Yandex (NASDAQ:YNDX) stock price has fallen by 6.4% since its earnings release on the 21st of Feb 2014. The company currently trades at a TTM P/E (trailing twelve month price to earnings ratio) of 31, lower than that of Google and Chinese search giant Baidu. Is the fall a sign of the Russian juggernaut losing its way? Or is the stock more attractive post the latest pullback in price? We continue to like Yandex as we evaluate its financials, business metrics and current valuations .
What went wrong in Q4 results?
Yandex missed its own FY 2013 guidance but more importantly its FY 2014 guidance was lower than market expectations.
- Yandex missed its revenue guidance for FY 2013 by close to $ 15 million
In its FY 2013 revenue guidance, Yandex outlined a 34% - 38% Y/Y growth over the previous year’s revenue adjusted for contribution from Yandex.Money. However, at 32.4%, adjusted revenue growth lagged the company’s guidance.
- The midpoint of its 25% - 30% FY 2014 revenue growth guidance was marginally lower than analysts’ estimates of 28.5%.
Key Financials & Business Metrics
The quarterly performance remained noteworthy in spite of the revenue shortfall. The company has made it a habit to register strong growth and high levels of profit margins, thus raising the bar for itself.
In FY 2013 revenue grew at 31% on a Y/Y basis. Operating Profit Margins and Net Profit Margins were in line with their 3 year averages with a marginal improvement in Net Margins even after adjusting for the one-time income from the sale of stake in Yandex.Money.
In Q4 2013, revenue growth slowed to 27% versus its LTM average of 36%. However, the incremental revenue for the quarter nearly equaled its best quarterly addition in the last 3 years. At operating and net levels, the quarter ended with the robust margins that we have come to associate with Yandex.
|Quarters||2012 Q4||2013 Q3||2013 Q4|
|Revenue ($ millions)||290.4||315.9||369.3|
* Note: Net margins in Q3 include one time inflows from the Yandex.Money stake sale.
In Q4, the company saw an increase in the ‘cost of revenue’ on account of higher employee and data center costs. However, the management has indicated that employee costs will be capped near its current levels at a maximum of 20% of revenue in FY 2014, adding an extra degree of predictability to the company’s operating costs and margins.
Note: Personnel costs are spread across each of its expense categories.
Inside the Yandex growth engine
Yandex closed the quarter controlling 62% of Russia’s online search market and also edged past Google in Belarus apart from accounting for more than 30% of the market share in Ukraine, deepening its footprint in the region.
In Q4, display advertising increased its share of revenue as text based advertising, the company’s cash cow, showed a sequential decline.
Within the text-ads segment, ad-revenue from company owned sites declined to 66% of the total revenue from 70% in Q3 2013. Ad-revenue from partner sites almost doubled on a Y/Y basis powered by the company’s tie up with Mail.ru. There was significant market expectation from this partnership, and the fact that it has started to contribute, should make investors happy.
Paid clicks grew at 52% vs 50% in Q3 and the number of advertisers grew to 270,000 from 251,000 clocking a 30% Y/Y growth. The percentage of mobile search queries, and their contribution to direct revenue improved by 1% each in Q4 as they stood at 16% and 12% respectively. With mobile user growth becoming more and more important, this development will be viewed positively.
Moving ahead to 2014, there are a number of developments to be excited about Yandex; starting with its transitioning of Yandex.Market from a price comparison site into a full blown e-commerce portal that will earn revenue from purchases made. Investors will be hoping that the company can replicate the success of Chinese e-commerce giant Alibaba and unlock the potential of its own marketplace.
Yandex’s acquisition of Kinopoisk and foray into online video advertising will also be something to watch out for.
With growth in search shares across desktop and mobile platforms like iOS and Android, the ongoing development of its browser and popular maps application TAXI should help Yandex strengthen its mobile presence.
The company issued an FY 2014 revenue growth guidance of 25% - 30% growth over FY 2013 revenue (ex-Yandex.Money), translating to a revenue of $ 1.51 - $ 1.57 billion for FY 2014.
Note: After the sale of 75% stake in the company, revenue from Yandex.Money is now reported under other income.
As we see it, there are a lot of positives that came out from the company’s Q4 2013 earnings release. With significant potential for growth, we think that the recent correction in stock price makes Yandex even more attractive.
|Market Cap (in billions of $)||59.83||5.20||1.22|
|LTM Net Income (in billions of $)||12.92||1.71||0.42|
|TTM P/E multiple||31.32||35.67||31.15|
* As on Feb 20, 2014
In conclusion, we remain optimistic about Yandex’s future. We have Yandex on our positive watch list since September 16 2013. Our analysis rates Yandex as 4.2/5 indicating it as a ‘very attractive’ investment option.
To see Yandex’s latest stock price movement, click here (NASDAQYNDX)