Ladies and gentlemen, welcome to the Yandex Second Quarter 2014 Financial Results Conference Call. My name is Jacob, and I will be your conference coordinator. [Operator Instructions] I will now hand you over to Greg Abovsky to begin. Thank you.

Hello, everyone, and welcome to Yandex's Second Quarter 2014 Earnings Call. 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 on newswire services. Today, we also have on the call our CEO, Arkady Volozh; and our CFO, Alexander Shulgin. Our call will be recorded. 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 will 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 20 -- on Form 20-F dated April 4, 2014, 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 those 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 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 release we issued today. And now I'll turn the call over to Arkady, who will give you an update of our Q2 operational activities.

Ladies and gentlemen, thank you for joining us on our second quarter call. We had a strong quarter in our quarterly base of the present [ph] business with gross of 38% year on year. Nice increase in the number of advertisers and search queries. This time, I would like to emphasize 5 areas in the company development. One, during Q2, we rolled out Islands, our new search concept. We rolled it out in Russia, Ukraine and Belarus. Two, we continue to demonstrate solid growth in the number of paid clicks both overall as well as on our owned and partner [ph] websites, and our CPCs are also growing. Three, we launched the new mobile app called the Yandex.City, which combines our strengths in maps with user-generated reviews of local businesses. Four, we entered the market of after classifieds with our acquisition of Auto.ru. And five, on June 3, our shares were accepted for trading on the Moscow exchange. I will elaborate on each of these in a minute, but let me begin with comments about our search share. According to LiveInternet, our search share decreased from 61.9% in Q1 to 61.6% in Q2. More recently, our search share, according to LiveInternet, has been around 60.5%. We believe that the decline is a technical artifact, as our own internal analytic tools do not show a decrease in user activity audience size or the number of visits to our search site. It shows that these metrics are increasing in line with the market as a whole. During Q2, the number of search queries on Yandex grew 21% year-over-year, similar to the rate of growth in Q1. Let me update you on our shares on mobile. In Q2, our search share on Android stood at around 54%. Our search share on iOS grew…

Thank you, Arkady. And thank you, all, for joining. In the second quarter of 2014, our consolidated revenues grew 52% year-over-year and reached RUB 12.2 billion. Excluding the impact of Yandex.Money from Q2 2013, our total revenues grew 35%. Text-based advertising accounted for 93% of total revenues in Q2 and demonstrated a healthy growth of 39% year-on-year. Yandex owned and operated websites constituted 70% of total revenues and grew 27% year-over-year, accelerating slightly from Q1 growth rates. Our text-based advertising network grew 92% year-on-year. This growth was driven by our partnership with Mail.ru, started on July 1, 2013, and we expect our text-based ad network revenue growth to stabilize in Q3 2014 as we anniversary the start of this partnership. As a result, contribution of ad network revenues to the total revenues grew from 15% in Q2 2013 to 22% in Q2 2014. Share of this advertising shrank from 7% of total revenues in Q1 to 6% in Q2 as a result of macroeconomic conditions. Our revenues from our owned and operated display were down 16%, while display ad network revenues grew to RUB 101 million from RUB 17 million 1 year ago. All in all, revenues from display decreased 6% year-over-year. We expect the trailing conditions for display advertising to remain challenging in the near to medium term. However, we are actively adding new inventory and development demand for new products like our TV network by adding new platforms and offering new ad platforms [ph] to advertisers. Other revenues doubled but still comprise 1% of the total revenues. Growth was primarily driven by revenues received from Yandex.Taxi. Traffic acquisition costs related to the partner ad network grew 103%, while partner TAC as a percent of partner revenues was 67% in Q2 2014. Compared to Q1, our partner TAC as…

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

Wondering if you can give us a bit more color on the reaccelerating revenue growth, O&O search, in particular, and how we should think about that going forward. And kind of as a follow-up, maybe you can talk about to what extent that may have been helped by some of the ad tech initiatives on server clusterization and provide an update on the status of the API for automated bidding and dynamic ad creative.

Lloyd, this is Alex speaking. Thank you for the question. So talking about O&O revenue growth, it was solid at 27% in Q2 compared to 26% in Q1 2014 and 37% in Q2 2013. When we implemented the 1,000 block of -- in Yandex.Direct. Just to remind everyone, at the end of Q1 2013, so 1 year ago, we moved our block of advertising to the right-hand part of organic search results -- from the right-hand part to the bottom of the organic search results. Taking that we decreased the number of ad links from 4 -- 5 to 4, CTR of the new 1,000 block increased considerably, so did the page clicks on owned and operated search result pages. Despite the strong growth of O&O 1 year ago, we still demonstrated assorted growth in paid clicks in Q2. The driver of all the growth in Q2 was a bunch of smaller technological and interstate initiatives and changes in Yandex.Direct. So as a result of this initiative, paid clicks on owned and operated properties grew 30%. While overall, for the whole company, paid clicks growth was 36%. And also, CPC helped a little bit. So CPC were up 1%. Other drivers were bringing growth for it as well, and this includes an increasing number of advertisers and inflow of foreign advertisers for text-based revenue. Number of advertisers grew 25% to more than 295,000 customers in Q2 2014. And the growth rate in number of advertisers comes from -- and the growth comes primarily from regions, as Moscow and St. Peter are already pretty high penetrated. So the impact of the new technology initiatives that Arkady talked about, they are not yet as visible in our Q2 results, but we expect them to contribute to our performance going forward. This is special arrangement for the bigger customers who are around sophisticated multiple companies and new to questions -- millions of keywords online.

The next question comes from the line of Edward Hill-Wood from Morgan Stanley.

I have 2 questions. Firstly, on mobile. You mentioned the traffic is up to 20% of total queries, revenue 14% [ph]. The GAAP between traffic and monitor -- or traffic and revenues widened to around 70% in the quarter, and it's been widening every quarter. So I was wondering if you could just touch on mobile monetization and whether or not we should be a little bit concerned that the -- your ability to monetize that traffic is getting a little tougher and maybe some comments there. And secondly, on the Yandex.Market, I was wondering if you could give us an update on the -- how the transition to CPA model is going, maybe some conversion rates of how many retailers or GMV, which has transitioned over, and whether that's going according to plan. And just how the marketplace is doing in a tougher consumer environment and whether or not we should expect that business to grow faster or slower than the core this year.

Ed, it's Greg. Couple of things. Turning to mobile first. You're quite right that the GAAP that you are used to seeing between revenue share and query share widened slightly. There have been no changes in the way that we monetize any of the platforms. And so the divergence is primarily just a result of mix shift inside of mobile and the relative proportion of tablets which, as you know, monetize very well, and phones, which don't monetize as well. So that's, I think, all there is to that. On the question of Yandex.Market, as you know, we have been rolling out a lot of the features. We've added the ability, as Arkady said, to pay with credit cards. We've added the CPA functionality. There's more features, which are still coming down the pipe. We currently have about 200 customers signed up with the CPA model. It's still not a very large number, but we are hoping that, over time, that will grow. As you know, also, Yandex.Market itself derives a significant portion of its revenues from categories such as consumer electronics and white goods, basically, categories that are sort of ideal candidates for online sales. And the foreign exchange weakness that we've observed in Russia year-to-date, has probably negatively impacted the sales of those goods more so than it has many other sectors. So I think that's kind of one of the effects that we're seeing out there from a macro standpoint. I'd say, overall, e-commerce continues to be healthy and grow at a good pace. But certainly, certain sectors of it that are much more tied to things like FX are more heavily impacted than others.

Great. And one final one, if I may, just while I'm on the line. On the Auto.ru, which you mentioned, I think the ambition to become market leader in the autos classified sector, I was wondering if this can be achieved without a significant ramp-up in marketing budget.

This is Alex speaking. So with Auto.ru, we acquired an auto classified portal with a very loyal audience, number of people who use Auto.ru directly, I mean, type-in traffic is very high. There is also a relative [ph] team. So we plan to support Auto.ru on different fronts, from technology perspective, from teams perspective, scale and also from advertising expense. I don't expect a substantial increase in advertising spend, I mean, which will be visible in Q3 or Q4 results for the total Yandex company, clearly on the group level. But we all definitely plan to aggressively support Auto.ru from different perspectives, also by promoting Auto.ru service on Yandex web proper.

The next question comes from the line of Anna Lepetukhina from Sberbank.

I have 2 questions. My first question is on display advertising. Can you, please, talk a bit about revenues growth in display advertising on ad network? What exactly is driving this growth? And do you think, going forward, decline in display advertising on Yandex website can be offset by growth on ad network?

Anna, this is Alex again. So in Q2, this advertising in total was 6% down year-over-year, and the part related to our own web properties was down 16%. So as I mentioned for many times, these advertisers are very sensitive for macroeconomic and geopolitical conditions. And in Q2, we saw cuts of budgets from multinational auto and different [indiscernible] brands and also from local retail, telecom and finance companies. Also, this was transferred by the high basin H1, first half of last year, when display advertising was growing at 38% year-over-year. The introduction of the partner display network helped the share to beat this negative trend. So the display ad network increased from RUB 17 million 1 year ago to RUB 101 million. And I would say it's still in a stage of fast growth and development. So we run now actively adding new inventory and technology forums and developing demand for the new products like active network and adding new platforms and offering new ad formats for advertisers to overcome the negative trends in display, which as I said, is due to primarily by macroeconomic and geopolitical conditions.

And my second question is on Yandex.Market. I'm just wondering when do you think you will start advertising this product to customers. I mean, when do you plan to launch some advertising campaign? Do you think it will be this year or already next year?

Anna, it's Greg. So I think our plan with respect to marketing the CPA functionality of Yandex.Market is to market that more aggressively in the back half of 2014, probably more closely to the holiday shopping season.

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

My first question is coming back to perhaps the macro situation. You mentioned a slight slowdown in display as a result of that. Could you perhaps talk about what you're seeing on contextual? obviously, you didn't see it on the results in the second quarter, but have you had any conversations with advertisers that are, perhaps, more concerned with the macro situation or more hesitant to spend money there? And my second question is actually about CapEx longer term. So you slightly increased the guidance for this year. But perhaps, how do you see CapEx evolving over the next 3 to 4 years, let's say?

Boris, this is Alexander speaking. So on contextual text-based advertising, as you see in our Q2 results, we see sort of good trends. We've got a healthy growth both in O&O and partner ad network fronts. The growth comes from primarily growing paid clicks, which is very good for all customers. CPC slightly growing at 1%. One item to mention is that we also see accelerated growth from the international customers, meaning even foreign customers. The rate of growth has actually accelerated compared to 1 year ago. So in Q2 2013, the growth contribution of foreign customers to our total revenues was 4%, now at 7%. And by foreign, I mean customers which are based outside of Russia, not have operations in Russia. We also see growing sort of -- growth trends from multinational companies, which are based in Russia. So by reiterating our revenue guidance, despite the slowing down -- slowdown in display advertising growth, we tried to signal that we expect to see good sort of trends in text-based revenue in the following quarters.

Yes, this is Arkady. Maybe to follow up with the contextual. This is not the first crisis we have. And in any crisis, display advertising reflects the expectations of the companies, and they are usually low. Whereas contextual advertising is -- it reflects the real business. And as we see in our numbers, and you see it now also, the real business is still going. And we expect it to continue throughout this year.

Yes. Answering the second question about CapEx, so we increased expectations of capital expansions throughout the 16 -- the range of 16% to 19% of total revenues in 2014. The reason here is improvement that we see and need to improve performance and productivity of advertising technologies, primarily to share the news of the biggest customers who run certificate [ph] campaigns and also to improve our search quality and increase the index in foreign languages, which are even for the Russian users. So for Russian users, we search in foreign languages. So these are 2 main reasons for CapEx increase. And the result was somewhat -- which is -- could be potentially related to new installation initiatives in Russia.

And we have a question from the line of Anastasia Obukhova from VTB Capital.

Could you, please, share with us the percentage [ph] Yandex.Market [indiscernible] CapEX compares in revenues had in the revenue structure of Yandex in the second quarter and also your -- my estimated time of CPA auction launch this year? And do you also believe that the additional cost to guiding advertising these new services regarding Yandex.Market, et cetera, will kind of materially impact your overall budget or overall expense?

Anastasia, it's Greg. Couple of things. On the Yandex.Market, the CPA auction that I think you were asking about, I think the current plan is to roll it out probably later this quarter. In terms of the advertising to support Yandex.Market, obviously, that's been the budget itself at a certain level of spend. And obviously, we will tailor that spend based on how well or not well it's going. But so far, that's already in the budgets as they're currently laid out. Was there something else?

Yes, the sale of Yandex.Market in total revenue structure. Yandex needed change, for example, versus the past year, and how it's evolving or higher than the context that they'll...

It is slightly lower than it was historically by a very small amount. It's sort of in the same mid- to high-single-digits area as it was before. But as I was saying, since a significant a portion of Yandex.Market revenues are derived from consumer electronics and white goods, which are growing slower than other e-commerce categories, such as apparel or toys or building supplies, therefore, sort of Yandex.Market itself is probably growing a little slower. It's still showing nice healthy growth trends for the business.

The next question comes from the line of Ulyana Lenvalskaya from UBS.

We didn't yet hear on Turkey. Could you, please kindly, update us on the progress with the market share? And do you expect start -- maybe start monetizing this market training time soon?

It's Arkady. In Turkey, as we reported, we reached 5% market share in previous quarter. Then we switched off couple of distribution channels, which didn't give us enough conversions. Our market share went a little bit lower, below 5%, but still there, and our quality of traffic improved dramatically. It's really our users now, the number of sessions per user, and all the other site metrics [ph] are now higher than ever. We continue in Turkey. We've got a brand new team there, and we still expect to grow our market share this year. And on the monetization, we already monetized it. We just got the Sales Director there. Maybe you read some news. We're going to have some -- we're going to have for the first revenues from Turkey this year.

And maybe another question to Alex. Could you, please, update us on the margin guidance this year, given we have seen some improvement in profitability quarter-on-quarter?

Sure, it's Greg. So a couple of things on margins. Overall, as you saw, we demonstrated some operating leverage quarter-over-quarter from Q1 to Q2, and we continue to invest in personnel. They're probably at a slightly slower pace than we have before. As you know, personnel is, obviously, the primary cost category for us. Our thinking is that, it still makes sense for us to keep hiring people to keep investing in various strategic initiatives that we have, sort of irregardless of the macroeconomic environment that we sort of see and read about. Revenues, on the other hand, are kind of driven by the success we have in converting strategic focus areas to actual dollars and cents as well as kind of the overall macro backdrop that we operate in. And so macro's challenging. There are certain sectors of the economy that are not doing as well. As you know, certain segments of our business which are not doing as well, such as display, which are, obviously, getting impacted by the challenging environment that we have. But at this point, I don't think I can point to anything that will make display better. But at the same time, contextual feels pretty good. So when you have certain expenses and certain revenues, margins end up just being a product of that. I think we will sort of keep the expense structure more or less where it is. We will continue to invest in the strategic focus areas and the revenues will sort of be what they will be based on how the situation evolves, and then the margins will fall out of that.

It's Arkady. I would like to add that we keep focus on margins. And all experiments in Turkey or our focus on macro [ph] will always be there, and we will be sure that we keep the healthy margins as we have now.

We now have a question from the line of Igor Semenov from Deutsche Bank.

I just wanted to go back to one of the previous questions and just to follow up on CapEx. Could you talk a little bit about the medium-term outlook for your CapEx? Do you see any need to increase CapEx dramatically as a result of maybe recent regulatory initiatives?

Igor, this is Alex speaking. So in Q2, our CapEx was 18% of revenues, and as I said, the outlook for this year, 16% to 19%. This year, we expect to complete investments in our new data center in Finland. And next year, therefore, CapEx as a percentage of revenues should not be increasing and probably will be lower than this year, simply because we'll not be investing in any material -- or substantial amount in data centers. But we will continue to invest in server equipment in order to increase CapEx and productivity of overall core technologies. In 2016, maybe '17, we'll probably start on getting data centers again to expand -- to be in line with our projections on productivity that we need from equipment perspective. But things we invest into a much higher efficient data centers that we used to have, we expect the new constructions to have positive impact on our operating costs, especially around the leasing [ph] costs and also on rental fees. So all-in-all, we've seen that this year, CapEx will be slightly on the higher side of our multiyear level, and probably, there will be some decrease as percentage of revenues following year. And then new data center will have some additional impact.

And we have a follow-up question from Anastasia Obukhova from VTB Capital.

Could I ask you one more question, please? Last conference call, during the first quarter, you conditioned with us your kind of understanding of where the EBITDA profitability might dilute under the best- and the worst-case scenarios. You gave 130 up to 300 range of potential full year dilution. Would you now stick to this kind of understanding? Or is it becoming worse or better, the outlook for profitability dilution for this year?

Anastasia, it's Greg again. No, it's slipping [ph]. I just wanted to kind of explain to you that the puts and takes that go into it, right? Again, at the lower end of our revenue outlook, it could be sort of the 300 basis points. At the high end, it should be a little lower. But at the end of the day, we will keep investing in personnel and strategic initiatives. And we, obviously, will watch what the macro situation is and what the revenue is as it comes in, but we, also, want to keep investing in business. We don't want to sort of target margins blindly, and that range that we gave before of the various sort of sensitivity cases, it's just as valid today.

The next question comes from the line of Mitch Mitchell from BCS.

I just wanted to clarify on the share buybacks. The 15 billion share program is over and that you have an additional 3 million shares which you're buying. Has that program already started? And also, it looks to me like you bought 3 million shares just over the last quarter, which suggests you're moving at pretty quick pace. What happens at the end of the next quarter if you've bought out these 3 million shares? Would you have another buyback program or might you be looking at paying out dividends at that point?

So first of all, the quarter was fruitful [ph] one, I guess, in terms of volatility for our stock and presented us with many opportunities for a stepped-up piece of buyback, which we were able to take advantage of. Again, it's very hard to predict what the stock prices will do. But we remain disciplined, and we would rather buy stock at low prices than high prices. The 3 million share repurchase plan has not commenced yet, but will commence shortly after this quarter in a couple of days. As you know, we are limited, somewhat, in our ability to buy back stock beyond the hypothetical needs of our employee stock option plan. And we, as you know, any buybacks in excess of that would be taxed and will not be very capital-efficient for us. So our -- the 3 million share represents sort of our expectations of the shares that we can buy back over some period of time kind of on an annual basis. So I don't think we'll be speaking here in 3 months time, again, depending on the stock price, but -- about reloading the share buyback program by another 3 million shares. We will, also, continue to evaluate other means of returning capital to shareholders. The board as a whole is committed to returning capital to shareholders. And we'll continue to evaluate alternatives -- alternative means of returning capital to shareholders over time.

Thank you. And we have no further questions coming through. So I will hand back to your host, Gregory Abovsky, to conclude today's conference. Thank you.

Great. Well, thank you, everybody, for dialing into today's call. And we're very happy with our results. And we're looking forward to speaking with you again in another quarter's time in October.

Ladies and gentlemen, thank you for joining today's conference. You may now disconnect your lines.