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Yandex Announces Third Quarter 2018 Financial Results

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MOSCOW and AMSTERDAM, the Netherlands, Oct. 29, 2018 (GLOBE NEWSWIRE) -- 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, 2018.

Q3 2018 Financial Highlights(1)(2)(3)

Q3 2018 consolidated financial results

  • Revenues of RUB 32.6 billion ($496.6 million), up 39% compared with Q3 2017
  • Net income of RUB 4.8 billion ($72.7 million), up 459% compared with Q3 2017; net income margin of 14.6%
  • Adjusted net income of RUB 6.1 billion ($93.0 million), up 157% compared with Q3 2017; adjusted net income margin of 18.7%
  • Adjusted EBITDA of RUB 10.7 billion ($163.5 million), up 88% compared with Q3 2017; adjusted EBITDA margin of 32.9%

Q3 2018 financial results excluding Yandex.Market in 2017 and 2018

  • Revenues excluding Yandex.Market of RUB 32.6 billion ($496.6 million), up 44% compared with Q3 2017
  • Net income excluding Yandex.Market of RUB 4.7 billion ($71.0 million), up 549% compared with Q3 2017
  • Adjusted net income excluding Yandex.Market of RUB 6.0 billion ($91.3 million), up 167% compared with Q3 2017; adjusted net income margin excluding Yandex.Market of 18.4%
  • Adjusted EBITDA excluding Yandex.Market of RUB 10.7 billion ($163.5 million), up 96% compared with Q3 2017; adjusted EBITDA margin excluding Yandex.Market of 32.9%

  • Cash, cash equivalents and short-term deposits as of September 30, 2018:
    • RUB 93.5 billion ($1,425.0 million) on a consolidated basis
    • Of which RUB 26.3 billion ($401.7 million) related to Taxi segment 
    • RUB 32.2 billion ($490.3 million) related to Yandex.Market and is not included in Yandex N.V. consolidated balance sheet

Q3 2018 Operational and Corporate Highlights 

  • Share of Russian search market, including mobile, averaged 55.9% in Q3 2018, up from 54.9% in Q3 2017 and down slightly from 56.2% in Q2 2018, according to Yandex.Radar
  • Search share on Android in Russia was 49.1% in Q3 2018, up from 47.8% in Q2 2018 and 41.2% in Q3 2017 according to Yandex.Radar
  • Search queries in Russia grew 12% compared with Q3 2017
  • Paid clicks on Yandex's and its partners' websites, in aggregate, increased 13% compared with Q3 2017. Excluding Yandex.Market, paid clicks grew 22% compared to Q3 2017
  • Average cost per click grew 5% compared with Q3 2017. Excluding Yandex.Market, average cost per click increased 2% compared to Q3 2017
  • Number of rides in the Taxi segment (including Uber rides) grew 131% year-on-year compared with Q3 2017; this includes a full quarter of Uber rides in Q3 2018
  • Yandex launched Yandex.Cloud, a public cloud platform
  • Yandex repurchased 4.5 million Class A shares from public shareholders in Q3 2018, as part of the share repurchase program announced in Q2 2018

Q3 2018 Subsequent Events

  • Yandex increased its ownership share in discount aggregator and cashback service Edadeal from 10% to 100%
  • Yandex acquired a majority stake in Food Party, one of Russia's largest meal kit subscription service providers

"It is hard to overstate the progress that Yandex has made over the past few years. The last time we grew at this rate was in 2012 when we were a quarter of the size we are today.  All this became possible due to successful new product launches across all of our business units, our strong ecosystem, and our ability to attract and retain the best talent," said Arkady Volozh, Chief Executive Officer of Yandex. "In Q3 our ride sharing business gained considerable momentum and reached profitability in its core market - Russia. We are committed to investing in the Taxi segment, including food tech, self-driving cars and new ride-sharing markets."

 "We delivered 39% year-on-year revenue growth in Q3 with strong contributions from Taxi, Classifieds and Experiments. Our revenues excluding Yandex.Market from Q3 2017 grew 44% year-on-year," said Greg Abovsky, Chief Operating Officer and Chief Financial Officer of Yandex. "Yandex.Drive became the leading car-sharing service in Russia and we launched Yandex.Cloud, our public cloud platform, providing companies with Yandex's advanced technologies and infrastructure across domestic data centers."

The following table provides a summary of our key consolidated financial results for the three and nine months ended September 30, 2017 and 2018, which includes Yandex.Market financial results through April 27, 2018:

     
In RUB millions Three months ended September 30, Nine months ended September 30,
  2017 2018 Change 2017 2018 Change
Revenues 23,438 32,570 39 % 66,194 88,815 34 %
Ex-TAC revenues2 19,033 27,277 43 % 53,638 74,481 39 %
Income from operations 1,847 5,883 219 % 8,219 13,390 63 %
Adjusted EBITDA2 5,695 10,725 88 % 19,782 27,271 38 %
Net income 853 4,768 459 % 5,156 39,950 675 %
Adjusted net income2 2,371 6,100 157 % 10,110 15,189 50 %
 

The table below provides a summary of our key financial results excluding Yandex.Market for the three and nine months ended September 30, 2017 and 2018:

     
In RUB millions, excluding Yandex.Market Three months ended September 30,  Nine months ended September 30, 
  2017 2018 Change 2017 2018 Change
Revenues ex. Yandex.Market  22,591  32,570 44 %  63,276  87,588 38 %
Ex-TAC revenues2 ex. Yandex.Market  18,240  27,277 50 %  50,899  73,288 44 %
Income from operations ex. Yandex.Market  1,633  5,883 260 %  7,076  13,709 94 %
Adjusted EBITDA2 ex. Yandex.Market  5,472  10,725 96 %  18,554  27,534 48 %
Net income ex. Yandex.Market  718  4,658 549 %  4,281  11,954 179 %
Adjusted net income2 ex. Yandex.Market  2,240  5,990 167 %  9,194  15,390 67 %


(1)   Pursuant to SEC rules regarding convenience translations, Russian ruble (RUB) amounts have been translated into U.S. dollars at a rate of RUB 65.5906 to $1.00, the official exchange rate quoted as of September 30, 2018 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.
     
(3)   On April 27, 2018, Yandex and Sberbank formed a joint venture based on the Yandex.Market platform. Since that date, each of Yandex and Sberbank hold an equal number of the outstanding shares in Yandex.Market, with up to 10% of outstanding shares allocated to management and an equity incentive pool. Accordingly, starting April 27, 2018, we deconsolidated Yandex.Market from Yandex's consolidated financial results and, under the equity method of accounting, we record our share of Yandex.Market's financial results within the other (loss)/income, net line in the consolidated statements of income. Financial results excluding Yandex.Market exclude the results of Yandex.Market, gain from deconsolidation and Yandex's share of Yandex.Market's net income after the deconsolidation from the three and nine months periods ended September 30, 2017 and 2018
     

Consolidated revenues breakdown

     
In RUB millions Three months ended September 30, Nine months ended September 30,
  2017 2018 Change 2017 2018 Change
Online advertising revenues:            
  Yandex properties  16,330  19,965 22 %  46,217  56,303 22 %
  Advertising network  5,551  5,952 7 %  16,113  16,936 5 %
Total online advertising revenues  21,881  25,917 18 %  62,330  73,239 18 %
Other  1,557  6,653 327 %  3,864  15,576 303 %
Total revenues  23,438  32,570 39 %  66,194  88,815 34 %


     
In RUB millions, excluding Yandex.Market Three months ended September 30, Nine months ended September 30,
  2017 2018 Change 2017 2018 Change
Online Advertising Revenues ex. Yandex.Market:            
  Yandex properties ex. Yandex.Market 15,307 19,965 30 % 43,087 54,777 27 %
  Advertising network ex. Yandex.Market 5,566 5,952 7 % 15,866 16,857 6 %
Total online advertising revenues ex. Yandex.Market 20,873 25,917 24 % 58,953 71,634 22 %
Other ex. Yandex.Market 1,718 6,653 287 % 4,323 15,954 269 %
Total revenues ex. Yandex.Market 22,591 32,570 44 % 63,276 87,588 38 %
 

Online advertising revenues grew 18% in Q3 2018 compared with Q3 2017 and generated 80% of total revenues. Online advertising revenues include revenues derived from performance and brand advertising on Yandex properties and in our advertising network. Excluding revenues of Yandex.Market from Q3 of 2017, online advertising revenues grew 24% in Q3 2018 compared with Q3 2017.

Online advertising revenues from Yandex properties increased 22% in Q3 2018 compared with Q3 2017 and accounted for 61% of total revenues. Excluding revenues of Yandex.Market from Q3 of 2017, online advertising revenues from Yandex properties increased 30% in Q3 2018 compared with Q3 2017.

Online advertising revenues from our advertising network increased 7% in Q3 2018 compared with Q3 2017 and accounted for 18% of total revenues.

Other revenues grew 327% in Q3 2018 compared with Q3 2017 and amounted to 20% of total revenues. The growth was mainly driven by increases in Yandex.Taxi revenues and revenues from the newly launched Yandex.Drive.

Segment revenues

     
In RUB millions Three months ended September 30, Nine months ended September 30,
  2017  2018  Change 2017  2018  Change
Revenues:            
Search and Portal  21,159    26,675   26 %  59,996    73,642   23 %
E-commerce*  1,060    -   n/m  3,523    1,697   -52 %
Taxi  1,150    5,109   344 %  2,700    12,289   355 %
Classifieds  548    988   80 %  1,371    2,609   90 %
Media Services  290    414   43 %  785    1,230   57 %
Experiments  92    706   n/m  223    1,302   n/m
Eliminations  (861 )  (1,322 ) 54 %  (2,404 )  (3,954 ) 64 %
Total revenues  23,438    32,570   39 %  66,194    88,815   34 %
Total revenues, excluding Yandex.Market*  22,591    32,570   44 %  63,276    87,588   38 %

*Our E-commerce segment revenues include revenues of Yandex.Market through April 27, 2018. Standalone revenues of Yandex.Market, on a like-for-like basis, are provided in the table below.

     
In RUB millions Three months ended September 30, Nine months ended September 30,
  2017 2018 Change 2017 2018 Change
Revenues:            
Yandex.Market, like-for-like  1,060  1,813 71 %  3,523  4,479 27 %
 

In Q1 2018 we introduced the following changes to our segments structure:

  • Search and Portal segment (including Geolocation Services) offers a broad range of services in Russia, Belarus and Kazakhstan (and, for periods prior to the imposition of sanctions on Yandex by the government of Ukraine in May 2017, all our services offered in Ukraine), other than those described below. Since Q1 2018 our Search and Portal segment also includes Search and Portal in Turkey and Yandex Launcher, previously reported in Experiments and Yandex.Travel, previously reported in Classifieds.
  • E-commerce segment includes Yandex.Market for the period prior to April 27, 2018, the date of the completion of the Yandex.Market joint venture between Yandex and Sberbank;
  • Taxi segment includes our Taxi business (including Yandex.Taxi and Uber in Russia and neighboring countries) and Food Delivery business (including Yandex.EATs and UberEATs);
  • Classifieds segment includes Auto.ru, Yandex.Realty and Yandex.Jobs;
  • Media Services segment includes KinoPoisk, Yandex.Music, Yandex.Afisha and Yandex.TV program; Media Services were broken out from Experiments and now constitute a separate business unit;
  • Experiments segment includes Zen, Yandex.Cloud, Yandex.Health, Yandex.Drive and Yandex Data Factory. Yandex.Cloud and Yandex.Health initiatives previously were a part of our Search and Portal segment. Yandex.Drive is our car-sharing service, launched in February 2018.
  • Eliminations represent the elimination of transactions between the reportable segments, primarily related to advertising.
  • Prior periods were restated to conform to the current year presentation.

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 include 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 2018 Yandex's headcount increased by 566 full-time employees. The total number of full-time employees was 8,854 as of September 30, 2018, up by 7% compared with June 30, 2018, and up 28% from September 30, 2017.

Cost of revenues, including traffic acquisition costs (TAC)

     
In RUB millions Three months ended September 30, Nine months ended September 30,
  2017 2018 Change 2017 2018 Change
TAC:            
Related to the Yandex advertising network 3,296 3,772 14 % 9,340 10,379 11 %
Related to distribution partners 1,109 1,521 37 % 3,216 3,955 23 %
Total TAC 4,405 5,293 20 % 12,556 14,334 14 %
Total TAC as a % of total revenues 18.8% 16.3%   19.0% 16.1%  
Other cost of revenues 1,640 3,777 130 % 4,584 9,700 112 %
Other cost of revenues as a % of revenues 7.0% 11.6%   6.9% 10.9%  
Total cost of revenues 6,045 9,070 50 % 17,140 24,034 40 %
Total cost of revenues as a % of revenues 25.8% 27.8%   25.9% 27.1%  
 

TAC grew 20% in Q3 2018 compared with Q3 2017 and represented 16.3% of total revenues, 250 basis points lower than in Q3 2017 and 40 basis points higher compared with Q2 2018 due to revenue mix effect.

Other cost of revenues in Q3 2018 increased 130% compared with Q3 2017, mainly due to an increase of costs related to Taxi, primarily driven by our B2B services and food delivery, as well as costs related to our car-sharing service Yandex.Drive.

Product development

     
In RUB millions Three months ended September 30,  Nine months ended September 30, 
  2017 2018 Change 2017 2018 Change
Product development 4,569 5,542 21 % 13,560 16,715 23 %
As a % of revenues 19.5% 17.0%   20.5% 18.7%  
 

Product development expenses grew in line with revenues, driven by the growth of share-based compensation, new hires as well as salary increases in Q3 2018. Excluding Yandex.Market from Q3 2017, product development expenses grew 30% in Q3 2018 compared with Q3 2017.

Sales, general and administrative (SG&A)

     
In RUB millions Three months ended September 30,  Nine months ended September 30, 
  2017 2018 Change 2017 2018 Change
Sales, general and administrative 8,047 8,957 11 % 19,059 25,742 35 %
As a % of revenues 34.3% 27.5%   28.8% 29.0%  
 

SG&A expenses grew 11% in Q3 2018 compared to Q3 2017. The deceleration of growth rates in Q3 2018 compared to Q2 2018 was mainly due to optimization of our costs related to Yandex.Taxi business, as well as a high base effect of our extensive advertising and marketing campaign related to Search in Q3 2017.

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 ended September 30,  Nine months ended September 30, 
  2017 2018 Change 2017 2018 Change
SBC expense included in cost of revenues 36 47 31 % 142 126 -11 %
SBC expense included in product development 548 1,139 108 % 1,666 3,343 101 %
SBC expense included in SG&A 292 530 82 % 991 1,441 45 %
Total SBC expense 876 1,716 96 % 2,799 4,910 75 %
As a % of revenues 3.7% 5.3%   4.2% 5.5%  
 

Total SBC expense increased 96% in Q3 2018 compared with Q3 2017. The growth primarily related to new equity-based grants made in 2017-2018.

Depreciation and amortization (D&A) expense

     
In RUB millions Three months ended September 30,  Nine months ended September 30, 
  2017 2018 Change 2017 2018 Change
Depreciation and amortization 2,930 3,118 6 % 8,216 8,934 9 %
As a % of revenues 12.5% 9.6%   12.4% 10.1%  
 

D&A expense increased 6% in Q3 2018 compared with Q3 2017. D&A expense primarily reflects our investments in servers and data center equipment connected with the launch of our new data center in Vladimir, Russia, in 2017, which was partly offset by expiration of useful lives of part of our equipment and intangible assets.

Income from operations

             
In RUB millions Three months ended September 30,  Nine months ended September 30, 
  2017 2018 Change 2017 2018 Change
Income from operations 1,847 5,883 219 % 8,219 13,390 63 %
 

Income from operations increased 219% in Q3 2018 compared with Q3 2017.

Adjusted EBITDA

Consolidated adjusted EBITDA

             
In RUB millions Three months ended September 30,  Nine months ended September 30, 
  2017 2018 Change 2017 2018 Change
Adjusted EBITDA 5,695 10,725 88 % 19,782 27,271 38 %
 

Adjusted EBITDA increased 88% in Q3 2018 compared with Q3 2017.

Adjusted EBITDA by segments

             
In RUB millions Three months ended September 30,  Nine months ended September 30, 
  2017  2018  Change 2017  2018  Change
Adjusted EBITDA:            
Search and Portal  8,936    12,200   37 %  25,894    34,068   32 %
E-commerce*  223    -   n/m  1,228    (263 ) n/m
Taxi  (3,168 )  (711 ) -78 %  (6,379 )  (4,305 ) -33 %
Classifieds  44    78   77 %  27    (165 ) n/m
Media Services  (104 )  (238 ) 129 %  (360 )  (595 ) 65 %
Experiments  (236 )  (604 ) 156 %  (628 )  (1,469 ) 134 %
Total adjusted EBITDA  5,695    10,725   88 %  19,782    27,271   38 %
Total adjusted EBITDA, excluding Yandex.Market  5,472    10,725   96 %  18,554    27,534   48 %

*Our E-commerce segment adjusted EBITDA includes adjusted EBITDA of Yandex.Market through April 27. Standalone adjusted EBITDA of Yandex.Market, on a like-for-like basis, is provided in the table below.

             
In RUB millions Three months ended September 30, Nine months ended September 30,
  2017 2018  Change 2017 2018  Change
Adjusted EBITDA:            
Yandex.Market, like-for-like  223  (489 ) -319 %  1,228  (660 ) -154 %
 

Adjusted EBITDA excluding Yandex.Market increased 96% in Q3 2018 compared with Q3 2017.

Adjusted EBITDA of Taxi was negative RUB 711 million in Q3 2018. The positive Adjusted EBITDA of our ride-sharing business in Russia and CIS was partly offset by our investments in food delivery, autonomous vehicle and new markets. Adjusted EBITDA loss of Yandex.Taxi in Q3 2018 also includes the full quarter of Uber losses.

Interest income in Q3 2018 was RUB 928 million, up compared with RUB 732 million in Q3 2017.

Interest expense in Q3 2018 was RUB 260 million, up from RUB 226 million in Q3 2017.

Foreign exchange gain in Q3 2018 was RUB 648 million, compared with a foreign exchange loss of RUB 609 million in Q3 2017. This gain reflects the depreciation of the Russian ruble during Q3 2018 from RUB 62.7565 to $1.00 on June 30, 2018, to RUB 65.5906 to $1.00 on September 30, 2018. 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 the 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 an upward revaluation of the ruble equivalent of these U.S. dollar-denominated monetary assets and liabilities in Q3 2018.

Income tax expense for Q3 2018 was RUB 2,410 million, up from RUB 874 million in Q3 2017. Our effective tax rate of 33.6% in Q3 2018 was lower than in Q3 2017, primarily due to the effects of certain tax provisions recognized in Q3 2017. Adjusted for the similar tax effects, SBC expense and also for deferred tax asset valuation allowances provided on operations of our newly acquired Uber and Food Delivery businesses, our effective tax rate for Q3 2018 was 24.0%, compared with 26.2% for Q3 2017.

Net income was RUB 4.8 billion ($72.7 million) in Q3 2018, up 459% compared with Q3 2017. Excluding Yandex.Market, net income increased 549% in Q3 2018 compared to Q3 2017.

Adjusted net income in Q3 2018 was RUB 6.1 billion ($93.0 million), a 157% increase from Q3 2017. Excluding Yandex.Market, adjusted net income increased 167% in Q3 2018 compared to Q3 2017.

Adjusted net income margin was 18.7% in Q3 2018, compared with 10.1% in Q3 2017.

As of September 30, 2018, Yandex had cash, cash equivalents and short-term deposits of RUB 93.5 billion ($1,425.0 million), including cash, cash equivalents and short-term deposits of Yandex.Taxi in total amount of RUB 26.3 billion ($401.7 million). Cash and cash equivalents of the Yandex.Market joint venture, which are not included in Yandex N.V. consolidated balance sheet, amounted to RUB 32.2 billion ($490.3 million) as of September 30, 2018.

Net cash flow provided by operating activities for Q3 2018 was RUB 7.6 billion ($115.8 million) and capital expenditures were RUB 4.3 billion ($65.6 million).

During Q3 2018 there were no repurchases of convertible debt notes.

Redeemable noncontrolling interests presented in our condensed consolidated balance sheets relate to the equity incentive arrangements we have made available to the senior employees of the Taxi, Classifieds and Media Services segments, pursuant to which such persons are eligible to acquire depositary receipts, or receive options to acquire depositary receipts, which entitle them to economic interests in the respective business unit subsidiaries.

The total number of shares issued and outstanding as of September 30, 2018 was 324,397,865 including 286,519,206 Class A shares, 37,878,658 Class B shares, and one Priority share and excluding 5,918,449 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 were cancelled.

There were also employee share options outstanding to purchase up to an additional 3.6 million shares, at a weighted average exercise price of $34.24 per share, 0.6 million of which were fully vested; equity-settled share appreciation rights (SARs) for 0.2 million shares, at a weighted average measurement price of $32.25, all of which, excluding SARs for approximately 1,000 shares, were fully vested; and restricted share units (RSUs) covering 13.1 million shares, of which RSUs to acquire 4.8 million shares were fully vested. Equity awards in respect of business unit subsidiaries are described under Redeemable noncontrolling interests above.

Financial outlook

Based on our recent performance and taking into account the deconsolidation of Yandex.Market from our consolidated financial results, we would like to update the revenue outlook for the full year 2018, which excludes Yandex.Market from prior periods. We currently expect our ruble-based revenues excluding Yandex.Market from 2017 and 2018 results to grow in the range of 35% to 38% for the full year 2018 compared with 2017.

Based on the recent performance of Search and Portal, we now expect our Search and Portal ruble-based revenue growth to be in the range of 21% to 23% in the full year 2018 compared with 2017.

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.

Conference Call Information

Yandex's management will hold an earnings conference call on October 29, 2018 at 8:00 AM U.S. Eastern Time (3:00 PM Moscow time; 12:00 PM London time).

To access the conference call live, please dial:
             
            US: +1 929 477 0402
            UK/International: +44 (0) 330 336 9411
            Russia: 8 10 800 2867 5011
            Passcode: 5309170
             
A replay of the call will be available until November 5, 2018. To access the replay, please dial:
             
            US: +1 719 457 0820
            UK/International: +44 (0) 207 660 0134
            Russia: 8 10 800 2702 1012
            Passcode: 5309170

A live and archived webcast of this conference call will be available at

https://edge.media-server.com/m6/p/ddcuerow

ABOUT YANDEX

Yandex (NASDAQ:YNDX) is a technology company that builds intelligent products and services powered by machine learning. Our goal is to help consumers and businesses better navigate the online and offline world. Since 1997, we have delivered world-class, locally relevant search and information services. Additionally, we have developed market-leading on-demand transportation services, navigation products, and other mobile applications for millions of consumers across the globe. Yandex, which has 27 offices worldwide, has been listed on the NASDAQ since 2011.
More information on Yandex can be found at https://yandex.com/company.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements that involve risks and uncertainties. These include statements regarding our anticipated revenues for full year 2018. Actual results may differ materially from the results predicted or implied by such statements, and our reported results should not be considered as an indication of future performance. The potential risks and uncertainties that could cause actual results to differ from the results predicted or implied by such statements include, among others, macroeconomic and geopolitical developments affecting the Russian economy, competitive pressures, changes in advertising patterns, changes in user preferences, changes in the political, legal and/or regulatory environment, technological developments, and our need to expend capital to accommodate the growth of the business, as well as those risks and uncertainties included under the captions "Risk Factors" and "Operating and Financial Review and Prospects" in our Annual Report on Form 20-F for the year ended December 31, 2017, which is on file with the U.S. Securities and Exchange Commission (SEC) and is available on our investor relations website at http://ir.yandex.com/sec.cfm and on the SEC website at www.sec.gov. All information in this release and in the attachments is as of October 29, 2018, and Yandex undertakes no duty to update this information unless required by law.

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, (4) interest expense, (5) other loss/(income), net, (6) provision for income taxes, and (7) operating losses resulting from sanctions in Ukraine imposed in May 2017, less interest income
  • 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, (3) foreign exchange losses/(gains) adjusted for (reduction)/increase in income tax attributable to foreign exchange losses/(gains), (4) losses from repurchases of our convertible notes adjusted for the related reduction in income tax, (5) amortization of debt discount related to our convertible debt adjusted for the related reduction in income tax and (6) losses resulting from sanctions in Ukraine imposed in May 2017, less effect of deconsolidation of Yandex.Market
  • 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.

Gains and losses from repurchases of convertible debt

Adjusted net income for the nine months ended September, 2017 also excludes a loss from the repurchase of $12.0 million in principal of our 1.125% convertible senior notes due 2018 for approximately $11.6 million that we recorded in the first half of 2017. We have eliminated this loss from adjusted net income for the nine months ended September 30, 2017 as it is not indicative of our ongoing operating performance.

Losses resulting from sanctions in Ukraine

We also adjusted our net income and EBITDA in 2017 for losses and gains from write-off of assets and liabilities in our Ukrainian legal entities. In May 2017, the government of Ukraine imposed sanctions on our Ukrainian operations. The sanctions resulted in the freezing of the assets held by our Ukrainian legal entities and restricting our services in Ukraine. We believe that it is useful to present adjusted net income and adjusted EBITDA measures excluding the one-off impact of these events, which are not related to our operating activities.

Effect of deconsolidation of Yandex.Market

Adjusted net income also excludes a gain from deconsolidation of Yandex.Market following the formation of Yandex.Market joint venture by Yandex and Sberbank in April 2018. We believe that it is useful to present adjusted net income and related margin measures excluding the effect of this significant item and to present certain other financial metrics described above in order to provide a clearer picture of our underlying operating performance and to provide meaningful period-to-period comparisons.

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.

YANDEX N.V.

Unaudited Condensed Consolidated Balance Sheets

(in millions of Russian rubles and U.S. dollars, except share and per share data)

             
    As of
    December 31,   September 30,    September 30, 
    2017*   2018    2018 
    RUB   RUB   $
ASSETS            
Current assets:            
Cash and cash equivalents    42,662      49,388      753.0  
Term deposits    23,040      44,077      672.0  
Accounts receivable, net    9,746      12,123      184.8  
Prepaid expenses    1,269      2,158      32.9  
Other current assets    4,039      6,252      95.3  
Total current assets    80,756      113,998      1,738.0  
             
Property and equipment, net    21,171      29,339      447.3  
Intangible assets, net    5,023      11,191      170.6  
Goodwill    9,328      52,667      803.0  
Long-term prepaid expenses    1,788      1,627      24.8  
Term deposits, non-current    5,005      -      -  
Investments in non-marketable equity securities    2,001      36,910      562.7  
Deferred tax assets    2,171      2,700      41.2  
Other non-current assets    3,301      4,357      66.4  
TOTAL ASSETS    130,544      252,789      3,854.0  
             
LIABILITIES AND SHAREHOLDERS' EQUITY            
Current liabilities:            
Accounts payable and accrued liabilities    11,111      16,528      252.1  
Taxes payable    4,213      3,774      57.5  
Deferred revenue    2,464      2,187      33.3  
Convertible debt    17,834      20,904      318.7  
Total current liabilities    35,622      43,393      661.6  
Deferred tax liabilities    959      1,688      25.7  
Other accrued liabilities    1,316      489      7.5  
Total liabilities    37,897      45,570      694.8  
             
Commitments and contingencies            
Redeemable noncontrolling interests    9,821      7,322      111.6  
Shareholders' equity:            
Priority share: €1.00 par value; 1 share authorized, issued and outstanding            
Preference shares: €0.01 par value; 1,000,000,001 shares authorized, nil shares issued and outstanding            
Ordinary shares: par value (Class A €0.01, Class B €0.10 and Class C €0.09); shares authorized (Class A: 1,000,000,000, Class B: 46,997,887 and Class C: 46,997,887); shares issued (Class A: 289,364,467 and 292,437,655, Class B: 40,692,286 and 37,878,658, and Class C: 4,166,448 and nil, respectively); shares outstanding (Class A: 285,612,556 and 286,519,206, Class B: 40,692,286 and 37,878,658, and Class C: nil)    271      264      4.0  
Treasury shares at cost (Class A: 3,751,911 and 5,918,449, respectively)    (3,814 )    (10,923 )    (166.5 )
Additional paid-in capital    16,469      69,140      1,054.1  
Accumulated other comprehensive income    1,864      7,753      118.3  
Retained earnings    68,036      111,979      1,707.2  
Total equity attributable to Yandex N.V.    82,826      178,213      2,717.1  
Noncontrolling interests    -      21,684      330.5  
Total shareholders' equity    82,826      199,897      3,047.6  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    130,544      252,789      3,854.0  

Derived from audited consolidated financial statements



YANDEX N.V.

Unaudited Condensed Consolidated Statements of Income

(in millions of Russian rubles and U.S. dollars, except share and per share data)

               
    Three months ended September 30, 
    2017    2018    2018 
    RUB   RUB   $
             
Revenues   23,438     32,570     496.6  
Operating costs and expenses:            
Cost of revenues(1)   6,045     9,070     138.3  
Product development(1)   4,569     5,542     84.5  
Sales, general and administrative(1)   8,047     8,957     136.6  
Depreciation and amortization   2,930     3,118     47.5  
Total operating costs and expenses   21,591     26,687     406.9  
Income from operations   1,847     5,883     89.7  
Interest income   732     928     14.1  
Interest expense    (226 )    (260 )    (4.0 )
Other (loss)/income, net    (626 )    627      9.6  
Net income before income taxes   1,727     7,178     109.4  
Provision for income taxes   874     2,410     36.7  
Net income   853     4,768     72.7  
Net loss attributable to noncontrolling interests    47     334     5.1  
Net income attributable to Yandex N.V.   900     5,102     77.8  
Net income per Class A and Class B share:            
Basic   2.77     15.60     0.24  
Diluted   2.72     15.25     0.23  
Weighted average number of Class A and Class B shares outstanding            
Basic   325,341,670     326,960,171     326,960,171  
Diluted   330,979,488     334,518,196     334,518,196  
             
             


(1)   These balances exclude depreciation and amortization expenses, which are presented separately, and include share-based compensation expenses of:


                 
Cost of revenues   36   47   0.7  
Product development   548   1,139   17.4  
Sales, general and administrative   292   530   8.1  



YANDEX N.V.

Unaudited Condensed Consolidated Statements of Income

(in millions of Russian rubles and U.S. dollars, except share and per share data)

               
    Nine months ended September 30,   
    2017    2018    2018   
    RUB   RUB   $  
               
Revenues   66,194     88,815     1,354.1    
Operating costs and expenses:              
Cost of revenues(1)   17,140     24,034     366.4    
Product development(1)   13,560     16,715     254.8    
Sales, general and administrative(1)   19,059     25,742     392.5    
Depreciation and amortization   8,216     8,934     136.2    
Total operating costs and expenses   57,975     75,425     1,149.9    
Income from operations   8,219     13,390     204.2    
Interest income   2,129     2,453     37.4    
Interest expense    (671 )    (724 )    (11.0 )  
Other (loss)/income, net    (1,492 )    30,895      470.9    
Net income before income taxes   8,185     46,014     701.5    
Provision for income taxes   3,029     6,064     92.4    
Net income   5,156     39,950     609.1    
Net loss attributable to noncontrolling interests    94     1,578     24.0    
Net income attributable to Yandex N.V.   5,250     41,528     633.1    
Net income per Class A and Class B share:              
Basic   16.19     126.84     1.93    
Diluted   15,89     123.65     1.89    
Weighted average number of Class A and Class B shares outstanding              
Basic   324,321,917     327,396,376     327,396,376    
Diluted   330,365,639     335,852,917     335,852,917    
               
               


(1)   These balances exclude depreciation and amortization expenses, which are presented separately, and include share-based compensation expenses of:


               
Cost of revenues   142   126   1.9
Product development   1,666   3,343   51.0
Sales, general and administrative   991   1,441   22.0



YANDEX N.V.

Unaudited Condensed Consolidated Statements of Cash Flows

(in millions of Russian rubles and U.S. dollars)

             
    Three months ended September 30, 
    2017    2018    2018 
    RUB   RUB   $
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:            
Net income    853