OREANDA-NEWS. October 31, 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 September 30, 2012.

Q3 2012 Financial Highlights
Revenues of RUR 7.3 billion (USD 235.2 million1), up 41% compared with Q3 2011
Ex-TAC revenues2 (excluding traffic acquisition costs) up 39% compared with Q3 2011
Income from operations of RUR 2.5 billion (USD 82.3 million), up 43% compared with Q3 2011
Adjusted EBITDA3 of RUR 3.4 billion (USD 111.3 million), up 47% compared with Q3 2011
Operating margin of 35%
Adjusted EBITDA margin2 of 47%
Adjustedex-TAC EBITDA margin2 of 57%
Net income of RUR 2.3 billion (USD 74.2 million), up 34% compared with Q3 2011
Adjusted net income3 of RUR 2.2 billion (USD 72.1 million), up 53% compared with Q3 2011
Net income margin of 32%
Adjusted net income margin2 of 31%
Adjusted ex-TAC net income margin2 of 37%

 "Q3 marked yet another strong quarter with our core contextual search business driving 41% top-line growth," said Arkady Volozh, Chief Executive Officer of Yandex. "We launched our own browser, a milestone for the company. And I am pleased with the performance of our search product over the past few months as we maintained 60+% market share in Russia. Importantly, we recorded a noticeable improvement in the quality of our search and increased our share of searches across all major browsers and platforms."    
1 Pursuant to SEC rules regarding convenience translations, Russian ruble (RUR) amounts have been translated into U.S. dollars at a rate of RUR 30.9169 to USD 1.00, the official exchange rate quoted as of September 30, 2012 by the Central Bank of the Russian Federation.
    
2 This is a non-GAAP financial measure. Please see "Use of Non-GAAP Financial Measures" below for a discussion of how we define this non-GAAP financial measure. You will find a reconciliation of this non-GAAP financial measure to the most directly comparable US GAAP measure in the accompanying financial tables at the end of this release.
    
3 Adjusted EBITDA and adjusted net income are non-GAAP financial measures. Beginning with Q1 2012, our adjusted EBITDA and adjusted net income include adjustments for the accrual of expense related to the contingent compensation that may be payable to certain employees through November 2013 in connection with our acquisition of the mobile software business of SPB Software. Beginning with Q3 2012, our adjusted net income includes adjustment for gains from the sale of our equity investments. Please see "Use of Non-GAAP Financial Measures" below for a discussion of how we define adjusted EBITDA and adjusted net income. You will find a reconciliation of adjusted EBITDA and adjusted net income to GAAP net income, the most directly comparable US GAAP measure for both non-GAAP measures, in the accompanying financial tables at the end of this release.
Q3 2012 Operational Highlights
Share of Russian search market (including mobile) averaged 60.5% in Q3 2012 (according to LiveInternet)
Search queries grew 31% from Q3 2011
Number of advertisers — more than 202,000, up 28% from Q3 2011 and up 5% from Q2 2012
 Launched Yandex Browser
 Expanded Yandex.Market to include the lucrative apparel segment of the fast growing e-commerce market 
Text-based advertising revenues, accounting for 90% of total revenues in Q3 2012, continued to determine overall top-line performance.

Text-based advertising revenues from Yandex's own websites accounted for 72% of total revenues during Q3 2012, and increased by 39% compared with Q3 2011. Text-based advertising revenues from our ad network increased 55% compared with Q3 2011 and contributed 18% of total revenues during Q3 2012. Growth rates on the ad network sharply contrast with those seen from Q3 2011 through Q2 2012 given that a full year has passed since we implemented changes to our monetization algorithms that increased network ad revenues and since we added Rambler to our partner network.

Paid clicks on Yandex's and its partners' websites, in aggregate, increased 35% in Q3 2012 compared with Q3 2011. As with growth rates in network ad revenues, lower growth rates in paid clicks reflects the fact that a full year has passed since we launched initiatives on our ad network that resulted in a significant increase in click through rates and the number of clicks on the ad network and since we added Rambler to our ad network. Additionally, growth rates during the four previous quarters benefited from our initiatives also launched in Q3 2011 targeted at regional advertisers that resulted in many new lower cost clicks on our own search. Our average cost per click in Q3 2012 increased 5% compared with Q3 2011, and 10% compared with Q2 2012.

Display advertising revenue, accounting for 8% of total revenues during Q3 2012, increased 25% compared with Q3 2011.

Online payment commissions accounted for 2% of revenues during Q3 2012, and increased 40% compared with Q3 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 Q3 2012, Yandex added 133 full-time employees, an increase of about 4% from June 30, 2012, and up 14% from September 30, 2011. The total number of full-time employees was 3,607 as of September 30, 2012. Total share-based compensation expense increased 61% in Q3 2012 compared with Q3 2011.
D&A expense increased 50% in Q3 2012 compared with Q3 2011, primarily reflecting our considerable investments last year in servers and data centers.

 As a result of the factors described above, income from operations was RUR 2.5 billion (USD 82.3 million) in Q3 2012, a 43% increase from Q3 2011, while adjusted EBITDA reached RUR 3.4 billion (USD 111.3 million) in Q3 2012, up 47% from Q3 2011.

Interest income in Q3 2012 was RUR 268 million, up from RUR 47 million in Q3 2011, principally as a result of investing more of our cash provided by operating activities in Russia, where our investments earn higher returns.

Foreign exchange loss in Q3 2012 was RUR 13 million, compared with a foreign exchange gain of RUR 383 million in Q3 2011. This loss is due to the depreciation of the U.S. dollar during Q3 2012 from RUR 32.8169 to USD 1.00 on June 30, 2012 to RUR 30.9169 to USD 1.00 on September 30, 2012. Yandex's Russian operating subsidiaries' functional currency is the Russian ruble, and therefore changes in the ruble value of these subsidiaries' assets and liabilities that are denominated in other currencies 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 downward revaluations of the ruble equivalent of these U.S. dollar-denominated assets in Q3 2012.

Other non-operating income in Q3 2012 was RUR 160 million, arising primarily from gains on the disposition of Yandex's interest in face.com in connection with that company's acquisition by Facebook.

Income tax expense for Q3 2012 was RUR 667 million, up from RUR 484 million in Q3 2011. Our effective tax rate in Q3 2012 was in line with previous quarters at 22.5%. The effective rate in Q3 2011 benefited from the effect of a change in our treasury policy following the IPO. 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 Q3 2012.

Adjusted net income in Q3 2012 was RUR 2.2 billion (USD 72.1 million), a 53% increase from Q3 2011. Growth in adjusted net income exceeded revenue growth as costs generally increased at a rate slower than revenue.

Adjusted net income margin was 30.6% in Q3 2012, compared with 28.3% in Q3 2011.

Net income was RUR 2.3 billion (USD 74.2 million) in Q3 2012, up 34% compared with Q3 2011. The growth in net income at a rate below that of adjusted net income is due to a considerable foreign exchange gain recorded in Q3 2011.

Balance Sheet

 As of September 30, 2012, Yandex had cash, cash equivalents, term deposits (including long-term deposits) and long-term debt securities of RUR 24.3 billion (USD 785.9 million).

 Assets and liabilities related to the operations of Yandex.Money, our proprietary electronic payments system, have been reclassified on the balance sheet as assets of RUR 1.7 billion, (USD 56.0 million) and liabilities of RUR 1.3 billion (USD 42.7 million), respectively, held for sale, as we are actively seeking to transfer majority control of Yandex.Money to a strategic buyer.

Net operating cash flow and capital expenditures for Q3 2012 were RUR 3.1 billion (USD 100.1 million) and RUR 1.5 billion (USD 49.7 million), respectively.

 The total number of shares issued and outstanding as of September 30, 2012 was 327,258,774, including 187,851,850 Class A shares, 139,406,923 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 11.0 million shares, at a weighted average exercise price of USD 4.33 per share, of which options to purchase 8.0 million shares were fully vested; equity-settled share appreciation rights equal to 1.2 million shares, at a weighted average measurement price of USD 20.21, none of which were vested; and restricted share units equal to 1.0 million shares, none of which were vested.