OREANDA-NEWS. August 2, 2012. Yandex (NASDAQ: YNDX), the leading internet company in Russia operating the country’s most popular search engine and most visited website, today announced its unaudited financial results for the quarter ended June 30, 2012.

Q2 2012 Financial Highlights

Revenues of RUR 6.8 billion (USD 207.2 million1), up 50% compared with Q2 2011

Ex-TAC revenues2 (excluding traffic acquisition costs) up 45% compared with Q2 2011

Income from operations of RUR 2.2 billion (USD 68.4 million), up 63% compared with Q2 2011

Adjusted EBITDA3 of RUR 3.1 billion (USD 93.5 million), up 60% compared with Q2 2011

Operating margin of 33%

Adjusted EBITDA margin2 of 45%

Adjusted ex-TAC EBITDA margin2 of 54%

Net income of RUR 2.0 billion (USD 60.4 million), up 76% compared with Q2 2011

Adjusted net income3 of RUR 2.1 billion (USD 63.0 million), up 64% compared with Q2 2011

Net income margin of 29%

Adjusted net income margin2 of 30%

Adjusted ex-TAC net income margin2 of 37%

“Yandex delivered 50% growth in the top-line and expanded profitability margins in the second quarter, driven by strong advertiser dynamics, solid search share performance and overall Russian internet market leadership,” said Arkady Volozh, Chief Executive Officer of Yandex. “Technology and innovation are the foundation of our company. Along with ongoing search enhancements, we deployed important new mobile, mapping, and cloud-based services that enhance the relevance of Yandex for users and advertisers across our markets.”

The following table provides a summary of key financial results for the three months and six months ended June 30, 2011 and 2012.

Q2 2012 Operational Highlights

Share of Russian search market averaged 60.4% in Q2 2012 (according to LiveInternet)

Search queries grew 30% from Q2 20114

Number of advertisers - more than 193,000, up 34% from Q2 2011 and up 8% from Q1 2012

Opera - renewed current agreement

Microsoft - launched default search partnership agreement for Windows Phone in Russia, CIS and Turkey

Turkey - the appointment of Mehmet Ali Yalзэndaр as Chairman of the Board of Yandex.Turkey

4 In Q1 2012 year-on-year query growth was 34%.

Revenues

Text-based advertising revenues, accounting for 89% of total revenues in Q2 2012, continued to determine overall top-line performance.

Text-based advertising revenues from Yandex’s own websites accounted for 72% of total revenues during Q2 2012, and increased by 43% compared with Q2 2011. Text-based advertising revenues from our ad network increased 93% compared with Q2 2011 and contributed 17% of total revenues during Q2 2012.

Paid clicks on Yandex’s and its partners’ websites, in aggregate, increased 62% in Q2 2012 compared with Q2 2011. This growth in paid clicks continues to reflect our initiatives to attract new advertisers and increase the relevance of the ads on our own sites and the network. At the same time, average cost per click is 7% lower compared with Q2 2011, but up 18% compared with Q1 2012.

Display advertising revenue, accounting for 9% of total revenues during Q2 2012, increased 43% compared with Q2 2011.

Online payment commissions accounted for 2% of revenues during Q2 2012, and increased 40% compared with Q2 2011.

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, including related share-based compensation expense. Increases across all cost categories, excluding D&A, primarily reflect investments in overall growth, including personnel. In Q2 2012, Yandex added 133 full-time employees, an increase of about 4% from March 31, 2012, and up 16% from June 30, 2011. The total number of full-time employees was 3,474 as of June 30, 2012. Total share-based compensation expense decreased 32% in Q2 2012 compared with Q2 2011.

Cost of revenues, including traffic acquisition costs (TAC)

TAC increased from 16.0% of text-based revenues in Q2 2011 to 18.9% in Q2 2012, representing an increase in our Yandex ad network revenues’ share in Yandex revenues for the period.

Other cost of revenues in Q2 2012 increased 55% compared with Q2 2011, reflecting principally an increase in datacenter-related costs and utilities, personnel expenses and content acquisition costs.

Product development

The increase in product development expenses in Q2 2012 primarily reflects an increase in personnel-related expenses due to an increase in headcount in this category from 1,626 at June 30, 2011 to 1,899 at June 30, 2012, as well as salary increases.

Selling, general and administrative (SG&A)

SG&A costs in Q2 2012 were considerably lower as a percentage of revenues, and increased modestly in absolute terms, compared to Q2 2011 mainly due to IPO-related expenses and higher than usual advertising costs incurred in Q2 2011.

Share-based compensation (SBC) expense

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

Total SBC expense decreased 32% in Q2 2012 compared with Q2 2011. The decrease is primarily related to the effects of variable accounting for certain options previously granted to advisors, included in the SG&A expense.

Depreciation and amortization (D&A) expense

D&A expense increased 63% in Q2 2012 compared with Q2 2011, primarily reflecting our considerable recent investments in servers and data centers.

As a result of the factors described above, income from operations 2.2 billion (USD 68.4 million) in Q2 2012, a 63% increase from Q2 2011, while adjusted EBITDA reached RUR 3.1 billion (USD 93.5 million) in Q2 2012, up 60% from Q2 2011.

Interest income in Q2 2012 was RUR 234 million, up from RUR 36 million in Q2 2011, principally as a result of investing more of our cash provided by operating activities in Russia, where our investments earn higher returns. Additionally, we earned significantly more interest income in the Netherlands in Q2 2012 due to the investment of our IPO proceeds.

Foreign exchange gain in Q2 2012 was RUR 52 million, compared with a foreign exchange loss of RUR 34 million in Q2 2011. This gain is due to the appreciation of the U.S dollar during Q2 2012 from RUR 29.3282 to USD 1.00 on March 31, 2012 to RUR 32.8169 to USD 1.00 on June 30, 2012. Yandex’s Russian operating subsidiaries’ functional currency is the Russian ruble, and therefore changes in the ruble value of these subsidiaries’ monetary assets and liabilities that are denominated in other currencies (primarily U.S. dollar-denominated cash, cash equivalents and term deposits maintained in Russia) due to exchange rate fluctuations are recognized as foreign exchange gains or losses in the income statement. The U.S. dollar value of Yandex’s U.S. dollar-denominated cash, cash equivalents and term deposits was not impacted by these currency fluctuations, but they resulted in upward revaluations of the ruble equivalent of these U.S dollar-denominated monetary assets in Q2 2012.

Income tax expense for Q2 2012 was RUR 549 million, up from RUR 256 million in Q2 2011. Our effective tax rate increased from 18.5% in Q2 2011 to 21.7% in Q2 2012, but remained in-line with Q1 2012. The effective rate of Q2 2011 benefited from the effect of the change in our treasury policy following the IPO and a reversal of an accrual for dividend withholding tax made in Q1 2011 of RUR 24 million. In recent years, Yandex’s principal Russian operating subsidiary had been paying dividends to its Netherlands parent company and incurred a 5% withholding tax in Russia when these dividends were paid. Under the new treasury policy, however, management does not currently expect this Russian operating subsidiary to pay dividends to the parent company out of 2011 or 2012 earnings. Therefore, no accrual for dividend withholding tax was required for Q2 2012.

Adjusted net income in Q2 2012 was RUR 2.1 billion (USD 63.0 million), a 64% increase from Q2 2011. Growth in adjusted net income exceeded revenue growth primarily as a result of decreases as a percentage of revenues in SG&A and product development costs.

Adjusted net income margin was 30.4% in Q2 2012, compared with 27.7% in Q2 2011.

Net income was RUR 2.0 billion (USD 60.4 million) in Q2 2012, up 76% compared with Q2 2011. The higher growth in net income compared with adjusted net income was primarily the result of SBC expenses representing a smaller portion of operating costs and expenses and a foreign exchange gain versus losses when comparing Q2 2012 to Q2 2011.

As of June 30, 2012, Yandex had cash, cash equivalents, term deposits (including long-term deposits) and long-term debt securities of RUR 24.3 billion (USD 741.7 million).

Net operating cash flow and capital expenditures for Q2 2012 were RUR 2.9 billion (USD 89.7 million) and RUR 0.7 billion (USD 21.2 million), respectively.

The total number of shares issued and outstanding as of June 30, 2012 was 326,429,234, including 177,989,385 Class A shares, 148,439,848 Class B shares, and one Priority share and excluding Class C shares outstanding solely as a result of conversion of Class B shares into Class A shares; all such Class C shares will be cancelled. There were also options outstanding to purchase up to an additional 11.9 million shares, at a weighted average exercise price of USD 4.24 per share, of which options to purchase 8.4 million shares were fully vested; and equity-settled share appreciation rights equal to 0.8 million shares, at a weighted average measurement price of USD 20.76, none of which were vested.

Outlook for 2012

We confirm our revenue guidance for the full year and expect year-on-year ruble-based revenue growth of 40-45%.