Yandex's (YNDX) CEO Arkady Volozh on Q2 2016 Results - Earnings Call Transcript

| About: Yandex N.V. (YNDX)

Yandex N.V. (NASDAQ:YNDX)

Q2 2016 Earnings Conference Call

July 28, 2016 08:00 AM ET

Executives

Katya Zhukova - IR

Arkady Volozh - CEO

Greg Abovsky - CFO

Alexander Shulgin - COO

Mikhail Parakhin - Chief Technology Officer

Analysts

Lloyd Walmsley - Deutsche Bank

Edward Hill-Wood - Morgan Stanley

Alex Balakhnin - Goldman Sachs

Cesar Tiron - Merrill Lynch

Vladimir Bespalov - VTB Capital

Mitch Mitchell - BCS

Alexander Vengranovich - Otkritie Capital

Sergey Libin - Raiffeisenbank

Svetlana Sukhanova - Sberbank

Cesar Tiron - Merrill Lynch

Operator

Good day and welcome to Yandex Second Quarter 2016 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to hand the call over to Katya Zhukova. Please go ahead.

Katya Zhukova

Hello, everyone and welcome to Yandex’s Second Quarter 2016 Earnings Call. We distributed our earnings release earlier today. You can find the copy of the press release on the company’s Investor Relations website as well as on Newswire services. On the call today, we have Alexander Shulgin, our Chief Operating Officer; Greg Abovsky, our Chief Financial Officer; as well as Mikhail Parakhin, our Chief Technology Officer. Arkady Volozh, our Chief Executive Officer will join the Q&A session.

The call will be recorded. The recording will be available on our IR website in a few hours. We have also put together a few supplementary slides currently available on our IR website.

And now, I will quickly walk you through the Safe Harbor statement. Various remarks that we make during this call about our future expectations, plans and prospects constitute forward-looking statements. Our actual results may differ materially from those indicated or suggested by the forward-looking statements, as a result of various important factors, including those discussed in the risk factors section of our Annual Report on Form 20-F dated March 21, 2016 which is on file with the SEC and is available online. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

Although we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. During this call, we will be referring to some non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with U.S. GAAP. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings release we issued today.

And now, I am turning the call over to Alexander.

Alexander Shulgin

Thank you, Katya and hello everyone. Thank you for joining our second quarter earnings call. We delivered another solid set of results in Q2 with revenues up 30%, ex-TAC revenues up 33% and adjusted EBITDA up 40%. Adjusted EBITDA in our core business stands at 290 basis points compared to Q1 2016 and reached 41.9%. In Q2 we saw continuous stabilization in the overall economic environment. We also made significant advances in the advertising technology which allowed us to improve our targeting capabilities. And we improved monetization of smartphones, as a result of the Anti-Trust case in Russia we were able to sign a number of distribution agreements with various OEMs for pre-installation on android devices.

Our search share in Russia averaged to 57% in Q2, down 60 basis points compared to Q1. The decrease was driven by seasonality, limitation of our distribution activities in Google Chrome and a decrease of our search share in iOS. Share on iOS is continuing to decline for reasons we have discussed previously. However in the recent weeks we gained approximately 200 basis points on android as certain models of smartphones with Yandex services preinstalled have already been shipped into the Russian market and became available in retail stores.

As of today there's only one update regarding the Anti-Trust case in Russia. The next hearing is scheduled for August 16th. The Yandex proudly continues to strengthen its position on desktop as well as in mobile. Its share on desktop has reached 19.5%. Its total share in the overall search traffic, including desktop and mobile is around 17%.

Gross of Yandex.Browser was supported by Zen, our personalized content recommendation seat, which we fully rolled-out in Russia in June. The product provides intelligent content discovery feed based on use of interest and demographic profile. The product relays on the latest developments in the artificial intelligent research. Interestingly average time spent for user on Zen was comparable with global social networks. Zen also clears additional advertising inventory and has all restarted to generate revenues.

Now turning to segments, I am very excited with how our business units have been progressing. Taxi is actively penetrating new regions. The growth rate in [indiscernible] accelerated in Q2 compared with Q1 2016. The regional cities ex most consistent, now generate almost a quarter of all rights. We are now in 25 cities, In Russia as well as in Yerevan, Armenia and Minsk Belarus.

The Yandex markets continue to benefit from product improvements, strong ecommerce trends and increased margin activities. In Q2, we transfer 20 categories of good in to the CPU model. As a result of this transaction, we saw retailers increase the level of recent models in Yandex market. Currently we have 10% of our merchants working with us under the CPU model, we have also increased our take rate from 1% to 2%. Over the [indiscernible] continues to strengthen its position in Saint Pete and in Russian regions. In June, we opened our first certification center in Moscow that will allow sellers to get independent technical opinion on their cars, and to highlight their listings with it certified by orders that we have signed.

In Q2, non-advertising revenues have classified conclusion our real estate, travel and jobs grew 70%. As I mentioned earlier, we significantly increased monetization of smartphones in Q2. With this I will hand the microphone over to Mikhail Parakhin, our Chief Technology Officer, who will walk you through improvements in advertising technology and conclusion with respect to mobile monetization that we made during Q2. Mikhail, please go ahead.

Mikhail Parakhin

Thank you for introduction and hello everyone. In Q2, 27% of all our queries came from mobile and monetization for mobile devices was up 150 basis points, generating 22% of our search revenue. This growth was driven by significant increase in monetization of smartphones due to a number of changes we made in head layout, VCG formulas for smartphones as well as by significant investment in targeting technology.

In Q2, we conducted a number of experiments, we have add content and layout on smartphones, putting more element information in that. This is not an increase number of paid clicks but lowered the average quarter. To maximize the value of these clicks for our advertisers, we adjusted planters which we use in picking ads to be shown in our priority head block. As a result of these adjustments held into far head significantly increased has did the average click quota for advertiser.

We have also made significant advancements in our targeting capabilities. We improved the quality of click prediction and the conversion probability formula and headed the new factors to our targeting technology. The fact that we are now allocating more service to analysis user data allows us to expand our targeting capacity. All this changes reflect our new philosophy and to optimizing total economic value of an ad, this just in a rate advertisers to fade on buyer bids and allows us to compute the total value they are providing to that advertisers. Since not all clicks are created equal, it might be better to drive fewer higher value clicks and a larger volume of the low quality once.

Now turning to another high growth segment Yandex advertising network. We’re benefiting from the increase in inventor that our advertisers continue allocating to Yandex.Direct. improvement in marketing, which I mentioned above, replacement of old fashion text-based blocks by the more effective programmatic advertising formats, as well as by improvements in targeting algorithms. We are also enjoying strong growth in our mobile add network, as result of increasing inventory and improved targeting. In addition to smarter, the mobile supply site platform that joined our RTB as exchange in early 2016, we now work with the three more sizable SSPs: mobile, interactive, and note pads. We also enjoy increases in mobile inventory, now we’re existing Yandex Advertising Network partners. Finally, I would like to highlight the recent launch of Yandex audience, service which helps advertisers’ targets new clients more effectively but creating and analyzing segments based on their existing client data.

Now advertisers can upload there regular clients email addresses, phone numbers or mobile device ids into Yandex audience and you will create look like audiences for them. Overall we still see significant potential in improving our advertising technology and do not expect the fountain to run dry in the foreseeable future. With this I turn the micro phone over to Greg.

Greg Abovsky

Thank you, Mitchell and thank you all for joining our call today. We’re delivering another solid set of result. Our consolidated revenues grew 30% year-on-year and reached RUB18 billion. Online advertising revenues accounted for 96% of total revenues in Q2 and increased 28% year-on-year. Yendex websites, which includes our text based and display revenues were 24% year on year. Our ad network which includes revenues from tax-based and display partner networks grew 37% year-on-year benefiting from increased inventory that our advertisers allocated to the Yendex.Direct both in the stock as well as noble.

From an improvement of our targeting capabilities, and increased quality of ad selection algorithms that Mikhail discussed recently. Ad network comprised 26.3% of total revenues in the quarter. Contribution of ad network revenues to total revenues increased by approximately 150 basis points compared to Q2 of last year. In Q2, we saw growth of ad budgets across all advertising categories. Revenues from Travel segment continued to be soft, as our consumer electronics and home appliances, it was rapidly growing ad categories, were real estate apparel, and FMCG with approximately but still grew approximately 40% growth rate in each. Auto and financial services grow in line with overall growth. Other revenues grew 106% primarily driven by the growth of Yandex.Taxi.

Other revenues comprised 3% of total revenues in Q2, up then 50 basis points, compared to Q2 of 2015. Traffic acquisition costs related to partner advertising network grew 25%, slower than ad network revenues due to the change in our partner mix and improvement in revenue sharing terms with some of our partners. As a result, in Q2, our partner TAC comprised 55.7% of our ad network revenues, down from 61.2% a year ago and down 56.3% in Q1 of 2016.

Traffic acquisition costs related to distribution partners were flat year on year and constant at 7.7% of advertising revenues from Yandex sites, compared to 9% year earlier and 7.8% in Q1 2016. As a result of these factors total TAC grew 18% year on year and constituted 19.7% of total revenues, 200 basis points lower, compared with Q2 of last year and 90 basis points lower than a quarter earlier 13% while cost per click increased 14%.

Turing to our cost structure, total OpEx excluding TAC and G&A grew 27% in Q2. Excluding stock based comp, expenses grew 25%. Growth was primarily driven by growth in advertising and marketing expenses for our business units, such as Taxi, ecommerce and classifieds, in that order. Personnel costs still remain the largest cost item. In Q2, our headcount was up 2% compared with both June 30th of last year as well as March 31st of this year. In Q2 our personnel costs constituted 21% of revenues, down two percentage points from Q1. Stock based comp increased 48%. The stock based comp growth rates were driven by new grants and Forex. G&A expense for the quarter increased 24%. G&A grew slower than the previous quarters reflecting lower investments in new servers in Q2.

Our adjusted EBITDA increased 40% year-on-year, due to a shift of some of our expenses towards Q3. As a result our consolidated adjusted EBITDA margin was 37.5%, up 290 basis points from the previous year. This quarter, the impact from ForEx was a loss of RUB958 million related to dollar denominated assets and liabilities in our balance sheet, following the appreciation of the ruble from 67.6 on March 31, to 64.3 on June 30. Adjusted net income was up 40% and adjusted net income margin was 21.7%. Our CapEx was RUB2.5 billion or 14% of our Q2 revenues, up from 9% in Q1 of this year. The peak of our server purchases fell on June while other capital expenditures related to purchases of equipment for our [indiscernible] DC, as well as the [indiscernible] DC which is under construction.

Turning to performance of business units. Search and portal revenues were up 26%, due to a number of factors including CPC increase which was driven by [VCG] implementation September 2015, better macro as well as technological improvements and ad layout changes that Mikhail discussed earlier. Adjusted EBITDA of search and portal grew 41% in Q2 and reached 41.9%, up 290 basis points from Q1. Revenues of Yandex.Market were up 46%. The growth was driven by improved consumer demand compared to year earlier, increased traffic coming from search as well as advertising and marketing support. Adjusted EBITDA of Yandex.Market decreased 21% year-on-year and its adjusted EBITDA margin was 30% in Q2 compared to 36% in Q1 as a result of increased advertising and marketing activity as well as hiring.

Revenues of Yandex.Taxi were up 172%, the growth was driven by the addition of new cities and an increase in the number of rides. As we have discussed in the past, we are making significant investments in Yandex.Taxi including advertising and hiring of additional personnel. In Q2, adjusted EBITDA of Yandex.Taxi was negative RUB153 million. Revenues of classifieds grew 48% driven by growth of IVAS and listing revenues at Auto.ru and other verticals. Adjusted EBITDA of classifieds was RUB23 million, down 66% from Q2 of last year. The main driver of the decline in EBITDA was growth in advertising and marketing activities as we continue to invest for growth. We continue investments in our experimental businesses represented by our media services Yandex.Turkey, YDF and discovery. These revenues grew 63% driven by growth across all the lines. These businesses continue to be a drag in our overall margins however. The magnitude of the EBITDA drag in these businesses declined however as the EBITDA loss decreased by RUB250 million year-over-year.

Now, getting back to corporate matters, we did not buyback any convertible bonds during Q2. Jus to remind you since the inception of buyback program we've repurchased approximately 292 million face value of the bonds. We ended the quarter with approximately $979 million in cash and equivalent.

Now turning to guidance, this current trading conditions, we increase our revenue guidance for 2016 from 15% to 19% range provided previously to 19% to 22%.

And with this I’ll turn the call over to the operator for the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instruction] We will take now our first question from Lloyd Walmsley from Deutsche Bank. Please go ahead.

Lloyd Walmsley

Thank you. Two, if I may. First, it looks like a lot of the strength in the quarter came from the network side with the two-year growth stack accelerating a bit, while the O&O side, while strong, was a little bit of a deceleration. Wondering if you can just parse out what the big drivers are between those two?

And then, second, you have got a lot of monetization initiatives underway. Mikhail outlined several of them. Wondering if you can just give us some color on how much you think those will help in the second half and some color on the cadence of the launches? It looks like custom audiences and the look-alike targeting was just launched. So the impact is largely on the comb, but if you can just talk about the timing and potential impact of some of that, that would be great.

Greg Abovsky

Hi, Lloyd its Greg, I’ll take the first question and I’ll hand it over to Mikhail for the second question. So just in terms of the break down or revenue growth between the network side as well as the O&O side, what I would say is look the network side is defiantly getting a lot of benefits from better targeting that we are putting to use there. And I think that Mikhail will highlight some of those as he has in his prepared remarks as well, as we are putting sort of more competing power behind our factors analysis.

On the O&O side, I think it's mostly just business as usual and to that question sort of cadence is to where some of those advances lay. Furthermore, I would say the network side defiantly is getting a benefit from the growth of our mobile network as Mikhail talked about, and that’s defiantly helping to accelerate growth there more so than on the O&O side at this point, I’ll hand it over to Mikhail.

Mikhail Parakhin

Yes, thanks Greg. So yes it's just -- we said previously, advertising network is growing faster than search and that’s being going on for a while. We do have significant potential there still in improving targeting technology as well as in search by the way too. The specific date is harder to predict as you know shipping technologies is kind of an unpredictable business. But we do believe we still have great few bullets left. Not a one single super bullet, but quite a few bullets left in second half of the year. We think we will try to fight against of course very difficult counts compared to last year's VCG launch. And we have -- you might expect from technological improvements from us in the second half of the year.

Lloyd Walmsley

Thanks guys, nice quarter.

Operator

Thank you. We will take now our next question from Edward Hill-Wood from Morgan Stanley. Please go ahead.

Edward Hill-Wood

I have two questions based on the guidance, please. The full-year guidance being raised, it still implies a very sharp slowdown in growth in the second half of the year. I was just wondering if you could just comment on how you are seeing trading at the moment through the summer period and when you might be seeing that sort of scale of slowdown or whatnot you are factoring in a sort of degree of conservatism for later on in the year as the comps get tougher? And, secondly, I was wondering if you could just update us on your previous guidance of margins declining around 300 basis points for the full year, including investing in new projects, whether or not that still stands as a reasonable base case? Thank you

Arkady Volozh

On the first question and what is implied by our guidance, well clearly our guidance imply the slowdown which reflects our conservatives and imply the fact that the micro environment still means uncertain, I think you’re seeing stability, I don’t think you’re real inflection in growth. I think that what we had is we had kind of rapid declines, which were taken over by sort of slowing down in a rate of decline to stability, I don’t think we’re seeing growth yet.

And in terms of trading conditions, I think they are generally similar in line and in line with the previous quarters and obviously the comps that you said, do get tougher, the VCG auction, we will anniversary that in September 1. The rebate anniversary on September as you know and so all of those taken together leaders to where we are this are the guidance but again just to remind you, we started off the year at the 12 % to 18% range we’re now at 19% to 22% . It has been quite a lot of moving up helped by obviously are showing results. On the question of margins, yes I did talk about 300 basis points last year, so at the last call, it appears that it should be tapped and touch tab better than that. I’m guessing, we’re probably decline 200 basis points or so on a year over year basis.

We’re stepping up aggressively more aggressively than even before on our business units, again it’s in that order that I talked about in the call, it’s Yandex.Taxi for us, it’s market second it’s classified, third in terms of the volume or investments they are taking but all those taken together are starting to sort of roll into the base now and we’re getting much more aggressive on them. And so I do think that we will manage to spend, the access revenue that we generate by pulling back into the business and investing for growth.

Edward Hill-Wood

It's great. Could I just clarify on the first point, so the current trading conditions through the summer are brought in line with previous quarter, and the conservatism relates to future potential trends?

Arkady Volozh

That’s correct.

Operator

Thank you. We will take now our next question from Alex Balakhnin with Goldman Sachs. Please go ahead.

Alex Balakhnin

Yes. Two questions from me, if I may. One is, you mentioned some Android deals, which helps you improve the market share from the end of June. Could you please elaborate on that? What is the magnitude of the market share improvements you see, maybe some [indiscernible] and also on the partners, who do you partner with? Are those B brands or maybe some A brands as well, and how do they really do with [indiscernible] and so on? Where do you appear, do you appear on the front screen or there are some hybrid solutions? That is my first question. The second question, the decline in the experiment process, does that reflect the scale down of Turkey, or it hasn't started yet? What really drives this sequential decline in the experiment process you have?

Alexander Shulgin

I'll start with a broader perspective on our search market share including android as well. So, we think we are positive about market share. We do not expect any dramatic changes to it. Our share on iOS is most likely will continue to decline for the reasons that we just described in the previous calls. On android our market share started to grow as a result of our distribution deals and I will speak about this in a minute. And we hope this strength will continue. Of course but [indiscernible] market share on android created depends on the results of the current Anti-Trust legal process that we have -- FAS has with Google. And also depends on practical implementation of the FAS through them, once hopefully the court takes possession of FAS in this case. On desktop we think we know how to maintain and to hopefully increase our share. So, all in all we're positive about our market share and just have to remind that it also depends on the relative growth of mobile traffic and our share in mobile. Going to distribution deals on android we have several deals currently with big and small OEM manufacturers on some specific models. I think for competitive reasons I wouldn't like to specifically name those companies but we already see that's helping us to increase our market share.

Greg Abovsky

Hey Alex on the question of experiments yes it's primarily the ramp down of advertising and distribution costs in Turkey that's driving that year-over-year savings.

Alex Balakhnin

And just to follow up on the first question, so those agreements, can you provide us some details? They do appear on the front screen, or it is the second screen installations that usually your search books appear on the screens? Like any details of that kind will be helpful. And, also, you mentioned iOS market share is declining. Can you provide the numbers which you normally disclose? So I guess Android is still [indiscernible]. What is the iOS now?

Alexander Shulgin

So, maybe brief you over you on situation android and there is also FAS case. So, what we believe what happens currently is that following the favorable decision of FAS, in the Anti-Trust case regarding Google distribution practice on android, we believe that Google has loosened some of its express prohibitions against Yandex with respect to android OEMs. And we're now able to make several deals and hopefully more by bringing our services on plus run or minus runs.

So we are not yet less in our sort from the default home screen with some several exceptions, which I will leave open. At the same time, the core practice of Rogo which used up preferences for its product run on android devices seems to be still enforce. And to remind this techniques are bond of Google must have Go Play app store with search, browse, and [Pikachu weather] apps. And requirement for OEMs to [indiscernible] on the default home screen and to set all search access points into Google. And so important item that Google use to -- is still doing so up in. we have position is it fiction of plays content to a products on the devices into this search.

So as I said currently we believe what happens if that Google loosens it's tight grip on OEM, and that placed in our products in product on the minus 1 and plus 1. And hopefully wants the FIS sort of gets implemented will be able to place our products on the default home screen.

Operator

Thank you. We will move on now to our next question from Cesar Tiron from Merrill Lynch. Please go ahead.

Cesar Tiron

Two questions from my side, on the handset manufactured deals that you signed, can you please share how they work I understand you might not go into all the details but, basically the an installation fee and then pay a revenue sharing fee? And then the second question would be on Turkey, just I think that you need to be in Turkey and do you believe that you can continue to reduce operating expenses in Turkey this year? Thank you so much.

Arkady Volozh

I’ll take on some of this in this following ways, that we expect that on mobile devices, to be roughly similar tech to the desktop. So mobile tech will be growing in the one which along with additional traffic of grows, but as percentage overwriting, we don’t think it will have a material change versus current change.

Cesar Tiron

That is one the deals are activated right.

Arkady Volozh

Yes exactly.

Cesar Tiron

Okay.

Arkady Volozh

On Turkey, maybe I can just add a couple words, yes we always feel we are in Turkey with our products, we continue improving our products in quality. And we are completely committed to Turkish audience users. At the same time, even worse than in Russia we face very harsh conditions in the distribution. And that’s we decided for now to cut our cost on marketing distribution at all. So we are still there with our products but trying not spend too much waiting for this situation to change.

Cesar Tiron

Thank you very much.

Operator

Thank you. We will now take our next question from Vladimir Bespalov from VTB Capital.

Vladimir Bespalov

I have a couple of questions. First is on Yandex.Taxi. Given that you target like big cities in Russia and the former Soviet Union and you are present in more than 20, right now, how long would it take to cover all these cities you are playing in your strategy?

And maybe once you completed your expansion and rollout of this service, what would be the normal margins for these businesses in your view and to what market share on the addressable market, regional markets you are targeting for Yandex.Taxi? And the second question is on real estate. Could you provide us an update how the year is going, are you going to complete it like scheduled in October and things like this? Thank you

Greg Abovsky

Hey Vladimir it’s Greg, let me take both of those. On the taxi side, so we’re currently in 25 cities in Russia, we’re also Minsk and Belarus and in Yerevan and Armenia. And just today we launched service in Kazakhstan and [Elmonte]. Our plan in terms of rolling out to more cities is still a fairly aggressive one, we see marks opportunity in many, many cities in Russia, it appears that the service works and works well and cities with a few hundred thousand people. Beyond Russia we’re also looking at some of the neighboring republics and so far we’ve launched in Armenia and Belarus and Kazakhstan.

And I think some of some of the other former Soviet republics are also quite interesting markets. So we see sort of plenty of opportunity for expansion. In terms of margins and market share, very hard to answer those obviously, it very much depends on the size of the city, the comparativeness of the market and so on. And some of our more establish markets were seeing very healthy margins, but at the same time, we’re continuing to invest aggressively in building out new cities. And have to think about it actually, our rides and so I have talked in the prepared remarks. The number of rides is much quicker than the amount of revenues just from accounting stand, so that’s should be where it gets through, over time as well.

In terms of market share we look what clearly aiming to be market leaders, we would like to be a number one or number two in every market that we plan. And then on the real estate front, look the deals is scheduled for closing in early November of 2016, we’re obviously monitoring the situation and seeing those out there, in terms of exchange rates in terms of Masco real estate prices and so on. But we do have an option to walk away from the deal without any material penalties.

Vladimir Bespalov

And given the stock appreciation, are you considering an option like this, or can you enter, altar the terms of the deal given the price of increase in dollar terms?

Greg Abovsky

So sure, so it was that I was saying, look the factors are play into the decision are obviously things like the exchange rate. Things like the rental rates for comfortable real estate, thing like cap rates, things like our own stock price, all of those factor into the decision, in totality and the fact that we do have an option to walk away without any material penalties, it’s is obviously something that allows us to consider all of our options.

Operator

Thank you. We now move on to our next question from Mitch Mitchell from BCS.

Mitch Mitchell

Congratulations on the very good results today. Two questions. One, Greg, you just mentioned that part of the reason for the strong margins in the second quarter was the result of shifting some expenses forward in the third quarter. I wonder if you could just give us a bit more color on that. And then, on Taxi, I just wanted to ask, thinking about growth, you have said that rides are growing faster than revenue. Are we -- are you growing in terms of geographical expansion and attracting a number of drivers? Are you still accelerating your growth at this point, or is there more of a plan that you are following and that is driving how growth is going?

Greg Abovsky

So, on margins if you take what I said about margins on a full year basis which currently our view is that they should decline approximately 200 basis points year-on-year and you combine that with the fact that our margins were up in Q1 and Q2 on a year-over-year basis, that would imply that margins in Q3 and Q4 should be down on year-over-year basis just to make the full year work. So, that's what I would say. Yes, we had some marketing spend that was postponed from Q2 to Q3 just because -- the product weren't ready or the launches for Yandex Taxi were little later than planned or what not. So, that's on margins. On Taxi, so, we're seeing I would say very healthy growth and in the more established cities. What we're seeing is a very strong acceleration in a number of rides in the regions. So, the regions I think make up something like a quarter of all of our rides now and those are accelerating exponentially.

Mitch Mitchell

But based on --.

Greg Abovsky

Sorry, and just to finish that talk. And the reasons that rides are growing even faster than revenues is because in some of the brand new cities we're not collecting any meaningful revenues.

Mitch Mitchell

And that was my follow-up question. So you are operating in 25 cities, but you are not necessarily generating revenue in 25 cities.

Greg Abovsky

That's correct. So, we've operated in 25 cities in Russia as of today and other three outside of Russia and we're collecting revenues in call it half of those cities.

Operator

Thank you. [Operator Instructions] We'll take now our next question from Alexander Vengranovich from Otkritie Capital. Please go ahead.

Alexander Vengranovich

Two questions from my side. First, on your take on potential implications from the recent [indiscernible] terrorist package [indiscernible]. I haven't seen any comments from your side regarding the potential impact from your CapEx and operating expenses. Has anything changed from your side? What is your latest view on whether, based on the current state of the war and based on your predictions, what sort of impact you could expect? Is there any potential option to [indiscernible] that impact and how it looks like physically for you? And the second question is on your classifieds business out of that.

So basically it has been growing quite rapidly, and we see improving results there. But, at some stage, it looks like I would expect that there will be more competition in that market. Can you -- if you please, the competition, which just like puts more pressure on your margins than that business, do you think you could participate in some market consolidation there? And, from your point of view, whether you would like to be a consolidator in the market or do you think it is better to dispose that business at some stage, and you don't think it is complementary to your main portal and search business?

Alexander Shulgin

So, on data storage flow, of course we know that telecom operators, for example, they estimate substantial impact on their CapEx from implementation of this law, which becomes fully inactive from July 1, 2018. However, we, Yandex, are in a different business model, so for us we don’t exactly what the impact will be , but we don’t think it will be significant specifically Yandex, this is not to comment on telecom operators business. They know the situation much better than we do. So for us, we don’t think it will be significant.

On the classified and potential LNA or business combination deals, we are open to different opportunities and if there is way to increase market capitalization of the company by doing the combination of or disposing of a matter, this is of course something in which we will be willing to consider, but not -- there is not a guarantee be into works. We are committed to growing Auto.ru. It is doing very well in most [indiscernible] as gaining share in the regions. And we will disappointed with [indiscernible].

Alexander Vengranovich

Okay thank you.

Operator

Thank you. We will move on now to our next question -- a follow up question from Alex Balakhnin from Goldman Sachs.

Alex Balakhnin

Yes. I am just trying to reconcile the revenue guidance increase year to date from 12% to 18% to 19% to 22% with just 100 basis points difference in your margin outlook, which implies that year to date and probably even from April until now, you plan to spend RUB2.5 billion to RUB3 billion more in terms of costs. And I was just wondering if that is the case where do you -- what's the allocation of those costs versus what the expectations you had in April?

If you can provide some comment, that would be helpful. Because it seems that you plan to spend quite a lot on tax yield already in April, same as [indiscernible] and so on. If anything, so far, we see the policy of trends in the spending in your verticals. I mean, less than we thought. So if you can provide some comments how this margin outlook works that would be helpful.

Greg Abovsky

Hi Alex, it's Greg. So I am obviously not going to comment on exact stages, but to give you general sense, you are absolutely right, most of the spend that we are giving this year is going into Taxi, a lot of the increase, that you are seeing from higher revenue base without commercial expansion of margins as because of at the same as overall revenues have grown as our guidance.

To talk on our guidance, went from 18 to 19 to 22, all of that has been a company by increase commitment to the Taxi business. And some of that hasn’t been reflected numbers yet, which is why the margin compression in Q3 and Q4 will be there where it actually didn’t have a change to flow through it in Q1 and Q2. That’s basically have risen, so as a revenue guidance has kick up, so has investment, an investment is primarily going into an investment is primarily going into Taxi and to a smaller extent into market classified in the core search business?

Alex Balakhnin

Thanks. That is helpful. Obviously, Taxi does really well. I was just wondering to what extent -- well, the cost basis Taxi last year was RUB800 million. Can it increased fivefold, six fold, to account for that for the full year?

Greg Abovsky

It should increase meaningfully.

Operator

Thank you. We will now take our next question from Sergey Libin from Raiffeisenbank.

Sergey Libin

I am not the first one to ask, but could you please disclose some numbers which you normally provide such as share on iOS, Android, and then maybe the evolution of your share on desktop and in Turkey, please? And, secondly, I was just wondering that with RUB1 billion in cash now and not buying out the convertibles, have you thought of any other type of cash distribution, maybe share buybacks or dividends or something like that? Could you also speak on that, please? Thank you.

Arkady Volozh

Hi Sergey, on market share, on Android, our market share is right around 40% as of Q1 on IOS its right around 43% .On desktop it is around 64%. And as far as uses of cash, so I think the economic environment is still reasonable unstable in that doing something aggressive when the cash front seems, whether its share buyback or dividends, seem a bit mature. The Boards of the view and this is obviously a Boards decision that we should continue to monitor the situation and see how the landscape of all’s, I mean it’s amazing, I guess how much the landscape has changed, if you take into totality the last 24 months.

We sort have gone from full on crisis mode to from stability to crisis to what looks like stability again and we’re obviously all hopefully is that stability will trend to growth, but we’re not seeing that yet. Until we see that, I don’t think you should expect us to do something meaningful, vis-à-vis the cash balance either for buybacks, share buybacks or for instituting a dividend.

Operator

Thank you. We will now take the question from Svetlana Sukhanova from Sberbank. Please go ahead.

Svetlana Sukhanova

A small follow-up question for me. Can you please kindly deliberate why stock is down so significantly, both on distribution and on the network?

Arkady Volozh

I’ll take it on the partner side, because that’s easier, on the partner side, it’s down due to mix and due to more favorable splits in our favor. As we’re able, essentially the way works as a partners of our, they don’t think about splits percent, they think about another amount of revenues that we generate for them. And so that’s the extent that we generate more revenues then they are happy and as long as we keep doing that, we can also see overall rates decline, right? Because they only care about the final ruble amount not the split. And so partner, I think I've answered. On the distribution front frankly it just reflects a lack of distribution partners both on desktop and on mobile. On desktop most of our distribution partners have been replaced with our own browser which is growing considerably and currently has approximately 20% market share on the desktop and on mobile, the picture is clear. It is what it is and that has been primarily addressed in the Anti-Trust case against Google vis-à-vis android and on iOS the problem is as Sasha described.

Svetlana Sukhanova

But, if I may a quick follow-up on distribution, you mentioned earlier that mobile tech is roughly the same as -- essentially revenues as a desktop tech. Did I get it right?

Arkady Volozh

Yes. So, the question is do you have partners you can pay tax to in order to grow your market share and on android the primary challenge has been that we have been essentially just simply pushed out of the platform.

Operator

Thank you. We'll now take a follow-up question from Cesar Tiron from Merrill Lynch.

Cesar Tiron

The question is on Yandex.Taxi and all the incremental money that you are planning on spending. Have there been any changes in the competitive behavior of Uber or yet that you have noticed in the past months, weeks? Not sure, for example, subsidizing rides, stuff like that, I mean those two companies have raised quite a significant amount of capital in the past couple of months. And is there any changes, do you think, to the strategy in Russia?

Greg Abovsky

I think it's kind of hard to monitor what everybody does and it's obviously better questions for them as to what their strategy is vis-à-vis the Russian market given their recent fund raising. I think we're just sort of focused on execution, I think we're doing better in some regions. I think we could be doing better in others, there's room for improvement. But overall I think everybody is just focused on growing market share and getting more usage on their platform and building loyalty vis-à-vis those users and are expanding the footprint. So, and that's what we're doing as well.

Cesar Tiron

Is there a subsidy -- so do you guys subsidize rights, not for drivers but for end users?

Arkady Volozh

We certainly incentivize users to trial our services. When we launch new cities we usually launch them with aggressive pricing which we tend to maintain over time. And we obviously subsidize drivers to create the network effect in newly launched cities.

Operator

Thank you. We'll now take another follow-up question from Mitch Mitchell, BCS.

Mitch Mitchell

I wonder if we could just go back to Yandex.Market. We haven't talked very much about that, and just, again, if you can walk us through what is driving the growth there and what the potential is for changes in the trend going forward. Have we seen any of the impact of the change of the shift to the CPA model on the higher take rate yet, or have those changes come so late that they are still ahead of us to see what the effect is there?

Alexander Shulgin

This is Alexander Shulgin speaking. So on Yandex.Market we are focused across several front on improving the quality of our products, so people are more happy with they can make more orders when visiting the website. And it is a number of users with a substantial investment in advertising and promotion on Yandex.Market. And also a long term strategic focus for us is transition to CPU, as I said it's about 10% of merchants who are working under CPU model. Take rate increases not was done recently, so it's yet to be seen in the results, and I said the key priority for us is to increase number of merchants and categories on the CPU model. We believe that’s a very important project to complete.

Mitch Mitchell

Great thank you.

Operator

Thank you. As there are no further questions at this time, I’ll hand back the call to Katya Zhukova for any additional or closing remarks. Thank you.

Katya Zhukova

Hello everyone again, thank you very much for joining our Q2 2016 earning call. Please feel free to reach out us with any question you may have. And the next call will be held in late October. Thank you.

Operator

Thank you. Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.

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