Q2 2018 Yandex NV Earnings Call on July 26, 2018 / 12

THOMSON REUTERS STREETEVENTS PRELIMINARY TRANSCRIPT YNDX - Q2 2018 Yandex NV Earnings Call

EVENT DATE/TIME: JULY 26, 2018 / 12:00PM GMT

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CORPORATE PARTICIPANTS Gregory Abovsky Yandex N.V. - COO & CFO Katya Zhukova Mikhail Parakhin Yandex LLC - CTO

CONFERENCE CALL PARTICIPANTS Alexander Vengranovich Sova Capital Limited, Research Division - Research Analyst Cesar Adrian Tiron BofA Merrill Lynch, Research Division - Research Analyst Lloyd Wharton Walmsley Deutsche Bank AG, Research Division - Research Analyst Miriam Anuoluwapo Adisa Morgan Stanley, Research Division - Equity Analyst Mitch Mitchell BCS Financial Group, Research Division - Media and Industrials Senior Analyst Slava Degtyarev Svetlana Sukhanova Sberbank CIB Investment Research - Senior Analyst Ulyana Lenvalskaya UBS Investment Bank, Research Division - Director and Analyst of Media and Technology Vladimir Bespalov VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst

PRESENTATION Operator Good day, and welcome to the Yandex Second Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Katya Zhukova, Investor Relations Director. Please go ahead.

Katya Zhukova Hello, everyone, and welcome to Yandex' Second Quarter 2018 Earnings Call. We distributed our earnings release earlier today. You can find a copy of the press release on our IR website and on Newswire services.

On the call today, we have Greg Abovsky, our Chief Operating Officer and Chief Financial Officer; and Mikhail Parakhin, our Chief Technology Officer. Arkady Volozh, our Chief Executive Officer; and Vadim Marchuk, our VP of Corporate Development will be available on the Q&A session. The call will be recorded. The recording will be available on our IR website in a few hours. As usual, we prepared a few supplementary slides, which are currently available on our IR website.

Now I will quickly walk 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 27, 2018, 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 those forward-looking statements as representing our views as of any date subsequent to today.

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During this call, we'll be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance to the U.S. GAAP. A 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'm turning the call over to Mikhail Parakhin.

Mikhail Parakhin - Yandex LLC - CTO Thank you, Katya, and hello, everyone. I'm delighted with our accomplishments in Q2. Our consolidated revenue grew 34% year-on-year, reaching RUB 29.7 billion. Revenue growth was primarily driven by the solid growth on Yandex properties, accounting for the bulk of our revenue as well as by great across Taxi, Classifieds, Media Services and Experiments. On April 27, we completed the formation of Yandex.Market JV with Sberbank and deconsolidated Yandex.Market from our consolidated numbers. From a reporting perspective, this in use our consolidated revenue growth has Q2 2018, we report only 27 days of Yandex.Market results versus full quarter of Yandex.Market in Q2 2017. Excluding the impact of Yandex.Market from 2017 and 2018, our revenues in Q2 grew 39% year-over-year. Revenues of Yandex properties grew 21% year-over-year. Excluding Yandex.Market, revenues of Yandex properties grew 28% year-over-year. This is compared with 24% growth on the X Yandex.Market basis in Q1 this year. The acceleration was driven by solid trends in Search and across our other properties with then images and homepage as main contributors to growth. Growth in our core search product were driven by a number of factors, primarily by games in Android and our advancements on the front. The new approach to auction that we unveiled in late April as part of our launch was well adopted by advertisers. We continued experimenting with different layouts and within organic search results. We see encouraging trends in mobile monetization as a result of some of these -- In June, we started experimenting with placement of Yandex.Direct on our homepage. The experiment combined sufficient targeting capabilities of Yandex.Direct with an extensive research provided by Yandex homepage, one of the largest online advertising on the Internet. Currently, we're in this experiment on a limited audience size and we're seeing encouraging results. On the Ad Network front, we continue seeing the adverse impact from the change of our partner mix that I mentioned in April. In Q2, it was not fully offset by the positive impact of our new partnerships. Revenues of Yandex Ad Network grew 4% year-over-year this quarter. Turning to our search share trends. In June, our overall search share reached 55.5%, up 120 basis points compared to the year-ago. Our search share and desktop averaged 65.9% in June, gaining 160 bips from June 2017, but down 160 bips from March 2018 due to regular seasonality and the adverse impact of the road cap on our desktop searches. On mobile, our search share hit new heights at 46.2%, growing 540 bips year-over-year. On Android, our search share averaged 48% in June. This is an increase of 120 bips from March 2018 and 80 bips up year-over-year. On the past 4 weeks, our share on Android reached 48.6%. Our search share on iOS was 39.4% in June, up 19 bps compared to March 2018, but slightly down from a year ago. Share of mobile traffic reached 45% of our total search traffic in Q2. Mobile revenues represented 35% our research revenues. Mobile platforms remained the key driver of our search increase driven by growth of our mobile share and the adoption for Alice, our intelligent voice assistant. Alice continues to drive user engagement and loyalty. In Q2, its number of skills significantly increased 10,000. This growth was driven by Yandex dialogues, our platform for third-party developers, allowing to integrate third-party skills quickly and easily. In share of voice search traffic in our search app grew from single-digit to 18%, while our search app audience had doubled. We strongly believe that voice is a key element to connect the online and the off-line worlds. Alice is currently available in Yandex.Browser, Yandex.Search app, navigator and Yandex.Station, our smart that we recently. Yandex.Station is on board, assist people in their homes, managing daily routine tests. This is the first smart speaker developed for the Russian market. We see a strong interest in Yandex.Station. We sold out our first batch during the first day. Now everyone can order Yandex.Station on Yandex.Market and -- the price is RUB 9,990, which is approximately USD 160. Yandex.Plus is another new product that we unveiled in Q2. It is our subscription-based membership program that currently provides access to bundle of Yandex services. The subscription monthly fees below $8, but it offers number of nice benefits, unlimited music streaming on Yandex.Music, free moves on KinoPoisk, discounts for Yandex.Taxi and Yandex.Drive rights, predelivery for the users and additional storage space on Yandex disk. Yandex.Plus provides its subscribers with benefits of using their favorite products and give them opportunity to discover new ways like Yandex services can help them. I'm excited for the speed of new product launches that we demonstrated recently. With this, I'm turning the microphone over to Greg, who will walk you through the operational performance of business units and our financials.

Gregory Abovsky - Yandex N.V. - COO & CFO Thank you, Mikhail, and thank you all for joining our call today. In Q2, we delivered another strong set of results. Our consolidated revenue grew 34% year-on-year, reaching RUB 29.7 billion. Online advertising revenues accounted for 83% of total revenues in Q2 and increased 17% year-on-year.

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Excluding Yandex.Market, Ad revenues grew 21%. Reported revenue growth of Yandex properties was 21% year-over-year. Excluding Yandex.Market, Yandex properties grew 28%. Revenues from our Ad Network increased to 4% year on your due to the reasons Mikhail mentioned earlier. Revenues from our Ad Network accounted for 19% of total revenues. Other revenues grew 344% year-on-year in Q2, primarily driven by Yandex.Taxi revenue, which contributed the bulk of the other revenue line. Traffic acquisition costs related to our partner advertising network grew 9% year-on-year. Partner TAC as a percent of partner revenue was 61% in Q2, up 2.9 percentage points compared to Q2 2017 and up 2.2 percentage points sequentially. Partner TAC grew faster than our partner revenue due to the change in the product mix and partner mix. Traffic acquisition costs related to distribution partners increased 20% year-on-year and amounted to 6.8% of advertising revenues from Yandex properties, down 10 basis points compared with Q2 2017 and 20 bips higher on a sequential basis. Total TAC increase 12% year-on-year and amounted to 15.9% of total revenues, down 320 bips from Q2 2017 and 30 bips lower compared with the previous quarter. Clicks grew 10% year-on-year, while cost per click was up 6% year-on-year. Excluding Yandex.Market, paid clicks grew 16% year-on-year and were driven by solid growth rates on search and our other properties. Turning to our cost structure. In Q2, total OpEx, excluding tax and G&A, grew 46% year-on-year. Excluding stock-based comp, operating expenses increased to 45%. The growth was primarily driven by either increasing growth of cost and services provided to Taxi corporate clients as well as advertising and marketing costs across all our businesses. As of June 30, 2018, our headcount reached 8,288 people, up 2% compared to March 31 and 27% higher compared with a year ago. The growth was primarily driven by hires in Taxi and in our core business, but was muted by the of the Yandex.Market. Excluding Yandex.Market, our headcount was up 12% compared to March 31, an up 40% compared to a year ago. In Q2, our personal costs constituted 20% of total revenues despite acceleration and hiring. Stock-based comp increased to 62% year-on-year in Q2 and constituted 5.3% of revenues, up 90 bips from 4.4% a year ago. Due to the exploration of part of our equipment and our intangible assets. Our consolidated adjusted EBITDA increased to 23% year-on-year. Excluding Yandex.Market, our adjusted EBITDA grew 32% year-on-year. This quarter, the impact from ForEx was a gain of RUB 2.1 billion related to the depreciation of Russian ruble during Q2 from RUB 57 to the dollar and RUB 63 to the dollar. It's important to note that our other nonoperating income significantly increased in Q2 compared to a year ago. As this line included the gain from the deconsolidation of Yandex.Market. This gain was approximately RUB 28 billion. Net income was were up 857% year-on-year in Q2 2018, primarily as a result of the gain from Yandex.Market deconsolidation. Our adjusted net income was up 27% year-over-year and adjusted net income margin was 17.1%. Adjusted net income, excluding Yandex.Market was up 44% from Q2 2017 and adjusted net income margin excluding Yandex.Market was 18%. Our CapEx was RUB 9 billion or 30% of our total Q2 revenues. As we mentioned before, our CapEx primarily relates to service and data center equipment, is not evenly spread out across the quarters and dependent delivery data equipment. The first 6 months of the year, our CapEx amounted to 18% of our revenues. On a full year basis, we expect CapEx to be in the mid-teens as a percentage of revenues. Now turning to the performance of our business units. Search and Portal revenue grew 22% year-on-year driven by the growth on our owned and operated properties. Adjusted EBITDA of Search and Portal grew 27% year-over-year in Q2 and adjusted EBITDA margin reached to 46.6%, growing 170 basis points compared to a year ago and increasing 10 basis points sequentially. On a full year basis, we expect our Search and Portal margins to be up slightly year-over-year due to additional hiring as step up and advertising marketing cost to support our existing products and some hardware initiatives, which negatively effect our core adjusted EBITDA margin in the second half of the year. Moving to Yandex.Market stand-alone. We saw revenue growth acceleration on the Yandex.Market side due to improvements in traffic and conversion rates in our comparison-shopping product. In Q2, revenues of Yandex.Market on a like-for-like basis grew 21%. Adjusted EBITDA loss of Yandex.Market was RUB 9 million in Q2. Turning to our Taxi segment. As of June 2018, the combined business operated 181 cities with a population of 100,000-plus and 109 cities with a population between 50,000 and 100,000. Our total number of rights with 207% year-over-year, including a full quarter's contribution from Uber. Revenues of Taxi grew 426% year-on-year in Q2. Adjusted EBITDA loss of Taxi was RUB 1.9 billion in Q2. Significant portion of it included 4 quarters of Uber's losses as as our investments in the free delivery business. We completed the integration with Uber in mid-June and expect a positive impact from Uber cost optimization in the short to medium term. We continue to expect that on an annual basis, our adjusted EBITDA loss of Taxi segment will be roughly on par with the 2017 losses in absolute terms. Our investments in the second half of the year will be skewed towards our delivery business as well as new initiatives. While in our established markets, we expect improvements in our adjusted EBITDA. Now let me turn to Classifieds. Revenue Classifieds business grew 101% year-on-year in Q2, primarily driven by revenues from listing fees and VAS, which increased to 102%, as well as from off-line revenues related to the business, which is run by on experimental basis. In Q2, this experiment had generated 18% of total revenues of Classifieds and contributed 36 percentage points of the revenue growth rate. In general, Auto.ru continues strengthening its market positions. Adjusted EBITDA of Classifieds was positive RUB 44 million. Turning to Media Services. Yandex.Music reached 1 million subscribers in June and continues to grow. This is an impressive step up from 250,000 subscribers in late 2016. Furthermore, we see benefits from integration of Yandex.Music into a range of our products, such as Yandex.Auto and Alice. We also believe that Yandex.Plus and Yandex.Station will contribute to the growth of Yandex.Music subscription base going forward. We also continue strengthening KinoPoisk and we significantly increased its legal content library in the quarter. In Q2, Media Services revenues were RUB 395 million and grew 57% year-on-year. Media Services adjusted EBITDA was negative RUB 260 million as a result of our investments in the content library as well as an increase in advertising and marketing costs. In Q2, 2018, revenues

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©2018 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. PRELIMINARY JULY 26, 2018 / 12:00PM, YNDX - Q2 2018 Yandex NV Earnings Call of experiments represented by Zen, Cloud and Yandex.Drive reached RUB 440 million. The growth was primarily driven by Zen and Yandex.Drive. Adjusted EBITDA loss of Experiments was RUB 460 million. Zen's reached 13 million users and more than doubled over the past year. The average time spent per user on a platform remained stable. Engagement of Zen app users has been progressing well. In June, the revenue run rate of Zen exceeded RUB 4 billion. Zen continues adding new features aimed at increasing user engagement. In Q2, we introduced short posts and videos and the ability to leave comments, which increases user engagement. Getting back to corporate matters. We ended the quarter with approximately RUB 97 billion in cash and equivalents, which is approximately RUB 1.5 billion of exchange as of June 30. This includes the cash and cash equivalents of Yandex.Taxi, which amounted RUB 27 million. Cash equivalents related to Yandex.Market accounted for RUB 32 billion and are not included in the Yandex in the consolidated balance sheet cited above. Turning to guidance. Based on our recent sound solid performance, we increased our outlook for our Search and Portal business to grow in the range of 20% to 22% year-over-year in 2018. Excluding Yandex.Market from 2017 and 2018 results, we expect our revenues to grow 30% to 35% in 2018 compared to 2017 levels. With this, let me turn the call over to the operator for the Q&A session.

QUESTIONS AND ANSWERS Operator (Operator Instructions) We will now take first question from Cesar Tiron from Bank of America Merrill Lynch.

Cesar Adrian Tiron - BofA Merrill Lynch, Research Division - Research Analyst Two questions from me, please. The first one, there seems to be still a lot of operating leverage in core search and as percentage of revenues keep declining which is up some of our peers are experiencing. Do you think this is sustainable going forward? And then the second question, could you please give us some metrics on the food delivery business, discuss the success you've had so far and possibly tell us how much you spent for delivering in 2Q?

Mikhail Parakhin - Yandex LLC - CTO This is Mikhail Parakhin. I'll take the first one and then maybe Greg will take the second one. On TAC, so we have to 2 TAC, distribution TAC and partner TAC. Distribution TAC was pretty much flat, I think, 6.8% of our total revenues, and we expect it to be roughly stable in going into next year. For our partner TAC and Ad Network, that actually increased as a result of changing partner share mix and we actually think that this will also continue. That's why we are emphasizing our own properties, where we've obviously done TAC. I think you, again, you can sort of you think that this trend will continue going forward.

Gregory Abovsky - Yandex N.V. - COO & CFO Thanks, Mikhail. Yes, Cesar, so on the second part of your question with respect to food delivery. I can't provide to specific metrics because it's still in a very early-stage, but what I can say is that Yandex.Eats grew very significantly. The UberEATS business that we inherited from Uber transaction has been phased out and everything is now branded as Yandex.Eats. I think if you walk around Moscow these days, all you'll see are couriers with Yandex.Eats uniforms and Yandex.Eats food bags walking around. The other thing I can mention is obviously the most important metric that we track from a customer satisfaction standpoint is the click-to-eat metric, meaning how long it will take for consumer to get the food from the moment they order in the app, and so we actually receive it. And not only are we seeing significant increases in this click-to-eat metric for ourselves, we're also appear to be significantly better compared to the competition, which is obviously driving significant growth in market share for us in Moscow, which is our primary at this point. We're present in a few other cities, but we only launched there a few weeks ago. And then just in terms of how we plan to invest in this business, we're very bullish on it. We think there is a lot to do in food tech in general. I think fits in very well with the rest of the Yandex ecosystem with Taxi, with Search, and so on. And so we expect to significantly ramp up investments in food delivery over the course of the year. Does that answer your question?

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Operator We will now take the next question from Lloyd Walmsley from Deutsche Bank.

Lloyd Wharton Walmsley - Deutsche Bank AG, Research Division - Research Analyst I have 2. The first one would just be on core Yandex growth. Can you give us a sense for where you are in terms of the templates rollout. It sounds like it wasn't one of the top drivers of the revenue acceleration. How should we kind of think about that rolling out more broadly and the impact to revenue? And then just second one on the Taxi business. Can you just give us an update on where we are in terms of subsidies across the riders and drivers, and how those are kind of likely to trend over the next few quarters?

Mikhail Parakhin - Yandex LLC - CTO Mikhail, again. So on templates, well, actually contributing significantly -- reasonably to our revenue growth. Its manufacturers contribute -- template contribute as well. We keep on shipping new and new formats been controlled by templates. And just, in fact, recently, we expanded very significantly with on mobile devices with where ad was placed in the middle of the search page, instead of concentrating all of them on the top as we so far some of our competitors do. So it's not -- as i was sort of consistently saying, template is a whole broad spectrum of technologies that we gradually rollout. So they -- every time it's not 1 huge sort of 1 go, no go more every sort of week, new format appears, we included in templates and it starts been optimized in the new formats. And sometimes you could see that right now if you're careful, you will see more and more cases when, for example, navigation nonpaid links will be above the page link, things that previously unthinkable. And again, as I said on mobile, there is many more expectations when added in the middle of the search page. So those things just digest not sort of 1 big boom, they're going gradually these things are fairly successful so far.

Gregory Abovsky - Yandex N.V. - COO & CFO Thanks, Mikhail. And I'll take the second question with respect to Taxi. So what I can say overall is the Taxi business is tracking obviously very, very well. We're kind of very happy with where it is currently. In terms of the overall loss for the -- EBITDA loss in the segment as I mentioned in the prepared remarks, we continue to expect that it will be give-or-take RUB 8 billion. Obviously, going to include the core ridesharing business, the food delivery business that I just talked about as well as the self-driving initiative. And so over the course of the year, we should expect to see the losses of the Taxi segment will definitely mitigate. But then on the other hand, like I said, we're bullish on food delivery. And I think we're making great strides there, as I just said. And then the other thing that we are getting increasingly excited about is obviously self driving, where we feel that the AI talent that we have assembled here is at Yandex is world class, and we're making significant advances with considerable smaller resources in the rest of the competitors. And so we'll continue to support this initiatives and we think it's world-class in terms of capabilities.

Operator We will now take the next question from Miriam Adisa from Morgan Stanley.

Miriam Anuoluwapo Adisa - Morgan Stanley, Research Division - Equity Analyst Just another follow-up question on Taxi. There's been a bit of bit more aggressive price competition in Moscow after the quarter ended. So just wanted to get an idea what your attitude towards price competition. Do you feel like you've built up enough of the not to participate or do you see more option domestically? And then the second question would be on -- if you can give us an update on the rollout of new devices with the Search -- has that largely been done now or is there anything left to come in terms of new manufacturers rolling out?

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Gregory Abovsky - Yandex N.V. - COO & CFO Hey, Miriam, it's Greg. I'll try to take both of those questions. In terms of subsidies in Taxi business, look, we've always insisted that ridesharing is highly competitive global market. And we think in the end, it will be totally defined by strong network effects, superior product, superior tech stack and then the ability to leverage an entire ecosystem of services. I'd say the ridesharing market is still very young. And so there's lots of players who think that ridesharing is really easy. I'd say time and time again, you see competitors burn tons and tons of cash and sort of misguided attempts to buy market share with subsidies. And by the way, it completely works, right. But only works for short time and only as you have really deep rational investors behind you. We've seen another competitor in the market here, such as I think they raised a total of $700 million cumulatively and invested in number of different markets. And I think based on sort of public data, their market share is significantly 75% in New York, in U.K., in Russia and everything else. So I think in the end, we feel very good about Yandex.Taxi in outlook. We think that competition only serves to enlarge the market. I think it serves to accelerate transition from off-line. We think off-line is kind of a it's going to go away or be transformed with the help of the Yandex ecosystem and AI technologies to be much more robust. And in the end, the market will migrate sort of the personal transportation to shared transportation. And Yandex.Drive, Yandex.Taxi, all of these services accelerate that shift. And then on the Search widget question. Actually, there's been very limited rollout of Search widget to date. It's still the preponderance of devices do not have search widget, but simply have the chrome choice but it is in the market now, it's ramping up. And so I think that is still ahead of us.

Operator We will now take the next question from Slava Degtyarev from Goldman Sachs.

Slava Degtyarev Couple of questions, especially on guidance. So does your guidance include Yandex.Station in both revenues and EBITDA, and if so, how many stations you aim to sell roughly? And maybe also broadly how would you describe your strategy with regards to the Yandex.Station also into as your margin and maybe the long-term strategy here as well? And secondly, if you can describe the current gross bookings run rate for Taxi, sorry, if I missed that during that call? And also how should we, just thinking about the several one of the factors that has affected the growth in the second quarter because it seems like, hey, your taxi bills will deteriorate in the second half of the year, maybe somehow quantify qualitatively the various factors, including the cap effect?

Gregory Abovsky - Yandex N.V. - COO & CFO I'll try to take a couple of these and Mikhail will try to take a couple of these as well. So in terms of hardware they are pretty much not included in the guidance, included a little bit of hardware sales that we already had to date. As you know, we sold out the Yandex.Station in the first batch and we're looking to acquire and distribute more of those. Those are all 0 or even potentially slightly negative margin. But Mikhail will explain what the strategy there and I'll leave it up to him. So there's essentially no hardware revenue in the guidance. Although, our EBITDA guidance does include pressure from those dilutive hardware sales. And then I'll turn it over to Mikhail to talk a little bit about the strategy with station and otherwise voice platform technologies.

Mikhail Parakhin - Yandex LLC - CTO Yes, so obviously our main goal here is to have Alice in every household system being placed in every single household in Russia and other countries that we work in. This is our goal and we do not envision ourselves as being this hardware manufacturers. It's not really our main sort of business expertise. But we do get ourselves into this from time to time to open new market or to have devise that sort of referenced device others can use and maybe create variance We do not think we will be making money on the devices obviously, and we do not think it's going to be like super huge part. But we will do whatever is necessary to have the device in every single household in other countries -- in our country

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Gregory Abovsky - Yandex N.V. - COO & CFO Slava, just at the question of Taxi revenue growth which you asked. Obviously, look, it's going to slow down over the course of the year, it's a lot of business grow sustainably 465% year-over-year. But we still think that there's lots and lots of growth ahead of us. And in terms of gross bookings run rate, I think, we're currently tracking around $2.5 billion run rate or so.

Operator We will now take the next question from Ulyana Lenvalskaya from UBS.

Ulyana Lenvalskaya - UBS Investment Bank, Research Division - Director and Analyst of Media and Technology I just wanted to firstly to follow up on the margin question. Given this fairly strong result achieved in EBITDA margin the quarter Search and Portal business, how should we think about the outlook for the second half, you previously were guiding at flat margin in a year, is it still the case?

Gregory Abovsky - Yandex N.V. - COO & CFO Hi, Ulyana. So with respect to the Search and Portal margins, as I mentioned in the prepared remarks, at this point, we expect that the core Search and Portal margins will be up slightly for the full year. And so in the first half of the year, I think, our core Search and Portal margins were up something like close to 300 basis points. But, I think, I also mentioned in the last earnings call that we constantly sort of try to balance off the investment opportunities in our core business against demonstrating sort of natural operating leverage in the business. And the set of investment opportunities that's ahead of us is largely the same that we talked about in the last call. And that's AI, which in turn, drives speech and voice platforms, it's Jio-based services, including an initiative to drive the adoption of location-based advertising by the SMB segment, and in general, sort of simplifying online advertising for the SMB client, both in terms of Yandex.Direct, which is still contextual advertising side as well as on location-based side. And finally, the hardware initiatives, which like I said, are significantly margin dilutive and we wanted to be careful about the potential impact of those in the second half of the year when those products do ship.

Ulyana Lenvalskaya - UBS Investment Bank, Research Division - Director and Analyst of Media and Technology Make sense. And secondly, could you please talk a bit about the car sharing business, how many cars you have now and what's the future of this business?

Gregory Abovsky - Yandex N.V. - COO & CFO Sure. So car sharing business is a really interesting one. Currently, I think, we have about 2.5000 cars in the platform. We think we are more or less the market leader in the Moscow market. And interestingly enough, Moscow is the largest car sharing market in the world, which is, I think, it speaks to the sort of the wisdom of the local government here, which has allowed car sharing companies to have 3 intercity parking for all the car sharing providers. And we are seeing really, really good utilization rates out of our cars. And remember, these cars, they tap into the entire kind of Yandex ecosystem. Because they leverage of our mapping, they leverage our navigation, they leverage a single login across all of our services. So consumer can reserve a car on Yandex.Drive, they can get into it. They will be automatically logged into the system inside the car, meaning the in-dash navigation, in-dash entertainment, and so on, and so they can pull of their favorite playlist from Yandex.Music. And then on top of that, we try to cross-sell things like Yandex.Plus subscriptions, right, which is our membership subscription service that for RUB 169 provides you access to Yandex.Music, discounts on premium service on Yandex.Taxi, discounts on Yandex.Drive, free shipping on and so on, and so forth. For example, more space on Yandex disk. And so I think the combination of all of those things that we can pull together and offer the consumer has made the service incredibly successful. And we're excited -- we're very excited about kind of this full range of transportation functionality that we can offer to the consumer.

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Operator We will now take the next question from Alexander Vengranovich from Sova Capital.

Alexander Vengranovich - Sova Capital Limited, Research Division - Research Analyst So first question is a follow-up for previous answer on Yandex.Plus, I guess. So can you please share results from the launch of the subscription service, Yandex.Plus, in terms of the maybe the user growth for improvement of the engagement on Yandex.Taxi or Yandex Drive or anything you can share, which might be useful the success of the launch? So that's the first question. Second question is on the integration of Uber operations. Can you remind me what they have completely integrated their driver-side application of uber and whether there's anything left in terms of the integration of the operations? And the fourth question is technical, I guess, looking at the presentation, I see there was a massive CapEx growth in second quarter '18 -- sorry, if I missed something, but can you please elaborate on what was the reason behind the 2?

Gregory Abovsky - Yandex N.V. - COO & CFO Hi, Alexander. So on Yandex.Plus, I'm not going to be able to share a lot of it because it's so early. But what I can say is it's a significant contributor to the growth of Yandex.Music subscription service. As I mentioned in the prepared remarks, we have over 1 million subscribers in Yandex.Music now and we used to have something like at the end of 2016, we had 0.25 million. And so there was this massive exploration in terms of Yandex.Music subscriptions and we are definitely seeing a lot more of the various services for subscribers And I think we'll probably able to share a little bit more with you on the Q3 earnings call, especially as we integrate the ability to subscribe to Yandex.Plus and more and more services. Currently, it's primarily Yandex.Music that's driving additional subscribers, but, we think, that we could sell this membership program inside of Taxi, inside of Drive and inside of as well. On the question of the Uber integration, that is completed. It was completed just before World Cup started. So currently both the driver-side and the passenger side application platforms are controlled by us. And finally, on CapEx, as I mentioned in my prepared remarks, capital spend is not evenly split over the quarters. It was significantly higher in the first half and it will be -- for the year as a percentage of sales, we continue to stick with our guidance of mid-teens as a percent of sales. And most of our purchases in the first half were aimed at purchasing GP use for various AI initiatives as well as buying servers for our upcoming cloud product, which is currently still in development phase and is obviously 1 of the investment projects that we're excited about and working on.

Operator We will now take the next question from Vladimir Bespalov from VTB Capital.

Vladimir Bespalov - VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst I have actually couple of questions. The one is on the capital allocation. You have a pretty good cash pile, you have a good cash-generating ability. But your investments are kind of restricted to certain extent. You're trying to give those at a certain level. expect you might be probably a bit more aggressive in this sense. What is the reason behind this, is this like the lack of management you don't want to focus on too many projects at a single time or maybe execution risk and things like this? And the second question might be a kind of a follow-up to this one. Could you maybe elaborate a little bit on new undertaking of Yandex.Health, which is experiment, maybe a bit more on Yandex.Cloud and what is the future of Yandex how do you see it, maybe some other experiments that you could comment on?

Gregory Abovsky - Yandex N.V. - COO & CFO So I'll take the first question on the balance sheet and then Mikhail will discuss Cloud, Health, YDF and other experiments with you. So on cash, look, we're very comfortable with where we are right now. We think we are well-capitalized and it's a good position to be in to have a cash cushion to deploy against various projects as we said and we also want to be extremely disciplined about the allocation of capital. I think you're right in

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Mikhail Parakhin - Yandex LLC - CTO Yes. So cloud is obviously 1 of our biggest investments now, and we are super excited about it. As you know, Russia uniquely lacks other countries in terms of the cloud penetration for whatever reason, even for the countries with similar level of GDP, in Brazil. Russia surprisingly has much lower percentage of business using cloud services. We believe that cannot stay, it's actually going to change in the usage of cloud services is going to explode. We believe that we are uniquely positioned to provide the best possible service with compliance with all regulations and very high-quality we're probably have operators of the biggest the data centers in the country. I'm assuming. So cloud is, I'm sure it will be hearing a lot about in upcoming months. Yes, we feel strongly that everything is on track and we should define. Health and what was that YDF -- not very big, tiny. So I probably wouldn't want to bring too much spotlight on them. They're either experimenting lots of ideas.

Operator We will now take the next question from Mitch Mitchell from BCF Global Markets.

Mitch Mitchell - BCS Financial Group, Research Division - Media and Industrials Senior Analyst To questions and one kind of blue sky question for you. Concretely, do I understand -- we talked about partner network growth in the first quarter and you said we should see some acceleration in second quarter and we didn't. And you also sort of clearly indicated obviously that your operating businesses is more profitable for you. Are you still hoping that the partner network growth will pick up going forward or just really the result of conscious decision to deploy resources to grow your own businesses faster and you're going to sort of lead the partner network go where it goes? That's the first question. Second question is just, I wanted to ask if you can give us some color on what you have your convertible notes expiring this year, what you're thinking around them? And then the last question is very blue sky question. Obviously, you saw that the EU ruled against Google around Android much in the same way that the against them here in Russia. I'm wondering if you think that, that presents a long-term opportunity for Yandex in other countries in a way that maybe been in the past?

Gregory Abovsky - Yandex N.V. - COO & CFO Hey, Mitch. So on partner revenue, clearly, we were wrong. We were certainly expecting that partner revenue would accelerate in the second quarter and it didn't, and we're obviously disappointed by that. Not going to tell you that it's a conscious decision kind of post I think when you play tennis, you got to play tennis with a net. So we were wrong, it didn't grow. We're hoping that it will accelerate in the back half of the year, but it's simply a question of partner mix and product mix there. We are making a conscious effort to invest in our own properties, as you obviously tell by the math of a release. Our own properties kind of excluding Yandex.Market grew 28% year-on-year in Q2, which is obviously very significant. And I think it's a great result. That includes things like Yandex.Images, Yandex.Collections, Yandex.Zen, all contributing to that growth. Obviously, having an ability to control product as well as the advertising and modernization is significant. So I think, on partner TAC, I'll just leave it at that. In terms of convertible notes, the ones that are due in December 2018, we plan to simply repairs when they come due. I think RUB 321 million of them left outstanding and we obviously have ample cash on hand to previous question to repay those. And in terms of opportunities, look, we think about opportunities in terms of first and foremost, can we bring something unique to the consumer, can we get into the hands of consumer, and is it going to be differentiated. And the keys is where we can answer those questions in affirmative, we try to build the product that fit those needs. I don't think there's particular decision really changes anything for us.

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Operator We will now take the next question from Sveta Sukhanova from Sberbank.

Svetlana Sukhanova - Sberbank CIB Investment Research - Senior Analyst I wanted to ask you about Zen. In May, you give us update run rate for Zen was around RUB 4 billion. I wanted to ask has anything changed since that time, how -- what the track record of Zen from May until now? That would be my first question. My second question would be, if I may, about over 1 million subscribers for Yandex.Music, is it total number subscribers, including trials or it is just like paid subscribers for Yandex.Music? That would be my second question. And my third question, if I may, would be about as part of the World Cup including advertisement and taxi?

Gregory Abovsky - Yandex N.V. - COO & CFO Hey -- couple of things. On Zen, the current run rate is something, I think, just north of RUB 4 billion, as I said in terms of just seasonality, as you could expect, summer months tend to be a little bit slower, so it did grow sequentially from May to June, but not significantly. And it's going to be some time until it kind of picks up again, probably in September when the rate accelerates one more time. And then just on subscribers for Yandex.Music, it includes both free and paid. And, oh, just -- the monthly revenues are still growing 130% at Zen. So it's in a very high revenue growth trend. And then Mikhail will answer the question about World Cup.

Mikhail Parakhin - Yandex LLC - CTO Yes, so impact of World Cup was pretty much as you would expect. So increase in our maps and sort of local search credits. We saw people searching more for restaurants and things like that, that you would imagine people would do after watching or watching the game. We saw decrease overall in search credits in general. We saw increase in usage of our news properties, again, no surprise there. Overall, people spent less time on online properties in general, but more on video online. And that was very successful for us. The -- in terms of taxi, the good news, the overall rides were higher obviously. The bad news was that also we were a little bit oversubscribed, demand was very high, right. So really nothing that you wouldn't think yourself kind of this standard...

Svetlana Sukhanova - Sberbank CIB Investment Research - Senior Analyst Of course, it makes sense. But my question was more like quantify contribution of 2 weeks of the World Cup in the second quarter into the taxi number of rides and into the organic ad revenue growth, which was very strong, 28% in the second quarter, Yandex properties? There's a third follow-up question about quantifying, but second question what Greg mentioned is 130% monthly growth for Zen, is it month in month, did I get your right?

Gregory Abovsky - Yandex N.V. - COO & CFO Hey Sveta, that's year-on-year. 130% year-on-year growth in the month of June.

Mikhail Parakhin - Yandex LLC - CTO And I'm quantifying -- so on ad front, we see roughly revenue neutral. So we made less money on some properties, more money on others like roughly probably flat.

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Gregory Abovsky - Yandex N.V. - COO & CFO And on Taxi, basically, we got fewer rides, I mean, we got the some number of rides. We got more revenue from them because basically the search factor was higher. There's more -- a lot more demand without -- and equal number of supply so I wouldn't focus too much on positive impact of that.

Operator We will now take a final question -- a follow-up question from Alexander Vengranovich from Sova Capital.

Alexander Vengranovich - Sova Capital Limited, Research Division - Research Analyst Just broad and general question on self driving. So you mentioned you are quite optimistic your investments there, can you please just outline the potential the reasons why you're investing in self driving, how do you think you might get some payback on these investments? So in which areas do you think these investments some additional for you?

Gregory Abovsky - Yandex N.V. - COO & CFO Hey, Alex. Sure. Look, I think, it's nothing -- I don't think we're going to be sort of reinventing the wheel here, pardon the pun. I think we are sort of pursuing the exact same business models, sort of every other company self driving around the world. The applications either in self driving cars or self driving taxi fleets.

Vladimir Bespalov - VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst As far as I understand right now, obviously everybody is investing in this area, but this stage is pretty unclear how the whole model will work in the future, so it's more about just invest in future, right?

Gregory Abovsky - Yandex N.V. - COO & CFO You're right, it's investing in technology stack, which will prove to be extremely important in the future, right.

Mikhail Parakhin - Yandex LLC - CTO I think that at least 2 opportunities for us, first of all, it's savings in taxi, which is direct opportunity. And indirectly, if we believe our technology is to be have to sold on global markets and this would -- could become potentially a very good worldwide.

Operator Thank you. This will conclude today's question-and-answer session. I would now like to turn the conference back to the host for any additional or closing remarks.

Katya Zhukova Thank you all for joining our call today. Please feel free to reach out in case you have any follow-up questions. We are always happy to answer them. Thank you, and see you in 3 months. Bye-bye.

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Operator This concludes today's call. Thank you for your participation. You may now disconnect.

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