Nebius Group NV (YNDX) 2018 Q2 法說會逐字稿

Good day, and welcome to the Yandex Second Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Katya Zhukova, Investor Relations Director. Please go ahead.

Hello, everyone, and welcome to Yandex' Second Quarter 2018 Earnings Call. We distributed our earnings release earlier today. You can find a copy of the press release on our IR website and on Newswire services.

On the call today, we have Greg Abovsky, our Chief Operating Officer and Chief Financial Officer; and Mikhail Parakhin, our Chief Technology Officer. Arkady Volozh, our Chief Executive Officer; and Vadim Marchuk, our VP of Corporate Development, will be available on the Q&A session. The call will be recorded. The recording will be available on our IR website in a few hours. As usual, we prepared a few supplementary slides, which are 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 27, 2018, 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 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 to the U.S. 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'm turning the call over to Mikhail Parakhin.

Thank you, Katya, and hello, everyone. I'm delighted with our accomplishments in Q2. Our consolidated revenue grew 34% year-on-year, reaching RUB 29.7 billion. The Revenue growth was primarily driven by the solid growth on Yandex properties, accounting for the bulk of our revenue as well as by great performance across Taxi, Classifieds, Media Services and Experiments.

On April 27, we completed the formation of Yandex. Market JV with Sberbank and deconsolidated Yandex. Market from our consolidated numbers. From a reporting perspective, this mutes our consolidated revenue growth, as in Q2 2018, we report only 27 days of Yandex. Market results versus full quarter of Yandex. Market in Q2 2017.

Excluding the impact of Yandex. Market from 2017 and 2018, our revenues in Q2 grew 39% year-over-year. Revenues of Yandex properties grew 21% year-over-year. Excluding Yandex. Market, revenues of Yandex properties grew 28% year-over-year. This is compared with 24% growth on the exYandex. Market basis in Q1 this year.

The acceleration was driven by solid trends in Search and across our other properties, with Zen, Images and Homepage as main contributors to growth. Growth in our core Search product was driven by a number of factors, primarily by share gains on Android and our advancements on the ad tech front. The new approach to auction that we unveiled in late April as part of our Templates launch was well adopted by advertisers. We continued experimenting with different ad layouts and their placement within organic search results. We see encouraging trends in mobile monetization as a result of some of these tests.

In June, we started experimenting with placement of Yandex. Direct ads on our Home Page. The experiment combines efficient targeting capabilities of Yandex. Direct with an extensive reach provided by Yandex Home Page, one of the largest online advertising premises on the Russian Internet. Currently, we run this experiment on a limited audience size and we see encouraging results.

On the Ad Network front, we continued seeing the adverse impact from the change of our partner mix that I mentioned in April. In Q2, it was not fully offset by the positive impact of our new partnerships. Revenues of Yandex Ad Network grew 4% year-over-year this quarter.

Turning to our search share trends. In June, our overall search share reached 55.5%, up 120 basis points compared to the year-ago. Our search share on desktop averaged 65.9% in June, gaining 160 bps from June 2017, but down 160 bps from March 2018 due to regular seasonality and the adverse impact of the World Cup on our desktop searches.

On mobile, our search share hit new highs at 46.2%, growing 540 bps year-over-year. On Android, our search share averaged 48% in June. This is an increase of 120 bps from March 2018 and 880 bps up year-over-year. On the past full week, our share on Android reached 48.6%. Our search share on iOS was 39.4% in June, up 90 bps compared to March 2018, but slightly down from a year ago.

Share of mobile traffic reached 45% of our total search traffic in Q2. Mobile revenues represented 35% our search revenues. Mobile platforms remain the key driver of our search query increase driven by growth of our mobile share and the adoption of Alice, our intelligent voice assistant. Alice continues to drive user engagement and loyalty. In Q2, its number of skills significantly increased and hit 10,000.

This growth was driven by Yandex. Dialogues, our platform for third-party developers, allowing to integrate third-party skills quickly and easily. Since launch, share of voice search traffic in our Search App grew from single-digits to 18%, while our Search App audience has doubled. We strongly believe that voice is a key element to connect the online and the off-line worlds.

Alice is currently available in Yandex Browser; Yandex. Search App; Navigator; and Yandex. Station, our smart speaker that we presented recently. Yandex. Station, with Alice on board, assists people in their homes, managing daily routine tasks. This is the first smart speaker developed for the Russian market. We see a strong interest in Yandex. Station. We sold out our first batch during the first day. Now everyone can order Yandex. Station on Yandex. Market and Beru. The price is RUB 9,990, which is approximately USD 160.

Yandex. Plus is another new product that we unveiled in Q2. It is our subscription-based membership program that currently provides access to a bundle of Yandex services. The subscription monthly fee is below $3, but it offers a number of nice benefits: unlimited music streaming on Yandex. Music, ad-free movies on KinoPoisk, discounts for Yandex. Taxi and Yandex. Drive rides, free delivery for Beru users and additional storage space on Yandex. Disk.

Yandex. Plus provides its subscribers with benefits of using their favorite products and gives them the opportunity to discover new ways that Yandex services can help them. I'm excited with the speed of new product launches that we demonstrated recently.

With this, I'm turning the microphone over to Greg, who will walk you through the operational performance of business units and our financials.

Thank you, Mikhail, and thank you all for joining our call today. In Q2, we delivered another strong set of results. Our consolidated revenue grew 34% year-on-year, reaching RUB 29.7 billion. Online advertising revenues accounted for 83% of total revenues in Q2 and increased 17% year-on-year. Excluding Yandex. Market, ad revenues grew 21%. Reported revenue growth of Yandex properties was 21% year-over-year. Excluding Yandex. Market, Yandex properties grew 28%. Revenues from our Ad Network increased 4% year-on-year due to the reasons Mikhail mentioned earlier. Revenues from our Ad Network accounted for 19% of total revenues.

Other revenues grew 344% year-on-year in Q2, primarily driven by Yandex. Taxi revenue, which contributed the bulk of the other revenue line. Traffic Acquisition costs related to our partner advertising network grew 9% year-on-year. Partner TAC as a percent of Partner Revenue was 61% in Q2, up 2.9 percentage points compared to Q2 2017 and up 2.2 percentage points sequentially. Partner TAC grew faster than our Partner Revenue due to the change in the product mix and partner mix.

Traffic Acquisition costs related to the distribution partners increased 20% year-on-year and amounted to 6.8% of advertising revenues from Yandex properties, down 10 basis points compared with Q2 2017 and 20 bps higher on a sequential basis. Total TAC increased 12% year-on-year and amounted to 15.9% of total revenues, down 320 bps from Q2 2017 and 30 bps lower compared with the previous quarter.

Paid clicks grew 10% year-on-year, while cost per click was up 6% year-on-year. Excluding Yandex. Market, paid clicks grew 16% year-on-year and were driven by solid growth rates on Search and our other properties.

Turning to our cost structure. In Q2, total OpEx, excluding tax and D&A, grew 46% year-on-year. Excluding stock-based comp, operating expenses increased 45%. The growth was primarily driven by the increase in the growth of outsourced costs and services provided to taxi corporate clients as well as advertising and marketing costs across all our businesses.

As of June 30, 2018, our headcount reached 8,288 people, up 2% compared to March 31, and 27% higher compared with a year ago. The growth was primarily driven by hires in Taxi and in our Core Business, but was muted by the deconsolidation of Yandex. Market. Excluding Yandex. Market, our headcount was up 12% compared to March 31, and up 40% compared to a year ago.

In Q2, our personnel costs constituted 20% of total revenues despite acceleration in hiring. Stock-based comp increased 62% year-on-year in Q2 and constituted 5.3% of revenues, up 90 bps from 4.4% a year ago. D&A expense in Q2 increased 4% year-on-year. The sequential deceleration of growth rates in D&A primarily related to the expiration of useful lives of a part of our equipment and our intangible assets.

Our consolidated adjusted EBITDA increased 23% year-on-year. Excluding Yandex. Market, our adjusted EBITDA grew 32% year-on-year. This quarter, the impact from ForEx was a gain of RUB 2.1 billion related to the depreciation of the Russian ruble during Q2 from RUB 57 to the dollar to RUB 63 to the dollar. It's important to note that our other nonoperating income significantly increased in Q2 compared to a year ago as this P&L line included the gain from the deconsolidation of Yandex. Market. This gain was approximately RUB 28 billion.

Net income was up 857% year-on-year in Q2 2018, primarily as a result of the gain from Yandex. Market deconsolidation. Adjusted net income was up 27% year-over-year, and adjusted net income margin was 17.1%. Adjusted net income, excluding Yandex. Market, was up 44% from Q2 2017; and adjusted net income margin, excluding Yandex. Market, was 18%.

Our CapEx was RUB 9 billion or 30% of our total Q2 revenues. As we mentioned before, our CapEx primarily relates to servers and data center equipment. It's not evenly spread out across the quarters and dependends on delivery date of equipment. The first 6 months of the year, our CapEx amounted to 18% of our revenues. On a full year basis, we expect CapEx to be in the mid-teens as a percentage of revenues.

Now turning to the performance of our business units. Search and Portal revenue grew 22% year-on-year driven by the growth on our owned and operated properties. Adjusted EBITDA of Search and Portal grew 27% year-over-year in Q2 and its adjusted EBITDA margin reached 46.6%, growing 170 basis points compared to a year ago and increasing 10 basis points sequentially. On a full year basis, we expect our Search and Portal margins to be up slightly year-over-year due to additional hiring and step up in advertising and marketing costs to support our existing products and some hardware initiatives, which negatively affect our core adjusted EBITDA margin in the second half of the year.

Moving to Yandex. Market standalone. We saw revenue growth rates acceleration on the Yandex. Market side due to improvements in traffic conversion rates in our comparison shopping product. In Q2, revenues of Yandex. Market on a like-for-like basis grew 21%. Adjusted EBITDA loss of Yandex. Market was RUB 9 million in Q2.

Turning to our Taxi segment. As of June 2018, the combined business operated in 181 cities with a population of 100,000-plus and in 109 cities with a population of between 50,000 and 100,000. Our total number of rides grew 207% year-over-year, including a full quarter's contribution from Uber. Revenues of Taxi grew 426% year-on-year in Q2. Adjusted EBITDA loss of Taxi was RUB 1.9 billion in Q2. A significant portion of it included full quarters of Uber's losses as well as our investments in the food delivery business.

We completed the integration with Uber in mid-June and expect a positive impact from Uber cost optimization in the short to medium term. We continue to expect that on an annual basis, our adjusted EBITDA loss of Taxi segment will be roughly on par with 2017 losses in absolute terms. Our investments in the second half of the year will be skewed towards our food delivery business as well as new initiatives. While in our established markets, we expect improvements in our adjusted EBITDA.

Now let me turn to Classifieds. Revenue in the Classifieds business grew 101% year-on-year in Q2, primarily driven by revenues from listing fees and VAS, which increased 102% as well as from off-line revenues related to the dealership business, which is run by Auto.ru on an experimental basis. In Q2, this experiment had generated 18% of the total revenues of Classifieds and contributed 36 percentage points of the revenue growth rate. In general, Auto.ru continues strengthening its market positions. Adjusted EBITDA of Classifieds was positive RUB 44 million.

Turning to Media Services. Yandex. Music reached 1 million subscribers in June and continues to grow. This is an impressive step up from 250,000 subscribers in late 2016. Furthermore, we see benefits from integration of Yandex. Music into a range of our own products such as Yandex. Auto and Alice. We also believe that Yandex. Plus and Yandex. Station will contribute to the growth of Yandex. Music's subscription base going forward.

We also continue strengthening KinoPoisk, and we significantly increased its legal content library in the quarter. In Q2, Media Services revenues were RUB 395 million and grew 57% year-on-year. Media Services adjusted EBITDA was negative RUB 260 million as a result of our investments in the content library as well as an increase in advertising and marketing costs.

In Q2, 2018, revenues of Experiments represented by Zen, Cloud and Yandex. Drive reached RUB 414 million. The growth was primarily driven by Zen and Yandex. Drive. Adjusted EBITDA loss of Experiments was RUB 460 million. Zen's DAU reached 13 million users and more than doubled over the past year. The average time spend per user on a platform remains stable. Engagement of Zen app users has been progressing well. In June, the revenue run rate of Zen exceeded RUB 4 billion. Zen continues adding new features aimed at increasing user engagement. In Q2, we introduced short posts and videos and an ability to leave comments, which increases user engagement.

Getting back to corporate matters. We ended the quarter with approximately RUB 97 billion in cash and equivalents, which is approximately RUB 1.5 billion of the exchange rate as of June 30. This includes the cash and cash equivalents of Yandex. Taxi, which amounted RUB 27 billion. Cash and equivalents related to Yandex. Market accounted for RUB 32 billion and were not included in the Yandex N.V. consolidated balance sheet sided above.

Turning to guidance. Based on our recent solid performance, we increased our outlook for our Search and Portal business to grow in the range of 20% to 22% year-over-year in 2018. Excluding Yandex. Market from 2017 and 2018 results, we expect our revenues to grow 30% to 35% in 2018 compared to 2017 levels.

With this, let me turn the call over to the operator for the Q&A session.

(Operator Instructions) We will now take the first question from Cesar Tiron from Bank of America Merrill Lynch.

Two questions from me, please. The first one, there seems to be still a lot of operating leverage in core search and your TAC as percentage of revenues keeps declining which is not what some of your peers are experiencing. Do you think this is sustainable going forward? And then the second question, could you please give us some metrics on the food delivery business, discuss the success you had so far and possibly tell us how much you spent in food delivery in 2Q?

Hi, Cesar, this is Mikhail Parakhin here. I will take the first one and then maybe Greg will take the second one. On TAC, so we have to 2 TACs, right, distribution TAC and partner TAC. Distribution TAC was pretty much flat at, I think, 6.8% of our total revenues. And we expect it to be roughly stable going into next year. For our partner TAC and Ad Network, that actually increased as a result of changing partner share mix. And we actually think that this trend will also continue. That's why we were lately emphasizing our own properties, where we've obviously don't pay TAC. And I think you -- again, you can sort of -- we think that this trend will continue going forward. Greg?

Thanks, Mikhail. Yes, Cesar, so on the second part of your question with respect to the food delivery. So I can't provide you specific metrics because it's still in a very early stage. But what I can say is that Yandex. Eats grew very significantly. The UberEATS business that we inherited from the Uber transaction has been phased out and everything is now branded as Yandex. Eats. I think if you walk around Moscow these days, all you'll see are couriers with Yandex. Eats uniforms and Yandex. Eats food bags walking around. The other thing I can mention is obviously the most important metric that we track from a customer satisfaction standpoint is the click-to-eat metric, meaning how long it would take for consumer to get their food from the moment they order it in the app until they actually receive it. And not only are we seeing significant increases in this click-to-eat metric for ourselves, we also appear to be significantly better compared to the competition, which is obviously driving significant growth in market share for us in Moscow, which is our primary city at this point. We're present in a few other cities, but we only launched there a few weeks ago. And then just in terms of how we plan to invest in this business, we're very bullish on it. We think there's a lot to do in food tech in general. I think it fits in very well with the rest of the Yandex ecosystem with Taxi, with Search, and so on. And so we expect to significantly ramp up investments in food delivery over the course of the year. Does that answer your question?

Thanks, Greg and Mikhail, very clear.

We will now take the next question from Lloyd Walmsley from Deutsche Bank.

I have 2. The first one would just be on core Yandex sites growth. Can you give us a sense for where you are in terms of the templates rollout. It sounds like it wasn't one of the top drivers of the revenue acceleration. How should we kind of think about that rolling out more broadly and the impact to revenue? And then just the second one on the Taxi business. Can you just give us an update on where we are in terms of subsidies across the riders and drivers, and how those are kind of likely to trend over the next few quarters?

Hi, Mikhail, again. So on templates, well, it actually is contributing significantly reasonably to our revenue growth. Its -- many factors contributed and templates contributed as well. We keep on shipping new and new formats being controlled by templates. And just, in fact, recently, we experimented very significantly with -- on mobile devices with formats where ad was placed in the middle of the search page, instead of concentrating all of them on the top as we so far and some of our competitors do. So it's not -- as I was sort of consistently saying, template is a whole broad sort of spectrum of technologies that we gradually roll out. And so they -- every time, it's not one huge sort of one go, no go. It's a little more every sort of week, right? We -- new format appears, we included in templates and it starts being optimized and then the new formats and sometimes you could see that right now if you're careful, you will see more and more cases when, for example, navigation queries, the nonpaid link will be above the paid link, things that were previously unthinkable. And again, as I said on mobile, there's many more situations when added in the middle of the search page. So those things just -- they're just not sort of one big boom. They're going gradually in -- these things are fairly successful so far.

Thanks, Mikhail. And I'll take the second question with respect to taxi. So what I can say overall is the Taxi business is tracking obviously very, very well. We're kind of very happy with where it is currently. In terms of the overall loss for the -- EBITDA loss for the segment as I mentioned in the prepared remarks, we continue to expect that it will be give-or-take RUB 8 billion. Obviously, that's going to include the core ridesharing business, the food delivery business that I just talked about, as well as the self-driving initiative. And so over the course of the year, we should expect to see that the losses of the Taxi segment will definitely mitigate. But then on the other hand, like I said, we're bullish on food delivery. And I think we're making great strides there, as I just said. And then the other thing that we are getting increasingly excited about is obviously self-driving, where we feel that the AI talent that we have assembled here at Yandex is world class and we're making significant advances with considerably smaller resources than the rest of the competitors. And so we'll continue to support this initiative and we think it's world-class in terms of capabilities.

We will now take the next question from Miriam Adisa from Morgan Stanley.

Just another follow-up question on taxi. So there's been a bit of -- a bit more aggressive price competition in Moscow after the quarter ended. So just wanted to get an idea of what your attitude is towards price competition. Do you feel like you've built up enough of the lead not to have to participate? Or do you see it more optimistically? And then second question would be on -- if you can give us an update on the rollout of new devices with the search widget, has that largely been done now? Or is there anything left to come in terms of new manufacturers rolling out?

Hey, Miriam, it's Greg. I think I'll try to take both of those questions. In terms of subsidies in Taxi business, look, we've always insisted that ridesharing is a highly competitive global market. And we think in the end, it will be totally defined by strong network effects, superior product, superior tech stack and then the ability to leverage an entire ecosystem of adjacent services. I'd say the ridesharing market is still very young, and so there's lots of players who think that ridesharing is really easy. I'd say time and time again, you see competitors burn tons and tons of cash in sort of misguided attempts to buy market share with massive subsidies. And by the way, it completely works, right? But it only works for a very short time and only if you have really deep and irrational investors behind you. We've seen another competitor in the market here, such as Gett. I think they raised a total of $700 million cumulatively and invested in a number of different markets. And I think based on sort of public data, their market share is significantly sub-5% in New York, in the U.K., in Russia and everywhere else. So I think in the end, we feel very good about Yandex. Taxi and its outlook. We think that competition only serves to enlarge the market. I think it serves to accelerate transition from off-line. We think off-line is kind of a vestige that's going to go away or be transformed with the help of the Yandex ecosystem and AI technologies to be much more robust. And in the end, the market will migrate from sort of this personal transportation to shared transportation. And Yandex. Drive, Yandex. Taxi, all of these services accelerate that shift. And then on the search widget question, actually, there's been very limited rollout of search widget to date. It's still the preponderance of devices do not have search widget, but simply have the Chrome choice screen. But it is in the market now, it's ramping up. And so I think that is still ahead of us.

We will now take the next question from Slava Degtyarev from Goldman Sachs.

Couple of questions, especially on guidance. So does your guidance include Yandex. Station in both revenues and EBITDA? And if so, how many stations you aim to sell roughly? And maybe also broadly, how would you describe your strategy with regards to the Yandex. Station? Do you also aim to sell it at 0 margin, and maybe the long-term strategy here as well? And secondly, if you can describe the current gross bookings run rate for taxi, sorry, if I missed that during the call. And also how should we be thinking about the several one of the factors that affected the taxi growth in the second quarter because it seems like, here, your taxi growth will decelerating in the second half of the year. Maybe you will somehow quantify qualitatively the various factors, including the World Cup effect?

Hey, Slava. I'll try to take a couple of these, and Mikhail will try to take a couple of these as well. So in terms of hardware revs, they are pretty much not included in the guidance. We included a little bit of the hardware sales that we already had to date. As you know, we sold out of the Yandex. Station in the first batch. And we're looking to acquire and distribute more of those. Those are all 0 or even potentially slightly negative margin. But Mikhail will explain more the strategy there, and I'll leave it up to him. So there's essentially no hardware revenue in the guidance. Although, our EBITDA guidance does include pressure from those dilutive hardware sales. And then I'll turn it over to Misha to talk a little bit about the strategy with Station and otherwise voice platform technologies.

Yes. So obviously, our main goal here is to have Alice in every household, our conversation assistant, being placed in every single household in Russia and other countries that we work in. This is our goal, and we do not envision ourselves as being this hardware manufacturers. It's not really our main sort of business expertise, but we do get ourselves into this from time to time to open new market or to have devised that sort of reference device that others can use and maybe create variance of. So we do not think we will be making money on the devices obviously, and we do not think it's going to be like super huge part. But we will do whatever is necessary to have the device in every single household in other countries -- in our country, I mean.

Sorry. And Slava, just on the question of taxi revenue growth, which you asked. Yes, obviously, look, it's going to slow down over the course of the year. It's not a lot of businesses that grow sustainably 465% year-over-year, but we still think that there's lots and lots of growth ahead of us. And in terms of gross bookings run rate, I think, we're currently tracking at around $2.5 billion run rate or so.

We will now take the next question from Ulyana Lenvalskaya from UBS.

I just wanted firstly to follow up on the margin question. Given this fairly strong result achieved in EBITDA margin in the core Search and Portal business, how shall we think about the outlook for the second half? Greg, you previously were guiding at flat margin in a year. Is it still the case?

Hi, Ulyana. So with respect to the Search and Portal margins, as I mentioned in the prepared remarks, at this point, we expect that the core Search and Portal margins will be up slightly for the full year. And so in the first half of the year, I think, our core Search and Portal margins were up something like close to 300 basis points. But I think I also mentioned in the last earnings call that we constantly sort of try to balance off the investment opportunities in our core business against demonstrating sort of natural operating leverage in the business. And this set of investment opportunities that's ahead of us is largely the same as what we talked about in the last call. And that's AI, which in turn, drives speech and voice platforms, it's geo-based services, including an initiative to drive the adoption of location-based advertising by the SMB segment and, in general, sort of simplifying online advertising for the SMB client, both in terms of Yandex. Direct, which is the contextual advertising side as well as on the location-based side. And finally, the hardware initiatives, which I -- like I said, are significantly margin-dilutive and we wanted to be careful about the potential impact of those in the second half of the year when those products do ship.

Makes sense. And secondly, could you please talk a bit about the car-sharing business? How many cars you have now and what's the future of this business?

Sure. So car-sharing business is a really interesting one. Currently, I think, we have about 2,500 cars on the platform. We think we are more or less the market leader in the Moscow market. And then interestingly enough, Moscow is the largest car-sharing market in the world, which is -- I think, it speaks to the sort of the wisdom of the local government here, which has allowed car-sharing companies to have free intercity parking for all the car-sharing providers. And we are seeing really, really good utilization rates out of our cars. And remember, these cars, they tap into the entire kind of Yandex ecosystem because they leverage our mapping, they leverage our navigation, they leverage a single login across all of our services so a consumer can reserve a car on Yandex. Drive, they can get into it. They'll be automatically logged into the system inside the car, meaning the in-dash navigation, in-dash entertainment, and so on, so they can pull up their favorite playlists from Yandex. Music. And then on top of that, we try to cross-sell things like Yandex. Plus subscriptions, right, which is our membership subscription service that for RUB 169 provides you access to Yandex. Music, discounts on premium classes of service in Yandex. Taxi, discounts on Yandex. Drive, free shipping on Beru and so on and so forth. For example, more space on Yandex. Disk. And so I think the combination of all of those things that we can pull together and offer the consumer has made this service incredibly successful. And we're excited -- we're very excited about kind of this full range of transportation functionality that we can offer to the consumer.

We will now take the next question from Alexander Vengranovich from Sova Capital.

So just first question is a follow-up for previous answer on Yandex. Plus, I guess. So can you please just share the first results from the launch of the subscription service, Yandex. Plus, in terms of maybe user growth or improvement on the engagement on Yandex. Taxi or Yandex. Drive? Or anything you can share, which might be useful to track the success of the launch? So that's the first question. Second question is on the integration of Uber operations. Can you remind me whether you have completely integrated on their driver-side the application of Uber and whether there is anything left in terms of the integration of the operations? And the fourth question is a bit technical, I guess. Looking at the presentation, I see there was a massive CapEx growth in second quarter '18. Sorry if I missed something, but can you please elaborate on whatever the reasons behind that growth?

Hi, Alexander. So on Yandex. Plus, I'm not going to be able to share a lot of figures with you just because it's so early. But what I can say is it's a significant contributor to the growth of Yandex. Music subscription service. As I mentioned in the prepared remarks, we have over 1 million subscribers on Yandex. Music now and we used to have something like -- at the end of 2016, we had 0.25 million. And so there was this massive acceleration in terms of Yandex. Music subscriptions, and we are definitely seeing a lot more cross-pollination of the various services for Plus subscribers. And I think we'll probably be able to share a little bit more with you on the Q3 earnings call, especially as we integrate the ability to subscribe to Yandex. Plus and more and more services. Currently, it's primarily Yandex. Music that's driving additional subscribers. But we think that we could sell this membership program inside of Taxi, inside of Drive and inside of Beru as well. On the question of the Uber integration, that is complete. It was complete just before World Cup started. So currently, both the driver-side and the passenger-side application platforms are controlled by us. And finally, on CapEx, as I mentioned in my prepared remarks, capital spend is not evenly split over the quarters. It was significantly higher in the first half, and it will be -- for the year as a percentage of sales, we continue to stick with our guidance of mid-teens as a percent of sales. And most of our purchases in the first half were aimed at purchasing GPUs for various AI initiatives as well as buying servers for our upcoming cloud product, which is currently still in development phase and is obviously one of the investment projects that we're excited about and working on.

We will now take the next question from Vladimir Bespalov from VTB Capital.

I have actually a couple of questions. The one is on the capital allocation. You have a pretty good cash pile. You have a good cash-generating ability. But your investments are kind of restricted to a certain extent. You're trying to keep those at a certain level. You -- my view is that you might be probably a bit more aggressive in this sense. What is the reason behind this? Is this like the lack of management resource if you don't want to focus on too many projects at a single time or maybe execution risks and things like this? And the second question might be kind of a follow-up to this one. Could you maybe elaborate a little bit on your new undertaking such as Yandex. Health, which is an experiment, maybe a bit more on Yandex. Cloud? And what is the future of Yandex Data Factory, how you see it? Maybe some other experiments as well that you can comment on?

Hey, Vladimir. On -- so I'll take the first question on the balance sheet, and then Misha will discuss Cloud, Health, YDF, and other experiments with you. So on cash, look, we're very comfortable with where we are right now. We think we are well-capitalized. And it's a good position to be in to have a cash cushion to deploy against various projects as we -- as you said. And we also want to be extremely disciplined about the allocation of capital. I think you're right in terms of -- we're always more in need of high quality management resources than capital, which is a good position to be in because it forces you to be extremely disciplined about what you do, but also more importantly about what you don't do. And furthermore, we are starting to -- as you saw with the announcement of our buyback, we are starting to allocate some of the -- what we view as excess cash to buy back some of our shares. We have bought back some amount over the last few months, but we're looking to obviously buy back more. I'll turn it over to Mikhail.

Yes. So Cloud is obviously one of our biggest investments now, and we are super excited about it. As you know, Russia uniquely lags other countries in terms of the cloud penetration for whatever reason, even for the countries with similar level of GDP, say, Brazil. Russia surprisingly has much lower percentage of business that's using cloud services. We believe that cannot stay, and it's actually going to change. And the usage of cloud services is going to explode. We believe that we are uniquely positioned here to provide the best possible service with compliance with all the regulations and very high-quality. We probably have operators of the biggest the data centers in the country, I'm assuming. So Cloud is -- I'm sure we will be hearing a lot about it in upcoming months. Yes, we feel strongly that everything is on track and we should do fine. Health, and what was that, YDF, they are not very big. They're tiny, so I probably wouldn't want to bring too much spotlight on them. They're experimenting with lots of ideas.

We will now take the next question from Mitch Mitchell from BCS Global Markets.

Two questions and one kind of blue-sky question for you. Concretely, do I understand -- you -- talked about partner network growth in the first quarter and you said we should see some acceleration in the second quarter and we didn't. And you've also sort of clearly indicated that obviously that your owned and operated businesses is more profitable for you. Are you still hoping that the partner network growth will pick up going forward? Or is this really the result of a conscious decision to deploy resources to grow the -- to grow your own businesses faster and you're going to sort of let the partner network go where it goes? That's the first question. The second question is just, I wanted to ask if you can give us some color on what -- you have your convertible notes expiring this year, what you're thinking around them? And then the last question is a very blue-sky question. Obviously, you saw that the EU ruled against Google around Android much in the same way that FAS ruled against them here in Russia. I'm wondering if you think that, that presents a long-term opportunity for Yandex in other countries in a way that it maybe hasn't been in the past?

Hey, Mitch. So on partner revenue, clearly, we were wrong. We were certainly expecting that partner revenue would accelerate in the second quarter and it didn't, and we're obviously disappointed by that. I'm not going to tell you that it's a conscious decision kind of post-factum. I think when you play tennis, you got to play tennis with a net. So we were wrong. It didn't grow. We're hoping that it will accelerate in the back half of the year, but it's simply a question of partner mix and product mix there. We are making a conscious effort to invest in our own properties. As you obviously tell by the math of our release, our own properties kind of excluding Yandex. Market, grew 28% year-on-year in Q2, which is obviously very significant. And I think it's a great result. That includes things like Yandex. Images, Yandex. Collections, Yandex. Zen, all contributing to that growth. And obviously, having an ability to control product as well as the advertising and modernization is significant. So I think, on partner TAC, I'll just leave it at that. In terms of convertible notes, the ones that are due in December 2018, we plan to simply repay those when they come due. I think we have RUB 321 million of them left outstanding, and we obviously have ample cash on hand, to Vladimir's previous question, to repay those. And in terms of opportunities, look, we think about opportunities in terms of, first and foremost, can we bring something unique to the consumer, can we get it into the hands of the consumer, and is it going to be differentiated? And the cases where we can answer those questions in the affirmative, we try to build the product that fits those needs. I don't think this particular decision really changes anything for us.

We will now take the next question from Sveta Sukhanova from Sberbank.

I wanted to ask you about Zen. In May, you gave us updated run rate for Zen was around RUB 4 billion. I wanted to ask has anything changed since that time? How -- what's the track record of Zen from May until now? That would be my first question. My second question would be, if I may, about over 1 million subscribers for Yandex. Music. Is it total number subscribers, including trials? Or it is just like paid subscribers for Yandex. Music? That would be my second question. And my third question, if I may, would be about effect of the World Cup on your verticals including advertisement and taxi?

Hey, Sveta. A couple of things, on Zen, the current run-rate is something, I think, just north of RUB 4 billion, as I said, in terms of just seasonality. As you could expect, summer months tend to be a little bit slower, so it did grow sequentially from May to June, but not significantly. And it's going to be some time until it kind of picks up again, probably in September when the run-rate really accelerates one more time. And just on subscribers for Yandex. Music, it includes both free and paid. And, oh, just so you know, the monthly revenues are still growing 130% at Zen. So it's in a very high revenue growth trend. And then Misha will answer the question about World Cup.

Yes. So impact of World Cup was pretty much as you would expect, so increase in our maps and sort of local search queries. We saw people searching more for restaurants and things like that, that you would imagine people would do after watching or during watching the game. We saw decrease overall in search queries in general. We saw increase in usage of our news properties. Again, no surprise there. Overall, people spent less time on online properties in general, but more on video online and that was very successful for us. The -- in terms of taxi, the good news, the overall rides were higher obviously. The bad news was that also we were a little bit oversubscribed because demand was very high, right? So really nothing that you wouldn't think yourself kind of this standard (inaudible)

Of course. It makes no sense. My question was about more like quantifying contribution of World -- of 2 weeks of the World Cup in the second quarter into the taxi number of rides and into the ad -- organic ad revenues growth, which was very strong, 28% in the second quarter at Yandex properties. That's a first follow up question about quantifying the impact. And second question, what Greg mentioned is, 130% monthly growth for Zen. Is it month-on-month? Did I get you right?

Hey, Sveta. No, that's year-on-year, 130% year-on-year growth in the month of June.

Quantifying -- so on ad front, we see it's roughly revenue-neutral. So we made less money on some properties, more money on others, like roughly, it's probably flat.

And on Taxi, basically, we got fewer rides, I mean, we got the some number of rides. We got more revenues from them because basically the search factor was higher. There's more -- a lot more demand without -- and equal number of supply to match it, so I wouldn't focus too much on the positive impact of that.

We will now take the final question, a follow-up question from Alexander Vengranovich from Sova Capital.

Just a pretty broad and general question on self-driving. So you mentioned you're quite optimistic on your investments there. Can you please just outline the potential reasons -- the reasons why you're investing in self-driving and how do you think you might get some payback on these investments? So in which areas do you think these investments will generate some additional revenues to you?

Hey, Alex. Sure. Look, I think, it's nothing -- I don't think we're going to be sort of reinventing the wheel here, pardon the pun. I think we are sort of pursuing the exact same business models of sort of every other company in self-driving around the world. The applications are either in self-driving cars or in self-driving taxi fleets.

As far as I understand right now, obviously everybody is investing in this area. But at this stage, it's pretty unclear how the whole model will work in the future. So it's more about just investing in the future, right?

It's -- you're right, it's investing in technology stack, which will prove to be extremely important in the future, right.

I think that it leads to direct innovation opportunities for us. First of all, it's savings in taxi, which is direct opportunity. And indirectly, if we believe our technology is strong enough to be sold on global markets and this would -- it could become potentially very good product to sell worldwide.

Thank you. This will conclude today's question-and-answer session. I would now like to turn the conference back to the host for any additional or closing remarks.

Thank you all for joining our call today. Please feel free to reach out in case you have any follow-up questions. We are always happy to answer them. Thank you, and see you in 3 months. Bye-bye.

This concludes today's call. Thank you for your participation. You may now disconnect.