Yandex Search Engine Sees Steady Growth In Russia

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Somewhere in Russia, two people are probably arguing over a fact or a piece of trivia. Like many folks in the digital age, they decide to settle the matter by doing an Internet search to find out who's right and who's wrong.

Do they say "Let's Yandex it" the way U.S. Internet users say, "Let's Google it?"

Probably not -- even thoughYandex ( YNDX ) is Russia's largest search engine, with more than 60% of the market. Its nearest competitor,Google ( GOOG ), has an estimated 26% of the Russian search market.

Since debuting on the Nasdaq in May 2011, Yandex has run off eight straight quarters of 25%-or-better earnings growth. Sales have risen at least 29% over the same period.

Despite those numbers, the use of "Yandex" as a verb doesn't appear to have caught hold on a mass scale just yet.

Run a search of "Yandexed" and you come up with about 400 results. Run a search of "Googled" and you get closer to 68 million.

Maybe that's why Yandex is often referred to as the "Google of Russia," while Google is almost never referred to as the "Yandex of America."

Entrenched Search Engine

If Yandex lacks Google's name recognition, it can still take solace in the fact that it is firmly entrenched as Russia's top search engine and appears ready to pad its lead in coming years.

"(Yandex) offers the best exposure to the growth prospects of the Russian online sector through online advertising," Uralsib Capital analyst Konstantin Chernyshev noted in a report following Yandex's first-quarter earnings report.

Yandex is also growing its share of the global search engine pie. Earlier this year, it was reported that Yandex passed Microsoft Bing to become the world's fourth-largest Internet search engine.

Data released by ComScore qSearch show that Yandex passed Bing in the number of monthly search queries worldwide in November and December, the latest period global data are available.

According to that report, users of Yandex generated 9.46 billion search queries in November and December. That compares with 8.96 billion processed by Bing and other Microsoft sites.

Bing is owned byMicrosoft ( MSFT ) and processes more than 90% of the software giant's sites. Other Microsoft search sites in ComScore's report include MSN and Windows Live.

Google maintained its dominant global position with 228.9 billion search queries in the final two months of 2012.Baidu ( BIDU ) sites ranked second with 29.1 billion queries, followed byYahoo ( YHOO ) sites with 17.2 billion.

The November-December performance continued a strong recent run by Yandex as it looks to grab more share from the sector's traditional heavyweights.

"Only two out of the Top 5 search entities grew higher last year -- Baidu (13%) and Yandex (27.8%) -- while the total number of search queries worldwide decreased by 4.6% since December 2011," Michael Bonfils, international managing director of SEM International, wrote in a report after the results were released.

He noted that while the market in Russia "continues to evolve and grow," growth in Western markets has slowed.

"Bing and other Microsoft sites started trending downwards in terms of search queries in the second half of 2012," Bonfils said. "Yandex, meanwhile, enjoyed solid growth on a monthly basis from July through December."

Just about all of Yandex's revenue -- an estimated 97% -- is sourced in Russia. The rest is split between Ukraine, Kazakhstan, Belarus and Turkey.

The company provides geographic-centered home pages within Russia to target the country's different regions and cultures. It also aggregates news and offers price shopping, customer reviews, mobile search, weather, traffic reports, TV and movie schedules and other services.

Meanwhile, online advertising -- Yandex's biggest source of revenue -- continues to take up a bigger slice of Russia's overall ad market.

In a report earlier this year, analyst Alexander Nazarov of Gazrombank, cited data from the Russian Association of Communication Agencies showing that the value of the Russian advertising market rose 13% in 2012. Internet banner and contextual advertising accounted for the biggest growth, rising 35% year over year.

Most of the online ad increase came from contextual advertising, which is a type of targeted advertising based on keywords and search patterns.

Banner Ads

While revenue from banner advertising in Russia rose 17% last year, contextual advertising climbed 45%. That favors Yandex, which gets only 8% of its revenue from banner advertising, Nazarov said.

In a report for HSBC, analysts Jean Kaplan and Herve Drouet called contextual advertising "the fastest growing, most scalable, and resilient segment within Russian media, and we expect Yandex to remain dominant."

Russia's growth in online advertising has helped Yandex put together a long track record of robust financial gains.

On April 25, the company posted first-quarter net income of $79 million, or 23 cents a share. That was up 53% from the prior year and above consensus estimates.

Revenue climbed 29% to $256.8 million, also above views. The top line was driven by 35% growth in text-based advertising. Display advertising rose 48% for the quarter.

Yandex management guided full-year ruble-based revenue growth of 30% to 35% this year, up from its earlier guidance of 28% to 32%.

Yandex's stock price on the Nasdaq shot up 16% to 24.94 the day it reported results. Shares have continued upward since then, hitting a 12-month high of 26.12 on May 3.

Analysts polled by Thomson Reuters expect full-year profit to rise 26% to $1.10 a share.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BIDU , GOOG , MSFT , YHOO , YNDX

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