FOCUS: Diversification, investment to prop up Yandex, Mail.Ru’s figures in Q4

By Yekaterina Yezhova

MOSCOW, Nov 7 (PRIME) -- Two Russian leading Internet companies, Yandex and Mail.Ru Group, are likely to boost their performance in October–December even further than they did at the previous quarter thanks to an expected approval of a merger between Yandex.Taxi and Uber and diversification of Mail.Ru Group, analysts said.

“Yandex continues to demonstrate good revenue growth and has again improved its upbeat outlook for 2017 to 22–23% from 16–19%, but the main negative point of the July–September report was the EBITDA margin that fell to 24.3% due to investments in promotion of search on mobile devices and Yandex.Taxi in new locations,” Promsvyazbank senior analyst Ilya Frolov told PRIME.

“We think, however, that the margin’s fall will not be long and it will recover in the future, while investments will improve user loyalty to Yandex’s services on mobile devices and raise the number of trips of Yandex.Taxi.”

Yandex said on October 24 that its U.S. GAAP July–September net income plunged 65% on the year to 900 million rubles. Revenue grew 21% to 23.4 billion rubles, while adjusted EBITDA lost 17% to 5.7 billion rubles.

The company’s numbers were in line with Sberbank CIB’s expectations on revenue, but 5% below consensus on adjusted EBITDA. “In our opinion, the results were solid in the search segment, which is well positioned to demonstrate a higher growth in the following quarters due to the search share gains,” Sberbank said in a research note.

Investment group Aton said that injections into the search engine and the taxi business somehow undermined total results and expects the next quarter to be stronger.

Brokerage BCS said Yandex’s results allow the company to develop taxi and marketplace segments. “We expect the closure of the deal with Uber in November and strong results for October–December,” it said.

Yandex and California-headquartered Uber agreed to merge their taxi businesses in Russia and some CIS countries into a company called NewCo, where Yandex will own 59.3% and Uber 36.6%, while 4.1% will be held by employees of the company.

Investment company Finam analyst Leonid Delitsyn said that Yandex’s weakness reflects its almost full dependence of revenue on the market of contextual advertising only. Google with its dominance on Android mobile devices and capitalization that exceeds Yandex’s one by 66 times is a real threat for Yandex, he said.

“Mail.Ru Group is a more diversified company, whose revenue is more balanced, and in addition to online advertising, online games and extra services in social networks contribute almost equally to the company’s revenue. The number of such services multiplies, and its control by mobile operator MegaFon created a basis for tightening its grip on the mobile sector and financial services,” Delitsyn told PRIME.

Mail.Ru Group said on October 27 that its IFRS aggregate net profit went down 0.5% on the year to 2.9 billion rubles. Aggregate revenue soared 39.1% to 13.6 billion rubles, and aggregate segment EBITDA added 1.1% to 4.3 billion rubles. The company improved its 2017 revenue growth outlook to 30–31%, or 55.6–56 billion rubles, from 23–26% seen earlier.

Georgy Vashchenko, director of the department of operations on the Russian stock market at investment company Freedom Finance, said the segment of massively multi-player online (MMO) games and online advertising were growth drivers for Mail.Ru Group in July–September.

“Mail.Ru’s revenue from online advertising rose 32% on the year in the third quarter compared with just 12% at Yandex. It happens thanks to a higher sales volume of video advertisements and spots in social networks,” Vashchenko said.

Sberbank CIB was pleased by the performance of the games and advertising segments as well as impressive revenue growth of Mail.Ru Group’s social network VKontakte.

“Although the solid top-line growth did not translate into much in the way of EBITDA growth, this was because the company continued to invest in new projects, including (classifieds service) Youla, which has caught up to its main competitor in user numbers. We expect these investments to pay off,” Sberbank CIB said.

Youla has 22 million users, which is a serious achievement according to Vashchenko at Freedom Finance, while its archrival, Avito, has some 35 million users, and the gap is shrinking quickly. The customer-to-customer (C2C) segment is currently valued at 300 billion rubles.

“VKontakte and Youla are on the second and third places by volume (after Avito), and the three floors account for more than 75% of deals. I expect that if Mail.Ru develops C2C projects, it could challenge the leadership in the segment on the horizon of two years,” Vashchenko said.

“Revenue from e-commerce in 2018 may rise to 3.7–3.9 billion rubles. Along with MMO games, it will be one of the fast-growing segments. Total revenue at the end of next year, in my view, will amount to 64–67 billion rubles with EBITDA at 23 billion rubles.”

Frolov at Promsvyazbank said that Yandex and Mail.Ru Group will keep their strategic aims in October–December to accelerate growth rates in new businesses, which should generally contribute to reaching the revenue targets set by management.

“At that, pressure on the margins could remain for several more quarters, till new services of Yandex and Mail.Ru would start bringing operating income,” he said.

(58.4296 rubles – U.S. $1)

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