Yandex Q1: Largely Unaffected By The Ukraine Crisis!

  • Yandex reported healthy growth and maintained its full year revenue guidance.
  • Profitability was lower due to the front-loading of costs in Q1 and higher TAC.
  • Yandex looks increasingly attractive at current valuations for long term investment.

Yandex Q1 Largely Unnafected by the ukraine crisis

On 24 April 2014, Russian search major Yandex (NASDAQ:YNDX) reported Q1 2014 numbers that were healthy and in line with expectations. Further, the company re-iterated its full year revenue guidance, a move that should inspire confidence among investors about its prospects amidst the political and economic turmoil in Russia. Though the company’s revenue growth doesn’t look as impressive in dollar terms, in its local currency (RUR), its performance looks unaffected by the crisis. Post the earnings release, the stock is down 15%, including a 10% drop on the black Friday when most of the internet stocks were battered.

Yandex Q1 2014 Estimates vs Actuals

As we had reported earlier, analyst estimates for Yandex were pegged at: Revenue - $305 million (RUR 10.96 billion) EPS - RUR 7.98 a share.

Yandex reported Q1 revenue of $305 million (RUR 10.88 billion) to meet revenue estimates in dollar terms. However, in RUR, the local currency, it missed the average consensus estimates by about 0.7%. On the EPS front, Yandex reported an EPS of RUR 8.56 to beat estimates by about 7.7%.

Key Financials & Metrics

In spite of missing revenue estimates marginally in RUR terms, Yandex recorded a healthy Y/Y growth of 39% after adjusting for the revenue from Yandex.Money in previous quarters.

Yandex Revenue and operating profit Trend

Profit margins, though still healthy, came in at their lowest this quarter with operating and net margins at about 25% each. Personnel costs and social taxes which tend to be frontloaded at the beginning of the year squeezed margins, as did an increase in TAC. Improvements are expected on both counts and profit margins could improve as we progress further into the year.

Yandex closed the quarter with a net cash inflow of RUR 2.4 billion, taking the total of cash and cash equivalents to RUR 51 billion. In dollar terms, cash and equivalents stood at $ 1.42 billion, down from $1.48 billion in Q4 2013 due to RUR depreciation.

Traffic Acquisition Cost or TAC grew by 97% to nearly double again as it did in Q4 2013. However, partner TAC as a percentage of partner revenue declined to 67% from 71% in Q4 2013. Yandex is pushing for further reductions in the TAC it pays out to its partners and expects to see the impact of the same later in the year.

At 49% Y/Y growth, paid clicks continued to grow at a healthy rate in Q1 vs 51% growth in Q4. Cost per click continued to decline albeit at a slower rate of 5% Y/Y.

Text ads accounted for 92% of total revenue. Growing at 104% Y/Y, text advertising revenue from Yandex’s ad network continued to grow at a much faster pace than the 26% Y/Y growth in revenue from text advertising on Yandex’s own sites. This was driven by Yandex’s tie-up with Mail.ru to power paid searches / paid clicks.

Display ad revenue accounted for 7% of total revenues. Display advertising on Own and Owned (O&O) sites grew 4% vs total display ad-revenue growth of 16%. Revenue from Yandex’s display ad-network grew to 76 million from 3 million in Q1 2014. In total, ad-network revenue has grown to 24% of revenue vs 16% of revenue in Q1 2013.

Yandex Market Share

Yandex continues to dominate the Russian search market with 61.9% market share.

It might be interesting to note that Yandex’s market share in Ukraine grew from 28% to 30% in 2014 so far, contrary to fears that an anti-Russia sentiment might dent the company’s presence in Ukraine. Yandex also saw growth in its search share on mobile devices to account for an estimated 54%.

Yandex announced the introduction of multi-currency bidding for advertisers on its Yandex.Direct ad-space buying platform to make bidding easier for customers. While this might seem like an exposure to currency fluctuations, this will give Yandex access to a stronger currency while also effectively hedging some portion of its revenue.

Future Outlook In A Challenging Environment For Yandex

As things stand, the company sees no immediate impact from the macro-economic strains on the Russian economy, as it noted that a recent drop in ad spends in the auto sector had been offset by an increase in the financial sector. Further the company believes that it will be partly shielded from a local slowdown as revenue from foreign clients is growing faster than revenue from local customers.

For now the company has maintained its full year revenue guidance of RUR 48.9 - 50.8 billion ($1.51 - 1.57 billion). Further, Yandex expects to see an improvement in profit margins as the year progresses. However, given Russia’s tougher macro-economic environment, it expects profit margins to remain between 1 - 3% lower than those seen in 2013.

It is also worth noting that the depreciation of the RUR vs USD has resulted in a gain of RUR 647 million (approximately $18 million).

Yandex announced a tie up with Nokia to pre-install Yandex apps like search and its app market. The move could help Yandex improve its search share and presence on mobile platforms.

Yandex re-purchased about 1.6 million shares in this quarter to reach a total of 11.6 million out of its authorization of 15 million shares. It is likely that it could continue to buy back its shares in the coming quarters.

Yandex Valuation

Following its earnings release, Yandex’s stock price has fallen by close to 20% in a matter of one week with Friday alone accounting for a 10% fall. Spiralling tensions between Ukraine and Russia have taken a toll on the stock and smothered the positive sentiment that should have come through its recent earnings release.

Google

Yandex

Baidu

Price/Earnings (P/E)

27.0

19.8

31.8

Price/Sales (P/S)

5.7

6.5

9.9

The fact that Yandex has continued to exhibit healthy growth and profitability is a positive, so is the re-iteration of its full year revenue guidance. In terms of growth and profitability, Baidu is followed by Yandex and then Google. Valuing Yandex based on an average (of Google and Baidu) P/E multiple, indicates that it should be priced at about $35 a share with a 48% upside from its current price of $24 a share.

Risks from the political and macro-economic environment in Russia continue to be a factor. However, we think Yandex is a great investment for the long term at its current valuations.

See also:
2014 Q1 Earnings Review for Google

2014 Q1 Earnings Review for Baidu

To see Yandex Inc.'s latest stock price movement, click here (NASDAQ:YNDX)

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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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