Yandex Executes Despite Russia’s Economic Struggles

Investor sentiment for Russia’s largest search engine was bearish heading into earnings with Russia’s economy expected to be flat for the year, the worst performance since 2009. International sanctions linked to the Ukrainian conflict have taken their toll. Additionally, Google (GOOG), Yandex’s largest competitor in Russia and neighboring Eastern European counties, reported slowing growth earlier in the week. Yandex (YNDX) released Q3 earnings results today and to the surprise of many, the company posted strong numbers.

Analyzing the Numbers

Top-line Traction

Yandex reported Q3 revenues of RUR13.1B ($331.5M), up 28% YoY. Russia still accounts for the majority of Yandex’s business as the international segment accounted for only 7% of revenues. Yandex exposure to the geopolitical tensions between Russia and Ukraine is nominal as approximately only 1.5% of total revenue is generated from Ukraine.

Q3 Yandex Revenue

The Russian Ruble depreciated a staggering 17% against the USD during the third quarter which is why revenues translated to USD have declined. The struggling Russian macroeconomic environment and economic sanctions have had marginal effects on Yandex operations thus far. If this continues, it serves as a de-risking feature for Yandex which resumes execution despite surrounding turmoil.

Mobile continues to be a point of emphasis for Yandex as 23% of searches came from mobile devices, which also accounted for 16% of total revenue for the quarter. This trend is expected to become a larger component of operations. Yandex appears to be well prepared for the shift towards mobile as the company has allocated much of their development costs towards mobile applications.

Full-year 2014 ruble-based revenue is expected to grow 27%-30% YoY, narrowed up from the prior 25%-30% guided last quarter.

Expanded Margins

Yandex reported an operating margin of 34.4%, up 260 basis points from Q3 2013 figure of 31.8%. Cost control was the main reason for this margin expansion as the company saw cost of sales, as a percentage of revenue, decline YoY by 200bp. Additionally, SG&A expense, as a percentage of revenue, came in at 14%, the lowest level ever.

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The author is long YNDX

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