Yandex(YNDX) - 2018 Q4 - Annual Report

Part I Key Information This section presents selected consolidated financial data for the five years ended December 31, 2018, and details comprehensive risk factors across global, economic, and business operations Selected Consolidated Financial and Statistical Data Selected financial data for 2014-2018 shows consistent revenue growth to RUB 127.7 billion in 2018, with net income surging to RUB 47.6 billion due to a one-time gain Selected Consolidated Financial Data (2016-2018) | Financial Metric | 2016 (RUB millions) | 2017 (RUB millions) | 2018 (RUB millions) | | :--- | :--- | :--- | :--- | | Revenues | 75,925 | 94,054 | 127,657 | | Income from operations | 12,847 | 13,036 | 20,861 | | Net income attributable to Yandex N.V. | 6,798 | 8,776 | 47,587 | | Total assets | 114,108 | 130,544 | 241,698 | | Total shareholders' equity | 77,086 | 82,826 | 202,785 | - The significant increase in net income in 2018 was primarily driven by a RUB 28.2 billion gain from the deconsolidation of the Yandex.Market joint venture[12] - Foreign exchange fluctuations, particularly the RUB/USD exchange rate, significantly impact 'Other income/(loss), net'; in 2018, a RUB 3.2 billion foreign exchange gain was recorded due to the ruble's depreciation, contrasting with a RUB 1.8 billion loss in 2017 from the ruble's appreciation[13] Risk Factors The company faces numerous risks including global scrutiny, volatile Russian economic and political environments, international sanctions, and intense competition - The company operates in an increasingly uncertain environment due to heightened scrutiny of technology companies' business practices, market presence, and strategic direction globally[19][21] - Emerging markets like Russia are subject to significant financial, economic, legal, and political risks, including currency volatility and the impact of international sanctions, which could adversely affect business operations[22][23] - Sanctions imposed by the U.S. and E.U. related to the conflict in Ukraine have adversely affected the broader Russian economy; Yandex's subsidiaries have been directly sanctioned in Ukraine since May 2017, blocking user access to its services[25][27][28] - The company faces strong competition from major global and Russian companies, principally Google and Mail.ru, in search, online advertising, and other services[47][49] - Several business units, including Yandex.Taxi (with Uber) and Yandex.Market/Yandex.Money (with Sberbank), operate as joint ventures, which introduces risks related to shared control, integration challenges, and potential partner failures[69][70] - The concentration of voting power with founders, directors, and senior management (54.92% as of Feb 15, 2019) limits the influence of public shareholders on corporate matters[178][179] Information on the Company This section details Yandex's business structure, operations, and primary segments, including key products, monetization strategies, competition, and the regulatory environment Business Overview Yandex is a technology company building intelligent products powered by machine learning, with business organized into six main operating segments - Yandex operates Russia's most popular search engine and provides a range of other services including on-demand transportation, navigation, classifieds, and entertainment[202] - The company's business is structured into six main segments: Search and Portal, Taxi, E-commerce, Classifieds, Media Services, and Other Bets and Experiments[207] Search and Portal The core Search and Portal segment offers search and information services, with Yandex Search holding a 56.3% market share in Russia in 2018, monetized primarily through advertising Russian Search Market Share (2018) | Platform | Yandex Search Share (%) | Google Search Share (%) | | :--- | :--- | :--- | | Overall | 56.3% | 40.0% | | Desktop | 67.1% | - | | Mobile | 46.5% | - | - The percentage of total search traffic from mobile devices grew from approximately 39% in Q4 2017 to 49% in Q4 2018, with mobile search revenues increasing from 31% to 41% of total search revenues in the same period[211] - Alice, the company's conversational intelligent assistant, launched in October 2017, has expanded to over 50,000 skills and is integrated into various Yandex products and third-party platforms[216] - Monetization is primarily through Yandex.Direct, an auction-based advertising platform for performance-based ads, and the Yandex Advertising Network, which extends ad reach to thousands of third-party websites[227][229] Taxi The Taxi segment, including ride-sharing, food delivery, and self-driving cars, expanded significantly in 2018, notably through a joint venture with Uber in Russia and neighboring countries - On February 7, 2018, Yandex.Taxi and Uber combined their ride-sharing businesses in Russia and neighboring countries, with the combined company approximately 59.3% owned by Yandex and 36.9% by Uber[241] - The Taxi service expanded its operations to 16 countries by the end of 2018, launching in new markets including Finland, Israel, and Ivory Coast under the brand Yango[242] - The food delivery service, Yandex.EATs, grew rapidly, expanding to over a dozen cities in Russia and delivering over 1 million orders in December 2018[243] - The self-driving car program received a license to operate in Nevada, USA, and began testing on public roads in Tel Aviv, Israel, in late 2018[247] E-commerce The E-commerce segment, centered on Yandex.Market, formed a joint venture with Sberbank in April 2018, launching new domestic and cross-border marketplaces - In April 2018, Yandex and Sberbank formed a joint venture based on Yandex.Market, with each partner holding an equal stake; Sberbank invested RUB 30 billion (approx. $500 million)[249] - Following the JV formation, Yandex deconsolidated Yandex.Market and now records its share of the financial results under the equity method of accounting[250] - The joint venture launched a domestic marketplace named 'Beru' in beta in May 2018 and a cross-border marketplace 'Bringly' in beta in November 2018[250][251] Classifieds The Classifieds segment includes Auto.ru, Yandex.Realty, and Yandex.Jobs, with Auto.ru holding a leading position in Moscow and St. Petersburg for car sales - The Classifieds segment includes Auto.ru (vehicles), Yandex.Realty (real estate), and Yandex.Jobs (employment)[252] - Auto.ru holds a leading position in Moscow and St. Petersburg, generating 76% and 66% of all calls from auto classifieds to dealers in these cities, respectively, in December 2018[255] Media Services The Media Services segment offers entertainment services like Yandex.Music and KinoPoisk, with the Yandex.Plus subscription bundling benefits across the Yandex ecosystem - Media Services encompass Yandex.Music, KinoPoisk, Yandex.Afisha, and Yandex.TV Program, with a combined monthly audience of over 50 million people[258] - Yandex.Plus, a subscription service launched in May 2018, provides a bundle of services including unlimited music, ad-free movies on KinoPoisk, and discounts for other Yandex services like Taxi and Drive[262] Other Bets and Experiments This category includes developing services and new business models such as Zen, Yandex.Cloud, Yandex.Drive (a market leader in car-sharing), and various Geolocation Services - Yandex.Cloud, a public cloud platform, launched in September 2018, offering infrastructure and AI-based services to businesses[267] - Yandex.Drive, a car-sharing service launched in February 2018, operates over 7,500 cars in Moscow and 850 in St. Petersburg, making it the leading car-sharing network in Russia[269] - Geolocation Services include Yandex.Maps, Yandex.Navigator, and Yandex.Auto, an in-car infotainment system being integrated with various car manufacturers[271][274] Competition Yandex faces significant competition across its businesses, primarily from Google and Mail.ru Group in search and advertising, and various players in vertical markets Russian Search Market Share by Traffic (2016-2018) | Company | 2016 (%) | 2017 (%) | 2018 (%) | | :--- | :--- | :--- | :--- | | Yandex | 56.0% | 55.1% | 56.3% | | Google | 37.1% | 39.6% | 40.0% | | Mail.ru | 4.1% | 3.4% | 2.2% | - The company's primary competitor in search and online advertising is Google; it also competes with Mail.ru Group, particularly for advertising budgets directed towards social networks[285][286] - In vertical markets, Yandex.Taxi competes with Vezet, Citymobil, and Gett; Yandex.EATs competes with Delivery Club (owned by Mail.ru); and Classifieds services compete with Avito[290] Government Regulation The company is subject to complex and evolving Russian regulations, including laws on advertising, data protection requiring local storage, and mass media ownership limits - The company is subject to extensive and evolving regulations in Russia, including laws on advertising, data protection, intellectual property, and mass media[307] - Russian data protection laws require companies to store all personal data of Russian users in databases located within Russia and mandate that "organizers of information distribution" retain user data for a period and provide it to authorities upon request[337][338] - Russian law limits non-Russian ownership of mass media to 20%; if Yandex's services were required to register as mass media, it would materially impact the company's ownership structure[331] Operating and Financial Review and Prospects This section provides management's discussion and analysis of financial performance, detailing revenue growth drivers, operating expense trends, liquidity, capital resources, cash flows, and critical accounting policies Results of Operations In 2018, total revenues grew 36% to RUB 127.7 billion, driven by online advertising and the Taxi segment, with net income surging to RUB 45.9 billion due to a non-taxable gain Revenues by Source (2017 vs 2018) | Revenue Source | 2017 (RUB millions) | 2018 (RUB millions) | YoY Growth | | :--- | :--- | :--- | :--- | | Total online advertising | 87,400 | 102,737 | 17.5% | | - Yandex websites | 65,149 | 78,696 | 20.8% | | - Yandex ad network | 22,251 | 24,041 | 8.0% | | Taxi segment | 4,891 | 19,213 | 292.8% | | Other revenues | 1,763 | 5,707 | 223.7% | | Total revenues | 94,054 | 127,657 | 35.7% | - The growth in online advertising revenue was driven by a 10% increase in paid clicks and a 7% increase in average cost-per-click (CPC) in 2018 compared to 2017[385] - Cost of revenues increased by 49.9% in 2018, primarily due to a RUB 4.4 billion increase in Taxi-related costs and a RUB 3.2 billion increase in traffic acquisition costs (TAC)[400] - The effective tax rate decreased from 36.3% in 2017 to 15.8% in 2018, primarily due to the non-taxable gain from the Yandex.Market deconsolidation[433][434] Liquidity and Capital Resources As of December 31, 2018, the company held RUB 68.8 billion in cash, with operating cash flow at RUB 28.2 billion, and significant capital expenditures and debt repayments impacting financing activities Cash Flow Summary (2017-2018) | Cash Flow Activity | 2017 (RUB millions) | 2018 (RUB millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | 23,772 | 28,212 | | Net cash (used in)/provided by investing activities | (7,788) | 25,959 | | Net cash used in financing activities | (587) | (32,804) | - Capital expenditures increased significantly from RUB 12.4 billion in 2017 to RUB 28.3 billion in 2018, which included RUB 9.7 billion for the acquisition of a property site for a new Moscow headquarters[366][458] - In December 2018, the company's 1.125% convertible senior notes matured, and the remaining outstanding principal of $321.3 million was repaid in full[447] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign currency exchange risk, mainly from U.S. dollar-denominated assets and expenses, and interest rate risk, which was eliminated with the repayment of convertible notes - The company is exposed to foreign currency risk as its Russian subsidiaries hold U.S. dollar-denominated cash and have U.S. dollar-denominated expenses, such as rent for its Moscow headquarters and capital expenditures for imported equipment[476][477] - A hypothetical 15% strengthening/weakening of the U.S. dollar against the ruble as of December 31, 2018, would have resulted in a foreign exchange gain/loss of RUB 2.0 billion[476] - Interest rate risk related to the company's convertible notes was eliminated as the notes were fully repaid upon maturity in December 2018[484] Directors, Senior Management and Employees This section details the company's leadership, including executive officers and board members, compensation, corporate governance structures, employee equity plans, and workforce headcount growth - The board consists of one executive director, Arkady Volozh (CEO), and seven non-executive directors, including Chairman John Boynton[487] Employee Headcount by Function (2017-2018) | Function | 2017 | 2018 | | :--- | :--- | :--- | | Product development | 4,290 | 4,582 | | Sales, general and administration | 2,716 | 3,712 | | Cost of sales | 439 | 473 | | Total | 7,445 | 8,767 | - The company grants equity awards under its 2016 Equity Incentive Plan, which allows for awards in the parent company (Yandex N.V.) or in specific business units like Taxi and Classifieds[513][514] Major Shareholders and Related Party Transactions This section details the company's ownership structure, including founder voting power, and significant related-party transactions, particularly with Sberbank as a joint venture partner Major Shareholder Voting Power (as of Feb 15, 2019) | Shareholder | Class A Shares (%) | Class B Shares (%) | Total Voting Power (%) | | :--- | :--- | :--- | :--- | | Arkady Volozh | <1% | 85.03% | 48.41% | | Vladimir Ivanov | 3.19% | 8.76% | 6.36% | | All directors & senior management (group) | 0.46% | 85.03% | 48.56% | - The company has a dual-class share structure where Class A shares have one vote and Class B shares have ten votes, concentrating significant voting power with holders of Class B shares[526] - Sberbank holds a priority share, giving it veto power over the accumulation of a 25% or greater stake by any single party and over the sale of substantially all company assets[546] - The company has significant joint ventures with Sberbank for its Yandex.Money and Yandex.Market businesses[550][552] Financial Information This item directs the reader to the full audited consolidated financial statements and accompanying notes, which begin on page F-1 of the report - This item directs the reader to the full audited consolidated financial statements, which begin on page F-1 of the annual report[555] The Listing The company's Class A ordinary shares are listed on the NASDAQ Global Select Market and have a secondary listing on the Moscow Exchange (MOEX) - The company's Class A shares are listed on the NASDAQ Global Select Market (YNDX) and the Moscow Exchange (YNDX)[558] Additional Information This section provides supplementary information on articles of association, material contracts, exchange controls, and taxation implications for shareholders in the Netherlands and the United States - Material contracts include the joint venture agreements with Uber for Yandex.Taxi and with Sberbank for Yandex.Market, as well as a 2018 agreement for the purchase of a property site for a new Moscow headquarters[563][566][570] - Dividends paid on Class A shares are generally subject to a 15% Dutch dividend withholding tax, though exemptions or refunds may be available for certain non-resident entities or U.S. holders qualifying under the U.S.-Netherlands tax treaty[578][587] - For U.S. holders, the company believes it was not a Passive Foreign Investment Company (PFIC) for the 2018 tax year and does not expect to become one, but this status is determined annually and cannot be guaranteed[194][610] Quantitative and Qualitative Disclosures About Market Risk This section refers to the market risk disclosures provided in 'Item 5. Operating and Financial Review and Prospects,' covering foreign currency exchange and interest rate risks - This item refers the reader to the market risk disclosures located within Item 5 of the report[614] Part II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with an unqualified audit opinion from JSC KPMG - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018[615] - Based on an assessment using the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[617] - The independent auditor, JSC KPMG, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[621] Audit Committee Financial Expert The board of directors has determined that Mr. Charles Ryan qualifies as an audit committee financial expert as defined in Item 16A of Form 20-F - The Board of Directors has identified Mr. Charles Ryan as the audit committee financial expert[629] Principal Accountant Fees and Services This section details fees billed by the independent registered public accounting firm, JSC KPMG, and its predecessor, AO Deloitte & Touche, for audit and other services Principal Accountant Fees (JSC KPMG) | Fee Type | 2017 (RUB millions) | 2018 (RUB millions) | | :--- | :--- | :--- | | Audit Fees | 18.1 | 69.1 | | Tax Fees | 1.8 | — | | All Other Fees | 6.7 | 1.1 | | Total Fees | 26.6 | 70.2 | Corporate Governance As a foreign private issuer, Yandex follows Dutch corporate governance practices, deviating from certain NASDAQ rules regarding shareholder meeting quorum and proxy statements - The company follows Dutch corporate governance practices instead of certain NASDAQ rules, particularly regarding quorum requirements for shareholder meetings and the provision of proxy statements[636] Part III Financial Statements This section presents the company's audited consolidated financial statements for 2016-2018, prepared under U.S. GAAP, including balance sheets, income statements, cash flows, and comprehensive notes Consolidated Balance Sheets Consolidated balance sheets show total assets increased from RUB 130.5 billion to RUB 241.7 billion by December 31, 2018, driven by goodwill and investments, while liabilities decreased due to debt repayment Consolidated Balance Sheet Highlights (as of Dec 31) | Metric | 2017 (RUB millions) | 2018 (RUB millions) | | :--- | :--- | :--- | | Cash and cash equivalents | 42,662 | 68,798 | | Goodwill | 9,328 | 52,662 | | Total Assets | 130,544 | 241,698 | | Convertible debt | 17,834 | — | | Total Liabilities | 37,897 | 25,878 | | Total Shareholders' Equity | 82,826 | 202,785 | Consolidated Statements of Income Consolidated income statements show strong revenue growth to RUB 127.7 billion in 2018, with net income attributable to Yandex N.V. dramatically increasing to RUB 47.6 billion due to a deconsolidation gain Consolidated Income Statement Highlights | Metric | 2016 (RUB millions) | 2017 (RUB millions) | 2018 (RUB millions) | | :--- | :--- | :--- | :--- | | Revenues | 75,925 | 94,054 | 127,657 | | Income from operations | 12,847 | 13,036 | 20,861 | | Effect of Yandex.Market deconsolidation | — | — | 28,244 | | Net income attributable to Yandex N.V. | 6,798 | 8,776 | 47,587 | | Diluted EPS (RUB) | 20.84 | 26.49 | 141.98 | Consolidated Statements of Cash Flows Cash flow statements indicate net cash from operating activities increased to RUB 28.2 billion in 2018, with investing activities generating a net inflow, while financing activities saw a major outflow due to debt repayment and share repurchases Consolidated Cash Flow Highlights | Metric | 2016 (RUB millions) | 2017 (RUB millions) | 2018 (RUB millions) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 25,286 | 23,772 | 28,212 | | Net cash (used in)/provided by investing activities | (13,106) | (7,788) | 25,959 | | Net cash used in financing activities | (5,549) | (587) | (32,804) | Notes to the Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial figures, covering business combinations, joint ventures, segment reporting, and the financial performance of each reportable segment - Note 4 details the business combination with Uber's regional business in February 2018, which resulted in the recognition of RUB 42.0 billion in goodwill and RUB 7.3 billion in intangible assets[756][760][761] - Note 4 also explains the formation of the Yandex.Market joint venture with Sberbank in April 2018, which led to the deconsolidation of Yandex.Market and the recognition of a RUB 28.2 billion gain[772] - Note 16 provides a breakdown of revenues and adjusted operating income by segment, highlighting that the Search and Portal segment generated an adjusted operating income of RUB 38.5 billion in 2018, while the Taxi segment had an adjusted operating loss of RUB 4.5 billion[932]