Thank you for standing by, and welcome to the Yandex Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] I must advise you the conference is being recorded today, on Thursday, the 25th of July, 2013. I'd now like to hand the conference over to your speaker today, Arkady Volozh. Please, go ahead.

Yes, well, thank you. We wanted to clarify an earlier statement that the company put out. We have since learned that Ilya is in coma and on life support, although not showing any brain function. Our thoughts are with him at this time. As you know, Ilya Segalovich and I founded Yandex more than 20 years ago. He served as the Chief Technology Officer of Yandex, and build up and inspired the incredible team of talented engineers, who are the backbone of the company now. Ilya, also, was a great philanthropist, contributing not only money but time and personal commitment to many in need, especially orphans in Moscow. And more importantly, Ilya was my own personal friend. I know that the strong technical teams that Ilya helped to build, train and motivate will continue with pride the work that Ilya began. And I'm currently with Ilya's family at this difficult time. I will, therefore, now turn the call over to Greg Abovsky, our Head of Investor Relations, who will update you on the business. And I will be speaking with you again in the future. Thank you.

Thank you, Arkady. On behalf of the entire Yandex team, I'd like to extend our deepest condolences to the Segalovich family. We'll now turn to a review of the second quarter. We distributed our earnings release earlier today. You can find a copy of the press release on the company's Investor Relations website, as well as our NEWSWIRE services. Today, we also have on the call, our CFO, Alexander Shulgin. Our call will be recorded and the recording will be available on Yandex's IR website in a few hours. We've put together a few supplementary slides, which are currently available on our IR website. Now I'll quickly take you through the Safe Harbor statement. Various remarks that we make during this call about our future expectations, plans and prospects constitute forward-looking statements. Our actual results may differ materially from those indicated or suggested by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our Annual Report on Form 20-F dated March 11, 2013, which is on file with the SEC and is available online. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Although we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. During this call, we'll be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with U.S. GAAP. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings…

Hello, everyone. This is Alex speaking. Today is a very sad day for all of us. We all regret very much the loss of our great Co-founder and CTO, Ilya Segalovich. Thank you, all, for joining us today. In the second quarter of 2013, Yandex's consolidated trading has increased 35% year-on-year to RUB 9.2 billion. Contextual or text-based advertising accounted for 88% of our total earnings in Q2 and continue to grow at a healthy base of 35% year-on-year. Yandex's own websites demonstrated 37% growth and constituted 73% of all total revenue, while our advertising network contributed 15%. Yandex's advertising network grew 25% year-on-year, which is slower than our owned and operated websites. As you will recall, we introduced a number of changes to our advertising system, during the first quarter, that primarily impacts our owned and operated websites. Display advertising accounted for 9% of our revenue in Q2 and grew 31% year-on-year. The remaining 3% of our revenue came from Yandex.Money and other sources. Our advertising network, TAC, grew 22%, slightly slower than our network revenues. Distribution traffic acquisition cost grew 40%, slightly faster than our owned and operated revenue, which grew 37%. The increase in distribution TAC, as a percentage of owned and operated trading, was very modest, up only 13 basis points year-on-year. Again, a very large portion of the increase in distribution TAC, as a percentage of owned and operating revenue, was driven by our activities in Turkey. Total TAC increased 28% year-on-year. TAC-based revenue growth was driven by growth in paid clicks, which increased 29% year-on-year, and by growth in cost per click, which increased 5%. As we mentioned in our Q1 call, we made several changes to our advertising system. We introduced the so-called southern block, with up to 4 apps shown on the…

[Operator Instructions] Your first question comes from the line of Lloyd Walmsley of Deutsche Bank.

I'm wondering if you can just give us a sense on the Mail deal of what's sort of TAC rates we should expect? And then, what percentage of ads you'll be powering? Is it all of it? Or is Mail going to continue to power some of their own search ads? And then, a second, if I may, if you could just talk about some of the changes, timing and impact, that you have planned for the ad system later this year? And then for the Yandex marketplace, we'd love some color there.

Lloyd, this is Alex speaking. I will take your first question and the second question will go to Greg. So talking about Mail.ru deal. Obviously, we will not be to disclose the commercial details of it. But what I could say is our increased revenue guidance, of full year revenue guidance of 34% to 38% includes both good solid performance that we see for our business in the remaining 2 quarters of the year, plus the incremental additional revenue that we generate from the Mail.ru deal. Talking about some details of this deal, Mail.ru, as well you know, switches to their own proprietary search engine, but the old paid search results that will be displayed on the Mail.ru search result pages will come from Yandex, Yandex.Direct advertisement system. And this starts July 1.

I'll try to take the second half of your question, Lloyd. In terms of the changes we're planning to the ad system, as you know, we're always tweaking with our ad system and making various improvements, both to the layout of the page, as well as to the click prediction mechanisms and the mechanisms for our advertisers to deal with the system itself. Obviously, before those changes are made, we cannot predict when and how effective those changes would be. As far as Yandex.Market is concerned, Yandex.Market continues to grow at a very healthy pace, growing at a rate faster than our revenues overall. And as far as our plans to launch Yandex marketplace, those are on track as well, and will roll out gradually over the course of the next few quarters, with first capabilities being launched later this year.

Your next question comes from Edward Hill of Morgan Stanley.

I have 2 questions please. Firstly, going back to the Mail deal. I know you disclosed a search revenue number, which last year in the first half -- or the first quarter this year. As you sort of look at that and make some assumptions, you could broadly get to around, all of the revenue increase, around 4% in terms of Yandex's revenue. I'm just trying to work out whether or not there's any underlying increase in the revenue guidance today, excluding the Mail deal, particularly the top end of it, which is like a 3% raise. I just want to sort of clarify the strength current trading, really, relative to where we were maybe a couple of months ago. And the second question relates to the partner websites, which are clearly still on the tracking the O&Os by around -- the gap's actually widened to around 13% in second quarter. I know there's significant technology change differences between the 2 revenue streams. Would you expect the gap to narrow between the 2, as we go in the second half of the year? Or do you think the changes taking place within the O&O side means that there's sort of a 10-plus percent revenue gap will be there for the rest of this year, please?

Thank you very much for your questions. As you know, we don't really break out the mix of revenue contributions by line items, such as the mix from O&O versus the mix from partner. Obviously, the changes that we've implemented earlier in Q1 impact primarily our owned and operated sites, such as the southern block that we introduced, which has, as we've said, excellent click-though rates and delivers a lot of paid clicks for our advertisers. So we can't really say much more about that. On the question of Mail.ru, obviously, it's up to them to really clarify exactly how much revenue they generate from search or other contextual advertising methods. Just to reiterate, our revenue increase reflects both good -- very good strength in our core business, as well as the contribution from the Mail.ru deal.

That's great. Can I ask one final just follow-up, if I may, just on your -- on the iOS 7 change? Is there any structural reason why you think that the market share within Apple iOS 7 devices would not necessarily be as high as within the Android platform?

Thank you for the question. Look, under the current setup in iOS, accessing Yandex.ru is fairly cumbersome for users. They can get to Yandex.ru either by typing it directly in their URL box or by bookmarking our site. As you can imagine, that's fairly cumbersome procedure. And I think it's a great testament to the power and strength of our brand and search engine that we still have about 35% market share on iOS today. We expect that with the changes introduced with iOS 7, that our market share should strengthen there considerably, given that users will now be able to select Yandex as a default engine in their smart box on Safari. And this applies, of course, both to iOS as well as to desktop Safari versions.

Your next question comes from Alex Balakhnin of Goldman Sachs.

Two questions from me, if I may. First is on Turkey. So for the update on the market share, can you please clarify what would be like the milestones for you, when you made the decisions on whether you keep pushing in Turkey or withdraw from there? And can you probably give me some information on how do you feel the audience uptake is taking place? And my second question is, we saw quite a substantial increase of the paid clicks, as you are changing the design of the search results page. Should we expect, probably, further acceleration of paid clicks towards the end of the year, so you will be able to give like a greater number of paid clicks to advertisers at cheaper prices? Or that should be stabilizing pretty much at the trend we saw in the second quarter?

Thank you, Alex. To take the first part of your question with respect to Turkey, look, as we've mentioned, we have about 2.5% share of searches there, and we've built a fairly strong local team there that we're very happy with. We have excellent local brand recognition in the marketplace. But obviously, there has been political turmoil there, which has dealt us a setback in terms of various activities that we had planned in terms of product releases and so on. We do anticipate growth there and market share in the second half, and we will continue to evaluate Turkey as a market for us. With respect to your second question on paid clicks, that's a very good question. As you know, Mail.ru is a fairly large player in the Russian search market, with about 8.5%, 8.6% market share according to LiveInternet. With the addition of the paid search results, which we're going to power on Mail, to our own base of properties, will obviously increase the rate of paid clicks growth. As you also know, paid clicks and CPCs are not mutually exclusive variables and are not completely independent. A large increase in paid clicks has the near-term impact of a dampening of paid CPC growth, as you witnessed this quarter, when we had our paid clicks growth rate accelerate from Q1 to Q2, you also saw some moderation in cost per click. Given that we now expect to see a fairly large acceleration in the growth rate in paid clicks, you should therefore expect to see some softening trends in CPCs. We believe though, that overall, first of all, lower CPCs are excellent for our advertisers, as they tend to improve their ROIs. And secondly, these effects tend to even themselves out fairly quickly. And at the end of the day, we will have a much larger share of the Russian contextual advertising market, which obviously, is a huge positive for us.

Just a quick follow-up on the first question on Turkey. You used to have a sort of an internal target, if you don't reach a high-single-digit market share, you would, like, reconsider the future of your expansion in Turkey. Is -- like, that still in place? Or you are changing the way you think about this market?

No, this does not obviously change the way we think about the market. We approach our investments in a disciplined fashion. And obviously, if we cannot make progress, we will reevaluate our investment there. But we are optimistic about our chances of increasing market share in Turkey.

Your next question comes from the line of Boris Vilidnitsky of Barclays.

First, my condolences again for the entire Yandex family. Quick question for me. First, on margins, the increased guidance for the full year on top line, but you maintained flat margin guidance for the full year. I'm just curious -- despite the dip in the first half, just curious if you could expand again on where you might see the margin pressure in the second half? And second, you obviously have a very healthy cash position right now with the deal we're looking at, close to $1 billion. Again, other than the buyback program, which should roughly cover $300 million, maybe slightly more, what are the thoughts there?

Boris, this is Alex speaking. Thank you for the questions. I will take the first one about margins. So you're right, it's a pretty high adjusted EBITDA margins in the first half of 2013, driven by improvements to our advertising system. And these improvements will have sustainable positive impact on our revenues going forward, we believe. Now our new contract with Mail.ru has obvious traffic position cost associated with incremental revenue that we generate. It is still too early for us to tell exactly how much incremental revenue we will generate out of this deal, but obviously, the better we do for Mail.ru, the better it is for our gross revenues and ex-TAC revenues, and all of it is accretive on EBITDA and net income level in absolute terms. But the margin percentages will be depressed somewhat down by this deal.

And let me pick up the question on cash. You're quite correct, we do have a share buyback program in place. We announced the 12 million share buyback program back in March of 2013. We currently executed a little over 4 million shares of that buyback program. Our AGM -- at our AGM, we extended the buyback program through the March of 2014, by which point we expect to complete the buyback program. And you're quite right, we do have a fair amount of cash on the balance sheet. It's a topic that obviously, the Board continues evaluate in terms of the best uses for that cash. And we will obviously inform you guys of when and if the Board makes that decision.

Anastasia Obukhova, please ask your question.

Can you please answer 2 questions. First of all, are you going to -- or when are you going to launch online payments on Yandex.Market? And the second, do you feel or do you see any kind of material participation or involvement in Russian e-commerce activity from classifieds like Avito, et cetera, or not?

Anastacia, thank you very much for your questions. With respect to Yandex.Market, as we said, we're rolling out the functionality gradually over the course of a few quarters. The first functionality of Yandex marketplace will be in place by the end of the year. And so you'll be able to experience it at that point. With respect to your questions about classifieds, obviously, that is -- they're a very good client of ours and we refer some traffic to them, and we get some traffic back from them. We think that they're a good player in the marketplace. And we're obviously very happy for that online commerce segment of the Russian economy continuing to grow, as that will obviously benefit our business greatly.

You have another question from Boris Vilidnitsky of Barclays.

Yes, there doesn't seem any more questions. I wanted to know what -- could you give us an update on your share within mobile and Android? And you mentioned on iOS, it was 35%, right?

Boris, yes, thank you very much for your question. In terms of our market share in mobile, as you know, we've cautioned on the previous conference call that LiveInternet market share data for mobile operating systems, such as iOS and Android, is somewhat unreliable. Lately, we also had some difficulty measuring our market share internally. Our latest assessment, however, is that on Android, we have at least 47% to 48%, and probably as high as 50%. And on iOS, our market share remains around 35%. Obviously, with respect to iOS, just to reiterate what I've said earlier. We're obviously very optimistic about an ability to increase that market share over the next few months when iOS 7 is rolled out, and our users can select Yandex as a search option in the smart box on their iOS devices, as well on Safari and the desktop.

That was the last question. Please continue.

All right, thank you very much to everyone for your participation on the call today. It's been a very emotional and difficult day for us all. Again, our condolences go out to Ilya Segalovich's family and thank you, all, for your understanding. We will speak to you again in the fall for our Q3 2013 conference call.

Thank you. That does conclude our conference for today. Thank you, all, for participating. You may all disconnect. Speakers, standby.