering if you can talk about customer adoption for custom audiences and look-alike targeting and what impact you're seeing from clients who are adopting this in terms of budget growth or maybe how its impacting CPCs? And then a second one, if I may on the Android share outlook.

How should we think about the timeline for striking handset or wireless carrier deals and then the adoption of new handsets with Yandex services pre-installed? And then what can you do to drive share within existing Android devices that are already on the market? And I guess what, across both those elements, what can you do now and what will require Google actually complying to unlock some of these things, if that makes sense? Thanks.

Yes, this is Mikhail Parakhin. I will take the first part of the question and then Alexander will take the second one. So on all of our new products that we released in the last 12 months, including Yandex Audience and others, we actually see very strong adoption. We see continuous growth.

As I was mentioning in my statement, in aggregate five of the products that we released, they already have run rate of around RUB800 million right now, and they are continuing to grow nicely. So we actually expect them to be a significant portion of the growth next year. The adoption is basically very strong. Sasha?

Hi, Lloyd. On Android market share I will give you just [cook up] data on overall and then Android. Our overall share, as I said, is 55.9% for Q3. That is on average. On desktop our share was flat compared to previous quarter, but actually when we look month by month between August to September, our market share on desktop has actually increased. So we have some positive expectations for desktop for Q4.

On Android, share was slightly down compared to previous quarter because of Google's increased activities around the search application through notifications and other activities. Our reply is of course to invest more behind product, investing more in developing Yandex search application, integrating our services in Yandex search app so it becomes an indispensable part of everyday life for our users. This one product is the key and we're committed to make as good product as we can.

On distribution activities, we are making progress. Of course it takes time between striking the deal and having the sizable share of new devices with our better placement to be used by people. So it's a lengthy process, but ultimately it has impact on our market share.

For example when you go now to retail stores you would find devices by sizable brands like ZTE, Samsung, Micromax with our products place better than they were placed before. So opportunities are now open to increase our share on these devices. And the names that I mentioned, on those devices our share is over 50%. In Q3, we also made progress striking deals with sizable OEMs with some of the devices actually being already in retail stores, like some of Huawei models are now available in retail with Yandex better placed.

So all in all, as I said in my prepared remarks, we expect our share on Android to be improved by those distribution deals. We're not certain on this, we're continuing to make distribution deals with Yandex better placed.

Yet as I said, Google has not yet acted on FAS ruling, and typically placement on first screen is still problematic for us because of Google's restrictions. FAS has opened a new schedule procedure against Google for noncompliance with the ruling, and when Google finally acts on it, I think we will be even better placed on the home screen on devices.

Arkady will add some remarks on Android market share as well.

Just one comment, FAS is definitely determined in enforcing their solution.

I guess as a follow up, do you think this is a technological issue, where Google is working on something to comply, or do you think they're just generally opposed and willing to dig in and see what happens? And how do you think that plays out?

Frankly it's very difficult to comment on competitor's actions, so I think we will refrain from commenting on this.

Okay. Thanks. Very helpful.

Cesar Tiron, Bank of America.

Two questions from my side. First on the core search margins for the first nine months of the year, they were up quite significantly although you expected them to be set for the full year. Can you please explain what has prompted this at the margin level in the core business?

Then finally CapEx was down also quite significantly for the first nine months. Should I conclude that it will be down by the same amount for the full year? Thank you so much.

Hello Caesar, it's Greg. On the core search margins, some of it has to do with timing of when we hire people, when we have certain advertising and marketing actions take place. We do continue to invest in core search.

We invest both on the technology front as well as on the product front, such as with Yandex Browser. You've seen Yandex browser grow very nicely over the last couple years with currently 21% market share on desktop, 11% market share on mobile, 17% or 18% share overall. So it's doing quite well.

I think going forward the degree of margin pressure or expansion within the core search business will just be driven by timing, to a certain extent, by investments in new initiatives to a certain extent when and if those come about. And also by revenue growth. Obviously to a large extent in the short term your costs are fixed while revenues are a product of your technological advancements.

Mikhail's team has done an amazing job last year with the introduction of ECG. They've rolled out a number of new features this year which should contribute both later in Q4 as well as next year. So to some extent that is a question of timing and when the revenues come in against the cost structure that you've put into place.

I'd say overall our picture in terms of where we want to be doesn't really change. We want to keep our core search margins roughly flat. What actually happens to them in the short term is just a function of those introductions.

Does that answer your question?

Yes. Thanks so much. And on the CapEx?

On the CapEx we still expect it to be in the mid-teens more or less, call it around 15%. This year we are building a data center in Russia. It's going to be finished up over the course of early next year, and then it's going to be starting to be filled in by servers.

Obviously the benefit of that is it's a much more modern facility. It's considerably more efficient. I'd say in terms of global comps it's probably at the very bleeding edge in terms of what's possible to be achieved from a utilization standpoint.

Thank you.

Vladimir Bespalov, VTB Capital.

Hello, thank you for taking my questions and congratulations. Some good results.

First I have a question on CPA, on your switch to CPA and Yandex Market, could you provide some color first of all on what is this plate of revenues between CPC and CPA models at the moment? Given that many big clients are not very happy with the switch, how in general you are going to balance the transition not to lose revenue, not to lose big clients, and things like this?

My second question is as we now have two months when we can compare apples to apples in terms of your transition to VCG auction, how this affects your revenues? What do you see because it gave a strong boost to your revenues when you switched to this option, but now how are the other things developing? Thank you.

Hello Vladimir. I will take the first part on CPC, CPA and Yandex Market, and I think Mikhail will take the second question on VCG.

In terms of the transition, roughly 11%. We estimated somewhere between 11% and 15% of all goods -- of the entire GMB of Yandex Market is going through the CPA/take-rate based model.

I think some customers are very happy, frankly, with what we've done. I'm sure there are some that are not happy.

Just in terms of your understanding of what are the differences, with a take-rate based model Yandex Market acts as a marketplace where the goods are presented on our site or in our app. The checkout takes place on our site or app, and rather than traffic being shifted off to the websites or whatever of our e-commerce clients.

We think ultimately this has a lot of benefits, both for consumers, for our e-commerce clients, and for us. But obviously you can't make everybody happy.

The way we're going to continue handling the transition is we're going to switch more and more categories to be take-rate based only. We started with Moscow where we took a number of categories and we basically communicated to our e-commerce clients that starting from this date only take-rate based offers will be available in Yandex Market.

So if you would like to continue working with us, you will have to present your product in the form of a take-rate based sale as opposed to a cost per click. We will do more and more of that going forward.

In my prepared remarks, I mentioned that we are willing to slow down the pace of growth of Yandex Market in order to accelerate this transition. I think that is our intention.

With that, let me hand it over to Mikhail to comment on the VCG.

Yes. Just to reiterate, last year we released VCG on September 1. It wasn't a switch flip kind of thing. It was -- it actually took maybe all the way through November, or maybe even later to achieve the full strength.

So the impact was gradual. This year in a similar fashion we just released a few things that I outlined in my statement on both the network side and the search side. We feel pretty good about them and we believe that a combination of the things that we gradually rolled out this year especially in Q3 will help us offset comping effect from the introduction of VCG auction last year.

Anton Fokin, Gazprombank.

Thank you for the presentation. I have two questions. The first is regarding your buyback program. Could you please clarify what are your plans regarding the buyback program? Are you going to freeze it, to continue it, and what are you going to do with your treasury stock?

The next question is regarding the cash pile you have on your balance sheet. What are your plans for spending that cash on your balance sheet? Thank you.

Hello Anton, it's Greg. Let me try to take those questions. A couple of comments. On the buyback program, so we've been over the last few quarters for the most part buying back our convertible bonds. We will continue to do so opportunistically.

When we buy them we cancel them right away. So to the extent that these convertible bonds are due in December of 2018 and we get to retire them at a discount to face, we feel pretty good about that.

If you're asking about the general repurchase of stock, we have not bought stock back in some time, but we will reevaluate it from time to time. The use of treasury stock that we've bought back is to manage dilution. So all of the treasury shares that are currently held on the balance sheet will be used to offset dilution from the issuances of RSUs to our employees over the next few years.

Then in terms of cash in general, I would refer you to the same statement that we made on the Q2 earnings call, where we said that the economic environment is still uncertain. While Yandex has performed extraordinarily well over the last few quarters, GDP growth as a whole in the country is still negative, and we will like to wait and see for Russia as a country to return to GDP growth, so that we see this incremental stability in the system before we reevaluate what to do to with the cash. Obvious uses of cash are dividends, buybacks, or M&A.

Am I right that you can see the change in your dividend policy and you continue the option to continue them?

Absolutely. Dividends are certainly one of the options that we consider.

In addition to that, as I mentioned earlier, we see the cash pile that we have as a very strong strategic asset that we can deploy to the betterment of our business units, such as Yandex Taxi. We see a massive opportunity ahead, and we're willing to use that fairly large cash pile to invest in that business. But dividends is certainly another item that is being closely considered by our Board of Directors.

Okay. Thank you.

(Operator Instructions)

Alex Balakhnin, Goldman Sachs.

Good afternoon again. Two more from me. Greg, you mentioned that those is guaranteed payments in Taxi will have some impact on the revenue growth. Can you elaborate what magnitude of slowdown should we expect in the near future? Or maybe alternatively, what would be the growth rate in Taxi should those practices be in place in the first quarter, whatever is easier?

My second question is you payroll to revenue ratio has been holding over just 20%. How should we think about that? Is this a new normal? Do you think it will gradually come down to the 20% you have been talking about before? Thank you.

Hello, Alex. On Taxi, I'm not sure I can say more other than what I've said. So the way that these guaranteed minimums work is that essentially Taxi drivers receive a certain amount from us for very short rides. It is essentially meant to offset the fact that very short rides could be not very economical for taxi drivers, but they are important to create overall liquidity in the system.

So they will subtract from the revenues that we book in Moscow, and therefore in terms of a comping from 2015 to 2016, that overall growth rate will come down. But as I mentioned, the number of rides is accelerating dramatically and the GMV is actually growing nicely as well. So from our standpoint of view, it is just a more of an accounting issue than anything else.

Furthermore, I would say it has actually been evolving, and the amount of our -- of those guarantees that we end up paying out has declined over time as people change their behavior somewhat and as we also fine tune the system. So that it is what it is, and we'll see how Q4 shapes up.

In terms of our payroll ratio, I think it's been fairly consistent going back nine or ten quarters at around 20%. Generally that is what we feel fairly good about.

I think going forward you'll see a lot more headcount growth in the business units and in our experiments than you will in the core business. I think there's a lot of appetite in terms of increasing the investment in the business units, specifically in Market and Taxi, to a smaller extent in Classifieds. And our Discovery business has actually -- is going to be potentially the next new gem, and we would like to investment in that as well.

Thank you.

Mitch Mitchell, BCS.

I think Alex asked my question already, but let me rephrase it and see if we are on the same page. I just wanted to make sure I understood the way the guaranteed payments work in Taxi.

So what you're saying is it's not that the costs will go up if we were just thinking about how the financials will look it's not that the costs will go up, but the revenues will go down. Is that -- am I understanding correctly?

At a high level, yes. Essentially, it's marketing expense that gets moved up into the revenue line.

Okay. And just generally speaking, are you -- do you feel that you are still in the phase of ramping up the investments in Taxi and market at this point, or are you comfortable with the levels where they are now?

I think we are still in the ramp-up phase.

Great. Thank you.

Dmytro Konovalov, HSBC.

Congratulation on great results. My question is about Yandex Market. Could you please indicate how big is a share of electronics sent through the Yandex Market?

And recently there was news about [VIDI] and other retailers trying to organize in their own virtual marketplace for electronics specifically. How big is the competition for you? How difficult do you think it's going to be to compete against those retailers? Thanks.

Hello, Dmytro, let me try to take that on Yandex Market. Consumer electronics is roughly 20%, maybe one-quarter of the business. In terms of how we think about the competition, I think that competition makes all the other players stronger and encourages them to improve their service dramatically.

What we're actually seeing in the market is we're typically competing with non-consumption. To a large extent, Russia has not had an e-commerce revolution as of yet, and I think it is one of the greatest opportunities ahead of us going forward.

Currently I think e-commerce penetration in Russia is roughly 3% for a whole host of reasons, everything from low use of credit cards to difficult logistics to lack of infrastructure for delivery and so on. The more players that are in here, the better. I think they will all invest in infrastructure, they will make consumers more likely to buy online than offline, and we will benefit from that shift.

Thanks.

Vladimir Bespalov, VTB Capital.

Thank you for taking me, I have two more questions. First is on Taxi. I would like to ask you, what is the timeframe when you expect to complete the rollout of your Taxi business throughout all target regional markets? When do you think this is going to be like the country going to be covered by the service and you start monetizing it and focus on margins?

And the second question is on your real estate, which you walked away after canceling this deal. Do you see an opportunity to start negotiations with the landlord to lower your lease rates in exchange for longer-term commitment to rent the same office? What are the opportunities here? Thank you.

Hello, Vladimir. Let me answer your questions in the order. On the Taxi front, what we found is actually the opportunity again is much larger than we thought at first. So what we see is that the service is scalable and feasible in much smaller cities.

I think we're currently in something like 40 or 41 cities across five countries. We think that there is lots and lots of room to go in terms of penetrating smaller and smaller cities in Russia, and also looking at other nearby markets.

We are currently in Armenia and Georgia and Kazakhstan and Ukraine and Belarus. There are probably more markets that we can go after that are nearby us.

So probably the right way of looking at it is what is the margin structure of the mature markets, mature cities versus the new cities? While I will not comment on them, I could tell you that we feel pretty good about where existing cities are versus new cities and the payback characteristics.

On the real estate deal, since we have walked away, and I do feel like we have we've done the right thing here, there has been a number of opportunities that have been presented to us. We're evaluating all of them. I think it's a good time right now from a number of options ahead of us.

Thank you.

It appears that there are no further questions at this time. I would like to turn the conference over back to your host for any additional or closing remarks.

Thank you all for joining our call today. Please feel free to reach out to us. I hope you are able to join our Q4 and full-year 2016 earnings call in February 2017. Thank you. Goodbye.

This completes today's call, ladies and gentlemen. Thank you for your participation. You may now all disconnect.