Yandex Plans $1B IPO: More Than 'Yet Another Indexer'

May.24.11 | About: Yandex N.V. (YNDX)

Originally created over 20 years ago by two Russian entrepreneurs, Yandex (NASDAQ:YNDX) now operates Russia's leading online search engine with a dominant 65% share of the country's search traffic. Often called the "Google of Russia," Yandex uses proprietary search algorithms to retrieve, aggregate and organic online content on its yandex.ru website.

Yandex has filed to raise $1.1 billion in its IPO by offering 52 million shares (70% insider) at a price range of $20 to $22, though sources report Yandex is now proposing a range of $24 to $25 due to strong deal demand. Assuming a share price of $25, Yandex would be valued at $8.4 billion and raise $1.3 billion in gross proceeds, making it the fourth largest IPO year-to-date (after HCA (NYSE:HCA), Kinder Morgan (NYSE:KMI) and Nielsen (NYSE:NLSN)).

The company intends to list on the NASDAQ on Tuesday under the ticker symbol YNDX. Morgan Stanley, Deutsche Bank Securities and Goldman, Sachs & Co. are the lead managers on the deal, which is one of eight scheduled to price on this week's US IPO calendar.

Background

According to the company website, Yandex's founders coined the term "Yandex" as an acronym for "Yet Another Indexer." Yandex's roots trace back to 1990, when its predecessor company Arcadia initially developed its underlying search technology, which uses advanced analysis of the Russian language to filter through possible word variations and improve search accuracy. With backing from Baring Vostok, a Russian private equity firm and Yandex's largest shareholder with a 19% post-offering stake, the company has continued to enhance its search technology and introduce parallel services such as email, e-commerce, maps, news, videos, music, blogs and online payments. Its yandex.ru website had over 38 million unique visitors in March 2011 and was the default homepage for 44% of Russia's Internet users in late 2010.

Financials

Yandex generates most of its revenue by charging per-click fees for text-based advertising, which are placed on both owned and third-party network sites. Last year, it booked $217 million in EBITDA on $440 million in sales, which increased 43% from $307 million in 2009. It had 180,000 advertising customers (+37% from 131,000 in 2009), who use an online auction-based service to bid on keywords, create ad campaigns, monitor performance and manage their ad budgets. Yandex expects further growth to be driven by the introduction of new features, its mobile platform (currently only 5% of its search traffic), location-based ad formats and selective international expansion.

Risks

The primary concern for Yandex is its exposure to political pressure from the Russian government, which could have unpredictable and adverse effects on the business. Additionally, operating margins could decline in the near-term as the company boosts spending on product development (17% of sales in 2010) and capital expenditures (18%). Lastly, though Yandex has maintained its dominant position over the years thanks to its technology and early mover advantage, intensifying competition from Mail.ru (8% share) and Google (22%) remains a long-term risk.

Outlook

Yandex should generate investor interest as the only US-traded company with pure exposure to Russia's large and underpenetrated online advertising market, which is expected to grow from $840 million in 2010 to $2.3 billion by 2013 (40% CAGR). Further, the company will likely benefit from positive momentum generated by LinkedIn's IPO (NYSE:LNKD), which was extremely well-received when it hit the market last week. Though political pressure is a concern, strong deal demand suggest investors are focusing more on Yandex's leading market position, notable track record and unique exposure to one of the world's fastest growing Internet populations.