Nebius Group NV (YNDX) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Yandex Q4 and full-year 2012 results conference call. (Operator Instructions). I'd now like to turn the conference over to your first speaker today, Greg Abovsky, Yandex's Vice President of Investor Relations. Please go ahead, sir.

Hello, everyone, and welcome to Yandex's fourth quarter and full-year 2012 earnings call. We distributed our earnings release earlier today. You can find a copy of this press release on the Company's investor relations website, as well as in news wire services.

Today, we have on the call, our CEO, Arkady Volozh, and our CFO, Alexander Shulgin.

Our call will be recorded. The recording will be available on Yandex's IR website in a few hours. We also put together a few slides to supplement the story. These slides are currently available on our IR website.

Now, I'll quickly take you through the Safe Harbor statement. Various remarks that we made during this call about our future expectations, plans, and prospects constitute forward-looking statements. Our actual results may differ materially from those indicated 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 2nd, 2012, 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 replied upon as representing our views as of any subsequent date. Although we may elect to update those 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 may 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've issued today.

And now, I'll turn the call over to Arkady Volozh, who will give an update of our Q4 and calendar year operational activities.

Thank you, Greg, and thank you, all, for joining us today for our Q4 2012 earnings conference call.

2012 was our first full year as a public company, and I'm very proud of everything we have achieved this year. As you may have seen, we recently moved ahead of Microsoft to become the fourth largest search engine in the world in terms of number of search queries processed, as measured by comScore. And to put that in perspective, 15 months ago were just sixth largest globally.

Now, turning to the Russian market, according to AKAR, contextual advertising in Russia grew 45% in 2012, while display advertising grew 17%. We grew faster than the market in both categories, with our contextual advertising revenue growing 46% and display growing 24%.

Let us now turn to our search share. I am pleased to report that during 2012 we established our search share slightly above 60% and we were able to achieve this because of continuous enhancements to our user experience that are made possible by the strength of Yandex's core technology.

We recently rolled out a new search platform, which allows for personalized search where results pages are tailored to individuals, based on knowledge of their search history, language preferences, and other interests. We increased the responsiveness of our search engine, as well as our search quality.

Over the course of 2012, we also released a number of important products, like the Yandex browser, our mobile (inaudible) application, and Yandex Disk, our cloud service solution. We also enhanced Yandex's market with the addition of the apparel vertical, launched a subscription music service for the iPhone, expanded the Yandex Taxi service and much more.

Let me actually spend a few minutes on the Yandex browser since we think it is an important product. We launched the Yandex browser on October 1st. It has been an overwhelming success for us. The product has been extremely well received by our users, and we have the results to prove it.

Our browser market share has recently surpassed 4% in Russia. Inside our browser, we have our around 90% share of search queries, and there is yet another significant benefit, as we primarily distribute the browser from our own site (inaudible).

And we believe that the browser product can keep gaining market share over the course of the year. As we move out to 2013, we are still focused on the mobile opportunity, with a number of important products and releases that are going to be rolled out throughout the year. At Yandex we have always believed that great products drive usage, which translates into market share, so when we approached mobile, we started off with terrific, highly portable products such as our maps, traffic jam, taxi service, music, and disk.

And we recently introduced the search application for the iPad and the Yandex app store for Android. The iPad search application provides users with instant answers to direct questions. It is a part of our intent-based search program aimed at developing the search agent's ability to understand its users intentions. We believe this is a key feature for mobile search and we will work to improve this application.

So, this year our mobile strategy will be focused on rolling out new products and working closely with our distribution partners.

Second major area of focus for us in 2013 will be Yandex Market. E-commerce is a large and rapidly growing segment of the Russian Internet market. Today, it is a $12 billion market, representing just about 2% of total offline sales, but it is projected to grow 35% year on year throughout 2015.

Yandex is a crucial link in the Russian economy. In December, Yandex Market had about 15 million unique users according to comScore. Around 40% of all e-commerce traffic in Russia passes through Yandex Market, and that is not even counting our Yandex Search.

We believe that there is a lot more that we can do with Yandex Market. In particular, in late Q3 we introduced the apparel vertical to our e-commerce offering, and our monthly audience for apparel is already 7% of the total audience of Yandex Market.

There was, actually, a lot of work involved in moving the architecture of Yandex Market from a feature-based comparison tool to a platform that is image-based. There are many categories of goods where overall appearance of an item is a lot more relevant than specific product attributes. Thus, this replatforming effort will yield many benefits in the future as we extend the Yandex Market into other verticals.

We also introduced some changes to our API and, together with apparel, these developments drove a meaningful acceleration in revenue growth at Yandex Market. It is interesting to know that Yandex Market is already growing faster than overall revenue and we will be launching new features and new verticals to increase our influence in the fast-growing Russian e-commerce market.

I want to spend a few minutes talking to you about Turkey. By the end of Q4, our average daily visitors numbered around 940,000 people, according to comScore, which is a tenfold increase from the year ago, and 73% increase from September.

In terms of market share, we currently have approximately 2% share, based on our own internal metrics. It has been only 15 months since we launched Yandex.com.tr, and only 10 months since we launched our first advertising campaign there. This compares approximately to 1% share we mentioned to you a quarter ago.

We believe search quality is the single most important driver of share, over time, and we rolled out some significant enhancements in (inaudible) as part of an efficient roadmap to improve search quality.

We are pleased with the early progress and we're growing in line with our business plan for this market. However, I want to stress that we are approaching Turkey as a staged (inaudible) style investment. We have set for ourselves very specific KPIs that we will need to hit in order to justify our ongoing investment.

This approach ensures that we are allocating shareholder capital in a disciplined manner to the most attractive opportunities. We look forward to updating you on Turkey further during the summer.

Let me briefly turn to Yandex Money. We felt that Yandex Money needed a strong partner with expertise in financial services and scale in order to accelerate its growth trajectory. We believe that we have found that strong partner in Sberbank, Russia's largest bank. As you know, we are received $60 million from Sberbank and retaining a 25% blocking stake in the joint venture. We think that Sberbank will help to create tremendous value here, and we're going to be able to participate in that upside through our equity stake.

Overall, we had a very strong quarter and a very strong year. We believe that our deep understanding of the Russian Internet market, our technology advantages, experienced management team, and a strong pipeline of products uniquely position us to benefit from the continued growth of Internet advertising in Russia.

And now it's my great pleasure to pass the microphone to Alexander, who will take you through our great financials.

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

In the fourth quarter of 2012, Yandex consolidated revenues increased 37%, year on year to RUR8.8 billion, taking our full-year revenue to RUR29 billion, a 44% increase, year on year.

Contextual or text-based advertising accounted for 87% of total revenues in Q4, and continued to grow at a healthy pace of 40%, year on year, faster than the overall Russian online advertising market. Yandex's own sites constituted 70% of total revenue, while advertising network contributed 17%. Yandex's advertising network grew 41%, year on year, generally in line with our own site. As you will recall, in Q4, we lapped several changes we made to the Yandex ad network, as well as the inclusion of Rambler.

Display advertising accounted for 11% of our revenue in Q4, and grew 12% year on year, considerably faster than the 4% growth posted by the overall market.

The remaining 2% of our revenue came from Yandex Money and other sources.

As Arkady mentioned, in December 2012, we announced a join venture with Sberbank. Under the terms of the JV, we are to receive $60 billion from Sberbank for a 75% stake in Yandex Money. We will retain a blocking 25% stake in Yandex Money once this transaction is completed in Q2 of this year.

Our advertising network TAC grew in line with our network revenues, while distribution TAC grew slightly faster than all integrated revenues, but the increase in distribution TAC as a percentage of O&O revenue was very modest at only 24 basis points. Total TAC increased 41% year on year.

Text-based revenue was driven by growth in paid clicks, which increased 26%, year on year, and by growth in cost per click, which grew 11%. Since we lapped the technology initiatives that I mentioned, we returned to a normalized growth pattern under which paid clicks grow slower than overall revenue, while cost per click increases.

Before I address our costs, I wanted to briefly mention Liveinternet. Many of you closely follow our market share data, as reported by Liveinternet. Since the end of 2012, Liveinternet is reporting that our share has increased by about 2% and so, while we agree with the direction of our market share developments, we would caution you against over-reliance on daily Liveinternet data, as we believe that for a number of technical reasons Liveinternet slightly overstates our share.

Now, turning to our cost structure, our total operating costs and expenses, excluding traffic acquisition costs and depreciation and amortization expense, grew 53% in Q4 and 43% for the full year. Excluding stock-based compensation and other non-cash items, our costs grew 45% in Q4 and 38% for the full year.

Personnel costs remain our largest cost item. In Q4 we added 154 employees, of which 78 were in product development. Our total personnel costs increased 44% year on year in Q4 and remained at 18% of revenue, as in previous quarter. The increase of personnel costs is partially driven by contingent considerations related to the acquisition of SPB software. US Generally Accepted Accounting Principles require us to record part of this acquisition as personnel expenses. Excluding this non-cash item, the growth of personnel costs in Q4 over the same period last year was 28%.

Growth in SG&A in Q4 was primarily driven by our browser marketing campaign in Russia and in Turkey and an acquisition-related charge.

Our depreciation and amortization expense for the quarter increased 48%, which its growth rate in excess of revenue growth rate primarily driven by last year's forward investments in servers and data centers.

Our adjusted EBITDA grew 30%, year on year, and our adjusted EBITDA margin was 48%, up sequentially, but down from 51% a year ago.

This quarter the impact from ForEx effect on our net margins was quite minimal, a RUR17 million gain, primarily related to dollar-denominated liabilities on our balance sheet, as the ruble strengthened from 30.9 as of September 30, 2012, to 30.4 on December 31, 2012.

Our effective income tax rate in Q4 was 22.7%, in line with Q3 effective tax rate of 22.5%. This reflects management's intention to continue to reinvest cash generated in Russia, without upstreaming dividends to our parent holding company in the Netherlands.

Adjusted net income, after adjusting for the effects of share-based compensation, foreign exchange gains and losses and the RUR173 million of contingent compensation related to the acquisition of SPB Software, grew 35%, and adjust net income margin was 34%.

Our Q4 CapEx was RUR1 billion, or 11% of revenue, a considerable change compared with Q3, when CapEx was at 21% of revenue. As we mentioned on our previous call, CapEx is not usually evenly spread across quarters. For the full year, CapEx was 14% of revenue, below our guidance of 15% to 18% of revenue.

Turning to our balance sheet, we ended the quarter with around $900 million in cash and investments.

Now, let me spend a few minutes on guidance. On a like-for-like basis, after removing Yandex Money from our 2012 and 2013 figures, we expect revenues to grow from 28% to 32% in 2013. Please note that we will still continue to report Yandex Money in our consolidated results until the transaction with Sberbank is completed.

To put it differently, we expect our 2012 advertising revenues of RUR28.2 billion to grow 28% to 32%. We are not explicitly forecasting the revenues associated with Yandex Money, even though we'll continue to recognize its revenues until the deal is closed.

I apologize that this is a bit more complicated than it has to be, but it has to do with the accounting treatment of this transaction. Since we are going to have a blocking stake in Yandex Money after the deal closes, we cannot treat it as discontinued operation today. After the transaction is completed, we will be recognizing our share of the JV's earnings in the other income line on our income statement.

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

(Operator Instructions). Your first question comes from the line of Edward Hill-Wood of Morgan Stanley. Please ask your question.

Hi, good afternoon, everybody. I have one question and one follow-up, if I may. Firstly, just on margins. You reported a 46% EBITDA margin in 2012. I was wondering if you excluded Turkey, the impact of Yandex Money, and the non-cash effects of Q4 would the Russian margin be around 50%?

And, if, indeed, the plan does involve -- if the venture capital star approach does not work and you do, in fact, end up closing down that business or at least modifying, is that sort of level for the Russian margin a realistic base case for maybe 2014 or '15?

That's my first question. The second question is a follow-up, just on use of cash. You've ended the year with $900 million of cash. CapEx is low. It looks as though it's sort of coming in lower than expected into next year, as well. Do you -- obviously, you have ambitions on M&A, but would you expect or, indeed, plan, possibly, to do a share buyback this year? Thank you.

Thank you for the questions. This is Alexander speaking.

So, talking about margins of 2012, you're absolutely right. The full-year margin was 46%, less compared to previous year, but if you peel back the onion a bit, you will see that the Russian core business demonstrates operating leverage, despite all numerous investments that we make in development of mobile applications, in e-commerce, and, of course, in core search.

But our Turkish investment masks that operating leverage a bit so that the overall margins appear flat, and our investment in Turkey accounts for about 2% of our revenue.

Talking about 2013, as you know, we generally do not provide specific guidance about the margins, but in general I could say that we expect the total business margins to be around flat compared to 2012, but, again, take into account the Turkish investment. The Russian business demonstrates operating leverage, which is reinvested in the Turkish (inaudible).

Then, coming back to your second question of the use of cash, I could say that between the cash generated by the business, we expect the proceeds from the Sberbank JV and, of course, cash that we already have on hand, which is about $900 million, we expect to have about $1 billion on the balance sheet, in total, in the near future.

At the same time, we do not see any large transformative acquisitions on the horizon, and we fund our (inaudible) investment opportunities and growth initiatives out of internal free cash flow that is generated by the business. So, we think that our capital structure of about $1 billion of cash is not absolutely or fully optimal.

We have nothing definitive to announce today, but I can tell you that we have been discussing shareholder returns in great detail at the Board level, and we are focused on the ways to create best shareholder value. So, please stay tuned.

Thank you. Can I just follow up on Yandex Money? You've broken out the revenues for us, very kindly, but could you also break out the OpEx base or confirm that business was either breakeven, loss making or low single digit margin, just so we get an idea of how to adjust the margins for 2013?

Yandex Money in 2012 was very close to breakeven, very slightly positive. So, in 2013, we'll have to report Yandex Money financials separately, so you will see the exact figures, but I'll say the margin is close to zero.

Great. And on the CapEx, the CapEx is clearly low in Q4. Is there something which has changed in the way you look at CapEx? I mean, should we expect CapEx to remain low for '13 and '14 now, as well, now, or lower than the 18% guidance?

Yes, thanks for raising this point, Ed. So, in 2012, our CapEx to revenue ratio was 14%, which is a large decrease compared to the 2011 level of over 20%. We early in Q3 guided that our 2012 CapEx would be in the range of 15% to 18%. Actual figure turns out to be lower because it is difficult to exactly time cash outflow on the basis of data construction project, data center construction project that we run now.

In 2013, we expect CapEx to sales rate to be in the same range of 15% to 18%, including that cash shift that we had from Q4 to Q1.

Also, we think that we are starting now to reach a point where the efficiencies created by our data center infrastructure start to pay off and, despite that, we do not provide formal guidance on 2014. We believe that capital efficiency of the business could improve from the standpoint of CapEx to sales ratio. This is a big change from the previous thinking of high teens to 20%. We think that in the long run our CapEx to sales ratio could be in low teens.

That's great. Thank you very much.

(Operator Instructions). Your next question comes from the line of Lloyd Walmsley of Deutsche Bank. Please ask your question.

Thanks for taking the question. Just wondering if we could dig into the TAC changes a big. It looks like network TAC declined a little bit, again, as a percentage of network revenue on a year-over-year basis. I'm wondering if this benefit is coming from just reduced TAC obligations to Mozilla as you're no longer the default search there, and what we should think about going forward on that?

And then on a related note, just wondering if you can comment on the rise in distribution TAC as a percent of O&O, and is that an effort to promote the Yandex browser in such a way that O&O can ultimately take share of network?

Lloyd, this is Alexander again. Thanks for the question. So, talking about TAC, total TAC as a percentage of revenue remained roughly flat compared to Q3. If we take separately the partner TAC as a percentage of its appropriate revenue stream, over partner network revenue, then TAC ratio is virtually flat. I mean, revenue share is the same.

When we talk about distribution TAC as a percentage of its appropriate revenue stream, we see some positive benefit of Yandex browser, since on this search traffic that we generate from our own browser we do not have to share revenues when it is distributed from our own website. And, as you correctly mentioned, starting July this year we do not have a search default position with Mozilla, and, therefore, would not have to share revenue on new installations.

Having said that, we are looking for a new distribution partner, and, therefore, distribution TAC as a percentage share with the revenue stream is, again, fairly flat if we take only Russia. There is small upside in distribution TAC as a percentage of revenue due to our additional distribution activities in Turkey, where we also distribute our browser, but currently do not yet generate revenue from the Turkish operation.

But, as we discussed previously, we estimate total Turkey costs, including TAC, personnel, and advertising expense, to be around 2% of our revenue.

Great, thanks, guys.

Your next question comes from the line of Alex Balakhnin of Goldman Sachs. Please ask your question.

Good afternoon. I had a question on your mobile product pipeline. Arkady mentioned briefly in the presentation that 2013 will be a big focus in the pipeline on these products, but also you mentioned that you expect the growth of the partnerships. Can you, probably, elaborate a little bit more on what the products are in the pipeline and what partnerships you are really thinking about? Do you expect, probably, some agreements you can share the information about now? That would be helpful.

And overall, what is your mobile traffic monetization strategy? Do you feel that, over time, there will be any price differential between desktop and mobile search? Or do you think you'll be able to price mobile traffic advertising at the same rates as desktop?

Thank you.

Thank you, Alex. It's Arkady. Talking about mobile, as we said, our main focus is on products. We believe that good products drive traffic and it drives monetization. So, in mobile we have one of the most popular products on the market, both in search, maps, disk, music, everything, and we will continue launching new products in mobile. I cannot now tell the full list of them, but we have several of them in the pipeline.

Talking about partnerships, we -- I will give you just one example of our partnership in the area of our shell for Android. You remember we bought a company called SPB Software more than a year ago. Now we have a product which we use in partnership with, in Russia, for example, MTS and MegaFon, and we also use this product in Turkey with Avea. That's the number two, three operator there.

So, we partner with operators. We partner with retail chains. We partner with vendors.

And on traffic monetization?

Yes, coming back to the traffic monetization question, first of all, there are two types of mobile devices. One is small-screen devices, smart phones, and feature phones, and the second part is tablets.

So, monetization of tablets is virtually the same as traditional PCs or laptops. There is absolutely no issue with monetization of this type of device.

On small screens, monetization is -- was lower, but we see the gap closing and monetization of smart phones, for example, just recently came back to exactly what we have on laptops. This is because on smart phones we show the most relevant ads. On PCs, or I will say on bigger screens, we show top placement and also ads on the right side, which makes a total average price per page slightly lower than on small-screen devices, because on small screens we show only one ad, which is the most relevant ad, and which has the highest CPC.

So, currently, we are happy with the progress of monetization of small-screen devices and with the trends.

And just a clarification question. When you talk about same monetization, you mean, CPT or CPC?

And another quick clarification, what share of mobile traffic is now accounting for (inaudible) traffic?

I was talking about CPC. About share of traffic, small-screen devices account for about 7% of our total search traffic.

Thank you.

Your next question comes from the line of Olga Bystrova of Credit Suisse. Please ask your question.

Good afternoon. My first question about the mobile market share. I don't know if you have a sort of rough estimate where you stand versus Google currently, just roughly, and how the market share on the mobile devices has changed in 2012 versus 2011? And what do you think was the main driver? And, therefore, how you think that might develop going forward?

And the second question, on our profitability, you mentioned something on a breakdown between Russia and Turkey. Do you have any indication where you expect your margins to come through in 2013, similar to what -- to guidance or indication you gave for 2012? Thank you very much.

This is Arkady. Olga, talking about our market share in mobile, if we talk about for Android, for example, in Russia we have something like 45% share, and this is flat, this has been flat throughout the year. It doesn't change, and this is despite the fact that -- of the distribution pressure we have. And I would add that, all in all, if you look at our market share through 2012, it didn't change or even grew up a little bit, and also it grows in the recent couple of months, which shows a combination of many different factors we had. And despite all these different factors in distribution, we still maintained our market share, which I think proves something.

Do you have the total? I mean, Android is currently sort of taking leadership in the market in terms of operating systems, but do you have an approximate total market share in the mobile? I guess it's probably going to be more than (inaudible).

In Liveinternet -- this is Alexander speaking -- there is no way to see total share on mobile devices, but if we take three major platforms, on Android our market share is about 45%, on iPhone it's in mid-30s, and on feature phones, there are not very many, our market share is close to 70%.

Okay. And I was actually wanting just revenues, to be honest, not traffic.

If we're talking about revenues, I can give you the metrics from our own business. So, the contribution of small-screen devices to total search traffic is about 6% to 7%, and revenue contribution is about 5%.

But, as we discussed just recently, we see the gap between contribution to search and contribution to revenue closing, over time.

Okay. Okay, that's fine. Thank you very much. And maybe on the profitability, if you could give some indications, just like you gave last year, for 2012?

Our policy is not to provide formal guidance on margins, but I could say that roughly we estimate 2013 margins to be flat compared to 2012, with the efficient operating leverage generated by the Russian business being reinvested in the Turkish project. We see Turkey as a stage investment project with clear metrics defined for this project in terms of market share and in terms of budgets allocated to this initiative. And we are intent and committed to re-assess the performance that we have in Turkey and make decisions on allocation of additional funds to this initiative.

Okay. Would you just that Turkey's developing currently below your previous expectations, or in line, or, perhaps, above?

No, it goes -- it's Arkady. It goes right in line with what we expected. Actually, we have several examples of coming to the market with search, and the first example is ourselves when we came to the market in 1997. It took us five years to gain our current market share, and when Google came to Russia it took them four years to gain market share. And in all cases, it was slow in the beginning, faster in the end, and then slow again.

So, we are with our -- we are perfectly fine with our 2% market share last year, after the first year of operations. Now we expect something larger and if we are there, then we are complete, totally, fine.

Okay, thank you very much.

The next question comes from the line of Jean Kaplan of HSBC. Please ask your question.

Good afternoon, gentlemen. Thanks for taking my call.

The question I have is on the SG&A expenses and, more specifically, the advertising part of that. What's exactly -- if you could break out, possibly, the kind of general split in that, that is Russia advertising, Turkey kind of understand that it's a maximum of 2% of revenue, but, basically, what, also is your goal, medium and kind of short-term tactical goals for the advertising that you're doing now?

I kind of want to understand the cycle of that spending and, in Turkey, this is the initial big push. How long does that go on? In Russia, what's the tactical current goal of the advertising campaign, et cetera? Thank you.

Jean, thank you for the question. This is Alexander speaking. So, there are two main reasons for the increase of SG&A cost in Q4 compared to Q4 last year. First one has been browser advertising campaign that we run in Russia, and also browser and mainstream advertising in Turkey.

The bigger part of advertising was in Russia, because we launched our very successful product, Yandex browser, and we wanted to support its growth with advertising campaign. In Q4 2011, our advertising spend was very low, because we ran advertising campaigns in previous quarters. And, therefore, comparison to previous quarter in Q4 is a bit like a negative.

The other part was accelerated recognition of the contingent consideration related to SPB Software acquisition. So, we had to accelerate recognition, and, therefore, it showed as G&A expense. Despite that, this is a non-cash item and it doesn't affect the adjusted EBITDA margin.

So, talking about the plans for advertising in 2013, we have allocated sufficient (inaudible) funds for advertising in Russia and in Turkey, and this expense is included in the margin expectations that I provided, to be flat compared to 2013. But due to competitive reasons, I cannot disclose the exact amounts that we plan to spend. And allocation of these funds will be contingent on the performance of the product that we launch and our product pipeline.

Great. Thanks very much.

Your next question comes from the line of Gene Munster of Piper Jaffray. Please ask your question.

Hey, good afternoon, and you mentioned that iPhone, your share in iPhone is in the mid-30s, and is there an opportunity for you guys to do a deal with Apple as the kind of default search in Safari? I know we've seen news, and you guys, obviously, do maps right now. So, would something like that make sense? And then one follow-up question.

Thanks, Gene. It's Arkady. Actually, I think this question should be related to Apple itself. But, in general, as you can see Apple's moves in Russia, they just recently launched their iTunes here. There were plans and announcement about some more localization in Russia. So, we are staying tuned and we expect for their next moves. But, again, it's for them to comment what their policy will be in Russia.

That makes sense. Then my follow-up question is regarding Yandex Market. Is there any percentage of sales that you can help us with in terms of to think about how big of a business that is? And is there a chance that this could be replacing search revenue, down the road? Thanks.

Gene, this is Alex speaking. Yandex Market accounts for high single digits percent of our total revenues, and just recently we saw some acceleration of growth in Yandex Market. We achieved this growth acceleration through acceleration of total e-commerce in Russia and the launch of Yandex apparel on Yandex Market. We believe that this product category has a high potential for growth.

Okay, great. Thank you.

Your next question comes from the line of Anna Lepetukhina of Sberbank. Please ask your question.

Yes, hello. My first question is on additional services such as Yandex Taxi, for example. Can you please share with us kind of does these services contribute any revenues to the total revenues right now? And do you see untapped potential in these services in terms of monetization? And when do you think this can happen and what can be the potential size?

And my second question on Turkey, just to understand, do you expect to generate any revenues from Turkey operations in 2013 or in 2013 you will focus on increasing your market share and then revenues will come more in 2014? Thank you.

Yes, Anna, it's Arkady. Talking about Yandex Taxi, it's a good example of both a very good service for customers, which retains our users with us, and also, for us, it's a testing ball in the new business model, I'd say. We don't expect this business model to be a huge driver for us, for our revenues, but the service has been already profitable, in the range of millions of dollars, and it has, of course, potential to grow. But this is -- not this specific service, but services like that, which connect the real world to the online, we believe, could drive some new revenues for us in the future.

But, first of all, again, the Yandex Taxi is a hugely successful service, one of the best ones we launched last year, and we currently more than 600,000 of users who download this application, the application and use it.

Talking about revenues in Turkey, of course, we have nothing against new revenues this year, but the main focus now is to gain market share. We need to reach some critical mass to start selling the search advertising there, so our focus this year will be market share and not so much revenues.

Okay, thank you.

Your next question comes from the line of Anastasia Obukhova of VTB Capital. Please ask your question.

Hi. Good evening. Could you please tell me, given, say, the lack of agreement with Apple, for example, or kind of not really successful attempt for cooperation with, like, Facebook (inaudible), which potential clients or IT companies or maybe some other companies could be the users of your potential non-advertising, say, technological products that you're currently, like you're working on, for example? Thank you.

Anastasia, it's Arkady. Our main focus is services for end customers, for users, not for businesses. So, we're not a B2B business. Talking about our partnerships with Facebook, [Vkontakte], the social networks, we partner with all of them in different areas. One -- there is one example, but we also have partnerships with Facebook in other areas, just like Twitter, and Vkontakte, and (inaudible), and the rest.

Talking about partnerships with Apple, just to remind you that last year we launched -- they launched their maps, independent map service, here on iPhones, which was powered by Yandex geosearch. So, we are already partnering with Apple, at least in one area.

And then, the follow-up question, and this regards which way of non-ad monetization, then, do you see for your end users, apart from -- again, apart from advertising?

So, we have the three major revenue streams. One is search advertising. It's the majority of our revenues. Another is display advertising, and the third is e-commerce. I don't know if you call it advertising, or what? So, in a sense, all the three are advertising revenue streams. On the other side, it's -- they are a little bit different.

We're experimenting with other models, like with Taxi or Yandex Music, but they haven't become the huge revenue streams yet.

But do you consider them to reflect kind of shift away from advertisement as you were mentioning in the third quarter conference call, for example, focus on e-commerce, or maybe have you seen some, already, impact in the fourth quarter, already?

No, we're focusing, of course, on advertising revenues, and, actually, I believe that our e-commerce, Yandex Market and other services around e-commerce, is -- for us is still advertising, because our major impact on the industry is advertising in e-commerce. So, for us, e-commerce is advertising and we -- and the share of e-commerce in our total revenue is increasing.

Okay, thank you very much.

Your next question comes from the line of Alexander Vengranovich of Otkritie Financial Corporation. Please ask your question.

Yes, good afternoon. My question actually continues the theme of display advertising. So, I would like to get your ideas regarding a potential increase in monetization of your own websites. So, currently, you have approximately the same amount of monthly active users on your portal, like (inaudible), but still you are getting less advertising budgets for display. Do you plan to develop further this business stream? And what are the ways for you to develop it further? Or you're kind of happy with the current market share and you expect this business to grow in line with the market? Thank you.

Alexander, thank you for the question. This is Alex speaking. So, talking about display, in Q3 and Q4, our display revenue was growing, if measured by AKAR, faster than the market. In Q4 our display revenue growth was 12%, while AKAR reports total market growth of 4%. So, we do activities to increase our share in the total display advertising.

And, as you said, we have now display advertising only on Yandex-owned web properties. There is some opportunity to do this advertising on search [results] pages, but currently we do not have this particular product. So, our market share in total display advertising increases and where we're committed to continue to provide good advertising tools for our customers to pull back even more customers from (inaudible) display and to Yandex, specifically.

And -- yes, thank you, and are you doing that by increasing the prices for your advertising, or you're increasing the inventory on your websites?

It's a combination of tools, but it's primarily new technologies that we provide on improved relevance and targeted display advertising, plus we're due to increase prices when we feel the -- and we see opportunities to do so.

Thank you. And if we come back to context advertising, do you expect that the main growth of the market will come from increase in CPC, and not from increase in number of paid clicks? And what should be the driver of the increase of this CPC at this stage? Thank you.

To put it in perspective, last year we saw high growth of paid clicks, which was driven by technology improvements that we made in early Q3 2011, by improving the relevance of the ads displayed on search results and primarily on Yandex third-party web pages in Yandex ad network. So, that improved relevance was driving huge increase in paid clicks, and, therefore, was driving revenue in partner network up by over 100%.

Now, starting Q3 2012, we are -- we lapped the period last year when those technology improvements were made, and paid clicks growth came back to roughly same as growth in search results pages. We think that, keeping all technology improvements neutral, paid clicks grow roughly at the same pace as total search result pages.

Now, we have some initiatives in the pipeline in technology, advertising technologies, to re-accelerate growth of paid clicks, which we believe is a better way to grow revenues, through paid clicks, rather than CPC. However, growth of CPC at around inflation level is absolutely normal and we are fine about that.

So, currently, in Q4 and probably Q1, we're passed the period when CPC growth grows slightly ahead of inflation, because in the online auction system, when we demand from our customers increase in the supply of paid clicks, CPC starts to increase.

Okay. And on the last quarter call, you told us that you're targeting small and medium enterprises, and the total number of these enterprises around 1 million in the country. So, currently, you have 213,000 of the clients for your context advertising. Do you expect that the increase of that number will be the key driver of the growth of your revenues in the context market?

Well, it's both. It's increase of total number of customers and also increase of spend per customer. It is very important for us to increase our customer base to accelerate acceptance of online text-based advertising by the Russian businesses.

But, say, a new business which comes online, doesn't -- they tend to not spend so much. It takes time for businesses to learn to improve efficiency of their advertising campaigns, and we have our own internal sales force and the agencies, which are educated by our sales people, to help customers do more targeted and higher relevance advertising campaigns.

So, as I said, we need to build the customer base, and that's why we are focused on increasing total number of customers. But the other very important way to grow our revenue is to up-sell our customers to increase their advertising spends.

Thank you, great.

Your next question (inaudible) comes from the line of Alex Balakhnin of Goldman Sachs. Please ask your question.

Yes, good afternoon, again. I just wanted to ask you on your Yandex Market initiative, and I was just wondering if you plan to go any further into the value chain. In particular, do you plan to own the customer experience in any shape or form? Probably hypothetically, do you think about pulling together some physical infrastructure for delivery or, I don't know, partnerships with the delivery services?

If you could just share your thoughts on how you want to progress further with e-commerce, that would be really helpful. Thank you.

E-commerce is one of our focuses for the Russian market, for our domestic market. Yandex Market, in its present form, has been launched 12 years ago, and, of course, the time came to change something, and we can do a lot in this area. The first change you witnessed last year was with this platform shift. We added -- usually Yandex Market was just feature selection mechanism. Now we added the picture-based selection mechanism. And we, in addition to apparel, in December we launched health and beauty category, and we'll continue launching categories, which fit to this type of selection.

And this is not the only thing we can do in this area, and we are thinking and working on new products, which we could launch to help the market grow here, to help the whole market to grow, and, of course, we want -- we don't want to take over this market from our partners. We will be focusing on collaborating -- continuing collaborating with them, but we are looking for other areas where we can help them.

But don't you think the customer will benefit from probably a little bit more customized results for the search and if the -- if Yandex owns all the credentials of all the customers so you build a sort of one-click purchase experience, do you think that this would be good for both (inaudible) customer and the merchant?

This is a good example of the lines we're thinking along.

Understood. Thank you.

Your final question comes from the line of Anna Kurbatova of BCS. Please ask your question.

Good afternoon. I have two questions.

First of all, could you elaborate a bit on current market developments, advertising in context and display, what you see from the beginning of the year? So, let's say 2013, the beginning. Do you see the normal or seasonal strength for this period of the year, or you see something special?

And my second question is about your cash instruments. Could you provide us with some rough split? Where do you hold your cash, what kind of instruments? Because our latest available information is at the end of 2011, there are some bank deposits and (inaudible). Could you provide some updates in this regard? Thank you.

Anna, thank you for the question. This is Alexander speaking. So, answering your last question, on cash, we keep cash -- more than 50% of our cash is accumulated in Russia in top-tier Russian banks, in term deposits. So, we believe that's a very safe instrument which provides reasonably high return.

The other part of cash is held in our holding company in the Netherlands, again, in money markets, in term deposits, and also interest-linked notes, which are linked to credit rating of Germany and the Netherlands. Again, we think these are safe instruments which provide a reasonably good return, judging by European interest rates.

Thank you very much.

There are no further questions. Please continue.

Okay. Thank you all for participating in the call today, and we look forward to speaking with you after our Q1 results in April.

That does conclude our conference for today, ladies and gentlemen. Thank you all for your participation. You may now all disconnect.