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 third quarter ended September 30, 2015.

Q3 2015 Financial Highlights(1)(2)

  • Revenues of RUB 15.4 billion ($233.1 million), up 18% compared with Q3 2014
  • Ex-TAC revenues (excluding traffic acquisition costs) up 18% compared with Q3 2014
  • Income from operations of RUB 3.2 billion ($48.1 million), down 29% compared with Q3 2014
  • Adjusted EBITDA of RUB 6.0 billion ($90.9 million), up 2% compared with Q3 2014
  • Operating margin of 20.6%
  • Adjusted EBITDA margin of 39.0%
  • Adjustedex-TAC EBITDA margin of 49.5%
  • Net income of RUB 4.3 billion ($64.6 million), down 2% compared with Q3 2014
  • Adjusted net income of RUB 3.5 billion ($52.9 million), down 10% compared with Q3 2014
  • Net income margin of 27.7%
  • Adjusted net income margin of 22.7%
  • Adjustedex-TAC net income margin of 28.8%
  • Cash, cash equivalents and deposits of RUB 55.1 billion ($831.9 million) as of September 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 66.2367 to $1.00, the official exchange rate quoted as of September 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.

"This was an excellent quarter for the company on all fronts," said Arkady Volozh, Chief Executive Officer of Yandex. "We stabilized our search share in Russia, became the default search engine for Windows 10 in Russia, Turkey, and several other countries, and achieved a historic decision from the Russian antimonopoly service that we hope will return fair competition to the market."

"Our consolidated revenues grew 18% in Q3," said Alexander Shulgin, Chief Operating Officer of Yandex. "We smoothly transitioned to the VCG auction, leading to lower CPCs for our advertisers, higher quality traffic to their websites and an increase in click through rates on Yandex.Direct."

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

     
In RUB millions Three months Nine months
  ended September 30, ended September 30,
  2014 2015 Change 2014 2015 Change
Revenues 13,057 15,439 18% 36,100 41,698 16%
Ex-TAC revenues2 10,295 12,157 18% 28,119 32,677 16%
Income from operations 4,496 3,183 -29% 10,845 6,865 -37%
Adjusted EBITDA2 5,905 6,021 2% 14,974 14,409 -4%
Net income 4,372 4,278 -2% 9,448 6,828 -28%
Adjusted net income2 3,914 3,507 -10% 9,784 8,547 -13%
             

Q3 2015 Operational Highlights

  • Share of Russian search market (including mobile) averaged 57.1% in Q3 2015 (according to LiveInternet)
  • Search queries in Russia grew 4% compared to Q3 2014
  • Number of advertisers grew to 354,000, up 18% from Q3 2014 and up 1% from Q2 2015
  • Switched to the VCG auction in Yandex.Direct and changed the ranking formula
  • Introduced 'Protect' online security technology built directly into Yandex.Browser

Subsequent Events

  • Announced cooperation with Microsoft to deliver Windows 10 with Yandex search in Russia, Ukraine, Turkey and several other countries

Revenues

     
In RUB millions Three months Nine months
  ended September 30, ended September 30,
  2014 2015 Change 2014 2015 Change
Advertising revenues:            
 Text-based advertising            
 Yandex websites 9,310 10,503 13% 25,263 28,318 12%
 Ad network 2,772 3,740 35% 8,140 10,095 24%
 Total text-based advertising 12,082 14,243 18% 33,403 38,413 15%
 Display advertising            
 Yandex websites 716 634 -11% 2,037 1,898 -7%
 Ad network 114 191 67% 291 381 31%
 Total display advertising  830 825 -1% 2,328 2,279 -2%
Total advertising revenues 12,912 15,068 17% 35,731 40,692 14%
Other 145 371 156% 369 1,006 173%
Total revenues 13,057 15,439 18% 36,100 41,698 16%
             

Text-based advertising revenues increased 18% compared with Q3 2014 and constituted 92% of our total revenues.

Text-based advertising revenues from Yandex websites grew 13% compared with Q3 2014 and accounted for 68% of our total revenues in Q3 2015.

Text-based advertising revenues from our ad network increased 35% compared with Q3 2014 and contributed 24% of total revenues during Q3 2015, as we added new partners to the network earlier in the year.

Paid clicks on Yandex's and its partners' websites, in aggregate, increased 15% in Q3 2015 compared with Q3 2014. Our average cost per click in Q3 2015 grew 3% compared with Q3 2014.

Display advertising revenue decreased 1% compared to Q3 2014 and contributed 5% to our total revenues.

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. In Q3 2015, our headcount reduced by 46 employees, a decrease of 2% compared to September 30, 2014 and a decrease of 1% compared to June 30, 2015. As of September 30, 2015, the total number of Yandex's full-time employees was 5,412.

Costs of revenues, including traffic acquisition costs (TAC)

     
In RUB millions Three months Nine months
  ended September 30, ended September 30,
  2014 2015 Change 2014 2015 Change
TAC:            
Related to the Yandex ad network 1,825 2,333 28% 5,418 6,312 17%
Related to distribution partners 937 949 1% 2,563 2,709 6%
Total TAC 2,762 3,282 19% 7,981 9,021 13%
Total TAC as a % of total revenues 21.2% 21.3%   22.1% 21.6%  
Other cost of revenues 808 1,036 28% 2,348 2,992 27%
Other cost of revenues as a % of revenues 6.2% 6.7%   6.5% 7.2%  
Total cost of revenues 3,570 4,318 21% 10,329 12,013 16%
Total cost of revenues as a % of revenues 27.3% 28.0%   28.6% 28.8%  
             

TAC grew 19% compared with Q3 2014 and slightly increased as a percentage of total revenues to 21.3% in Q3 2015. This is compared with 21.2% in Q3 2014 and 21.7% in Q2 2015. Our ad network TAC grew 28% in Q3 2015 compared with Q3 2014, slower than revenues from our advertising network, primarily reflecting 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 Q3 2015 increased 28% compared with Q3 2014, primarily reflecting an increase in expenses for content and outsource services, personnel expenses and rent expenses attributable to the material appreciation of the U.S. dollar in Q3 2015 compared to Q3 2014, since the rent for our Moscow headquarters is U.S. dollar-denominated.

Product development

     
In RUB millions Three months Nine months
  ended September 30, ended September 30,
  2014 2015 Change 2014 2015 Change
Product development 2,086 3,168 52% 6,169 9,815 59%
As a % of revenues 16.0% 20.5%   17.1% 23.5%  
             

Growth in product development expenses in Q3 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. As of the end of Q3 2015, our development headcount has grown by one employee to 3,273 employees compared with the end of Q3 2014 and Q2 2015.

Selling, general and administrative (SG&A)

     
In RUB millions Three months Nine months
  ended September 30, ended September 30,
  2014 2015 Change 2014 2015 Change
Sales, general and administrative 1,810 2,618 45% 5,479 7,489 37%
As a % of revenues 13.9% 17.0%   15.2% 18.0%  
             

SG&A costs grew 45% compared with Q3 2014. The growth was driven by several factors, including additional advertising and marketing expenses in Q3 2015, increase in personnel costs (connected with salary increases in the beginning of the year), growth of costs for legal services and increases in rent expenses for our Moscow headquarters related to the SG&A category.

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 Nine months
  ended September 30, ended September 30,
  2014 2015 Change 2014 2015 Change
SBC expense included in cost of revenues 27 41 52% 69 125 81%
SBC expense included in product development 191 457 139% 526 1,231 134%
SBC expense included in SG&A 86 173 101% 239 469 96%
Total SBC expense 304 671 121% 834 1,825 119%
As a % of revenues 2.3% 4.3%   2.3% 4.4%  
             

Total SBC expense increased 121% in Q3 2015 compared with Q3 2014. The increase is related to the material appreciation of the U.S. dollar in Q3 2015 versus Q3 2014, new equity-based grants made in 2014 and 2015, as well as the exchange of certain equity awards in Q2 and Q3 2015 (as described below).

Depreciation and amortization (D&A) expense

     
In RUB millions Three months Nine months
  ended September 30, ended September 30,
  2014 2015 Change 2014 2015 Change
Depreciation and amortization 1,095 2,152 97% 3,278 5,516 68%
As a % of revenues 8.4% 13.9%   9.1% 13.2%  
             

D&A expense increased 97% in Q3 2015 compared with Q3 2014, reflecting investments in servers and data centers made in 2014 and the first half of 2015.

As a result of the factors described above, income from operations was RUB 3.2 billion ($48.1 million) in Q3 2015, a 29% decline from Q3 2014, while adjusted EBITDA reached RUB 6.0 billion ($90.9 million) in Q3 2015, up 2% from Q3 2014.

Interest income, net in Q3 2015 was RUB 415 million, up from RUB 224 million in Q3 2014. The significant growth of interest income was 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 against the ruble.

Foreign exchange gain in Q3 2015 was RUB 1,947 million, up from RUB 1,824 million in Q3 2014. This gain reflects the appreciation of the U.S. dollar during Q3 2015 from RUB 55.5240 to $1.00 on June 30, 2015, to RUB 66.2367 to $1.00 on September 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 within other income, net in the statements of income. 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 an upward revaluation of the ruble equivalent of these U.S. dollar-denominated monetary assets and liabilities in Q3 2015.

Income tax expense for Q3 2015 was RUB 1,396 million, down from RUB 1,418 million in Q3 2014. Our effective tax rate of 24.6% in Q3 2015, generally in line with the effective tax rate in Q3 2014.

Adjusted net income in Q3 2015 was RUB 3.5 billion ($52.9 million), a 10% decrease from Q3 2014.

Adjusted net income margin was 22.7% in Q3 2015. This is compared with adjusted net income margin of 20.1% in Q2 2015 and 30.0% in Q3 2014.

Net income was RUB 4.3 billion ($64.6 million) in Q3 2015, down 2% compared with Q3 2014.

As of September 30, 2015, Yandex had cash, cash equivalents and deposits of RUB 55.1 billion ($831.9 million).

Net operating cash flow and capital expenditures for Q3 2015 were RUB 6.6 billion ($99.4 million) and RUB 2.5 billion ($38.1 million), respectively.

During Q3 2015, we repurchased $42.4 million in aggregate principal amount of our 1.125% convertible senior notesdue 2018 for approximately $36.6 million.

The totalnumber of shares issued and outstanding as of September 30, 2015 was 318,917,852, including 266,022,246 Class A shares, 52,895,605 Class B shares, and one Priority share and excluding 11,138,902 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 4.1 million shares, at a weighted average exercise price of $5.90 per share, of which options to purchase 4.1 million shares were fully vested; equity-settled share appreciation rights (SARs) equal to 0.3 million shares, at a weighted average measurement price of $27.27, 0.2 million of which were fully vested; and restricted share units (RSUs) covering 6.4 million shares, of which restricted share units to acquire 1.6 million shares were fully vested.

In Q3 2015, we completed additional exchanges of outstanding SAR awards for new RSU awards based on an exchange ratio of 2:1. In all but one instance, the exchanges were effected for non-senior employees and the replacement RSUs are subject to the same vesting schedule as was in place for the replaced SARs. An exchange was also offered to and accepted by one senior employee; in this case the replacement RSUs were granted on the condition that vesting be reset to begin as of January 1, 2016.

As a result of the exchanges, a total of 42 employees exchanged an aggregate of 256,850 SARs for an aggregate of 128,426 RSUs during Q3 2015. These exchanges are reflected in the outstanding equity award numbers as of September 30, 2015 set out above.