Nebius Group NV (YNDX) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for waiting and welcome to the Yandex third quarter 2013 financial results call. (Operator Instructions).

I would like to remind you that today's conference call is being recorded on Thursday, October 24. I'd now like to hand the call over to your speaker for today, Greg Abovsky. Please begin your meeting and I will be standing by.

Hello, everyone, and welcome to Yandex's third quarter 2013 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 in newswire services.

Today we have on the call our CEO, Arkady Volozh; and our CFO, Alexander Shulgin. Our call will be recorded. The recording will 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 through the Safe Harbor statement. Various remarks that we make during the 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 20-F 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 point in the future, we specifically disclaim any obligation to do so, even if our views change.

Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call we'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, I'll turn the call over to our Arkady, who will give you update of our Q3 operational activities.

Thank you, Greg; and thank you, all, for joining us today for our Q3 conference call.

We delivered another set of strong financial and operational results. Let me highlight some of the most important developments in our business over the last three months.

One, we saw excellent paid click growth, both on our own properties and overall, as increase the relevancy of our ads and drove higher ROIs for our advertisers.

Two, we grew our market share on mobile, both on iOS and Android.

Three, we unveiled the new cost per action model on Yandex.Market, including the ability to complete the purchase directly on our site.

And, four, we announced the acquisition of KinoPoisk movie search, which will serve as a new search vertical at Yandex.

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 62% in Q3 of 2013, compared to 60.5% the same quarter last year; an increase of 1.5 percentage points year over year, an increase of 0.3 percentage points sequentially.

Share gains were driven by a combination of our search technology; gains seen by Yandex. Browser and gains on mobile. We launched our Yandex. Browser just over a year ago. Currently, Yandex. Browser has approximately 6% market share in Russia.

Next month we are going to introduce Yandex. Browser for iPhones and for Android tablets, and cloud-based cross-platform synchronization for it. Overall, we think that Yandex. Browser is an excellent product and we will continue to invest in its development.

Let me now turn to the growth in paid clicks. The wave of improvement to click prediction, ad coverage and surf layout that we have making since the beginning of the year continue to bear fruit.

Paid clicks growth accelerated to 50% this quarter, compared to 29% growth we saw in Q2. Importantly, paid click growth on our own and operated sites, excluding the effect of Mail.ru and the rest of our advertising network, was comparable to the overall level of paid click growth.

And, obviously, all things being equal, supplying a greater volume of paid clicks at lower CPCs leads to better ROIs for our advertisers.

Our advertise account grew 24% year over year to a record of 251,000 advertisers, a healthy pace comparable to the rate of growth that we saw in the previous quarter.

Turning to mobile, I'm happy to report that we have been gaining share, both on iOS and on Android. On iOS we currently estimate that our market share is approximately 40%, and this is compared to 30% to 35% that I was quoting previously. And our iOS market share is still increasing as a result of iOS 7 upgrades, which is obviously (inaudible).

On Android we estimate that we have at least 51% market share, which compares to the 47% to 48% figure that we gave you last quarter. Our growth on Android is driven by two main factors. One is the wider availability of our browser and our search application; and second, we believe that a number of loyal Yandex users are upgrading from legacy smartphone platforms and choosing Yandex as their search engine.

Let me now turn to Yandex. Market. At the beginning of the year we told you that Yandex. Market is one of our top priorities for 2013. We have been working hard to transform Yandex. Market from a price comparison site with enhanced functionality into a marketplace platform. That includes introducing a cost-per-action pricing model for merchants, rather than a more traditional cost per click.

And we are now also giving our users an ability to complete their purchase directly on Yandex. Market without the need to leave our site. There are a number of benefits of this approach.

One users' information is stored in their Yandex passport, eliminated the need to re-enter their name, phone number and address every time. Shopping cart abandonment is a big problem for e-commerce, and this simple step should increase ease of use and elevate conversions.

And two, the cost per action model closely aligns our interest with e-commerce participants on our platform. We only make money when they make money. We are pricing this platform aggressively to make it extremely attractive to our merchant partners. Merchants can begin the test and development work using our open APIs as we are planning to give consumers an ability to buy their (inaudible) Yandex. Market in November.

Early in October we announced the acquisition of KinoPoisk, movie search in Russian. The largest and most comprehensive Russian language website dedicated to movies, TV shows and celebrities. KinoPoisk is really two sites rolled into one.

On one hand, it is a large repository of factual information about movies, such as actors, directors, (inaudible) and so on.

On the other hand, KinoPoisk is Russia's most influential and trusted brand in movie reviews. It is Russian's 16th largest web [property] overall. It has a worldwide audience of 18.6 million users according to Comscore with 100 million users ratings and 3 million new ratings every month.

With the addition of KinoPoisk, Yandex will be able to provide more comprehensive replies to users' queries and will be able to build a robust recommendation system using its machinery and technology, and the vast database of users' reviews found on KinoPoisk site.

And finally, let me tell you about the previously announced agreement with Mail.ru. We began powering their paid search results only July 1, and I believe we're off to an excellent start here. Alex Shulgin will provide you slightly more details on his remarks.

Turning to guidance, in terms of revenue outlook for this year we're currently expecting to come near the high end of the previously announced range of 34% to 38%.

And with this let me pass the mic. to Alex Shulgin, our CFO.

Thank you, Arkady; and thank you, all, for joining us today.

In the third quarter of 2013, Yandex consolidated revenues increased 40% year on year to RUB10.2 billion. On a like-for-like basis, our total revenues grew 43%. Contextual, or text-based, advertising accounted for 92% of total revenues in Q3 and demonstrated a healthy growth of 43% year on year.

The Yandex own and operated website constituted 69% of total revenue and grew 33% year on year.

Our advertising network demonstrated year on year growth of 82%. As you will recall starting July 1, 2013, we began to power page search results on Mail.ru properties. This partnership increased contribution of ad network revenues to 23% of the total revenues in Q3 compared to 16% in Q2 2013, again on the like-for-like basis.

Display advertising accounted for 8% of our revenues in Q3 and grew 35% year on year.

On July 4 we announced the completion of our joint venture with Sberbank. In Q3 our online payment commission revenue includes just four days of Yandex. Money operations. And going forward the economics of our 25% stake in the Yandex. Money JV will flow through the other income line.

Our advertising network TAC grew 102%, faster than our network revenues overall as we added Mail.ru.

Distribution TAC grew 46%, also faster than our own and operated revenue. The increase in distribution TAC as a percentage of O&O revenue was approximately 75 basis points year on year, while mobile TAC was roughly flat year on year. On a sequential basis, however, distribution TAC was up only about 10 basis points.

Total TAC increased 83% year on year. TAC-based revenue growth was driven by increase in the number of paid clicks, both on the own and operated website and on the network front.

Paid clicks growth on own and operated website was driven by increase in ad coverage, CTR improvements and changes in ad layout implemented earlier this year. Growth in the number of paid clicks on the network front was in a large part driven by Mail.ru.

Cost per click decreased 5% year on year.

Now turning to our cost structure, our total operating costs and expenses, excluding the acquisition costs and depreciation amortization expense grew 38% in Q3. Excluding stock-based compensation and other non-cash items our costs grew 37%.

As usual, personnel costs remain our largest cost item. In Q3 we added 393 employees, of which 269 were in product development. Our total personnel cost increased 38% year on year in Q3 and was 18% of revenue.

Our depreciation amortization expense for the quarter increased 25%.

Our adjusted EBITDA grew 28% year on year and our adjusted EBITDA margin was 43%. The decline in margins on year-over-year basis was the result of the inclusion of Mail.ru and more linear advertising spend in 2013 compared to 2012 levels. As you recall, in 2012, much more of our advertising budget was spent in the fourth quarter.

This quarter the impact from foreign exchange effect on our net margins was negligible. Only RUB2 million lost related to the dollar-denominated assets and liabilities on our balance sheet, as the ruble strengthened from RUB32.7 as of June 30, 2013 to RUB32.3 on September 30, 2013.

Our effective income tax rate was 13.5% on a GAAP basis. The decrease was mainly due to a one-off non-taxable gain from selling 75% stake of the Yandex. Money to Sberbank, that added RUB2 billion to our net income. Adjusting for this one-off item our effective tax rate would have been 21.3%.

Adjusted net income grew 41% and adjusted net income margin was 31%.

Our Q3 CapEx was RUB1.7 billion or 17% of revenues; year to date, our CapEx represents 12% of revenue. As we mentioned on our previous calls CapEx is usually not spread evenly across quarters and we expect our CapEx, on an annual basis, to be at the lower end of our previous guidance of 15% to 18% of total revenue.

Turning to the balance sheet, we entered the quarter with $982 million in cash and equivalents.

To update you on the previously announced share buyback program inception to date we repurchased 6.6 million shares.

Turning to the guidance, we expect revenue growth to be at the high end of the previously announced 34% to 38% range. And we currently expect the Mail.ru deal to have a negative 100 basis points impact on EBITDA margins, on a full-year basis.

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

(Operator Instructions). Lloyd Walmsley.

Was just wondering, the high end of the guidance range for the full year would imply a 4Q deceleration of about -- to about 38% ex-payments, by my math, from the 43% you just delivered. So just wondering if there's any reason to expect a deceleration like that, or if it's just conservatism?

And then, as a follow-up, it looked like you were able to fulfill or sell the increased inventory from Mail without any issue at all, and continue to grow O&O pretty strongly.

Do you feel like there's a lot of pent-up demand, as you add more inventory, whether that's through network partners or paid click growth, that you can continue to just see strong growth on the top line, as that inventory comes on line?

Lloyd, hello, this is Alexander. I will take your questions. Thank you ever so much.

So with what I said, we expect the full-year revenue to be close to the higher end of our guidance. We want to be realistic and prudent about providing the guidance, so that we can deliver on it.

We also see the Russian -- the rate of growth [of Russia to be] declining. In Q2, it was only about 1.2%. And we also hear from some sources that the operating and (inaudible) environment becomes tougher for some customers, who are in some industries; like, for example, B2B industries, or automobile.

So given our strong position in Internet advertising market and robust macro trends that drive growth of the Internet and Internet ad spend, we do not feel it's negatively hitting our business. However, Yandex is not isolated from the Russian economy. And, if the negative trends continue, our growth rates will be impacted as well.

But, as I said, with Q2 we delivered a strong set of results, and the business remains strong. So it's a combination of some concerns about macro, and intention to provide realistic prudent guidance.

Alex Balakhnin. (Operator Instructions).

Alex Balakhnin, Goldman Sachs; I have two questions.

First is on the Yandex. Market, change of the format. Can you please update us on how many [immersions] you were able to sign up for the experiment? And specifically, in what categories are they working? Is it like any skew to any particular categories, or you have, more or less, even categories distribution of the merchants?

And my second question is I just wanted to get clarification on the paid clicks. You mentioned that, for O&O, it's comparable to the average paid click growth for the Group. And I just wanted to check if I understood this correctly. So are you saying that O&O paid click was -- paid clicks growth was around 50% year on year, because it just doesn't add up with addition of Mail? If you can clarify here, it would be helpful. Thank you.

Hi, this is Arkady about Yandex. Market. So far, we have over 100 shops, which have already claimed to join the new format. And we have over 1,000 other shops interested in joining.

And categories?

On categories it's -- actually, I don't know exactly. We were selecting the best quality shops for this program first, only those who have the highest ratings. And I think it's mostly consumer electronics and that stuff.

Alex, this is Alexander. I will take your second question about paid clicks. So we disclosed the growth rate of the total paid clicks for the business.

But this time, we also wanted to particularly highlight that there was also strong growth in clicks on all own and operated websites, close to the 50% figure. And we are very happy about that, because it helps us to align interest of Yandex and our advertisers. By providing more quality traffic to our customers, we improve their ROIs. And, therefore, eventually, they would be more interested to spend their budgets on search advertising on Yandex.

Thanks so much; that's very clear. And just a follow-up on my first question; with these 100 merchants signed up and 1,000 interested, do you see that they are capable to provide a sufficient user experience, in terms of the delivery and availability of goods? So you think that with 100 already signed up you will be able to secure an improved user experience?

Well, it's a multi-stage rollout of the product. We actually hope to have it fully ready for operations by next spring. And this is just the first stage, and the first 100 is enough to test the model. That's all we need.

Of course, all the Yandex.Market is still there, it's still on, and nothing changes from that side.

That's very clear; thank you so much.

Anna Lepetukhina.

My first question is can you share, please, what are your plans in online video services?

You acquired KinoPoisk, but then there were also reports that you are looking to expand and to start offering video services. I know that it's all rumors and probably you don't comment speculations, but maybe you can provide some color?

And my second also question is on expenses. As a result of the launch of Yandex. Market in November, do you plan some aggressive advertising campaign? And should we expect increase -- additional increase in marketing expenses as a result of this launch? Thank you.

Hi, Anna. I will try to pick up the first question about video and KinoPoisk.

So Russia is one of the most active Russian audiences, but most active in Europe in video consumption, as you know. The KinoPoisk acquisition is just -- for now, it's just the vertical, which helps us to better answer the queries in this area. KinoPoisk is the best positioned resource to have all the answers in everything around movies and video.

So we acquired it, first of all, just to provide best information in this sector. We cannot now comment on other speculations on video, but we're looking into this very, very actively.

The second question?

Thank you.

Anna, this is Alex; let me take the second question. So on advertising expense, we will of course support all our good new product launches with appropriate marketing and advertising support.

However, as I said, advertising spend this year is not evenly allocated between quarters, and we think we have appropriate funds, like we spoke before, without a need to substantially increase expense compared to last year. So the growth rate will be more moderate in further marketing in Q4 compared to Q3.

I see. And can I just then ask a follow-up as a result of this? Previously, you didn't give guidance, but you indicated that we can expect margins to be somewhat flat. Is it something that we still can expect, or it is somehow changed following the addition of Mail.ru's paid search advertising?

Mail.ru deal will certainly have an impact on our adjusted EBITDA margin. For the full year, we expect about 100 basis points negative impact, because we generate lots of incremental revenue, yet we have to pay the TAC for this deal.

On a quarterly perspective, in Q3 and going forward in Q4 as well, the impact would be as we estimate it currently, about 200 basis points.

So barring the Mail.ru deal, our intention to keep the adjusted EBITDA margin on the same level as last year remains unchanged, as we always said. But again, as we always said, if there is a strategically important project that requires one-off incremental investment, it could have an impact in any given quarter.

Yet we -- just to give you some data points, we said that we expect the full-year revenue growth to be at the higher end of our guidance range, around 38%. We also had a strong set of results in Q3. And there is some negative impact from the Mail.ru deal.

Thank you very much.

Boris Vilidnitsky.

Two questions from me. First, are you guys already making plans for 2014? And if so, I would love to hear some initial thoughts there.

Second, something that we ask every quarter; the cash on the balance sheet, if you guys have any update there? Thank you so much.

Boris, thanks for the question. Yes, as I said, we have close to $1 billion of cash and equivalents on our balance sheet. We run the share buyback program for -- and we already purchase 6.6 million shares. So the shareholder return was about, say, roughly $200 million.

We expect to fulfill this program by the end of March next year, according to our 10b5-1 Plan. Beyond that, it's up the Board to decide on the appropriate means, and if they return cash to shareholders.

Thank you. And anything for 2014?

On 2014, we as a policy, we provide guidance on 2014 -- on each fiscal year at the Q4 conference call, so you guys will have to wait until that point in time.

All right, thank you.

Thank you.

Brady Martin.

Two questions; the first one is just more of a clarification question on Yandex. Money. We do have a suggested number and it's RUB552 million for year 2012; just wondering if you can give that number from January to July for 2013, to adjust -- to figure out exactly what this 38%. That's the first question.

The second question is really a follow-up to an earlier question on this Yandex. Market's cost-per-action model, and really about -- if you could give any color about what type of merchants are these 100 merchants that have already signed up? Are they specialist retailers, are they local retailers?

If I just think about -- you mentioned something about customer electronics. We -- I look also at consumer electronics sector in Russia and the only trading company there operating margins are very low, if you're talking about a 1% payment for a company like [NVidia], for instance, that's like 25% of their operating profit last year. That would be just quite significant.

I'm just wondering; is there some kind of character of the merchants that you're dealing with that we should be aware of? Thanks.

This is Greg. Thank you very much for your questions; the first one's easier to answer, which is, year to date, Yandex. Money looks like it generated about RUB394 million in revenue. And our guidance of 34% to -- to be at the higher end of 34% to 38% is on a like-for-like basis. So it excludes any impact from the addition of -- or removal of Yandex. Money from our results.

So this is the perimeter of Yandex as it is today compared to the perimeter of Yandex as it was a year ago. So it's completely like for like.

On the question of Yandex. Market and why is it an attractive value proposition, first of all, in the context of global marketplaces, 1% is actually an extremely attractive price point. It was chosen specifically to draw a large number of potential merchants to the site to embrace the platform.

While, obviously, each company keeps its take rights under wraps, it's sort of well-known that eBay's take rights are in the 8% to 10% range. People estimate that other players are in that neighborhood. So 1% by comparison is very low.

Furthermore, like we said, it aligns our interests much better with the interests of the merchants, because they only pay us if they have made a sale.

Does that answer your question?

Yes, that does. But I guess maybe just one follow-up on there is your -- the way you look at this, is this is a real incremental revenue opportunity to you? Or how much of this is a channel shift from what was previously -- the same merchants would have been advertising on your site and now we're talking about revenue sharing? Or is this a true incremental revenue stream?

Yes, very good question. Look, obviously, we will have to wait and see to see how successful this product is before we can answer that question fully.

The intention is that it increases the velocity of transactions on Yandex. Market site. As Arkady mentioned, shopping cart abandonment and ease of use is the primary target here. And then, secondly, it's the alignment of interests between us and the merchants. We believe both of those factors should contribute to higher velocity of goods sold.

Okay, that's clear; thanks a lot.

Ulyana Lenvalskaya.

Could you please update us on the Turkish project. Would you expect this to continue next year and what is the current state of things?

We -- it's my question; my favorite. We continue operating in Turkey. Since last call, our market share increased a little bit, despite the fact that we stopped all of our advertising activities and didn't increase any distribution channels there. The audience is still with us. We are still the largest domestic site in terms of audience there.

Now we started -- actually our tactic is to start launching the first serious products, which are really unique for the market, not just [need-to] products, as was launched previously.

The last launch was Yandex. Navigator, which we launched a couple of weeks ago. Since that time it has become, and still is, the number one by download in all the app stores, Android and Apple app store, and we actually doubled the number of [tracks] and so on. It was extremely well accepted by the market.

We also continue improving our search quality and we will be launching several more products this year. We launched a shopping vertical there, in September, which differentiates our search. We continue pushing there. I would say that we plan to continue investment [work] during 2014, and we have very good scope for that.

Thank you. We should not expect you to give up.

My second question is about --

At the same time, we're not planning to spend much more than we do, so.

Yes, thank you. Thank you. Can I have another question, please? What is the current share of mobile searches in your revenue and the number of searches?

Ulyana, this is Alexander; let me take this question. So in our total search (inaudible) about 16% of [credit] from all types of mobile devices, including traditional phones, smartphones and tablets. And the revenue contribution is about 11% on tablets and a bit lower on smartphone.

Thanks, Alexander. And there's a number for the third quarter, right?

Yes, this is the latest figure [confirmed].

Thanks. Thank you very much.

Alexander Vengranovich.

This is Alexander Vengranovich from Otkritie Capital. Actually, one question on KinoPoisk; as far as I understand, so you've already acquired the company and that will be impacting your financials in the fourth quarter.

So I was just wondering whether the effects of KinoPoisk acquisition is already included in your financial projection for this year, because as far as I understand that is quite a significant category with quite a significant average number of monthly users, which should, for sure, drive your revenues significantly and that will be your own ratings, not shared with the partners. So can you please give us some update on this?

And with regards to partner TAC, so as we've seen that in the third quarter on the back of Mail contract, the share of partner TAC in partner revenues has increased substantial. So am I getting this right that the 70% share of TAC and revenues is sustainable going forward until you have that contract with Mail? Thank you.

Alexander, thanks for the question. This is also Alexander speaking. So on KinoPoisk, this website has a very big audience, that's correct. But from the cost or revenue perspective compared to Yandex, the impact will be minimal on Q4.

We acquired this website primarily as important search category -- search vertical to provide better quality answers for this type of queries.

On the partner TAC, the revenue share in -- that you see in our Q3 results, I think, it's sustainable going forward. Increase was attributable to the Mail.ru deal. Revenue share insurance was up. Other partners remained unchanged.

Okay, good. And on KinoPoisk, just to follow up, are you planning to sell contracts advertising on this -- using KinoPoisk as a platform for this?

Yes, absolutely. KinoPoisk, as we discussed, has a big audience and, therefore, we'll use it as a platform, as a publisher for text-based advertising.

So you expect that most of the effect will come on the next year and the effect for this quarter will be not very big?

Yes, yes, exactly. Implementation of our advertising technology, plus some other activities that we plan to implement on this website, will have more visible impact next year, not before.

Thank you.

Alex Balakhnin.

I just wanted to ask you on the accelerated of your search engine result pages to 26% in the quarter. Apart from the mobile traffic coming from a higher market share, is there anything else contributing to the acceleration of the SERPs?

And my second question, probably a little bit of fall-off to the KinoPoisk questions, the fastest-growing advertising segment online is online video. And could you just share for me a little bit what is your strategy to build a -- or monetize on your presence there? And how KinoPoisk or Yandex. Video, or anything fits your strategy to build a presence in online media advertising? Thank you.

Hi, Alex, this is Greg. On the question of SERPs, obviously, there's multiple things that went into that number. It reflects both obviously rapid growth of mobile SERPs, as well as good growth on desktop queries as well.

In terms of our plans for online video, as you've seen, currently we've decided to purchase KinoPoisk to really strengthen our vertical search there. Obviously, there will be some component of video ads on KinoPoisk for pre-roll and things like that. But beyond that, we have nothing to comment on in terms of other plans for video, advertising on video sites.

Thank you.

There are no further questions at this time, sir. I now hand the conference back to you.

All right. Thank you, everyone, for joining us on our Q3 earnings call and we look forward to speaking with you at our Q4 call later -- actually, in 2014. Thanks so much.

Ladies and gentlemen, thank you for your participation today. This concludes today's conference, and you may now disconnect your line. Thank you.