Yandex, like its Internet peers Google (GOOG), Baidu (BIDU), and Yahoo (YHOO), earns the majority of its revenue through selling ads—especially text-based contextual ads, which are targeted based on users’ searches. Text-based advertising revenues accounted for 90% of Yandex’s total revenues in the fourth quarter of 2013. Display advertising revenue, accounting for 10% of total revenues in the fourth quarter of 2013, increased 20%, to $32.2 million, compared to the fourth quarter of 2012.
In 2001, Yandex launched Yandex.Direct, the largest automated, auction-based system for the placement of text-based advertising that made it easy for advertisers to bid for desired keywords and obtain the best prices for their ads. The company also delivers ads to the thousands of third-party websites that make up its Yandex ad network. It also earns a smaller portion of its revenues from display advertising, which principally consists of graphical ads that appear on specific webpages. Yandex said on its fourth quarter earnings call that Yandex.Direct covered approximately 70% of all search pages in Russia. According to ComScore, as of January 2014, the Yandex Advertising Network covered 96% of Russia’s Internet audience.
Yandex ad network revenue soars
Text-based advertising revenues were up 42% year-over-year, to $305.6 million. Text-based ad revenues from Yandex’s own websites accounted for 66% of total revenues during the fourth quarter of 2013, and increased 30%, to $224 million, compared to the fourth quarter of 2012. Text-based ad revenues from Yandex’s ad network increased 94% year-over-year, to $79.2 million, and contributed 23% of total revenues during the fourth quarter.
The number of advertisers grew to more than 270,000, up 30% from 4Q 2012 and up 10% sequentially. Paid clicks on Yandex’s and its partners’ websites, in aggregate, increased 52% year-over-year and grew 22% sequentially. But the average cost per click in the fourth quarter of 2013 decreased 7% year-over-year. Growth in the number of paid clicks on Yandex’s own websites was driven by higher ad coverage, click-through rate (CTR) improvements due to better targeting and improved click prediction, and implementation of a new ad layout.
Mail.Ru deal powers partner network revenues
In the fourth quarter of 2013, traffic acquisition costs (TACs) increased 100% year-over-year, with TACs from partner advertising network surging 118%. Yandex said the increase of partner network revenues as a share of total revenues, together with an increase in the growth rate of the ad network, reflected its earlier agreement with Mail.Ru. Yandex inked a deal with domestic rival Mail.Ru last year, under which Yandex shares advertising profits with the mail provider in exchange for Yandex’s advertisers getting access to Mail.Ru’s users. Mail.Ru offers a wide range of Internet services, including a popular Russian web mail service, and it operates two social networks, MoiMir and Odnoklassniki.Ru. Mail.Ru also owns a strategic minority stake in the most popular social network Vkontakte.Ru.
Last month, Yandex announced a partnership with Google over online display advertising sales. Through this partnership, Google’s and Yandex’s real-time bidding (or RTB) systems will be integrated, and Google’s advertising clients will gain access to the advertising inventory offered by publishers in Yandex’s Advertising Network, while Yandex’s advertising clients will be able to bid for display inventory in Google’s DoubleClick AdExchange.
Technology that enhances contextual advertising
Yandex uses its proprietary machine learning technology, MatrixNet, to display ads on its ad network. The technology allows the system to deliver ads better related to web users’ interests. To implement demographics-based ad targeting, Yandex has developed a new behavior analytics technology, Crypta, which analyzes hundreds of factors—like the length of search queries or the presence of certain terms. Advertisers can target their offers to the interests of specific age or gender groups in their Russian audience. Last year, Yandex said it had enhanced its precision-advertising audience targeting to increase click-through rates. The new Crypta-powered targeting technology finds patterns in website visitor behavior and then tracks down those who exhibit similar behavior online. Combined with the information about users’ actions on a website, provided by website analytics tool Yandex.Metrica, the new targeting allows advertisers to show their ads to a very narrow audience.