Yandex today announced its unaudited financial results for the third quarter ended September 30, 2016

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, 2016.

Q3 2016 Financial Highlights(1)(2)

• Revenues of RUB 19.3 billion ($305.5 million), up 25% compared with Q3 2015
• Adjusted EBITDA of RUB 6.9 billion ($109.1 million), up 14% compared with Q3 2015; adjusted EBITDA margin of 35.7%
• Adjusted net income of RUB 3.8 billion ($60.1 million), up 8% compared with Q3 2015; adjusted net income margin of 19.7%
• Cash, cash equivalents, term deposits and short-term investments in debt securities of RUB 66.2 billion ($1,048.9 million) as of September 30, 2016

Q3 2016 Operational and Corporate Highlights

• Share of Russian search market, including mobile, averaged 55.9% in Q3 2016 compared to 57.0% in Q2 2016 (according to LiveInternet)
• Search queries in Russia grew 5% compared with Q3 2015
• Yandex.Taxi introduced lower tariffs and rolled out surge pricing in Moscow
• Yandex announced termination of agreement to acquire its Moscow headquarters

“Revenue and EBITDA continued to grow strongly in Q3, boosted by innovation on our advertising platform,” said Arkady Volozh, Chief Executive Officer of Yandex. “We see new opportunities in our geolocation services to drive revenues from our maps and navigation products.”

“In Q3 we delivered 25% top line revenue growth and 36% adjusted EBITDA margins while deploying significant investments to our fast-growing business units,” said Alexander Shulgin, Chief Operating Officer of Yandex.  “We are moving aggressively to expand Taxi’s leading market position and, following encouraging market tests, are accelerating Market’s transition to a CPA model.”

The following table provides a summary of our key consolidated financial results  for the three months and nine months ended September 30, 2015 and 2016:

(1) Pursuant to SEC rules regarding convenience translations, Russian ruble (RUB) amounts have been translated into U.S. dollars at a rate of RUB 63.1581 to $1.00, the official exchange rate quoted as of September 30, 2016 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 U.S. GAAP measures.

Consolidated revenues breakdown

Online advertising revenues grew 22% compared with Q3 2015 and continued to determine overall top-line performance, contributing 96% of total revenues in Q3 2016. Online advertising revenues include revenues derived from text-based and display advertising on Yandex websites and in our ad network.

Online advertising revenues from Yandex websites increased 21% compared with Q3 2015 and accounted for 70% of total revenues during Q3 2016.

Online advertising revenues from our ad network increased 27% compared with Q3 2015 and contributed 26% of total revenues during Q3 2016, 50 basis points higher than in Q3 2015.

Other revenues grew 130% compared with Q3 2015, and were mainly driven by growth in Yandex.Taxi revenues.

Paid clicks on Yandex’s and its partners’ websites, in aggregate, increased 12% compared with Q3 2015.

Our average cost per click grew 10% compared with Q3 2015.

Segment revenues

Consolidated 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 reflect investments in overall growth. In Q3 2016, Yandex hired 350 full-time employees. The total number of full-time employees was 5,909 as of September 30, 2016, an increase of 6% from June 30, 2016, and up 9% from September 30, 2015.

Costs of revenues, including traffic acquisition costs (TAC)

TAC grew 14% compared with Q3 2015 and represented 19.3% of total revenues in Q3 2016, 200 basis points lower than in Q3 2015 and 40 basis points lower than in Q2 2016. The slowdown in the growth of partner TAC was mostly due to changes in partner revenue mix.

Other cost of revenues in Q3 2016 increased 14% compared with Q3 2015.

Product development

Growth in product development costs in Q3 2016 primarily reflects salary increases in early 2016 and new hires.

Sales, general and administrative (SG&A)

SG&A costs grew faster than revenue, increasing by 71% in Q3 2016 compared to Q3 2015 as a result of growth in advertising and marketing expenses which were aimed at supporting our core products, including search and Yandex.Browser, as well as our business units, including Taxi, E-Commerce and Classifieds.

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 increased 17% in Q3 2016 compared with Q3 2015. The increase is primarily related to new equity-based grants made in 2015-2016.

Depreciation and amortization (D&A) expense

D&A expense increased 16% in Q3 2016 compared with Q3 2015 and primarily reflected investments in servers and data centers made in 2015 and 2016.

As a result of the factors described above, income from operations was RUB 3.6 billion ($56.3 million) in Q3 2016, a 12% increase from Q3 2015, while adjusted EBITDA reached RUB 6.9 billion ($109.1 million) in Q3 2016, up 14% from Q3 2015.

Adjusted EBITDA

Consolidated adjusted EBITDA

Adjusted EBITDA by segments

Interest income, net in Q3 2016 was RUB 351 million, down from RUB 415 million in Q3 2015.

Foreign exchange loss in Q3 2016 was RUB 432 million, compared with a foreign exchange gain of RUB 1,947 million in Q3 2015. This loss reflects the appreciation of the Russian ruble during Q3 2016 from RUB 64.2575 to $1.00 on June 30, 2016, to RUB 63.1581 to $1.00 on September 30, 2016. 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/(loss), net line in the condensed consolidated 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 a downward revaluation of the ruble equivalent of these U.S. dollar-denominated monetary assets and liabilities in Q3 2016.

Income tax expense for Q3 2016 was RUB 1,243 million, down from RUB 1,396 million in Q3 2015. Our effective tax rate of 33.7% in Q3 2016 was higher than in Q3 2015. Adjusted for SBC expense, our effective tax rate for Q3 2016 was 27.8%, compared to 22.7% in 2015 as adjusted for SBC expense and one-off effects in 2015. The increase in the adjusted effective tax rate was primarily driven by additional provisions we have taken in Q3 2016 related to certain past tax audits.

Net income was RUB 2.4 billion ($38.7 million) in Q3 2016, down 43% compared with Q3 2015, mainly due to foreign exchange loss and an increase in SG&A, which grew faster than total revenue.

Adjusted net income in Q3 2016 was RUB 3.8 billion ($60.1 million), a 8% increase from Q3 2015.

Adjusted net income margin was 19.7% in Q3 2016, compared with 22.7% in Q3 2015.

As of September 30, 2016, Yandex had cash, cash equivalents, term deposits and short-term investments in debt securities of RUB 66.2 billion ($1,048.9 million).

Net operating cash flow for Q3 2016 was RUB 6.2 billion ($98.1 million) and capital expenditures were RUB 2.8 billion ($43.7 million), respectively.

During Q3 2016, we repurchased $4.6 million in principal of our 1.125% convertible senior notes due 2018 for approximately $4.5 million.

Redeemable noncontrolling interests presented in our consolidated balance sheets relate to the equity incentive program to the employees of the E-Commerce, Taxi and Classifieds segments.

The total number of shares issued and outstanding as of September 30, 2016 was 321,798,510 including 276,248,540 Class A shares, 45,549,969 Class B shares, and one Priority share and excluding 8,258,244 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 2.6 million shares, at a weighted average exercise price of $5.25 per share, all of which, excluding options for approximately 2,000 shares, were fully vested; equity-settled share appreciation rights (SARs) for 0.2 million shares, at a weighted average measurement price of $29.87, all of which, excluding SARs for approximately 1,000 shares, were fully vested; and restricted share units (RSUs) covering 7.7 million shares, of which RSUs to acquire 2.0 million shares were fully vested.

Please note, that historical information on revenues and adjusted EBITDA of our segments is provided in the supplementary slides accompanying our Q3 2016 earnings release, including quarterly data for the seven quarters from Q1 2015 through Q3 2016 and annual data for the three years from 2013 through 2015.

Financial outlook

Based on our current outlook, we are raising revenue growth outlook for the calendar year 2016. We now expect our revenue to grow in the range of 22% to 24% in 2016 compared with 2015.

This outlook reflects our current view, based on the trends that we see at this time, and may change in light of market and economic developments in the business sectors and jurisdictions in which we operate.

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 user-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.

USE OF NON-GAAP FINANCIAL MEASURES

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we present the following 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. The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliations of non-GAAP financial measures to the nearest comparable U.S. GAAP measures”, included following the accompanying financial tables. We define the various non-GAAP financial measures we use as follows:

• Ex-TAC revenues means U.S. GAAP revenues less total traffic acquisition costs (TAC)
• Adjusted EBITDA means U.S. GAAP net income plus (1) depreciation and amortization, (2) SBC expense, (3) accrual of expense related to the contingent compensation that may be payable to employees in connection with certain business combinations and (4) provision for income taxes, less(A) interest income, net and (B) other income/(loss), net
• Adjusted EBITDA margin means adjusted EBITDA divided by U.S. GAAP revenues
• Adjusted ex-TAC EBITDA margin means adjusted EBITDA divided by ex-TAC revenues
• Adjusted net income means U.S. GAAP net income plus (1) SBC expense adjusted for the income tax reduction attributable to SBC expense, (2) accrual of expense related to the contingent compensation that may be payable to certain employees in connection with certain business combinations and (3) amortization of debt discount related to our convertible debt adjusted for the related reduction in income tax; less (A) foreign exchange gains (plus foreign exchange losses) adjusted for the increase (reduction) in income tax attributable to the foreign exchange gains (losses) and (B)  gain from repurchases of our convertible notes adjusted for the related increase in income tax
• Adjusted net income margin means adjusted net income divided by U.S. GAAP revenues
• Adjusted ex-TAC net income margin means adjusted net income divided by ex-TAC revenues

These non-GAAP financial measures are used by management for evaluating financial performance as well as decision-making. Management believes that these metrics reflect the organic, core operating performance of the company, and therefore are useful to analysts and investors in providing supplemental information that helps them understand, model and forecast the evolution of our operating business.

Although our management uses these non-GAAP financial measures for operational decision making and considers these financial measures to be useful for analysts and investors, we recognize that there are a number of limitations related to such measures. In particular, it should be noted that several of these measures exclude some recurring costs, particularly share-based compensation. In addition, the components of the costs that we exclude in our calculation of the measures described above may differ from the components that our peer companies exclude when they report their results of operations.

Below we describe why we make particular adjustments to certain U.S. GAAP financial measures:

TAC

We believe that it may be useful for investors and analysts to review certain measures both in accordance with U.S. GAAP and net of the effect of TAC, which we view as comparable to sales commissions but, unlike sales commissions, are not deducted from U.S. GAAP revenues. By presenting revenue, adjusted EBITDA margin and adjusted net income margin net of TAC, we believe that investors and analysts are able to obtain a clearer picture of our business without the impact of the revenues we share with our partners.

SBC

SBC is a significant expense item, and an important part of our compensation and incentive programs. As it is a non-cash charge, however, and highly dependent on our share price at the time of equity award grants, we believe that it is useful for investors and analysts to see certain financial measures excluding the impact of these charges in order to obtain a clearer picture of our operating performance.

Acquisition-related costs

We may incur expenses in connection with acquisitions that are not indicative of our recurring core operating performance. In particular, we are required under U.S. GAAP to accrue as expense the contingent compensation that is payable to certain employees in connection with certain business combinations. We eliminate these acquisition-related expenses from adjusted EBITDA and adjusted net income to provide management and investors a tool for comparing on a period-to-period basis our operating performance in the ordinary course of operations.

Foreign exchange gains and losses

Because we hold significant assets and liabilities in currencies other than our Russian ruble operating currency, and because foreign exchange fluctuations are outside of our operational control, we believe that it is useful to present adjusted net income and related margin measures excluding these effects, in order to provide greater clarity regarding our operating performance.

Amortization of debt discount

We also adjust net income for interest expense representing amortization of the debt discount related to our convertible notes issued in Q4 2013 and Q1 2014.We have eliminated this expense from adjusted net income as it is non-cash in nature and is not indicative of our ongoing operating performance.

Gain from repurchases of convertible debt

Adjusted net income also excludes a gain from the repurchase of $4.6 million in principal of our 1.125% convertible senior notes due 2018 for approximately $4.5 million that we recorded in Q3 2016. We have eliminated this gain from adjusted net income as it is not indicative of our ongoing operating performance.

The tables at the end of this release provide detailed reconciliations of each non-GAAP financial measure we use to the most directly comparable U.S. GAAP financial measure.