Good day, ladies and gentlemen, and welcome to the Yandex First Quarter 2018 Financial Results Call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Katya Zhukova. Please go ahead, madam.

Hello, everyone, and welcome to Yandex' First Quarter 2018 Earnings Call. We distributed our earnings release earlier today. You can find its copy on our IR website as well as 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, 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 to the story, 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 these forward-looking statements as representing our views as of any date subsequent to today. During this call, we'll be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance 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.

Thank you, Katya, and hello, everyone. In Q1, our Search and Portal revenues grew 19% year-over-year. This growth was mainly driven by revenue growth on Yandex owned properties, partially offset by deceleration of growth rates from the partner ad network front. Our partner network revenues grew 4% year-over-year in Q1. The slowdown was caused by the changes in our partner mix. Turning to the dynamics of ad budgets across our key advertising categories. Auto and financial services continued demonstrating solid growth at 34% and 31%, respectively. Other ad categories grew roughly in line with online net revenue growth including travel. However, we continued seeing modest growth in apparel and home appliances. We haven't seen any significant changes in growth rates of our key ad categories in the recent weeks. Now turning to product development and tech improvements. In Q1, we continued further developing templates and have recently announced the change in the approach to bidding for our advertisers in Yandex.Direct. Previously, advertisers were bidding for specific entry positions. Either the positions in priority placement on top of organic search or the guarantee position at the bottom of the searches page. With the change of the bidding approach, advertisers will target specific amount of traffic they want to get, while our algorithms will choose which ad layout to use and will place it accordingly on the result page to provide the desired amount of traffic. We aim to increase the quality of traffic for our advertisers. We believe that this change in the auction approach, combined with the increased variety of ad layout and greater personalization of ad results, will increase ROIs for our advertisers that should boost ad budgets allocated towards online in general and Yandex.Direct specifically in the long run. It is also important to note that we launched the transformation of our Yandex.Direct into a one-stop shop which in addition to text-based advertising now allows to run better ads on the platform. The platform will allow advertisers to automate the process of creating apps and get statistics across all their ad products in the sales funnel in Yandex.Direct. Turning to our search trends. Our overall search share reached 56.5% in March this year, up 160 basis points compared with a year ago. Our search share on desktop hit new highs gaining 270 basis points year-over-year and averaging 67.5% in March. On Android, our search share grew 870 basis points year-over-year and reached 46.8% in March. Our search share on iOS slightly declined and was 38.5% in March, 40 basis points lower compared to December 2017. Share of mobile traffic significantly increased and reached 42% of our total search traffic. Mobile revenues represented 34% of our total search revenues. With this, I'm turning the microphone over to Greg, who will walk you through the operational performance of business units and our financials.

Thank you, Mikhail, and thank you, all, for joining our call today. In Q1, we delivered another solid set of results. Our consolidated revenue grew 29% year-on-year and reached RUB26.6 billion. The revenue growth was driven by solid growth in Yandex properties as well as great performance across our segments such as Taxi, Classifieds, Media Services and Experiments. Share of our noncore businesses reached approximately 21% of our consolidated revenues in Q1. Online advertising revenues accounted for 86% of total revenues in Q1 and increased 17% year-on-year. Yandex properties revenue grew 22% year-on-year in Q1 and accounted for 66% of total revenues. Revenues from our ad network increased 4% year-on-year and constituted 20% of total revenues in Q1. Other revenues grew 228% year-on-year on Q1, driven by Yandex.Taxi revenue, which constituted the bulk of the other revenue line in consolidated revenues. Traffic acquisition cost related to our partner advertising network grew 9% year-on-year. Partner TAC as a percent of partner revenue was 59% in Q1, up 90 basis points sequentially. Partner TAC grew faster than our partner revenue as a result of the change in the product mix and partner mix. Traffic acquisition costs related to the distribution partners increased 11% year-on-year and were 6.6% of advertising revenues from Yandex properties. This is 70 basis points lower compared with Q1 of 2017 and 10 basis points higher compared with the previous quarter. Total TAC increased 10% year-on-year and amounted to 16.2% of total revenues, down 290 basis points from Q1 of '17 and 100 basis points lower compared with the previous quarter. Paid clicks grew 7% year-on-year, while cost per click was up 8% year-on-year. Turning to our cost structure. In Q1 '18, total OpEx, excluding TAC and G&A, grew 49% year-on-year. Excluding stock-based comp, operating expenses increased 47%. The…

[Operator Instructions]. We will now take our first question from Cesar Tiron from Bank of America.

I have actually two questions for Greg. I mean the first one on Taxi. Is it fair to say that on a stand-alone basis, I mean, if I excluded the Food Delivery, it looks like you're two, three quarters away from breakeven? And then I think the second question I have is on the significant operating leverage that we've seen in the core search business with over 400 basis points of margin improvement from last year. I mean, have you delayed any expenses into Q2? Or do you think this kind of operating leverage is something that we could see in the next quarters as well?

Hi, Cesar, it's Greg, thank you very much for your questions. On the first question, so what I could say is just again reiterate what I said about the full year expectations for adjusted EBITDA loss of being roughly on par with previous year, including all of the investments that we are making. I guess what I didn't mention in the prepared remarks is, obviously, the investments we are making in self-driving, which are also quite significant, and we're making very large strides there. So I would just leave you with the prepared remarks. On the search question with respect to operating leverage, so, obviously, Q1 did see excellent results. I think it's kind of early in the year. And so at this point, we are going to stick with the guidance of flattish margins in the Search and Portal business. But, obviously, we always try to balance off the opportunities for additional investments in new technologies, things like our Alice intelligent voice assistant, things like speech technologies, things like mapping and navigation against sort of a natural operating leverage in the business, and we'll look to update you on these results over the course of the year.

Can I just follow up with one question on the margins and, obviously, the ruble has depreciated a little bit against the U.S. dollar in the past two weeks. So can you please remind us how you hedged your rent expenses, and I think that's until 2018? And what's going to happen after 2018?

Sure so we ended up -- we actually hedged our office rent expense more than a year ago, and it covers both our 2017 and 2018 lease payments through, I think, we used one counter party for that hedging transaction. And going forward, there are changes in the way that leases are accounted such that the P&L impact of the FX fluctuations will be minimalized -- minimized. And then just to remind you, obviously, that if you look at the way that our cash balance is currently made up, it is very heavily weighted towards the USD. So our sensitivity to FX changes with respect to FX fluctuation is less than it would have been otherwise. Currently if you look at our FX basket, we are 77% USD or nonruble currencies.

[Operator Instructions]. We will now take our next question from Slava Degtyarev from Goldman Sachs.

A couple of questions. Firstly, on Taxi. You started providing subsidies to the consumers in Moscow this April, just wonder why it is the case? Also, do you observe any significant slowdown in terms of the number of rides in Moscow, St. Petersburg this April as basically the base of the last year seems to be pretty soft and given the price competition with Uber was aggressive last year? And secondly, can you elaborate probably a bit more on Yandex.Cloud initiative. What kind of market size is this business potentially? And also, your market share aspirations and how your product might differ versus what competitors are having now?

Sure Slava, I'll take the first part of the question and then I'll hand it over to Mikhail for the second part of the question with respect to cloud. On the Taxi side, we are obviously experimenting and seeing kind of what the price elasticity is. One -- you're right that competition a year ago was intense vis-à-vis Uber. And so the higher base effect of the previous year has led to some slowdown in number of rides. But Moscow still continues to grow in triple digits, which is quite impressive. And as a result of this slight increase in subsidies that we undertook, we are seeing extremely positive reaction with respect to an acceleration in the pace of growth of rides and as well as GMV.

And Mikhail here to talk about cloud initiative. Obviously, it's too early for us to forecast any sort of revenue guidance or such. The interesting thing to note is that, in general, Russia forever has been little bit lagging behind other countries of similar GDP and similar sort of level of development in penetration of cloud services. So we actually see that as a big opportunity for us. And the situation is such that we still -- probably in other countries of similar level of development, it would be maybe too late. But in Russia, for various reasons, we believe that it's actually the right time to move in. And as the largest Internet company in Russia, we believe we are uniquely positioned to leverage our economy of scale of our data centers and, as you know, we have data centers both in Russia and in Europe to serve the customers in every possible way and probably be very competitive on the pricing and probably be very competitive with regards to all the local regulations in both Europe and Russia. So I'm very excited about it. I'm sure you'll be hearing more maybe within next two quarters.

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

Two questions, if I can. First, on templates. Mikhail, can you give us a sense of timing and kind of the mechanics of the rollout here? And you had mentioned advertisers seeing good ROIs, so wondering if you could elaborate on what's driving that and over what time frame you think that could impact search budgets? And then, Greg, on Taxi, can you talk about where you guys are in terms of gross revenue take rates and how we should think about take rates migrating maybe in big cities versus smaller regions over the next few months and quarters?

Sure. I'll probably answer about the templates. So as I described previously, templates is not like a one thing that you just ship and forget about it. It's a very gradual rollout for the whole host of features mainly related to the fact that the ad becomes more customized and different people will see ads for different queries, will see different ads -- your actual presentation of an ad. And also the more positions are opening. We -- in Q4 of last year, we were mostly focused on shipping features on desktop. In Q1, we had pretty big rollout on mobile. It will continue for maybe next, I expect maybe six months gradually we'll be shipping more and more smaller bits of technology in reaching again the actual presentation of an ad, maybe doing things like maps and stuff. It's -- we're, again, this probably is not going to be step wise kind of change. It definitely does help us to fight the comps vis-à-vis the previous year. We're proceeding right now very carefully and cautiously here because it's a big change. As you know, we also changed, as I outlined in my prepared statement, we changed the way advertisers are bidding, we. Are trying to change it so that they are bidding for additional traffic to get instead of specific position, and that's a key important thing for us to unlock the full potential of templates. Because there -- actually the amount of traffic might vary significantly, depending on your actual representation now not only on the position of an ad. So yes, we will be sort of gradual -- we will continue gradual rollout for the next six months, probably for sure, yes.

Lloyd, on the question about take rates for Taxi, so we did rollout some gradual increases in our commission rates, both in the larger cities as well as the smaller ones, and we are simply starting to play a little catch-up to where a lot of the competition is. Historically, we had fairly low take rates and we are still below most of the competition but slightly higher than we were before. And so I'd say the Moscow take rates are probably up a few hundred basis points in terms of the overall take rate from sort of late Q4, early Q1 to sort of late Q1.

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

Another question on Taxi. I understand the guidance for [indiscernible] losses, but could you confirm if you are close to breakeven in any city. And then also going into the second quarter and the World Cup, would you think that there is a chance that there could be an acceleration in revenues of ride growth? And then second question would be on the core search business. There's been reports that about 50% of users of Google haven't been able to access the servers in the last week or so because of the ban on Telegram. I was just wondering if you have seen a positive impact on any of your services since then?

So on Taxi, Miriam, we do expect some positive impact from World Cup. Obviously, it's not going to be very large considering our scale. The -- I remember how many people are supposed to come in for World Cup, a few hundred thousand or maybe 1 million or whatever it is. That is a small sort of drop in the bucket when you compare to the total number of rides that we are providing on a quarterly basis. So it should be a boost. We will likely be able to service them through the Uber app, which should work seamlessly when they come to the country. They'll be able to open up the Uber app and order up a Yandex.Taxi and we'll get all of the revenues associated with it. But I wouldn't sort of put an extremely high expectations on the impact of that sort of onetime boost. And then on -- in terms of city by city, I would just sort of reiterate what we said before, we do have a number of cities where the service is running quite profitably and we are very happy with our performance. And then on the question of Telegram, so just to fill people in, in terms of the background. There was a court ruling here in Russia. As a result of that ruling, it was proposed that Telegram be -- would be banned in the country. The way that, that has been implemented is through the blocking of certain IP addresses used by the Telegram app. There has been a number of Russian users who have been impacted as a result of this blocking even for apps other than Telegram. So many other international apps or even domestic apps have been impacted by this blocking of Telegram app. Obviously, we have no crystal ball, and we have no idea what the next steps would be, how long it lasts. If it's short term, we certainly expect that the impact on our share would be quite limited, if any at all.

[Operator Instructions]. Our next question comes from Ulyana Lenvalskaya from UBS.

The first question will be on the core business. Could you please elaborate a bit on the slowdown of the partners ad revenue, just 4% growth? Do you include the partners? You said that's a mix, but what exactly is happening? And what is the -- maybe what is the outlook for the rest of the year?

Hi, it's Mikhail here. So yes, the growth in our partner network was adversely affected by the changing mix of partners. One of very significant partners rebalanced their mix and reduced the amount of inventory they are sending to us. As you know, we also did another very significant partner but that happened very late in third quarter. So that wasn't really -- sorry -- first quarter, yes, late in first quarter and so that didn't affect the numbers. So going forward, we see growth picking up.

And there was a news article today about mail being more active and contextual advertising at own properties. Will it -- do you think it might potentially impact Yandex growth outlook in some way?

Well, it's hard for us to say. We see that mail has been increasing the ad load on their properties and increasing the amount of ads they are putting. So obviously, there is a little bit of downward pressure on the whole market because if you have more inventory, things maybe get slightly cheaper. We don't see the sort of a big kind of factor that we worry about at least right now. And of course, it's hard to predict the future. And, I think, we also -- overall, we also -- it has -- it might have the opposite effect of rising all the [indiscernible] because things getting cheaper and leads to redistribution of the budgets from TV and other advertising channels, so yes.

On the previous question, the 4% in partners revenue growth, is it going to be bottoming out? Should it be bothering the rest of the year?

Yes, so this is Greg. We do expect that in Q2, Ad Network growth should improve slightly compared to Q1. So obviously, again, no crystal ball, but our expectation is that the growth rates should be slightly higher than the levels you saw in Q1.

And on Taxi, you mentioned Yandex.Drive. Do you put it inside Taxi segment? The car sharing?

Yes. So Yandex.Drive car-sharing initiative is not inside of Taxi, it's inside of Experiments.

Okay. And if I may just follow up again on the EBITDA loss of Taxi segment. Looking at the numbers of the first quarter, it sounds like your guidance for full year flat EBITDA loss is kind of conservative. Is it fair to say that it's because of the Food Delivery investments? Or your potential aggressiveness in the segment? Or just core Taxi itself?

Sure, Ulyana, good question. So I think I mentioned this in the previous call as well. I would call it sort of three big buckets of spend within Taxi outside of the core Taxi business. The first one is Uber, where the integration takes some time, and that's what we talked about in the last call. Some of the technical integration still is not complete. And it should be complete sort of by the end of Q2. Until that happens, the spend level on the Uber side of the business is elevated. The second bucket is self-driving, where we are investing aggressively to develop our own self-driving technology. And the third bucket is Food Delivery, where we are investing aggressively to roll out the service and make it even more convenient and easier to use for consumers in Moscow. And then obviously, we are looking beyond Moscow as well as we roll this service out. I continue to believe that when we bring down the wait times for Food Delivery from sort of the 45 minutes to one hour that you see with some of our competition down to the 30-minute level, I think you would eventually see a step change in consumer behavior. And the same that you saw with Yandex.Taxi. Historically, in Moscow, it could be easily 45 minutes until you get a taxi to you from one of the conventional phone dispatch services, right? And when you -- now with Yandex.Taxi, I think, our ETAs in Moscow is sort of in the four-minute range. And then obviously it creates tremendous elasticity in consumption. And so we think that you might get the same effect with Food Delivery. That's why we are focusing on our own carriers, and that's why we are investing in it heavily.

We will now take our next question from Vladimir Bespalov.

First, I have a question, a follow-up question to what Ulyana asked on advertising network. When I look at your guidance for Search and Portal, there is some scope for acceleration compared to the first quarter. On the other hand, you mentioned that your guidance for margins is like more conservative for the full year compared to the first quarter. So does this basically mean that you are going to invest in accelerating the growth of advertising network and this might trigger some additional expenses and pressure on margins? This is the first question. Then I have a question on Yandex.Market. When I looked at your guidance you provided in the first quarter on the revenue growth, it was supposed to grow like for the full year more or less in line with Search and Portal. Do you still have the same guidance following the results of the first quarter, because this implies a major acceleration in the next several quarters. And the third question is on Classifieds. Could you probably provide more color on what are the expenses related to Classifieds because this should be a pretty profitable business but the margins are negative. So could you maybe break down the expenses? And what do you expect from these expenses going forward in terms of growth and maybe improvement in profitability?

Mikhail. Probably I'll take the first one and Greg will take the other two. So just to reiterate our own properties are growing very nicely and maybe even slightly better than I personally expected. So as we said, yes, we do have this little bit of a headwind due to the changing partner mix, but we are expecting things to pick up a little bit. Our margin guidance is the same, so we actually, I wouldn't say, we are like conservative or anything. We just keep reiterating kind of what we already had. So yes, I think that's about it.

I want to say that the -- my question was that you expect some acceleration probably in revenues for Search and Portal. But on the other hand your guidance implies that margins will go down in the subsequent quarters compared to the first one, so that's why I asked the question, what should drive this? Why do you expect this? So some maybe additional investment trying to accelerate the advertising network which will probably trigger some extra expenses?

We are still early in the year and, obviously, we will be making a lot of new investments. So that's why we are giving this guidance. And our -- the growth, large percentage of growth has been coming from our internal services and sort of continue -- we expect that to continue for the foreseeable future.

And then Vladimir on your second and third question on Yandex.Market. So obviously, what's implied from the guidance is that we think that market should grow at roughly the same overall growth rate as the rest of the business. So I think that's the implication from saying that the consolidation should have no real impact on the outlook either way. And then on your second -- rather on your third questions about Classifieds, the investment is in marketing, and we are still expanding the footprint of Yandex Classifieds business, specifically Auto.ru. Auto.ru is doing really well and gaining market share in a number of new regions as well as solidifying market share gains in Moscow and St. Petersburg. And so you have both excellent revenue growth, which we see as a very encouraging signal that consumer adoption of what we believe is extremely, extremely focused vertical classified service, encourages us to continue spending and investing in it. And, obviously, at scale, this is a Classifieds business just like any other. And so we believe that once it does reach that scale, once we do stop investing in advertising and marketing, it will be a very, very healthy Classifieds business that we are excited to have in our portfolio.

[Operator Instructions]. We will now take our next question from Olga Bystrova from Crédit Suisse.

Follow-up on Classifieds. You mentioned on the Auto.ru. Can you talk a little bit about other verticals that you are considering or maybe not considering at all to develop going forward? And in general what are your plans for Classifieds segment? And the follow-up question is on the mobile. Can you repeat again traffic and revenue share and how your monetization of mobile traffic has changed since the fourth quarter last year?

Hi, Olga. I'll take the first part of the question. So I mentioned Auto.ru because it's the largest component of the total. It represents, roughly speaking about 80% of total Classifieds revenue and probably more than 80% of the total EBITDA loss. The other segments that we are focused on is the real estate one, where we do have a pretty good product, and we're excited about it, and where revenue growth rates are generally in the same ballpark as the Classifieds business overall. The one business where we're not making heavy investments and is sort of there is jobs. And then let me hand it over to Mikhail for the question on mobile monetization.

Yes. And as I said, we do see very significant increases in mobile traffic recently and concurrent with our increase in share -- search share there. And so it reached 42% in fact 42.5%, right, for Q1. Our traffic has been coming from mobile. Then revenue share represents 34%. And yes, this trend is continuing into Q2 is what we are seeing right now. We're -- as I said, we are very focused on monetizing that traffic. That's why, in Q1, all our templates release is mostly we are focusing on mobile. I would say that there is a little bit of this effect again that when part of the market grows very quickly, we do see CPCs coming down a little bit in that area. Advertisers need to adjust [indiscernible] but overall, we are positive for working on monetization and reiterate our guidance, in fact, optimistic.

Okay. And if you don't mind, just a follow-up on the Taxi losses that you mentioned. There was a one-off due to the integration costs. Can you give us a sort of at least some rough idea of the magnitude of that one-off expense that I assume is not going to recur in the second quarter and throughout the year?

Sure. We mentioned that the one-off expense was related to the transaction fees. So I think you can make your own assumptions about what legal and investment banking fees would be for transaction of this size. The other costs, like I mentioned, of the integration will take some time, will still happen in Q2. And just to remind there that in Q2, we'll have Uber for the full 12 weeks of the quarter as opposed to just having it in the base for 6 weeks. And given the much higher efficiency on Yandex.Taxi side, that's a headwind.

We will now take our next question from Sergey Libin from Raiffeisen Bank

So I have two questions as well. First one is on Taxi. In the last couple of quarters, you provided growth rates for gross revenues for Yandex.Taxi. So could you do it again for this quarter as well, please? And also on Taxi, Greg, as you mentioned that you are optimizing driver incentives and other types of discounts. Is it fair to assume that for the whole 2018, the percentage of gross revenues which will be subsidized will be lower than in 2017? And secondly, I have a question on search, actually. So this quarter, search engine results pages grew faster than paid clicks, implying the -- some decline in click-through rates. So do I get it right that this happens because of more mobile traffic coming in? And is it also fair to assume that the increasing search here does not imply the similar increase in revenues?

Sergey, so on the growth revenue side for Taxi, we sort of didn't provide it because we didn't think it was that useful but we're happy to provide it. It was roughly 240% year-over-year. And in terms of subsidies, I think, it's reasonable to assume that subsidies overall in 2018 will be lower than 2017. But, obviously, it will depend on sort of the elasticity of demand within each particular city and will be sort of done on a bottoms up city-by-city basis as always. And then, obviously, you kind of have an overall number for EBITDA loss that we have kind of given you. And that's what we manage to in a way as well as whatever is the competitive situation in any particular city or town. I'll hand it over to Mikhail.

Yes, on paid clicks. No, I wouldn't infer that. We really don't look at them all that much because it's very easy to dramatically increase paid clicks by just showing cheaper products and something more interesting but will drop the revenues or will decrease the revenue growth. So we keep on focusing on overall sort of economic value we're driving, so total kind of clicks multiplied by how valuable they are. Mobile traffic, as you know, of course, monetizes somewhat worse on average than desktop traffic. So as our percentage of traffic coming from mobile increases, the overall sort of impact, not a significant just linear multiplying the desktop out. But what -- the traffic that we've been getting and the sort of the quality of the number of conversions we're seeing is about the same as you would expect for the normal mobile traffic. So I don't -- yes, like -- we don't see any difference in terms of like the new traffic we are getting on mobile and the traffic that we saw previously on mobile.

Thank you very much. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call back to Katya for any additional remarks.

Hi, again. Thank you very much for joining our call today. Please feel free to reach out to us in case you have any question, we will try to answer all of them. Have a great day, and see you later. Bye.

Ladies and gentlemen, this will conclude today's conference call. Thank you all for your participation today. You may now disconnect.