Yandex N.V.
Q3 2021 Earnings Call Transcript

Published: 27 Oct 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2021 Financial Results Call. I must advise you this conference is being recorded today, Wednesday, the 27th of October, 2021. We would now like to hand the call over to your first speaker for today, Yulia Gerasimova, Investor Relations Director. Please go ahead.

[Yulia Gerasimova:]

Hello, everyone and welcome to Yandex third quarter 2021 earnings call. You can find our earnings release additional prepared remarks and supplementary slides on our IR website. The key speakers on our call today are Tigran Khudaverdyan, our Deputy Chief Executive Officer; Svetlana Demyashkevich, our Chief Financial Officer; Vadim Marchuk our Chief Operating Officer; Daniil Shuleyko, the Head of E-Commerce and Ride-Tech Business Group; and Yevgeny Senderov, Chief Financial Officer of Yandex.Taxi will be available on the Q&A session. Now, I will quickly walk you through the Safe Harbor statement. The various remarks that we make during the call regarding our financial performance and operations may be considered forward-looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the Risk Factors section of our most recent Annual Report on Form 20-F filed with the SEC. During the call, we will be referring to certain non-GAAP financial measures. You can find a reconciliation of non-GAAP to GAAP measures in the earnings release we published today. And now I’m turning the call over to Tigran.

[Tigran Khudaverdyan:]

Thank you, Yulia, and hello everyone. Let me give you a quick overview of the key highlights from the third quarter. Our results again shows strong growth momentum across key verticals, including the two largest advertising and Ride-Hailing. This business has continued to generate solid cash flow for us to reinvest in a number of attractive opportunities. In addition to that both businesses continue to grow faster than their peers, further incrementing our leadership in Advertising and Mobility. Search and Portal delivered 43% revenue growth supported by our investment in ad-tech, SMB products and iOS share. iOS share improved during the quarter to 43.1% in the last week of September 2021, up 2.4 percentage points year-over-year. This growth was underpinned by targeted investments in product and marketing. Ride-Hailing revenues increased by almost 70% on the back of solid growth of rates in GMV to continue to improve our operational efficiency and optimize our cost structure, with operational expenses decreasing as a percentage of generally both quarter-on-quarter and year-over-year. At the same time, we invested in service quality in growing the driver base, which has led to a better supply demand balance as well as 33% increase year-over-year, the number of drivers on the platform. Our initiatives Ride-Hailing position us well for further growth and improvements to profitability. During the third quarter, we also demonstrated our commitment to invest in the future growth of the Yandex ecosystem, with a particular focus on expansion in the E-Commerce , Yandex.Plus and logistics verticals. We are pleased with the results delivered by these businesses. The number of Yandex.Plus subscribers doubled year-over-year to 10.5 million, with even faster growth in paying subscribers. In E-Commerce GMV increased more than three times year-over-year. Yandex.Delivery grew 4.5 times year-over-year. This was partially driven by the low base effect over the previous year, however, quarter-on-quarter growth was also robust with third quarter revenue up 40% plus compared to second quarter. E-Commerce remains our top priority, which is substantial progress in this key vertical, with GMV growth accelerating to over 200% year-on-year, a record levels of assortment, reaching 21 million SKUs, further growth of seller numbers and expansion of logistics infrastructure and significant progress in terms of service quality. During the quarter without using the factory in fully controlled logistics by 2.5 times to a level comparable with our key competitors. Product wise one of the key priorities for us in E-Commerce is further diversifying both our assortment and geography of our operations. We are actively investing in both of these areas. We have also introduced a category centric approach to organization, with appointed leaders responsible for end-to-end customer experience in categories such as FMCG and Fashion. We are developing to continue to invest in other business initiatives, such as fintech, Self-Driving technology and Cloud to ensure we are ready to meet future demand to create additional foundations for sustainable long-term growth. With this, let me turn the mic over to Svetlana.

[Svetlana Demyashkevich:]

Thank you, Tigran and hello, everyone. You have seen our press release and additional comments about the performance of our businesses that were published on our website. Let me focus on our updated outlook. In our core Search and Portal business, we are now guiding for high 20s year-on-year growth for the full-year 2021. This is the third time this year we are upgrading growth expectations for our advertising business. Early in the year faster than expected growth came mostly from a backend and macro environment specifically a faster than anticipated recovery and business activity and the advertising market after pandemic related restrictions during 2020. In recent months, this has been driven more by our deliberate decisions to reinvest part of our margin into growth. As Tigran already mentioned, these were primarily investments in Ad Tech, iOS market share and SMB products. With this investments our adjusted EBITDA margin for the full-year will be marginally down on year-on-year basis, but we still expect it to be over 48%. This extra basis points have allowed us to grow faster and solidify our leading position within the digital end-market. Our goal is to optimize for the highest possible absolute cash EBITDA in this business, our base case is that we should be able to keep at margin stable going forward. However, we may consider investing provided that the opportunities which will help us to achieve A, higher absolute adjusted EBITDA and B are in-line with our long-term strategic priorities. A couple of words about E-Commerce , which is currently a key priority for our management team and also the focus of our investments. We were pleased to see GMV growth in third quarter accelerate year-on-year to 3.1 times from 2.6 times in the previous quarter. This growth was underpinned by investments in expanding all logistics infrastructure and delivery channels, numerous enhancements to B2B product and B2C interfacings application. The launch of market express, as well as targeted marketing campaigns to strengthen our brands recognition as a multi category marketplace. Our guidance for E-Commerce growth and investments remains unchanged. We continue to expect GMV growth to be up by three times this year, while total cash drawn for all E-Commerce businesses in Russia will remain at around $650 million. As a reminder, we view total cash burn as a sum of adjusted EBITDA losses, CapEx and changes to the working capital. Based on this, our spending for nine-months amounted to around RUB40 billion. During the quarter, we continue to experience pressure on our unit economics on the back of Front Loaded investments in logistics infrastructure, as well as the success of our asset light dropship by seller model. The letter accounted for 30% of our turnover as of the end of the first quarter and contributed to relatively low utilization of controlled infrastructure. However, this also means that we are fully prepared for continued growth towards the high season and into 2022. We have also continued to work on improving operational efficiency. For example, we have fine tuned our pricing algorithms and assortment strategies, which helps to improve our margin, we benefit from a redesign of all pick up points compensation scheme, and an improvement in utilization rates. And we made adjustments to our CP tariffs. Finally, Ride-Hailing, we have raised our expectations for GMV growth to 65%, 70% from 60% previously. This primarily reflects our efforts to improve driver numbers on the platform and day utilization, which led to solid growth in ride with ride’s numbers having grown both year-on-year and quarter-on-quarter. As we said in our Q2 call in July, we have continued to invest in driver supply as well as improving the quality of our service to support our market position and long-term growth. Assuming no material changes in consumer or competitive environments in the remaining two months of 2021, we continue to expect the Ride-Hailing’s adjusted EBITDA margin as a percentage of GMV increase year-on-year compared to 2020. In conclusion, I would like to underscore that we have a very strong and experienced team with an established track record of finding new attractive opportunities and turning them into large and efficient businesses. Mobility is an excellent example of this. The results to-date clearly demonstrate that we are making good progress on our growth strategy, which justifies future investments that we are planning. Going forward, we will adhere to our policy of financial discipline, which will remain a core principle as we continue to create value for our shareholders. With this, let me turn the microphone back to the Operator for Q&A session. Thank you.

[Operator:]

Thank you Our first question today comes from Cesar Tiron of Bank of America.

[Cesar Tiron:]

Hi everyone, thank you very much for the call and thanks for taking my questions. I have two, so I will ask the first one overtime. I would like to understand what do you believe is your key competitive advantage in e-commerce , not today, but once a business sells up? Would that be things like speed of delivery, SKUs automation or do you think that you could use some of your competitive advantage in tech to basically gain market share and if you can explain us what would that be? Thank you so much.

[Vadim Marchuk:]

Hi, Cesar, this is Vadim speaking, let me tell you this one. So when we think about the longer term, what our key advantages could be? The way we think about those, as in any marketplace, you have got to look at the both sides, right, what it can offer the consumers and what it can actually offer to the sellers? And if you were to start with consumers, we believe that currently on the market, we are probably the only platform that has so many different components and pieces under the same roof, whether it is going to be you know, music streaming, video streaming, whether it is going to be the Ride-Hailing, FoodTech, our Yandex.Plus subscription with multiple benefits, whether it is going to be the cash backs on transactions or kind of the free subscription for both music and streaming. So overall, we think that by putting this kind of innovative complex bundle and offering together for the user, we can get - and then obviously another component here is the logistics, right, which allows the last mile delivery and we can do it quite quickly and smoothly, therefore, maximizing the user experience. And therefore, by putting those things together, rather than competing specifically on price alone, you will be competing both on price, but also on the breadth and widths and depths of the offering. So this is the first thing. The second thing, if you look at the merchant side. For the merchants, we can also put together quite a - what we believe we can put together quite a compelling bundle, which is going to help them both to improve their kind of on marketplace, but also potentially off marketplace, police sales. We do believe that we have the best Ad Tech in the country. And therefore, this is something that we can provide the merchants as a tool to promote their goods to enhance their sales. We do believe that throwing there the kind of our logistics component can also help them to get rid of this hassle of getting the goods to the users. And then with addition of our kind of fintech services later next year, and further out, we believe that we will be able to put together quite an attractive bundle that is going to cover all the needs from, starting from kind of dealing was their financial questions all the way through client’s management systems to the ways to attract those clients and an ability to sell their goods, and then deliver. So this is the way that we think about what is the advantages that we have, and why we can put a better package than probably some of our competitors.

[Cesar Tiron:]

Thank you so much. That was extremely helpful. Just wanted also to check on the Taxi business, specifically on the Ride-Hailing. Is the driver shortage situation improving and if not how long do you think this will take to improve and therefore potentially positively impact deck rates and profitability for the Ride-Hailing? Thank you.

[Tigran Khudaverdyan:]

Hi Cesar. Again well let me take this one. Well, we did say on our last call that we will continue to invest in the quality of the service and also in the driver base. And actually in September, drivers on the platform exceeded one million, and that is up 50% versus sort of the post lockdown summer of 2020. So we don’t envision, when we do our forecast that the cross border and the border opening situation will improve significantly. But while saying all of that, we do continue to see improving profitability in the Ride-Hailing business, we said before that 2021 is going to be a better year in terms of margin than 2020. And we will continue to see improvements in EBITDA margin in the future consecutive years. There is some seasonality, Q2 and Q3 tend to be lower margin wise in the Taxi business, and then Q1 and Q4 expand, but all of the overall trend for improving margin continues, and I think while the situation with drive arise is challenging we have found a way to deal with it.

[Cesar Tiron:]

Thank you so much. Very helpful.

[Operator:]

The next question today comes from Ulyana Lenvalskaya of UBS.

[Ulyana Lenvalskaya:]

Hi everyone. Thank you for this opportunity. I wanted to follow-up on the E-Commerce business first. Could you please comment on the current competitive environment and maybe the dynamics of the take rates for you and maybe some of the (Ph)?

[Vadim Marchuk:]

Ulyana hi, this is Vadim. Let me take this one. So as you know, we did increase our take rates back in July of this year. And which, I think we discussed during the last quarterly call. So far, we haven’t seen any kind of negative consequences of that move. And again, as we were describing it earlier, the way to think about the take rates rather than just you know, a pure numerical figure, probably the more correct way to think about it, is kind of the overall offering that we are providing the merchants with. So as our kind of call it B2B side of the marketplace is improving. We do quicker on-boarding, we are much better now with kind of was the picture that we are putting the product cars. We are able to provide them with means of different delivery options, such as Yandex.Logistics, et cetera. As we have seen that as our platform improves, we believe that we can start increasing the take rates, and this is what we did last June and July, and that number - and we haven’t seen any negative response from the merchants as well. We do believe that the market is very large. We are still in relative infancy of E-Commerce in Russia. We think that the take rates on the markets remain fairly low overall. And we do believe that they are likely to go up in the future for the industry as a whole.

[Ulyana Lenvalskaya:]

Great, thank you. That is very helpful. And secondly, I wanted to check with regards to the upcoming kind of working holidays or whatever, where we call it, for the year potential lookdown. What kind of impact do you expect mostly interested in the core Search and Portal trends, advertising market trend?

[Svetlana Demyashkevich:]

Hi, Ulyana, it is Svetlana and so let me take this question. So, you know, of course, that we have been operating in the pandemic situation for over one and a half years, at the moment, and we already adopted to this situation in all our businesses. In addition to that, I think we are well hedged there because of our diversification across our segments. And there are of course, some businesses that may have an adverse impact, like advertising or mobility, as we have seen in 2020. But there are also a number of businesses which will benefit from the roll down and we already see some of the trends here. In grocery, restaurants, delivery, E-Commerce , and streaming services, we should expect some improvements from lockdowns. In advertising, we do not expect material impact so far. At the moment, the new lookdown measures are not very severe, while non-working periods, only five days only. We will see if it continuous. But overall, I think that all sectors within advertising field quite well. We do see positive dynamic in growth in most of the sectors. So we did not expect any material impact.

[Ulyana Lenvalskaya:]

Thank you.

[Vadim Marchuk:]

Sorry. Let me just quickly add. Particularly to Taxi of her to add to what Svetlana was just saying you heard her earlier, raise our guidance for the Taxi genie from 60 to 65, 70. So that does include some impact from COVID in the fourth quarter. So we are playing for some impact. Of course, it is hard to predict what the final situation is going to be. But this is our fourth wave that we go through so we know what to do dealing with it.

[Operator:]

And our next question comes from Ildar Davletshin of Wood & Co.

[Ildar Davletshin:]

Good afternoon, thank you. I would like also to say thank you for additional disclosure in the shareholder letter, which is extremely helpful. So I want to ask a couple of questions. One is on your funding position liquidity? We have noticed you have been using more cash over the past couple of quarters due to high investments organic and non-organic. And I think total net cash position is below $1 billion. So my question is, are you worried that low will increase and may slowdown your growth trajectory later on and that is once a year and so what are your kind of priorities here? And I’m particularly interested if you are considering any partnership to maybe help with some of the verticals such as in terms of Self-Drive part so that is being my first question. Thank you.

[Svetlana Demyashkevich:]

Hi Ildar, let me take this quarter. So, of course, it is very important for us to remain financially flexible, because, as you know, we are considering and approaching a lot of opportunities. Of course, liquidity is an important factor when we are making decisions, including doing M&A. And as we have seen in Uber transaction, liquidity was also one of the factors for structuring the deal in the way it was structured. So, at the same time, we understand the situation in the market, and we are very confident in our ability to attract additional funding in different instruments, we are very stable, and performing fast growing with very attractive for the growth potential, so we are quite sure that funding is available for us in different forms. So we might consider different options going forward, subject to the market situation.

[Ildar Davletshin:]

Okay, thank you. And then the second one if I may is on your Yandex.Plus business, which is a great differentiate segment. However, even though year-on-year growth looks extremely attractive, but more on a quarter basis, it is actually slowing down. So I’m curious what is driven by this slowdown, is it because you are raising the number of paying customers or is it also because of the competition with alternative subscription services available from other providers? So please comment on that.

[Vadim Marchuk:]

Ildar hi, this is Vadim, let me take this one. So look, there are a couple of components in our answer. I mean, frankly, we think that we actually just quite a nice growth, I think it would be useful, if you were to compare it to the Netflix, EMEA distance from the second to third quarter. And take into account that our geography is definitely much more limited. But there is definitely seasonal components as well. It is a third quarter was two summer months, when people tend to spend outside of the city to go on vacations, and spend less time actually consuming streaming services, which is typically consume in-house, and when you spend time outdoors you tend to watch less. Now, we do definitely focus on paying subscribers, and therefore, we have somewhat limited the proportion of trials in our subscriber base. But overall, again, let me emphasize that we are quite happy with the net additions this quarter. And then furthermore, talking about the competition, et cetera, I guess what, I’m not sure whether you have seen it, but there was - recently I would say probably within a couple of two to three weeks time period, GFK posted kind of their analysis and survey of the streaming market in Russia, and what it actually shows that we are, I would say probably the only one of the very few players in that market that has been added or increasing their subscriber base in percentage terms compared to the competition.

[Ildar Davletshin:]

Okay, great. I have more questions, but I will let others ask with their company.

[Operator:]

Our next question comes from Vladimir Bespalov of VTB Capital.

[Vladimir Bespalov:]

Hello congratulations on good numbers and good trends. I have a couple of questions. My first will be one E-Commerce . First, could you provide maybe very broadly some outlook of how much you are going to spend on E-Commerce next year in terms of investments? And on investment, how in general do you evaluate the efficiency of those investments that you are making? What are the key metrics probably you are tracking? And how you make decisions on future investments in E-Commerce ? And in particular, could you also provide brief comments, for example, on this under utilization of logistics infrastructure in the third quarter of this year? What was behind this, because in general, we see the logistics as a bottleneck for the development of the E-Commerce ? And about the closure of several dark store for Yandex.Plus during the period? This is my first question. And the second question will be on logistics and delivery services that you are developing. Could you please provide what you see as your addressable market here? Who are your competitors and in general maybe what are the key drivers, the key assumptions behind the profitability level guidance that you have provided? So if you could comment on this, this will be helpful. Thank you.

[Svetlana Demyashkevich:]

Hello, Vladimir it is Svetlana. A lot of questions in this to be honest. So let me start and then I think the guys will also help me to continue. So let’s start with investment in ecommerce. For this year, let me remind you, our investment of $650 million allowed us to create $1.5 billion of incremental GMV and improve our market share versus our competition. It also allowed us to expand assortment and times and to increase our customer base twofold to 8.4 million. We also managed to improve retention of all clients and order frequency by 26%. It is also important for us that we were able to grow the number of active merchants on our marketplace by three times to 18000 and materially improve the quality of B2B products. In terms of logistics, we added seven new warehouses, mostly in regions and expanded our total warehouse capacity by three times. Now it is close to 300,000 square meters. We were able to create our own logistics platform and expense share of our own delivery in orders to 89% from 16% last year, so it is also great progress. And what is also important and it was mentioned by Tigran in his speech. We were able to improve the quality of delivery by 2.5 times. We also were able to decrease our defect rates. A lot of other operational improvements also in our letter to shareholders and you can look at them. So that is the justification of further investment for us. We do see the great progress and it increases our confidence in the success of this investments. And overall, the fact that we will be one of the leading E-Commerce players in the markets. And, of course, E-Commerce is one of our biggest priorities. So, looking at the assortments we have and understanding the financial discipline in terms of investments, including internally in the E-Commerce , we understand that we are committed for the next year, also. Of course, we will not to give guidance for the investments in E-Commerce for the next year. But as we commented previously, during the second quarter called, we shouldn’t expect less of investments than we did this year. So in terms of other investments, just the comments, how we make decisions in that respect. Of course, we look at the size of the opportunity, we look at the growth profile, return on investments and we also should understand how we create additional shareholders value in the midterm. So taking into account all these factors, we will of course prioritize, and we do maintain financial discipline. So it is very important for us to be able sometimes to de-prioritize some of the businesses or delay some of the developments, or sometimes even dismiss some of the projects, if we understand that we don’t see improvements in operational results, or we don’t see an increase of the shareholders value or returns. With that, I think, I will pass the floor to Vadim.

[Vadim Marchuk:]

Hi Vladimir, this is Vadim talking. So let me take part number five of question one. The under utilization of warehouses. So look, I mean, the way I actually would think about it, is essentially, these invested upfront into our warehouse capacity. And this is something that will be – the utilization will keep increasing, as the time passes by, so it is going to be this quarter, i.e. in the fourth quarter, next year, et cetera. The reason why we have seen relative under utilization compared to our original plan at the beginning of the year, is because as you know, at the beginning - starting from the beginning of this year, we started a rather massive switch from the price comparison model, the CPC, to marketplace model, the CPA. We had tens of thousands of merchants, the small and medium sized merchants on price comparison. And as we started moving them to kind of the marketplace, we realized that it would be much easier to facilitate that move. If we were to provide them with a fulfillment option, what we call internally dropship by seller, DSBS or DBS, that some other people in this room call it. And that essentially allows the merchant to list their items on our marketplace. And then who feel that sale or this transaction from their warehouses or fulfillment centers. When it is necessary or when they actually are needed, we also provide the kind of Yandex.Logistics service for them, and actually fulfill the last mile as well. So as we started transition from CPC to CPA, we saw a significantly higher uplift or faster uplift in dropship by seller model, which is actually a good trend because it is A, profitable from day one, we take commission from transaction and essentially don’t carry any fulfillment or delivery expenses. And number two, it allowed us to quickly expand our assortment just to remind you of you might view ads from two million at the end of last year, as to us to 20 million at the end of this quarter. So this is actually quite a good model. The GMV or we doing things that many merchants will actually switch to dropship by seller as opposed to move to our fulfillment centers. And therefore, for this quarter and probably some residual effects will remain the next quarter is some of our warehouses will be somewhat relatively underutilized. However, at the same time, when you look at our growth numbers, our transactions with GMVs that go through our fulfillment, obviously growing extremely fast as well and therefore that digitalization is going to catch up. Now, moving on to logistics or, I guess part six is, so look, the way we think about logistics. So first and foremost, and I know that we mentioned that on previous calls, but I think it is still important to mention, when we talk about Yandex.Logistics, this is an asset light model. Essentially what we do we match supply drivers kind of in cars or careers or watching careers, with demand and dementia could be C2C, and that was super popular during lockdown last year when people were locking their apartments, and they had to send something from one apartment to another, and they couldn’t actually how to get out on the streets. So that we are doing through the Yandex.Logistic service, or B2C, whereby it is small and medium enterprises that is trades on our platform on Instagram, or any other marketplaces would use our service to deliver, interceded. So that business we believe that canceled that business, all intra city deliveries, same day deliveries. As a matter of fact, we are actually expanding the TAM by also focusing on the next day deliveries, and we started experimenting with those. And as such, I think there would be numbers, but basically, we already did in excess of 20 million deliveries last quarter in Q3. And that thing is going extremely fast. The reason why to talk about the margin that we mentioned, which I think is mid to high single digits of GMV is because we compare the model - we think the model is very similar to the Ride-Hailing model. We are seeing already kind of low single-digits approaching to mid single-digits, but at the same time within Ride-Hailing, at the same time we do think that Logistics is somewhat lighter on the cost side as a model because you don’t need to deal with customer incentives. Your customer acquisition, as a matter of fact is going to be somewhat lower, because we fully utilize our existing properties, high traffic generating properties like our super apps, et cetera. So overall, I mean, it is a beautiful model, we think it is going to be highly marketable and we are extremely happy with their growth profile at this date.

[Vladimir Bespalov:]

Thank you very much. Very helpful.

[Tigran Khudaverdyan:]

Vladimir let me add on the Yandex.Plus a couple of words on delivery. So your question was in regards to the seven openings. But overall, I think this is expected to happen in any retail business where a certain number of units will be closed for one reason or the other. But if you look at overall openings, before the quarter, restaurants went from 360 to 395, and actually in October, they are already 400. So in Lavka, we already see that unit economics works very well in the regions with a high average check. So if we look at Moscow approximately 60% of our dark stores on pre-overheads, pre-marketing EBITDA level already positive. The gross margin of top 25 stores in Moscow is approaching 35%. And our dark stores in Moscow turned profitable on the pre-overheads, pre-marketing level EBITDA level between six to 12 months after launch. And we actually expect Moscow to become EBITDA positive on post overhead level within the next nine-months. In Russia overall, three overheads EBITDA for top 25 stores in September is already positive. And we have seen very encouraging dynamics with couriers were in high density stores where we had more than four deliveries per hour for our couriers. So, overall, when we look at our Lavka dark store business that we believe our unit economics are significantly better than any other competitor out in the market. And for delivery just to provide I think you asked about the customers just a couple of questions. We already in a very short period of time captured, we think more than 10% or teams of the express delivery market this year. Express deliveries probably weight a third of sort of over the last mile delivery market with the two-thirds being NDD and we are going to launch NDD by the next day - NDD’s next day delivery, sorry. NDD, we are going to launch by the end of this year. And if you look at our customer makeup, we have over 22,000 B2B partners, excluding SMB small, medium business. And that is approximately 46% of our deliveries in the third quarter. And SMB was actually another 30%. So out of the B2B customers, top 10 is probably over 70% of total deliveries, and that includes almost all large food and non-food retailers, E-Commerce players and so on.

[Vladimir Bespalov:]

Great. Thank you very much.

[Operator:]

And the next question comes from Kirill Panarin of Renaissance Capital.

[Kirill Panarin:]

Yes, hi everyone thanks very much for the call. I have got two questions. My first question is on the impact of IDFI policy changes on your advertising business, especially outside search. It seems there is no financial impact now. But how could these changes affect the targeting capabilities and efficiency measurement or pricing in the future and would the potential impact be material, if Android follows the same route as iOS? That is the first question. And then secondly, on Yandex.Eats, could you please comment on competitive dynamics and margin trends in the restaurant segment of Yandex.Eats excluding groceries? Thanks.

[Vadim Marchuk:]

Hi, Kirill, this is Vadim, let me take the first one. So look, kind of the gist of it, we think that the potential impact on our revenues or profitability from Apple, new privacy settings for that matters Android decides to introduce something similar is very limited, and significantly lower than it is going to be for some of our global peers. And let me explain why. So, as you know, structurally, approximately, well, more than 80% of our revenues are coming from the contextual advertising, i.e. this is something where a person will actually show ads and advertising for a specific query from a personal that search on our search engine results page. So this is piece number one. Now, when you look at the remaining call it, like you know, 20 or so percent of the revenue, what you need to keep in mind that unlike some of the peers that are mobile only, and single app type of companies, we operate, number one, quite a few applications on your mobile device, number one. And number two, we own a lot of desktop properties, whether it is going to be ours or whether it is going to be our partner network. Therefore, we actually gets to know quite a lot about the user through all of the combination while properties whether it is going to be mobile or desktop and therefore, we are not that heavily dependent on those limitations that Apple just introduced. On top of that, the third factor that you do need to consider very - well, a majority of our users, they actually are logged in users into Yandex ID, and therefore, it is easy to track them for us and B, they are ready to certain extent submitted their permission to provide us with first-party information, i.e. their information.

[Yevgeny Senderov:]

Hi, and it is Yevgeny. Let me add on. I think your question was on each restaurant. So the restaurant business itself actually grew and if you look in terms of orders that grew 62% year-over-year and GMV grew 67% year-over-year, and that is actually on two year stack basis, it is actually acceleration versus the trends we are still in the second quarter. And we did indeed invest in growth in the first nine-months of the year. And we believe we gained five percentage points of market share, according to our estimates. And new users continue to grow fast and actually grown 30% quarter-over-quarter, despite us actually beginning to limit certain promotion campaigns such as free delivery. So, while I, I think we are going to update and comment on overall profitability transfer next year and each on our next call. We do see improvement in restaurants profitability, and we expect it to continue into the next year.

[Kirill Panarin:]

Okay that is great color on both questions. Thank you very much.

[Operator:]

Our next question comes from Slava Degtyarev of Goldman Sachs.

[Slava Degtyarev:]

Hi thank you very much for the call. A couple of questions both from E-Commerce. I will start with the first one. If you can command on your strategy in the grocery or FMCG side of E-Commerce in terms of the performance and also the willingness to expand beyond the capital cities. Do you see reasonable unit economics in smaller cities in the fast and specifically ultra fast delivery format?

[Tigran Khudaverdyan:]

Look, you know Eats is, for us is a very sort of - it is a very challenging business, but I think addressable market is gigantic. So we continue to sort of invest in balance investments versus growth in our thinking. And so I think, when we look at losses per order, they decreased 30% in September compared to June in this business. So it is a challenging business model, but we think the addressable market is gigantic, and we are going to continue to look at it again carefully weighting investment versus growth.

[Slava Degtyarev:]

Okay. And then specifically, it was not only about the last performance, but maybe if there is some sort of a mix shift happening between the ultra fast into some sort of a medium fast to whether you have some help find from the right balance already?

[Vadim Marchuk:]

Slava this is Vadim, let me add to what Yevgeny already said. Look, it is - I think, pretty much as everybody else in the world right now. Everybody is trying for the kind of the right balance between the ultra fast and/or immediate or something a shorter one. We are experimenting with that. What we are seeing is, overall, that is the presence of what is going to be fresh, or whether it is going to be FMCG, on our E-Commerce marketplace is an important component to have. Because it drives frequency, it is improves your retention, it allows to actually to attract customers easier. So therefore, we see it as important components of our model. At the same time adding to what Yevgeny has said, it is a challenging business model, because you typically deal with a lower average checks, and a relatively painful CPR. And that is why we are trying to play with different kinds of components of this model, to optimize the burn, vis-à-vis the improvement in retention, and kind of the customer frequency of transactions on the main marketplace. At the same time, I guess one of the examples, what I could give you off what - so the first question that Cesar asked, what do we think is our competitive advantage? When I mentioned the presence of many different assets under the same roof, it does allow us to be much more flexible, creative, in combining different components of models and assets. So, for example, we mentioned in our script that we published earlier today. The fact that we launched our market Express. Essentially, what market Express is a combination of two models that we have under the same roof. So, the first one, the supply side is kind of remnants of our CPC model. This is a lot of partners that were present on our price comparison platform. And when we were looking to solve the kind of the quick scenario rather than trying to build all the infrastructure ourselves and deal with the inventory, and SKU selection, et cetera. We figured that it would be much quicker and easier to go to our former CPC partners and offer them Yandex.Logistic services in order to provide hundreds of thousands of SKUs within call it under two hours. And again, that is something that is wasn’t present in our business model, even three-months ago. We put it together, as we mentioned it is already kind of accounts for approximately low teens of the orders in Moscow. And because we have the necessary density on the Yandex.Logistic side, with CPO on those orders for us is significantly more optimized than it would be for any other competitor. So as we think about the FMCG, and foods for our E-Commerce marketplace, we will be following kind of a similar logic of trying to achieve the ultimate goal with respect to the user retention and other metrics in the most efficient way by combining what we already have under the same roof.

[Slava Degtyarev:]

Okay, thank you very much. And the second would be, if you can somehow qualitatively update where you currently stand on the process of CPC to marketplace transition in the E-Commerce. Do you see much room for further seller additions that are still on the price comparison? And maybe also related to that, if you can somehow comment on the quality of the DBS model for consumers specifically, versus the experience that consumers have on your own delivery from your own warehouse?

[Vadim Marchuk:]

Both are very good questions. I think the second question is actually, I would say, somewhat better than the first one. But let me start with the first one nonetheless. So look, where do we currently stand? I would say, this year we added approximately 10,000 active merchants, and it is just to align on the definitions. When we say active merchants, this is somebody who has sold or who did at least one transaction through our marketplace in the past month. So we added 10,000 of those, approximately two-thirds of those solutions came from CPC, the rest actually newcomers to our platform. We do see, there is still room for growth, both kind of intensive and extensive, as other merchants are doing the shift as merchants that originally didn’t switch from CPC to CPA are coming back. And then there is obviously the increase in sales in terms of GMV volume of those merchants that actually are on our platform. So we still think there was a significant potential in the conversion itself. Now, when we talk about the second question or the second part of your question, which relates to dropship by seller, you are right. Overall, like all else is equal, we do think that that model is somewhat inferior to situation where we fulfill the transaction and the delivery by ourselves. At the same time, as I mentioned before, this is something that allowed us to convert CPC to CPA easier and grow faster in that conversion. But the way we think about it, we mitigate that experience or the user experience by inserting the Yandex.Logistics, you know last leg, if you will, because then the user does know exactly what is happening with the delivery, because we control that leg. At the same time, being focused on this and the way we think about it is also we look at the kind of the matrix of the categories versus the frequency versus the margin that we can earned by keeping those SKUs in our warehouses, et cetera. And I do think that some of, it is probably correct to say that some of the goods that are currently being fulfilled by dropship by seller model will be moving to other models, fulfillment models, wherever we will be taking more and more involvement. That is pretty much it.

[Slava Degtyarev:]

Thank you very much.

[Operator:]

Our next question comes from Luke Holbrook of Morgan Stanley.

[Luke Holbrook:]

Hi good afternoon and I have got a couple of questions on the Self-Driving group and just wondered if you have any, if you can provide more color on the plans that you have to accelerate maybe investment in this part of the business, given what competitors are doing in the space? And can you provide a bit of an update on the progress that you are making in terms of launching the Robo Taxi service in Moscow by the end of the year, and also on the importance of the deal, you struck with the Russian post earlier this week on the rider side? Thank you.

[Vadim Marchuk:]

Luke hi this is Vadim so let me take this one. And let me start with the last one. So the kind of the deal that we announced with the Russian post earlier this week. I would say this is something similar to what we did or done with Grubhub in the U.S., whereby we are doing the kind of the last segment delivery with our rowers. And therefore, replacing essentially the mailman, if you will. We are seeing, kind of - the way to work with testing the different kind of user cases in this particular model and we will see whether, this is the pilot that we will start kind of converted to unless much more kind of mass or larger project. Now, with respect to the SDG, or the Self-Driving Group, they autonomous vehicles. We do think that our investments next year will be kind of somewhat similar to this year with some modifications. We think, we don’t need to kind of increase in absolute terms, our investment as much as our competitors, because historically, we have been extremely cost efficient in achieving the same results as any other self-driving autonomous company. And therefore, just kind of while there might be some increase, it will be nothing compared to what others are spending. And then finally, I think it was the second part of your question was respect to the Robo Taxi. Robo Taxi services in Moscow, we are already operating self-service, limited self-service, Self-Driving Taxi service in most countries in Moscow, one of the districts. It will be kind of more officially launched a little bit later this fall. And the passengers would be able to kind of order a Robo Taxi via our Yandex.Taxi app and travel between different pick up and drop off points. We think this is actually pretty cool. Given that our technology is only four years old.

[Luke Holbrook:]

Great. And just a quick follow-up, is there any update on your search for an OEM partner at this stage?

[Vadim Marchuk:]

Look, this is a process that is we kind of still evaluating and when we have something to report we will.

[Luke Holbrook:]

Alright, thanks.

[Operator:]

Our next question comes from Maria Sukhanova of BCS.

[Maria Sukhanova:]

Yes good afternoon. I have two questions. The first one on revenue growth insertion quarter of segments. So, you have mentioned effectors, but if you could put them into numbers like to say what was the contribution of strategies, dismissals for SME and increase in share files for, for instance, tell us what the rules would be if you didn’t have this extra factors? So the first and second in cost sharing with this competitor about to go public, there is somewhere get more aggressive. So do you think the parentheses in the number of cars, or you would rather it will congressionally in this area? That is it for me.

[Yevgeny Senderov:]

Hi, this Yevgeny. Let me start with your last question with drive just sort of give you a couple of words in our strategy overall. So we drive, we have been successful in B2C. And it continues to be extremely important and it is also very synergistic for the Ride-Hailing business. But it also turned out to be a great R&D, an idea platform and vehicle sharing. And let’s acknowledge that we can use it also in the B2B space fleet management, vehicle sharing. And we think this space, besides B2C has huge opportunities for growth for drive business, especially with the rapidly evolving E-Commerce delivery markets. And this business has significantly better vehicle utilization, which leads to better revenue per car and ultimately to better margins. So if we just looked at the third quarter of this year, B2B was approximately 12% of drive revenues and 30% of EBITDA, adjusted EBITDA. So and, we continue to accelerate and grow in both areas of the business. Our EBITDA margin reached 11% of GMV in the third quarter, but I think it is important to know, there is operating and financial leasing. So it is, I think, important to look at EBITDA margin, post finance lease costs or kind of all-in. And our EBITDA margin there was 7% of GMV, accounting for sort of taken into financial lease costs if they work under EBITDA. And operationally, the business continues to perform very well. We have 535 miles in September and that is where the user base we tend to have thresholds which are higher for registration in the service versus our competitors. So it is 21 years old, plus, and with at least two your driving experience. Usually these restrictions are more loose with our competitors. And if you look at our revenues, sort of the so called incidental fees, which are essentially fines paid by the users for various violations. There is half as much as they are with our closest competitor. So the business continues to perform very well. We in we plan to both grow the B2C in the B2B segment of it.

[Tigran Khudaverdyan:]

So let me quickly add to what Yevgeny said. Look, we actually welcome that listing. Be saying that, it would allow all of you to finally get a benchmarking cost sharing and incorporate the relevant metrics into our some of the parts for Yandex.Drive, which we actually think, again in our humble opinion is a better business. But going back to your first question with respect to the kind of advertising on Search and Portal growth. Look, overall, it is very difficult to say the impact of any particular components, or any one of the ad revenues, because they all interconnected. Probably some of the useful numbers here would be talking about our CPA. It is the share - our CPA conversion strategies, that is the clients actually be seen really accepting rather widely is already 30% of our revenues to be. I think it was in the proximately 20% range in spring. We are seeing that the kind of on the numbers that we outlined together with the clients, that the return on their marketing investments, it is much higher than when compared to the CPC strategies. Overall, similar kind of exercise for the Yandex Business Subscription, for the smaller businesses. We are seeing pretty high kind of subscription model as well received by our customers. Because for the clients on a small budget, it is definitely more difficult to optimize our typical tools such as the Yandex.Direct and that essentially be giving them kind of a tailored product just for them, whereby we actually optimize their return on investments on marketing investment. And that is pretty much it. I mean, it is really difficult to kind of separate all the different factors and their impact.

[Maria Sukhanova:]

I appreciate it anyway. Thank you very much.

[Operator:]

The next question comes from Anna Kupriyanova of Gazprombank.

[Anna Kupriyanova:]

Good afternoon. thank you very much for the opportunity to ask question. I will have a couple of very quick follow-ups. When we discussed the logistics business, you gave us a breakdown of B2C, B2B. But maybe you can also mention which part of your logistics areas has come in from internal group deliveries. This is my first question. Second quick question will be on your future update, you mentioned that you will be prepared like to start extra federation’s next year, but maybe just for our understanding some comments where you are at this point. And finally, maybe you can say a couple of thoughts on your other businesses, including Ad Tech or Cloud business, which of them do you see most potential as maybe a negative driver over a one, two year period? That is it. Thank you very much.

[Yevgeny Senderov:]

Hi Anna it is Yevgeny. To quickly answer your question, probably, I would say low-double-digits, I think that is the theory we are working with.

[Anna Kupriyanova:]

All double-digits, It is a share of internal deliveries, right?

[Yevgeny Senderov:]

Correct, yes.

[Anna Kupriyanova:]

Okay. Thank you.

[Vadim Marchuk:]

Anna hi this is Vadim. So let me take the fintech question. So it is essentially what we have been saying before. We are building the infrastructure to launch both , the client facing products, as well as the kind of call it banking-as-a-service to our internal services. And we will be ready to report more call it next year, I would say, not early in the year. Other than that, we reported before that we launched a limited experiments was buy now pay later called Split. We talked in the beginning of September that we opened that product for 10% of Yandex market users, since then we expanded it to 90% of the audience and frankly, we have seen quite encouraging results.

[Anna Kupriyanova:]

Okay. Thank you very much. So my third question was regarding your other bets and experiments, where you have Zen, Clouds and some other things. Which of them do you see as the next potential maybe driver of your revenues over the next two, three-years period? Which develops the best way? Do you see most potential there? Would you like to focus your operations in future? For example, maybe it is next potential target for Yandex as a group in 2021, 2022?

[Vadim Marchuk:]

Well, honestly we like all our other bets and experiments, because otherwise we wouldn’t be doing them. But probably out of many favorite children, we would like to highlight our Cloud initiatives. We are seeing extremely encouraging results. It is, three times year-on-year revenue growth of this quarter, and 25% quarter-on-quarter. We continue on-boarding new clients. We have approximately 30,000 active clients at the end of Q3, which is an increase of 60% year-over-year. We do believe there is a number of kind of key advantages, why we think we would take of the kind of the leading player in this market. And number one, it is 100% in-house technology platform, i.e. we are the only Cloud provider in Russia, hyper scalar was a fully fledged, scalable in-house infrastructure, which combines our own data centers, our own hardware and our own software capabilities. We are locally present, so they are compliant with all the laws and requirements for the data storage will be as a Russian users unlike of some of the other foreign competitors within the segment. And then finally, this is kind of interesting title, but I think we are the most certified Cloud in Russian market, i.e., which is all the required certification from different regulators and authorities, that allows us to work with personal data of Russian clients, and we can work with clients and financial industries and state owned enterprises, et cetera.

[Anna Kupriyanova:]

Thank you. That is great. And do you plan to actually develop your Ad Tech maybe to push some more effort into this area or you don’t see it as a priority for your business development at this stage.

[Vadim Marchuk:]

I’m sorry. Ad Tech as an advertising technology?

[Anna Kupriyanova:]

No sorry, it is education.

[Vadim Marchuk:]

Education. Well look we have been kind of seeing I think for the past number of years that I have received as an important kind of national wide projects important for the state. We believe, we have a lot of in-house kind of knowledge and abilities to provide cutting edge and top of the line education whether it is going to be in mathematics or whether it is going to be in programming et cetera. And this is what we are doing must be quite a lot in and our practicum which is the professional or this is the really the online courses for people that are, willing that are looking at changing professions is getting superb traction. And we think this is probably the best product on the market and we are very excited about it.

[Anna Kupriyanova:]

Okay. But you don’t plan any other investments specific like M&A in this segment, given the good momentum even Ad Tech development currently in rush?

[Vadim Marchuk:]

As usual, we do not comment on M&A.

[Anna Kupriyanova:]

Okay. Thank you very much. Thank you.

[Operator:]

Ladies and gentlemen that concludes our question-and-answer session. I would like to hand the call back for any additional or closing remarks.

[Yulia Gerasimova:]

Yes. It is Yulia Gerasimova, Head of Investor Relations. Thank you very much for all dialed in participants in all your questions. We hope that the answers were helpful. If anything that we haven’t discussed, please feel free to reach out by our team. Thank you so much, and goodbye.

[Operator:]

Ladies and gentlemen that concludes today’s conference call. We thank you for your participation. You may now disconnect.