Good day ladies and gentlemen and welcome to Yandex's fourth quarter and full year 2014 financial results conference call. Today's call is being recorded. I will now hand you over to Katya Zhukova, Yandex's IR Director to begin. Thank you.

Hello, everyone and welcome to Yandex's fourth quarter and full year 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 Web site as well as on Newswire services. Today, we have on the call Arkady Volozh, our Chief Executive Officer; Alexander Shulgin, our Chief Operating Officer; and Greg Abovsky, our Chief Financial Officer. Our call will be recorded. The recording will be available on Yandex's IR Web site in a few hours. We have put together a few supplementary slides which are currently available on our IR Web site. And 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 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 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 will be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with 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 will turn the call over to Arkady.

Hello, everyone and thank you for joining our today's call. Yandex posted another year of strong results in 2014. Despite macroeconomic headwinds we delivered revenue growth at the high end of our revenue guidance and total revenue growth on like for like basis of 30%. Our overall search share in Q4 averaged to 59.7%. Our market share on desktop remains largely stable hovering around 64%. On the mobile side, we improved our position on iOS with our search share on iOS increasing to 49% last quarter compared to 43% at the end of 2013. Our share on Android devices declined to 44% in Q4 compared to 49% in the prior year. Share of mobile in overall search traffic increased to 24% compared to 23% a quarter earlier with mobile generating 18% of our total search revenues compared to 16% a quarter earlier. And we saw improvements in mobile [acquisition] [ph] both on smartphones and on tablets. Now turning to overall macroeconomic conditions. With currency revaluation, inflation and lower disposable incomes, it appears that 2015 will be a difficult year for offline advertising in Russia in general. However, we believe that contextual advertising will continue to demonstrate healthy trends and we expect our revenues to grow approximately 15% in Q1 of this year. And now let me turn it over to Sasha, who will go through the details of our core business.

Hello, everyone. Today we have filed a request to the Russian Federal Antimonopoly Service to investigate Google's anti-competitive practices in Russia. Google's Android dominates the Russian market for mobile operating systems with more than 80% market share. Many believe that Android is an open platform. In reality, manufacturers of Android powered devices are locked into the proprietary Google Play application store and closed APIs. In order to install Google Play on their devices, OEMs and mobile network operators are required to preinstall the entire suite of Google services and set Google as the default search. In addition to that OEMs and MNOs are increasingly prohibited from installing any service from Google's competitors on their devices. For example, in the last three months three Smartphone vendors, Prestigio, Fly and Explay, who have been our long-term partners, have notified us that they are no longer able to pre-install Yandex services on their Android devices. We believe that Google is using its dominant market position in order to promote its core services including search. Google Play should not be bundled with other Google services. OEMs and MNOs should have access to Google Play with an ability to select which default their devices ship with. Now let me turn to the product side. The newly released Yandex Transport is a great mobile application which provides public transport schedules with real time information and live arrival times. This service was launched in certain Russian cities in beta last sprint and Moscow was added at the end of January. Since then the app was extremely well received with very positive reviews in the app store. For one week, Transport held the coveted number one spot overall on iOS and was in the top 20 overall on Android. Yandex Parking is another new app that helps drivers…

Thank you, Sasha and thank you all for joining our call today. In Q4 2014 our consolidated revenues grew 21% year-over-year and reached RUR 14.7 billion. Our full year revenues excluding the impact from Yandex.Money grew 30% right at the top end of our guidance outlook. Text-based advertising accounted for 90% of total revenues in Q4. It increased 22% year-on-year. Yandex's owned and operated Web sites constituted 68% of total revenues and grew faster than total revenues at a rate of 24% year-on-year. Our advertising network grew 16% year-on-year. Contribution of ad network revenues to total revenues decreased by 110 basis points year-over-year but grew 106 basis points sequentially to 22.3% in Q4 of 2014 primarily due to change in mix. Share of display advertising was higher than previous quarters which is typical for Q4. Display revenues contributed 8% to total revenues and grew 3% year on year. The growth was driven by the increase of revenues from our display advertising network which now supplies 16% of total display revenues overall. Other revenues tripled and comprised 1.7% of total revenues, consisting primarily of revenues from our Yandex taxi service. Traffic acquisition cost related to partner advertising network grew 4% white partner TAC as a percent of partner text-based revenues decreased to 64% in Q4 from 66% in Q3. 155 basis points due to change in our partner mix. Just to remind you once again, partner TAC includes both TAC from display side as well as from the text-based side. Distribution TAC increased 23% year on year in line with revenue growth in Yandex's websites. The growth rate decelerated slightly compared to Q3 of 2014. On an annual basis, distribution TAC was at 10% off text-based revenues from Yandex websites. Total TAC increased 9% year on year. Paid clicks grew 18%…

(Operator Instructions) We will now take our first question from Lloyd Walmsley from Deutsche Bank. Please go ahead. Your line is open.

I am wondering, looking at the [search] [ph] growth that continues to decelerate but some of that maybe things like Yandex.Islands. Can you give us a sense for what query growth is like and how that’s breaking down between desktop and mobile? Kind of where you see that growing going forward. And then second if I may. On the mobile side, have you guys thought about doing more development using the open source portion of android, perhaps with like a partner where you can develop phones with the full mobile, Yandex mobile services as a way of gaining share in mobile.

Hello, Lloyd. This is Alexander speaking. Thank you for the question. So on your first question about query growth, it was 9% Q4. We see a low single-digit growth in desktop and much higher rates of growth on mobile phones and mobile devices. The trends are very similar to what we have seen in Q3 in previous quarters of this year. So nothing unusual in the query growth trends in the last quarter of 2014. On mobile, our vision of how we should progress. First, we need to invest in developing high quality applications which will be appreciated and installed by users. And we have a number of those especially in the mapping and navigation areas. And also our browser is gaining share on mobile devices. Also as you know and as I mentioned in my call, this morning we have filed a request to the Federal Antimonopoly Service in relation to Google's practice on Android as we believe it uses its dominant market position in order to unfairly promote its search and other core services. And we believe that Google Play should not be bundled with Google applications and services and OEMs and mobile network operators should have access to Google Play with ability to select which service, which search service to install on their device as default. So coming back to mobile, first one is developing high quality apps, high quality services and also we believe that we are looking for an intervention from the Federal Antimonopoly Service. Also this is not something unusual to happen. EU Commission is also investigating Google's practices with a complaint filed by FairSearch Alliance which include Microsoft, Oracle, Nokia and many others.

Maybe I would, it's Arkady, I would maybe follow up on the Android, what our principles are. Again, we have our own version of Android which is the Yandex kit. The problem there is not with the software itself but with the ecosystem and ecosystem in Android is a kind of natural monopoly. It's hard for developers to develop their applications twice or three times to port it from platform to platform. So naturally in the development world everything tends to come to a semi-monopoly ecosystem, which is fine. The problem is that if a monopolistic operating system is a closed one and precludes its competitors to be positioned equally. But the best approach we believe is if an open -- actually we have two principles here. One is that such an ecosystem should be based on open standards so that any application written to the standards would work on any device supported by this platform. And the second principle is, a common application store. One place where you can put your application and it should be available to all the vendors who use this platform. So these two principles, unified standard and a common application store, these are the two principles of an open system. So it shouldn’t be bundled -- operating system should be open and not be bundled with applications.

We will now take the next question from Alex Balakhnin from Goldman Sachs. Please go ahead, your line is open.

Two questions from me, if I may. First is, there was quite a bit jump in the average wages in the fourth quarter. Can you probably provide some explanation, like what has happened? Do you front load some of the bonuses or there might have been, which I doubt, some FX element in it or maybe something else. What is your, basically strategy, for remuneration of your key employees and employees in general amid a growing inflation in the country and rising inflation expectations. My second question is on this complaint against Google. In your sort of ideal scenario, how do you think the ideal mobile phone should look like? Is this like a selection of a default search provider on the launch, like on the first launch of the device or you want to preinstall Yandex kit at the premises of vendors so basically the device already comes with Yandex instead of Google? And hypothetically thinking, if Google decides not to unbundle Google Play from the consumer services, do you feel you have a capability to rebuild an ecosystem that would still be attractive so vendors like put the whole solution on the devices. So your thoughts in this direction will be also appreciated. Thank you.

Hi, Sasha. This is Greg. Let me address the first two parts of your question and I think Arkady will pick up on the third. With respect to average wages, you are quite right in that there were some onetime bonus payments towards the end of Q4. With respect to our thoughts on inflation and wages, we clearly do have inflation in Russia. I think that if you read any publications from the Ministry of Finance or the newspapers you see that expectations for inflation are high. Maybe as high as 15% or so. Clearly some of our wages will go up as a result of that as we attempt to preserve the purchasing power of our employees. Certain employees that we think are valuable, we will maybe do other things to maintain them. But overall, yes, clearly there is some upward pressure on wages from inflation and we expect that personnel will be one of the pressure points on margins in fiscal 2015. As we think about our margin outlook for 2015, clearly it's very uncertain where revenue will fall for the rest of the year given the overall macroeconomic uncertainty. But it appears that, it's very possible that margins are to decline, that forex is the majority of that decline. But that things like personnel costs and advertising and marketing will be contributors to that as well. And then could you just repeat maybe the other question on Android?

Yes. Probably just a quickly follow up on that. I mean historically your wage increase was pretty much following [CPI] [ph] broadly. Although the mix of the personnel was changing as well, you hired a lot. If you put your expectations for 2015, do you think it will be like representative of what you have seen over the last several years, i.e. close to inflation or it should be somewhere like in the middle between none and inflation? Or it's too detailed?

I think on average it will probably be in line with inflation.

Right.

I think there will clearly be people who will be above inflation and I think there will be some who are below inflation.

Right. Thank you on that. And my second question was, how do you think the ideal set up for these Android devices will be? Will it be that the device comes with the choice of the default search engine or it will be like installed with Yandex setup and all Yandex services like from the very beginning and no choice will be provided to consumer? So that’s the first part of that. And second part, assuming Google decides not to unbundle Play from the consumer services, do you think you will be able to reassemble the ecosystem by yourself? Basically create a lot of applications or promote developers to write applications for what would be Yandex market hypothetically, or it's quite a tough thing to do?

This is Arkady, Sasha. First of all, we do not lobby for anything. We just want the operating system to be unbundled from applications. In our view we think that ultimately it's up to users to choose the best application. And that’s the only environment where applications may continuously be improving when competition are there. So ultimately it should be users' choice. In the real world we understand that it's up to vendors to configure their devices. But since there is a lot vendors, there is no dominating player there, no monopoly. We believe that if vendors who will be free to preinstall as they believe the market would accept, this will ultimately lead to users' choice. And, again, we believe that the users should be the king here. On the ecosystem and Play or app store, if all the -- an open platform should support open standards, which means that standardized APIs. If a platform supports standardized APIs, any application which is written to support those APIs will be compatible with all the devices supporting this platform. This is the first principle. And the second principle is that any application published for such an open platform should be available for all the stores, in any device.

We will now take our next question from Ulyana Lenvalskaya from UBS. Please go ahead, your line is open.

My first question will be a follow-up on the profitability outlook for 2015. Could you please talk a bit about the lease expense outlook. What approach should we take? Do you expect it to stay in dollars or do you see any probability of potential negotiations with the landlord?

Hi, Ulyana. It's Greg. On margins, so obviously like I said, it very much depends on where the revenue comes in for the year and it's in certain. We think that margins could be down 9 percentage points from the previous year. About 60% of the decline is related to Forex and the rest is related to things like personnel expense and advertising and marketing spend. However, we are currently studying opportunities for increased efficiencies in our spend across the board. With respect to the lease, the lease is dollar-denominated. It is becoming a fairly significant portion and a large portion of the margin contraction is related to the lease itself. We are in conversations with the landlord and obviously we would very much like to renegotiate our lease to ruble based lease with a cap on the foreign exchange rate. But there is nothing to report on that yet.

Thank you very much Greg. And my second question would be about the number of advertisers. In my view the trend was still healthy in the fourth quarter. But could you talk a bit about the trends you see in the beginning of 2015 because there was some data about number of small enterprises in Russia is declining.

Yes. Look, I think it's too early for me to comment on the number of advertisers in Q1. We will see where that comes out. Clearly, the advertising market overall is under pressure. I think if you read a number of sources you will see that television is down 20% to 30%, outdoor is down a similar amount year-over-year. The fact that text based advertising remains somewhat healthy obviously speaks to the fact that it delivers superior ROI to our clients and still represents an area of growth for budgets to continue to shift from off-line to online. So we are optimistic about that. But clearly the overall macroeconomic backdrop is not favorable.

We will now take our next question from David Ferguson of Renaissance Capital. Please go ahead, your line is open.

So, a couple of questions please. Firstly, I guess there has been some talk about reaching agreements with retailers to preinstall Yandex. So where you are in that sort of process? When could it start, if you have signed off with anyone? So that is the first question. The second question would be, how should we think about distribution TAC over the year as the handset manufacturers that were pre-installing Yandex stop. And then the third, could you talk a little bit about or clarify what the cost base is in Turkey? That’s it. Thank you.

Hey, David. So with respect to installing our services at the point-of-sale, that does take place. It's contributing a small amount of overall share on Android currently but we're hoping that it's going to continue to ramp up. Look, on the distribution front as you could tell from the comments that we made to the press with respect to the case put to the Federal Antimonopoly Service. Clearly, there is fewer places for us to spend our distribution dollars, given that our long-term partners on Android, Fly, Prestigio, and Explay, are no longer able to play with us. Look, distribution is kind of an unknown at this point, so I don't want to comment too much on it. You will see kind of where it all shakes out. It's still uncertain. And what was the second part of the question?

Thanks. The second part of the question was on, can you clarify what the cost base is in Turkey at the moment, please?

Cost base in Turkey. So historically, Turkey was I think 200 to 300 basis points of revenue. Clearly, some of the costs for Turkey are more closely linked to U.S. D then they are to the ruble. And as a result of that their total drag on the P&L does increase year-over-year. But some of the costs are obviously here in headquarters and are ruble denominated.

And we will now take our next question from Cesar Tiron from Merrill Lynch. Please go ahead, your line is open.

Just on the OpEx, if we can come back to that. I just have two questions. So on the salaries outlook, are you saying that basically unless you are hiring more people the personnel expense won't grow by more than inflation. And then can you please just repeat what you said on the lease for the building and whether you think you can renegotiate the rent as it seems that -- we are hearing that some people are already able to renegotiate the leases of triple A office space in Moscow. Thank you.

Hi, Cesar. On personality spend. So there is a couple of things that contribute to personnel spend. One is obviously wages and the other one is personal growth. We did in total, I think add something like 800 people over the course of 2014 which clearly increases our base for 2015. So the combination of increase in the base and wage increases contribute to negative variance to margins in an environment where in Q1 we expect our revenues to grow only 15%. Right. So as a result of that personnel does end up being a negative contributor to margins. On the lease front, you are quite correct. There are certainly stories of even class A office space being renegotiated by landlords in Moscow. However, we do have a very large office here with a long-term rent. So it's not as easy as it is if we were a company of 50 people who could just get up and leave. We are in negotiations with the landlord but it's certainly not as easy as some outlets, media outlets, make it sound.

But should we then assume that if the rent was in U.S. dollars, I mean should we just assume that it's going to double in 2015 in rubles?

Well, so the ruble -- the average rate for the ruble in 2014 was about 39. So 39 rubles to the dollar. Today it's about 62. On top of that we did take on considerably more space in May of last year. So the entire base has grown. So in 2014 we will have had five months of smaller office footprint and seven months of the enlarged office footprint. So the overall rent expense probably conservatively doubles in ruble terms year-over-year.

Thank you so much.

And again, like I said, we do expect margins to contact year-over-year primarily driven by Forex and the building itself is a very large portion of that.

Thanks. And just a very last follow-up on the personal. It seems that you have actually slowed down the number of people you have hired in Q4. Is that a good indication for 2015?

Yes. I think that given the overall environment out there, I think our pace of hiring will be much slower in 2015 than it was historically.

[Operator Instructions] We will now take our next question from Boris Vilidnitsky from Barclays. Please go ahead, your line is open.

A couple of questions from me. First, could you comment please on the increase in mobile monetization. I notice that there the percentage has increased faster than search. I was just curious if it was a result of change in mix or what it was. And second, perhaps you could expand on the Yandex Data Factory and what are the first signs that you have seen since you have officially launched? Thank you.

I will take the first question on mobile monetization, Arkady will jump in on the YDF front. On mobile monetization, it did increase. It actually increased both on tablet and on phones. So that's a good sign. As we are getting better at targeting our ads and as we look to show more ads, especially in the tablet version and we're looking to see if we can take that further. On YDF, Arkady will comment.

So if you don't mind Greg, just on follow-up on that since we are already on the topic and then we will go to the Yandex, the Data Factory. How do you guys look at convergence across devices and how easy it is for you guys to implement that?

It's doable. It's not as easy as it would be for somebody who owns a social network. But we are looking for ways to tie convergence both across Yandex Search to other websites as well as mobile websites to mobile apps and we're trying to connect that entire chain. So that's something that's currently being worked on.

Yes. Thank you.

On the Data Factory, which we officially launched in December. Look, we sit on a world-class technology. We have one of the best in specialists in big data machine learning here. Currently we apply it only to one industry and one geographical market. We just consume Internet in the Russian speaking Internet. So if we could apply the assets we have to other geographies or to other industries, it would not cost us too much and would just add to our revenues. That's the basic idea. With Yandex Factory, we tried to re-utilize our server farms, our knowledge of big data handling, our machine learning capabilities which we already developed for our tools, online web tools, and try to apply it to other industries. We had a series of pilots of prototypes run in many many different industries last year, going from finance and telecom operators to industrial manufacturers or infrastructure services. Some of those pilots were even paid pilots. People paid us for research. And that showed that our methods and our technology is easily applicable in many many areas and we can improve businesses in many industries and that improvement may be quite big. And of course we can have a share of that improvement. So that's why Yandex Data Factory was officially launched. It's kind of an internal start up. That's how we treat it internally. It's not -- it's a small investment because it's based on already existing assets. And we hope we are going to see this year how many real contracts the guys would have. How many added value we can provide and then maybe later this year we decided where to go.

We will now take the next question from Miriam Adisa from Morgan Stanley. Please go ahead, your line is open.

I was just wondering if you could give us a bit more detail on the revenue guidance in terms of contextual versus display. What have been the trends that you have seen in each of these categories and would you expect this to continue in the second quarter as well. Thank you.

So display has been kind of weak as you can tell. It remains weak. No real sort of changes there. We expect display to probably be flat to down, I think is a reasonable estimation. I think most of the growth will come on the contextual side as well as the smaller initiatives such as, Yandex.Taxi. Market seems to be doing a little bit better and has improved sequentially from its performance in January to February. Like I said, overall, there seems to be sequential improvement from the January pacing's to February pacing's although we do expect display to be weak for pretty much the whole year. I think display will likely mirror the type of contraction you are seeing in vision side, which as I mentioned earlier is down 25% I think in January.

We will now take the next question from Alex Balakhnin from Goldman Sachs. Please go ahead, your line is open.

Two more questions from me. One is, how should we think about your CapEx in 2015. Given the FX volatility, it's probably hard to give a percentage number of revenues but in terms of the capacity you would like to add to deliver on your expectations on the customer satisfaction and so on. How much server capacity do you need to add probably in, maybe using last year capacity addition as a base? And my second question, you mentioned -- well, that was a case for a couple of quarters that you achieved some saving on the marketing and advertising. How sustainable are those savings in 2015. I mean they are clearly discretionary but do those savings need to be restored at some point in 2015 or you think you will be able to live without them for a year quite easily. So your thoughts in this direction will be also helpful. Thanks.

Hi, Sasha. On CapEx, our view is that crisis come and crisis go and the crisis will not last forever and at some points things will return to normalcy. And in that kind of environment it is important to keep investing. It's a question of investing in your infrastructure, question of improving your index size of query response times and so on. So we do expect to continue to invest in CapEx this year as well. I think in dollar terms it will be roughly on part with 2014 but as you correctly pointed out, given the ruble depreciation in ruble terms it will be substantially more and from a CapEx to sales perspective it will look worse than 2014. But we think that's an important decision meant to expand the size of our index and keep investing in the quality of our search. With respect to sales and marketing, as I mentioned earlier, we do expect it to be a negative variance to margins this year. So we do intend to invest in important areas of sales and marketing where we do have a product that we are big fans of, whether that’s Yandex.Taxi or Auto.ru. And so there will be investment in those areas.

That’s very clear. Thank you.

I was going to say, and we tend to invest in sales and marketing when we have products that we think are potential candidates to be winners. And when we don’t, we try not to put marketing dollars behind them.

Thanks so much and probably just a very quick follow up. Is it fair to say that Turkey was not much in focus during the fourth quarter on the spending side or...?

Yes. Turkey, we did not spend as much in Turkey in Q4 as I think we did in the previous year. But generally I think in terms of our budget in 2014 it didn’t vary too much versus our early expectations of the year. So we did not achieve Q4 savings. It's just that from a year-over-year perspective Q4 was lighter in Turkey.

Thank you very much. We will now take our next question from [Alexander Vangranvich]. Please go ahead, your line is open.

First I have a question, a follow up question actually on salary inflation. Whether you have actually started to increase the salaries already in the first quarter or should we wait the salary increase in somewhere close to the end of the first quarter or maybe even the second quarter of this year? And second question is regarding potential cost optimizations. Because we are now heading to the crisis and probably there are some areas where you can save costs this year and improve efficiency. I mean can you please tell me whether there any sort of initiatives which you see where you can actually improve your efficiency on the cost side. Thank you.

Alexander, hi, this is Alexander Shulgin speaking. So on your first question on salaries. Basically we have software engineers especially they are more [indiscernible] and geographically mobile people who could be employed by our international competitors. And for those people we are more keen to do salary increases and we did some tactical increases which will have some impact on our personnel expenses. But we are trying now to be -- looking at the current situation, see what happens on the market both from the revenue perspective and also from the employment market and react in line with what industry does. So I wouldn’t say we will be aggressive on salary increases. On the second part on the cost optimization. Clearly, current economic situation is a good opportunity to reduce costs and remove activities which are ineffective or are not adding appropriate value in the business. And this is one of the projects that we are working on now I guess as many other companies in Russia.

Can you pleased name these activities which you think you can actually cut or can you share the potential impact, positive impact of that initiatives we should impact.

I don’t think it will be appropriate for me to name those projects right now. Basically our cost structure is relatively simple. Personal is number one item and then advertising, rent and data center operations. So as you can see there the room for potential projects is not that wide.

Thank you. We will now take the next question from Vladimir Bespalov from VTB Capital. Please go ahead, your line is open.

I have a question on your application to the federal antimonopoly watchdog. Could you provide any timeline on when decision could be taken on this issue?

Hello, this is Alexander speaking again. As I said, we filed just this morning and it's now up to FAS to launch an investigation and then the process will be controlled by the FAS and the official schedule as it should develop. At this stage we are not in a position to comment either about timeline or the decisions that we or anyone would expect. And of course we will be updating you on our quarterly calls on the progress of this process.

Thank you. And one more question. As I look into your presentation and at your changes in personnel in the last reporting quarter. It looks like you hired SG&A personal a little bit faster than the rest, the share of it increased a little bit. Was it one off or what was behind this, could you explain?

I think that was mostly a one off which could also be related to an acquisition that we did which had slightly more sales headcount than engineering headcount.

And we will now take the next question from Mitch Mitchell from BCS. Please go ahead, your line is open.

Just wondered if you could give us a little bit more color on Turkey. What's the outlook, what are your plans for this year. Thanks.

Hi, this is Arkady. As you can see Turkey spending were suspended a little bit last year. We actually did no advertise in Turkey since June last year. We are working on the quality of our products there and we have achieved a lot. I think you should expect more news later this year.

Thank you. There are no further questions in the queue at this time so I would like to turn the call back to the speaker for any final and closing remarks.