Yandex Earnings Review Q3 2014

  • Yandex beat revenue and EPS estimates for Q3 2014.
  • Improvements across operating metrics and new verticals are a positive.
  • Yandex valuations indicate an upside potential of about 38%-41%.

Yandex Earnings Review Q3 2014

Yandex (NASDAQ:YNDX) reported its earnings for Q3 2014 on 23 October. The stock was up by close to 6% following its earnings release, as revenue growth and profitability beat analyst estimates for the quarter. Yandex delivered a strong performance across metrics and narrowed its full year revenue growth guidance to the higher end of the range it had previously outlined. We see a further upside in Yandex valuations following its recent earnings release.

Yandex Q3 2014 – Actuals vs Estimates

Yandex beat revenue and adjusted EPS estimates by a fair margin to deliver strong earnings in Q3 2014. While the company’s revenue beat estimates by 2.8%, its adjusted EPS beat estimates by an impressive 15.3%.

Estimates

Actuals

Beat

Revenue (RUR billion)

12.7

13.1

2.8%

Adjusted EPS (RUR)

10.43

12.03

15.3%

Revenue ($ million)

322.4

331.5

2.8%

EPS $

0.264811

0.305424

15.3%

Note: The currency conversion rate of 39.3866 RUR = 1 USD which has been used in Yandex’s earnings release, has been used for all currency conversions in this earnings review.

Yandex Revenue Growth

In Q3 2014, Yandex registered a healthy revenue growth of 28% YoY (over Q3 2013). Growth was driven by revenue from its Text based advertising segment. Faster growth and higher revenue share generated on Yandex sites brought down Traffic Acquisition Costs (TAC) which accounted for 21% of revenue in Q3 2014 vs a TAC of 22% a year ago.

Yandex’s agreement with Mail.ru to power the latter’s paid search completed a year in Q3 2014. As a result, growth in Text ad-revenue from Yandex’s ad-network slowed when compared to the previous quarter, due to the availability of comparable numbers in Q3 2013.

Display advertising revenue on Yandex O&O sites fell marginally (YoY) and growth in this segment was driven by network partners.

YoY Growth

% of Revenue

Text Based Advertising

29%

92.5%

O&O

33%

71.3%

ad-network

19%

21.2%

Display Advertising

6%

6.4%

Other

84%

1.10%

Yandex has been attempting to garner more revenue from international advertisers. In Q3, Yandex generated about 7% of its revenue from foreign advertisers.

Yandex Operating Metrics

Yandex Market Share (search): Yandex continued to dominate the Russian internet search market and accounted for 60.3% market share. The company’s search share on iOS and Android mobile platforms stood at 48% and 47% respectively.

Search Queries: grew 13% YoY and the number of advertisers grew by 20% YoY.

Traffic Acquisition Costs (TAC): TAC came in at 21% of total revenue in Q3.

CPC (Cost Per Click): Yandex continued to see an improvement in its CPC with an 8% YoY growth in Q3 2014. Aggregate CPCs had been falling since Q3 2013 on account of the addition of clicks on Mail.ru. Yandex witnessed the first uptick in CPC in the previous quarter, and the trend has continued in Q3, a positive for the company.

Paid Clicks: Paid Clicks grew by 19% YoY, marking a slower growth when compared to a quarter ago, again, largely due to the higher comparable numbers in Q3 2013.

To sum up, Yandex delivered a strong performance across metrics.

Yandex Profit Margins

Profitability at Yandex shot up in Q3 2014, with the company clocking operating and net profit margins of 34.5% and 33.7% respectively. Profit margins were higher than they have been in over 4 quarters.

As we had predicted in our Yandex valuation earlier this month, Yandex’s net income got a boost of RUR 1.8 billion ($45 million) from forex gains as the Ruble depreciated by over 17% vs the USD, in Q3.

However, even the adjusted net income margin (excluding forex gains) of 30% was healthy, indicating a strong operating performance in Q3. Cost controls saw adjusted EBITDA margins jump to 45.2%, up by close to 4% compared to Q2.

Yandex Future Outlook

Yandex narrowed its full year revenue guidance range from its earlier range of 25% - 30% to 27% - 30%, a huge positive, given the current macro-economic environment in Russia.

In Q3 2014, Yandex strengthened its mobile presence, allowing users to pay for movie tickets and household utility bills directly on Yandex search pages. While these features may or may not translate to much in monetary terms, they will allow users to do more within the Yandex ecosystem on mobile devices. In Q3, mobile devices accounted for 23% of search queries and 16% of search revenue, up from 20% and 14% respectively in Q2 2014.

The acquisition of Auto.ru expands Yandex’s presence in the classifieds space, while the launch of Yandex.Master and Yandex.Music (re-launch) will build a presence in new verticals. The music recommendations feature built into Yandex.Music will eventually be rolled out on Yandex’s videos site KinoPoisk as well, and will add to its functionality.

A recent initiative will give Yandex access to municipal data feeds like road maintenance schedules, real time availability of parking spaces, etc which should strengthen its maps service among others and boost mobile adoption of Yandex services.

Yandex Valuations

Yandex is currently trading at $27.4 a share. At the current stock price, Yandex valuations are as follows:

  • Yandex PE ratio – 24.6
  • Yandex Price to Sales ratio – 6.5

Yandex valuations are currently significantly lower than those of its peers Google (NASDAQ:GOOG) and Baidu (NASDAQ:BIDU). Valued at an average of their PE and PS ratios, Yandex valuations indicate an upside potential of 38% - 41%, translating to a stock price of $38 - $39 a share.

The stock could continue to be vulnerable to geo-political tensions surrounding Russia in the short term. However, given the growing internet economy in Russia, Yandex is a good investment option for long term investors. Our Yandex stock analysis assigns the stock a buy rating.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and YNDX stock

TomW
bullish
Hello Mr. Nagarkar,

thank you for these great article. How do you calculate a P/E of 6.5, everybody else is ~20. I appreciate how you get the market cap (different on different sites) and the earnings. The Q3 report reports "suggest" earnings of ~300M USD in 2014.
reply
nagarkar.vikram
bullish
Hello, Mr. Tom, I erroneously mixed up the Price to Sales and PE ratios. It was the other way round. PE was 24 and PS was 6.5. I had mixed up the two in my article. However, My valuation calculations are based on the correct numbers.

Apologize for the error, and thanks for your comment.
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