OREANDA-NEWS. Yandex (NASDAQ:YNDX), one of Europe's largest internet companies and the leading search provider in Russia, today announced its unaudited financial results for the second quarter ended June 30, 2015.

Q2 2015 Financial Highlights(1)(2)

  • Revenues of RUB 13.9 billion ($250.7 million), up 14% compared with Q2 2014
  • Ex-TAC revenues (excluding traffic acquisition costs) up 15% compared with Q2 2014
  • Income from operations of RUB 2.2 billion ($39.5 million), down 40% compared with Q2 2014
  • Adjusted EBITDA of RUB 4.8 billion ($86.8 million), down 4% compared with Q2 2014
  • Operating margin of 15.8%
  • Adjusted EBITDA margin of 34.6%
  • Adjustedex-TAC EBITDA margin of 44.2%
  • Net income of RUB 0.4 billion ($7.6 million), down 82% compared with Q2 2014
  • Adjusted net income of RUB 2.8 billion ($50.3 million), down 16% compared with Q2 2014
  • Net income margin of 3.0%
  • Adjusted net income margin of 20.1%
  • Adjustedex-TAC net income margin of 25.6%
  • Cash, cash equivalents and deposits of RUB 46.9 billion ($845.1 million) as of June 30, 2015

1 Pursuant to SEC rules regarding convenience translations, Russian ruble (RUB) amounts have been translated into U.S. dollars at a rate of RUB 55.5240 to $1.00, the official exchange rate quoted as of June 30, 2015 by the Central Bank of the Russian Federation.

2 The following measures presented in this release are "non-GAAP financial measures": ex-TAC revenues; adjusted EBITDA; adjusted EBITDA margin; adjusted ex-TAC EBITDA margin; adjusted net income; adjusted net income margin and adjusted ex-TAC net income margin. Please see the section headed "Use of Non-GAAP Financial Measures" below for a discussion of how we define these measures, as well as reconciliations at the end of this release of each of these measures to the most directly comparable US GAAP measures.

"We grew our consolidated revenues 14% in a challenging economic environment," said Arkady Volozh, Chief Executive Officer of Yandex. "The total number of advertising clients served during the quarter grew by 9% sequentially and 17% year-over-year, demonstrating that contextual advertising remains a highly effective marketing channel for businesses of every size. We remain focused on improving the quality of our search products, including mobile search, as well as our advertiser solutions. Later in Q3, we plan to introduce a new auction mechanism that we expect will increase the quality of traffic we drive to our advertising clients and facilitate the overall growth of online advertising."

The following table provides a summary of key financial results for the three months and six months ended June 30, 2014 and 2015:

     
In RUB millions Three months Six months
  ended June 30, ended June 30,
  2014 2015 Change 2014 2015 Change
Revenues 12,158 13,920 14% 23,043 26,259 14%
Ex-TAC revenues2 9,507 10,898 15% 17,824 20,520 15%
Income from operations 3,631 2,196 -40% 6,349 3,682 -42%
Adjusted EBITDA2 5,027 4,817 -4% 9,069 8,388 -8%
Net income 2,396 423 -82% 5,076 2,550 -50%
Adjusted net income2 3,318 2,791 -16% 5,870 5,040 -14%

Q2 2015 Operational Highlights

  • Share of Russian search market (including mobile) averaged 57.3% in Q2 2015 (according to LiveInternet)
  • Search queries in Russia grew 2% compared to Q2 2014
  • Number of advertisers grew to 351,000, up 17% from Q2 2014 and up 9% from Q1 2015
  • Launched Yandex.Radio music service supported by audio advertising

Revenues

     
In RUB millions Three months Six months
  ended June 30, ended June 30,
  2014 2015 Change 2014 2015 Change
Advertising revenues:            
Text-based advertising            
Yandex websites 8,559 9,371 9% 15,953 17,815 12%
Ad network 2,705 3,342 24% 5,368 6,355 18%
Total text-based advertising 11,264 12,713 13% 21,321 24,170 13%
Display advertising            
Yandex websites 674 739 10% 1,321 1,264 -4%
Ad network 101 109 8% 177 190 8%
Total display advertising  775 848 9% 1,498 1,454 -3%
Total advertising revenues 12,039 13,561 13% 22,819 25,624 12%
Other 119 359 202% 224 635 183%
Total revenues 12,158 13,920 14% 23,043 26,259 14%

Text-based advertising revenues increased 13% compared with Q2 2014 and constituted 91% of our total revenues.

Text-based advertising revenues from Yandex websites grew 9% compared with Q2 2014 and accounted for 67% of our total revenues in Q2 2015.

Text-based advertising revenues from our ad network increased 24% compared with Q2 2014 and contributed 24% of total revenues during Q2 2015, as we continued to add new partners to our ad network.

Paid clicks on Yandex's and its partners' websites, in aggregate, increased 12% in Q2 2015 and our average cost per click in Q2 2015 was flat compared with Q2 2014.

Display advertising revenue increased 9% compared to Q2 2014 and contributed 6% to our total revenues. Year-on-year growth was primarily driven by the low base effect from Q2 2014.

Operating Costs and Expenses

Yandex's operating costs and expenses consist of cost of revenues, product development expenses, sales, general and administrative expenses (SG&A), and depreciation and amortization expenses (D&A). Apart from D&A, each of the above expense categories includes personnel-related costs and expenses, relevant office space rental, and related share-based compensation expense. Increases across all cost categories, excluding D&A, reflect investments in overall growth, including personnel. In Q2 2015, Yandex reduced the number of its full-time employees compared to Q1 2015. The total number of full-time employees was 5,458 as of June 30, 2015, an increase of 3% compared to June 30, 2014 and a decrease of 3% compared to March 31, 2015.

Costs of revenues, including traffic acquisition costs (TAC)

     
In RUB millions Three months Six months
  ended June 30, ended June 30,
  2014 2015 Change 2014 2015 Change
TAC:            
Related to the Yandex ad network 1,804 2,113 17% 3,593 3,979 11%
Related to distribution partners 847 909 7% 1,626 1,760 8%
Total TAC 2,651 3,022 14% 5,219 5,739 10%
Total TAC as a % of total revenues 21.8% 21.7%   22.6% 21.9%  
Other cost of revenues 776 960 24% 1,540 1,956 27%
Other cost of revenues as a % of revenues 6.4% 6.9%   6.7% 7.4%  
Total cost of revenues 3,427 3,982 16% 6,759 7,695 14%
Total cost of revenues as a % of revenues 28.2% 28.6%   29.3% 29.3%  

TAC grew 14% compared with Q2 2014 and slightly decreased as a percentage of total revenues to 21.7% in Q2 2015. This is compared with 21.8% in Q2 2014 and 22.0% in Q1 2015. Our partner TAC grew 17%, slightly slower than revenues from our advertising network mostly due to changes in our partner revenue mix. Partner TAC includes traffic acquisition costs related to both our text-based and our display advertising networks.

Other cost of revenues in Q2 2015 increased 24% compared with Q2 2014, primarily reflecting an increase in rent expenses and personnel expenses. The increase in rent expenses is attributable to the material appreciation of the U.S. dollar in Q2 2015 compared to Q2 2014, as the rent for our Moscow headquarters is U.S. dollar-denominated. A portion of this increase also reflects the additional space that we leased for our Moscow headquarters in May 2014.

Product development

     
In RUB millions Three months Six months
  ended June 30, ended June 30,
  2014 2015 Change 2014 2015 Change
Product development 2,079 3,300 59% 4,083 6,647 63%
As a % of revenues 17.1% 23.7%   17.7% 25.3%  

Growth in product development expenses in Q2 2015 primarily reflects growth of personnel expenses mainly related to salary increases effective in early 2015 as well as increases in our rent expenses described above. Our development headcount increased 5% from 3,106 as of June 30, 2014, to 3,272 as of June 30, 2015, with a net decrease of 118 employees compared to March 31, 2015.

Selling, general and administrative (SG&A)

     
In RUB millions Three months Six months
  ended June 30, ended June 30,
  2014 2015 Change 2014 2015 Change
Sales, general and administrative 1,907 2,568 35% 3,669 4,871 33%
As a % of revenues 15.7% 18.4%   15.9% 18.5%  

SG&A costs grew 35% compared with Q2 2014. The growth was primarily driven by an increase in rent expenses for our Moscow headquarters related to the SG&A category as well as by additional advertising and marketing expenses.

Share-based compensation (SBC) expense

SBC expense is included in each of the cost of revenues, product development and SG&A categories discussed above.

     
In RUB millions Three months Six months
  ended June 30, ended June 30,
  2014 2015 Change 2014 2015 Change
SBC expense included in cost of revenues 23 41 78% 42 84 100%
SBC expense included in product development 165 395 139% 335 774 131%
SBC expense included in SG&A 87 158 82% 153 296 93%
Total SBC expense 275 594 116% 530 1,154 118%
As a % of revenues 2.3% 4.3%   2.3% 4.4%  

Total SBC expense increased 116% in Q2 2015 compared with Q2 2014. The increase is related to the material appreciation of the U.S. dollar in Q2 2015 versus Q2 2014, to new equity-based grants made in 2014 and 2015, as well as to the SAR-for-RSU exchange program executed in Q2 2015 described below.

Depreciation and amortization (D&A) expense

     
In RUB millions Three months Six months
  ended June 30, ended June 30,
  2014 2015 Change 2014 2015 Change
Depreciation and amortization 1,114 1,874 68% 2,183 3,364 54%
As a % of revenues 9.2% 13.5%   9.5% 12.8%  

D&A expense increased 68% in Q2 2015 compared with Q2 2014, reflecting investments in servers and data centers made in 2014 and the first half of 2015, as well as the material appreciation of the U.S. dollar and Euro in Q2 2015 compared with Q2 2014.

As a result of the factors described above, income from operations was RUB 2.2 billion ($39.5 million) in Q2 2015, a 40% decline from Q2 2014, while adjusted EBITDA was RUB 4.8 billion ($86.8 million) in Q2 2015, down 4% from Q2 2014.

Interest income, net in Q2 2015 was RUB 356 million, up from RUB 203 million in Q2 2014. The significant growth is due to increased interest rates on our short-term deposits partly offset by an increase in interest expense on our U.S. dollar denominated 1.125% convertible senior notes following the material appreciation of the U.S. dollar.

Foreign exchange loss in Q2 2015 was RUB 1,869 billion, compared with a foreign exchange loss of RUB 625 million in Q2 2014. This loss is due to the depreciation of the U.S. dollar during Q2 2015 from RUB 58.4643 to $1.00 on March 31, 2015, to RUB 55.5240 to $1.00 on June 30, 2015. Yandex's Russian operating subsidiaries' functional currency is the Russian ruble, and therefore changes due to exchange rate fluctuations in the ruble value of these subsidiaries' monetary assets and liabilities that are denominated in other currencies are recognized as foreign exchange gains or losses in the income statement. Although the U.S. dollar value of Yandex's U.S. dollar-denominated assets and liabilities was not impacted by these currency fluctuations, they resulted in a downward revaluation of the ruble equivalent of these U.S. dollar-denominated monetary assets and liabilities in Q2 2015.

Income tax expense for Q2 2015 was RUB 342 million, down from RUB 821 million in Q2 2014. Our effective tax rate of 44.7% in Q2 2015 was significantly higher due to the increased effect of non-deductible SBC expense and valuation allowances on our consolidated effective tax rate following the decrease of net income before taxes of our principal Russian operating subsidiary.

Adjusted net income in Q2 2015 was RUB 2.8 billion ($50.3 million), a 16% decrease from Q2 2014.

Adjusted net income margin was 20.1% in Q2 2015. This is compared with adjusted net income margin of 18.2% in Q1 2015 and 27.3% in Q2 2014.

Net income was RUB 423 million ($7.6 million) in Q2 2015, down 82% compared with Q2 2014.

As of June 30, 2015, Yandex had cash, cash equivalents and long-term deposits of RUB 46.9 billion ($845.1 million).

Net operating cash flow and capital expenditures for Q2 2015 were RUB 6.4 billion ($115.0 million) and RUB 4.0 billion ($72.5 million), respectively.

During Q2 2015, we repurchased $24.3 million in aggregate principal amount of our 1.125% convertible senior notesdue 2018 for approximately $21.4 million.

The totalnumber of shares issued and outstanding as of June 30, 2015 was 318,651,572, including 263,755,966 Class A shares, 54,895,605 Class B shares, and one Priority share and excluding 11,405,182 Class A shares held in treasury and all Class C shares outstanding solely as a result of the conversion of Class B shares into Class A shares; all such Class C shares will be cancelled. There were also employee share options outstanding to purchase up to an additional 4.2 million shares, at a weighted average exercise price of $5.93 per share, of which options to purchase 4.2 million shares were fully vested; equity-settled share appreciation rights (SARs) equal to 0.5 million shares, at a weighted average measurement price of $28.21, 0.3 million of which were fully vested; and restricted share units (RSUs) covering 6.5 million shares, of which RSUs to acquire 1.4 million shares were fully vested.

In April 2015, we offered 14 employees an opportunity to exchange their outstanding SAR awards for new RSU awards, based on an exchange ratio of 2:1. The vesting of the replacement RSU awards was extended by 12 months beyond the original vesting schedule of the exchanged SAR awards. In addition, no exercise of the replacement RSUs will be permitted until April 10, 2016. A total of 14 employees, including certain senior employees, exchanged an aggregate of 1,663,750 SARs for an aggregate of 831,875 RSUs.

Also, in June 2015, we offered 51 additional non-senior employees an opportunity to exchange their outstanding SAR awards for new RSU awards, based on an exchange ratio of 2:1. The replacement RSUs were subject to the same vesting schedule as the existing SARs. A total of 41 employees exchanged an aggregate of 106,850 SARs for an aggregate of 53,426 RSUs. Such exchange was completed in July 2015, and is not reflected in the outstanding equity award numbers as of June 30, 2015 set out above.

ABOUT YANDEX

Yandex (Nasdaq:YNDX) is one of the largest European internet companies, providing a wide variety of search and other online services. Yandex's mission is to help users solve their everyday problems by building people-centric products and services. Based on innovative technologies, the company provides the most relevant, locally tailored experience on all digital platforms and devices. Yandex operates Russia's most popular search engine and also serves Ukraine, Belarus, Kazakhstan and Turkey.