A must-know investor's guide to Russia's web giant, Yandex

Part 2
A must-know investor's guide to Russia's web giant, Yandex (Part 2 of 6)

Why is Russian web giant Yandex seeing its growth slow?

Yandex growth

Yandex has consistently beat earnings estimates over the past few quarters, but its fourth quarter earnings came below analyst expectations. The company reported $0.31 diluted EPS for the quarter, down from $0.93 in the previous quarter, and up from $0.26 in the fourth quarter of 2012. Net income rose 24% from a year earlier, to $102.2 million. Revenues of $369.3 million were up 37% compared to the fourth quarter of 2012. Excluding traffic acquisition costs or TACs, revenues were up 25% year-over-year. For fiscal 2013, revenues were up 37%, to $1,206.9 million compared to fiscal 2012. The figures excluded online payment service Yandex.Money, which Yandex operates as a joint venture after selling a 75% stake to Russian bank Sberbank in July last year.

Yandex revenue breakdownEnlarge Graph

Advertising revenues, which we’ll discuss in detail in the next part of this series, continued to determine overall top-line performance. Other revenues almost tripled, but still accounted for less than 1% of total revenues.

Adjusted EBITDA of 5.1 billion rubles ($157.3 million) was up 21% compared to the fourth quarter of 2012, while adjusted EBITDA margin was 42.6%—down sequentially from 43.2%. In the third quarter of 2013, Yandex said adjusted EBITDA margins declined on a year-over-year basis due to the inclusion of an advertising agreement with Mail.Ru and more linear advertisement spending in 2013 compared to 2012 levels.

Yandex adjusted EBITDAEnlarge Graph

Yandex saw markets react negatively when it said it expected revenues to increase by 25% to 30% this year, slower than in 2013. Analysts believe a slowdown in the Russian economy has led to sluggish growth in the market for contextual advertising.

Yandex’s Russian Internet peer, Mail.Ru (MLRYY), also forecast slowing revenue growth for this year. Yandex’s Chinese peer, Baidu (BIDU), which announced its 4Q results earlier this month, earned $460 million in the fourth quarter of 2013—down 0.4% compared to the same period in the previous year. Baidu attributed its reduced earnings mainly to its increase in operating expenses. Another peer, Yahoo (YHOO), reported slowing quarterly revenue and profit growth in the fourth quarter of 2013.

Both Yandex and the London-listed Mail.Ru are planning a secondary listing in Moscow in the near future. The companies said they would favor inclusion on Russian equity indexes, and the move would allow employees to trade stocks and enhance liquidity.

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