Yandex N.V.

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'd now like to hand the call over to your first speaker for today, Yulia Gerasimova, Investor Relations Director. Please go ahead.

Hello, everyone, and welcome to Yandex 3rd 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 Fuderedan, our Deputy Chief Executive Officer, and Svetlana Dibishkevich, our Chief Financial Officer, Vadim Marchuk, our Chief Operating Officer, Danil Shuleyka, the Head of E-Commerce and Vitek 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 right remarks that we made 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'll 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.

Thank you, Yulia, and hello, everyone. Let me give you a quick overview of the key highlights from the third quarter. Our results again show strong growth momentum across key verticals, including the two largest advertising and write-allings. These businesses continue 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 cementing our leadership in advertising and mobility. Searching Portal delivered 33% revenue growth supported by our investment in AdTech, SMB Products, and IOS Share. IOS Share improved during the quarter to 43.1% in the last week of September 2021. up 2.4% points year-over-year. This growth was underpinned by targeted investments in product and marketing. Right-hailing revenues increased by almost 70% on the back of solid growth of rights and JV. We continue to improve our operation efficiency and optimize our cost structure, with operational expenses decreasing as a percentage of January both quarter-on-quarter and year-over-year. At the same time, we invested in service quality and in growing the driver base, which led to a better supply-demand balance as well as 33% increase year-over-year in the number of drivers on the platform. Our initiatives in retailing provision as 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, GMG increased more than three times year-over-year. and its delivery grew 4.5 times year-over-year. This was partially driven by the low base effect of 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 the GMV growth accelerating to over 200% year-on-year, 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, we reduced the defect rate 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 and continuing to invest in other business initiatives, such as fintech, self-driving technology, and cloud, to ensure we are ready to meet future demand and to create additional foundations for sustainable long-term growth. With this, let me turn the mic over to Svetlana.

Thank you, Tigran, and hello, everyone. You've seen our press release and additional comments about the performance of our businesses that we published on our website. Let me focus on our updated outlook. In our core Searching 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 better macroenvironment, specifically a faster-than-anticipated recovery in business activity and the advertising market after pandemic-related restrictions during 2020. In recent months, this has been driven more by our deliberate decision 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 investment, our adjusted EBITDA margin for the full year will be marginally down on a year-on-year basis, but we still expect it to be over 48%. These extra basis points have allowed us to grow faster and solidify our leading position within the digital ad 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 ad margins stable going forward. However, we may consider reinvesting, provided that the opportunities we achieve, A, 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 the 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 our logistics infrastructure and delivery channels, numerous enhancements to B2B product and B2C interface unification, the launch of MarketExpress, as well as targeted marketing campaigns to strengthen our brand's recognition as a multi-category marketplace. Our guidance for e-commerce growth and investments remains unchanged. We continue to expect GND growth to be up by three times this year, while total cash burn 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 working capital. Based on this, our spending for nine months amounted to around 40 billion rubles. During the quarter, we continued 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-like dropship by seller model. The latter accounted for 50% 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 strategy, which helped to improve our 1P front margin. We benefited from a redesign of our pickup points compensation scheme and an improvement in utilization rates. And we made adjustments to our 3P 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 their utilization, which led to solid growth in rides, with rights number 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 in improving the quality of our service to support our market position and long-term growth. If you make no material changes in consumer or competitive environment in the remaining two months of 2021, We continue to expect the right healing in just the TBDOM margin as a percentage of GND to 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.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. Please ensure that the mute function of your telephone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll just take a brief pause to allow all participants the opportunity to signal for questions. Our first question today comes from Cesar Tyron of Bank of America.

Hi, everyone. Thank you very much for the call, and thanks for taking my questions. I have two. So I'll ask the first one. Over time, I would like to understand what do you believe is your key competitive advantage in e-commerce? Not today, but once the business scales 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 to us what would that be? Thank you so much.

Hi, Cesar. This is Vadim speaking. Let me take 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've got to look at the both sides, right? What you can offer to consumers and what you can actually offer to the sellers. And if you were to start with consumers, we believe that 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's gonna be music streaming, video streaming, whether it's gonna be the ride-hailing full tech, our Yandex Plus subscription with multiple benefits, whether it's gonna be the cash back on transactions or kind of the free subscription for both music and streaming. So, overall, we think that, you know, by putting this kind of complex bundle and offering together for the user, we can get him. And then, obviously, another component here is the logistics, right, which allows, you know, the last mile delivery. And, you know, we can do it quite quickly and smoothly, therefore, you know, maximizing the user experience. And therefore, by putting those things together, rather than competing specifically on price alone, right, you will be competing both on price, but also on the breadth and width and depth of your offering. So this is the first thing. The second thing, if you look at the kind of the merchant side, right, for the merchants, we can also put together quite a, well, we believe we can put together quite a compelling bundle, which is going to help them both to improve their own marketplace, but also potentially off-marketplace 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 our logistics component can also help them get rid of this hassle of getting the goods to the users. And then with addition of our FinTech services later next year and further out, we believe that we would be able to put together quite an attractive bundle that's gonna cover all the needs from starting from dealing with their financial questions all the way to client 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 the advantages that we have and why we can put a better package than probably some of our competitors.

Thank you so much. That was extremely helpful. I just wanted also to check on the taxi business, specifically on the right heading. Is the driver shortage situation improving? And if not, how long do you think this will take to improve and therefore potentially positively impact tech rates and profitability for the right heading? Thank you.

Hi, Cesar. It's you again. You let me take this one. Well, you know, we did say on the 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 1 million, and that's up 50% versus sort of the post-lockdown summer of 2020. So we don't envision, you know, when we do our forecast that, you know, the cross-border and the border opening situation will improve significantly. But You know, while saying all of that, we do continue to see improving profitability in the right-hailing business. We said before that 2021 is going to be a better year in terms of margin than 2020, and we continue to see improvements in EBITDA margin in the, you know, future consecutive years. You know, there is some seasonality. Q2 and Q3 tend to be lower. margin-wise in the taxi business, and then Q1 and Q4 expand. But the overall trend for improving margin continues, and I think while the situation with dry arrays is challenging, we have found a way to deal with it.

Thank you so much.

Very helpful. The next question today comes from Uliana Lenvalskaya of UBS.

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 competitors?

Oriana, 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 takeaways rather than just a pure numerical figure, probably the more correct way to think about it is kind of the overall offering that we are providing the merchant with, right? So as our kind of call it B2B side of the marketplace is improving, you know, we do quicker onboarding. We are much better now with kind of, you know, with the pictures that we are putting there, the product cards, right? We are able to provide them with means of different delivery options, such as Yandex logistics, et cetera. As we've seen that, you know, as our platform improves, we believe that we can start increasing the take rates. And this is what we did last June, 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 market remain fairly low overall, and we do believe that they are likely to go up in the future for the industry as a whole.

Okay, thank you. This is very helpful. And secondly, I wanted to check with regards to the upcoming working holidays or whatever. where we call it, so the new potential lockdowns. What kind of impact do you expect? I'm mostly interested in the core search and portal trends, advertising market trends.

Hi, Ulyana. It's Svetlana, and let me take this question. 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 adapted to this situation in all our businesses. In addition to that, I think we are well hedged because of our diversification across segments, and there are, of course, some businesses that may have an adverse impact, like advertising or mobility, as we've seen in 2020. But there are also a number of businesses which will benefit from the lockdown, and we already see some of the trends here. In e-grocery, restaurant 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, new lockdown measures are not very severe, while non-working period only five days only. We'll see if it continues. But overall, I think that all sectors within advertising feel quite well. We do see positive dynamic and growth in most of the sectors, so we do not expect any material impact.

Thank you. Sorry, let me just quickly add, particularly to taxi, you've heard, you know, to add to what Sveta was just saying, you heard her earlier raise our guidance for the taxi GME from 60 to 65, 70. So that does include some impact from COVID in the fourth quarter. So we are planning for some impact. Of course, it's hard to predict what the final situation is going to be, but that's our plan. fourth wave that we go through so we know what to do dealing with it.

And our next question comes from Ildar Davletchin of Wooden Co.

Good afternoon, thank you. I'd 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. So we've noticed you've been using more cash over the past couple of quarters due to high investments, organic and non-organic. And I think your total net cash position is below $1 billion. So my question is, Are you worried that low liquidity may slow down your growth trajectory later on in the next one, two years? And if 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 a very promising self-driving car. So that would be my first question. Thank you.

Hi, Eldar, and let me take this question. So, of course, it's very important for us to remain financially flexible because, as you know, we're considering and approaching a lot of opportunities. Of course, liquidity is an important factor when we're making decisions, including doing M&A, and as you've seen in Uber transactions, 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 on 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 further growth potential. So we're quite sure that funding is available for us in different forms. So we might consider different options going forward, subject to the market situation.

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

Hi, this is Vadim. Let me take this one. So look, there are a couple components in our answer. I mean, Frankly, we think that we actually achieved quite a nice growth. I think it would be useful if you were to compare it to the Netflix EMEA editions 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's the third quarter. It was two summer months. When people tend to spend outside of the studio, go on vacations, and spend less time actually consuming streaming services, which you 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 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 it's – I'm not sure whether you've 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.

Okay, great. I have more questions, but I'll let others ask. Maybe I'll come back if there's time. Thank you.

Our next question comes from Vladimir Bespalov of VTB Capital.

Hello. Congratulations on good numbers and good trends. I have a couple of questions. My first will be on e-commerce. First, could you provide maybe very broadly some outlook on how much you are going to spend on e-commerce next year in terms of your investments? And on investments, 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 the utilization of logistics infrastructure in the third quarter of this year? what was behind it, because in general we see the logistics as a bottleneck for the development of e-commerce, and about the closure of several dark stores for Yandex.Lavka 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 provided. So if you could comment on this, this will be helpful. Thank you.

Hello, Vladimir. It's Svetlana. A lot of questions in this too, 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 e-comm. For this year, let me remind you, our investment of $650 million allowed us to create $1.5 billion of incremental GNV and improve our market share versus our competition. It also allowed us to expand assortment 10 times and to increase our customer base twofold to 8.4 million. We also managed to improve retention of our clients and order frequency by 26%. It's also important for us that we were able to grow the number of active merchants on our marketplace by three times to 18,000 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's close to 300,000 square meters. We were able to create our own logistics platform and expand share of our own delivery in orders to 89% from 16% last year. So it's also a great progress. And what is also important and was mentioned by Tigran in his speech, we were able to improve the quality of delivery by 2.5 times. So we were able to decrease our defect rates. A lot of other operational improvements are also in our letter to shareholders, and you can look at them. So that's the justification of further investment for us. We do see the great progress, and it increases our confidence in the success of this investment and overall the fact that we will be one of the leading e-com companies players in the market and of course Ecom is one of our biggest priorities so looking at the improvements we have and understanding the financial discipline in terms of investments including internally in Ecom we understand that we are committed for the next year also. Of course, we will not give guidance for the investments in ECOM for the next year, but as we commented previously during the second quarter call, we shouldn't expect less of investments than we did this year. So in terms of other investments, just comments, you know, how we make decisions in that respect. Of course, we looked at the size of the opportunity. We looked 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, of course, prioritize and we do maintain financial discipline. So it's very important for us to be able – sometimes to deprioritize 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 the increase of the shareholders' value or returns. With that, I think I'll pass the floor to Vadim.

Hi, Vladimir. This is Vladimir talking. So let me take part number five of question one, the underutilization of warehouses. So, look, I mean, the way I actually would think about it, right, is essentially we've invested up front, right, into our warehouse capacity. And this is something that will be, you know, the utilization will keep increasing, you know, as the time passes by. So it's going to be this quarter, i.e., the fourth quarter, next year, et cetera. The reason why we're seeing relative underutilization 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 a marketplace model, the CPA, right? 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 information. 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 fulfill that sale or the 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's 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, we went from 2 million at the end of last year SKUs to 20 million at the end of this quarter. So this is actually quite a good model, right? At the beginning of the year, we didn't think that many merchants will actually switch to dropship by seller as opposed to move to our fulfillment centers. And therefore, you know, for this quarter and probably some residual effect will remain in 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, you know, our transactions or GMVs that go through our fulfillment, obviously growing, you know, extremely fast as well. And therefore, that utilization is going to catch up. Now, moving on to logistics, or I guess part six, is, so look, the way we think about logistics, right? So first and foremost, and I know that we mentioned it 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 in cars or couriers, the walking couriers, with demand. Demand here could be C2C. That was super popular during lockdown last year when people were locked in their apartments. and they had to send something from one apartment to another, and they couldn't actually get out on the streets. So they were doing it through the Yandex Logistics service. Or B2C, whereby it's small and medium enterprises that trade on our platform, on Instagram, or any other marketplaces, would use our service to deliver intracity. So that business, we believe that TAM for that business are all intra-city deliveries, same day deliveries. As a matter of fact, we're actually expanding the TAM by also focusing on the next day deliveries, and we started experimenting with those. And as such, I think there have been numbers, but basically we already did in excess of 20 million deliveries last quarter in Q3, and that thing is growing extremely fast. The reason why we talk about the margin that we mentioned, which I think is mid to high single digits of GMV, is because 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's a beautiful model. We think it's going to be highly marginable, and we are extremely happy with their growth profile at this date.

Thank you very much. Very helpful.

Let me add on 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, you know, will be closed for one reason or the other. But if you look at overall openings for the quarter, restaurants went from 362 to 395, and actually in October they're 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, you know, approximately 60% of our dark stores on pre-overheads, pre-marketing EBITDA level are already positive. The gross margin of top 25 stores in Moscow is approaching 35%. And our 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-overheads level within the next nine months. In Russia overall, you know, three of our heads have been daffed. The top 25 stores, you know, in September is already positive. And we're seeing very encouraging dynamics with couriers. We're in high-density stores. You know, we have more than four deliveries per hour for our couriers. So overall, when we look at our LAFCA dark store business, we believe our unit economic is 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 teens of the express delivery market this year. Express delivery is probably way a third of, you know, sort of over the last mile, you know, delivery market with the two thirds being NDD. And we're going to launch NDD by the next day. NDD is next day delivery, sorry. NDD, we're going to launch by the end of this year. And if you look at our customer makeup, you know, we have over 22,000 B2B partners, excluding SMB, small, medium business. and that's approximately 46% of our deliveries in the third quarter, and SMB was actually another 30%. So out of the B2B customers, you know, top 10 is probably over 70% of total deliveries, and that includes almost all large food and non-food retailers, e-com players, and so on.

Great. Thank you very much.

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

Yeah. Hi, everyone. Thanks very much for the call. I've got two questions. My first question is on the impact of IDFA policy changes on your advertising business, especially outside search. It seems there's no financial impact now, but how could these changes affect the targeting capabilities, ad efficiency measurement, or pricing in the future? And would the perpetual impact be material if Android follows the same route as iOS? That's 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.

Hi, Kirill. This is Vadim. Let me take the first one. So look, the gist of it, we think that the potential impact on our revenues or profitability from Apple new privacy settings or for that matter if Android decides to introduce something similar is very limited and significantly lower than it's 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, where we actually show ads and advertising for a specific query from a person on our search engine results page. So this is piece number one. Now, when you look at the remaining, call it like 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 users, 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's going to be ours or whether it's going to be our partner network. Therefore, we actually get to know quite a lot about the user through all of the combination of our properties, whether it's 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, a majority of our users, right, they actually are logged in users into Yandex ID. And therefore, A, it's easy to track them for us, and B, they already, to a certain extent, submitted their permission to provide us with first-party information, i.e., their information.

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

Okay, that's great, Carlo, on both questions. Thank you very much.

Our next question comes from Slava Diktarev of Goldman Sachs.

Yes, thank you very much for the call. A couple of questions both on e-commerce. I will start with the first one. If you can comment on your strategy in the grocery industry, or FMCG side of e-commerce in terms of the formats 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?

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

Okay. And specifically, it was not only about the LAFTA type of format, but maybe if there is some sort of a mix shift happening recently, between the ultra-fast and some sort of a medium-fast, whether you have somehow found the right balance already.

Slava, this is Vadim. Let me add to what Jen already said. Look, it's... I think pretty much as everybody else in the world right now, everybody's striving for the right balance between the ultra-fast or immediate or something, a shorter one. We are experimenting with that. What we are seeing is overall that the presence of whether it's going to be fresh or whether it's going to be FMCG on our e-commerce marketplace is an important component to have. because it drives frequency, it improves your retention, it allows to actually to attract customers easier. So, therefore, we see it as an important component of our model. At the same time, you know, adding to what Jenny has said, it's a challenging business model because you typically deal with a lower average checks and a relatively painful CPO, right? And that's why we're trying to play with different kind of components of this model to optimize the burn vis-a-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 of what – To 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. For example, we mentioned in our script that we published earlier today, the fact that we launched Market Express, right? Essentially what Market Express is, 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, right? 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, etc., we figured that it would be much quicker and easier to go to our former CPC partners and offer them Yandex Logistics services in order to provide hundreds of thousands of SKUs within, call it, under two hours. And again, that is something that wasn't present in our business model, you know, even three months ago. We put it together. It flew, right? As we mentioned, it's already kind of, you know, accounts for approximately low teens of the orders in Moscow. And because we have the necessary density on the Yandex logistics side, right, the 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 food for our e-com marketplace, we will be following kind of the similar logic of trying to achieve the ultimate goal, right, with respect to the user, retention, and other metrics in the most efficient way by combining what we already have under the same roof.

Okay, thank you very much. And the second would be if you can somehow qualitatively update where you currently stand on the process of EPC to marketplace transition in the e-commerce. Do you see much room for the 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.

So, 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, you know, this year we added approximately 10,000 active merchants. And just, you know, to align on the definitions here, 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 additions came from CPC. The rest are actually newcomers to our platform. We do see, you know, there's 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 is a significant potential in the conversion itself. Now, when we talk, you know, 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 a 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 last leg, if you will, because then the user does know exactly what's happening with the delivery because we control that leg. At the same time, you know, The focus 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 earn by keeping those SKUs in our warehouses, etc. And I do think that some of, you know, it's 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, where we will be taking more and more kind of involvement. That's pretty much it.

Thank you very much.

Our next question comes from Luke Holbrook of Morgan Stanley.

Good afternoon all. I've got a couple of questions on the self-driving group. Just wondered if you have any, if you can provide more colour 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

progress that you're 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 rover side thank you 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 have done with Grubhub in the U.S., whereby we're doing the last segment delivery with our rowers and therefore replacing essentially the mailman, if you will. We are seeing the way it will work. We're testing the different user cases in this particular model, and we will see whether this is the pilot that we will start converting to a much more mass or larger project. Now, with respect to the SDG or the self-driving group, the autonomous vehicles, we do think that our investment next year will be kind of somewhat similar. This year was some modifications. We think we don't need to increase in absolute terms our investment as much as our competitors, because historically we've been extremely cost efficient in achieving the same results as any other self-driving autonomous company. And therefore, 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 with respect to the robot taxi services in Moscow. We are already operating limited self-service services. self-driving taxi service in Moscow, in one of the districts. It will be kind of more officially launched a little bit later this fall. And the passengers will be able to kind of order a robot 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.

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

Look, this is a process that's, you know, we're kind of still, you know, evaluating, and when we have something to report, we will. Great, thanks.

Our next question comes from Maria Tsifinova of BCS.

Yes, good afternoon. I have two questions. So, first one on revenue growth in certain portal segments. So, of this 33%, you've mentioned the factors, but if you could put them into numbers, like, to say what was the contribution of CPA strategies, these new tools for SME, and increasing share of IOs, or, for instance, tell us what the growth would have been if you didn't have these extra factors. So, that's first one. And second, in cash sharing, with Yelim Abis, competitor about the GoPublic, there's probably a risk that they will get more aggressive. So, do you think, do you plan to change the number of cars or you would rather, like, evolve more gradually in this area? That's it for me.

Hi, Maria. This is Evgenia. Let me start with your last question with drive, you know, just sort of give you a couple of words on our strategy overall. So, With Drive, we've been successful in B2C, and it continues to be extremely important, and it's also very synergistic with our ride-hailing business, but it also turned out to be a great R&D and idea platform in vehicle sharing, and that's a technology we can use also in 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. If we just look at the third quarter of this year, B2B was approximately 12% of drive revenues and 30% of EBITDA, adjusted EBITDA. And we continue to accelerate and grow in both areas of the business. Our EBITDA margin reached 11% of GME in the third quarter, but I think it's important to know You know, there is operating and financial leasing, so it's, I think, important to look at EBITDA margin post-finance lease costs kind of all in. And our EBITDA margin there was 7% of GMV accounting for sort of taking into financial lease costs if they were accounted in EBITDA. And operationally, the business continues to perform very well. We have 535 miles in September. And, you know, that's where the user base, we tend to have thresholds which are higher for registration in the service versus our competitors. So it's 21 years old plus with at least a year driving experience. Usually these restrictions are more loose with our competitors. And if you look at our revenues, you know, sort of the so-called incidental fees, which are essentially fines paid by the users for various violations, there's half as much as they are with our closest competitor. So the business continues to perform very well, and we plan to both grow the B2C and the B2B segment of it.

So let me quickly add to what Jenny said. Look, we actually welcome that listing. We think that, you know, it would allow all of you to, you know, finally get a benchmark in car sharing and incorporate the relevant metrics into our sum of the parts for Yandex Drive, which we actually think, you know, again, in our humble opinion, is a better business. But going... Back to your first question with respect to the kind of advertising on Surgeon Portal growth. Look, overall, it's very difficult to say the impact of any particular component or any one of the ad revenues because they're all interconnected. Probably some of the useful numbers here would be, you know, talking about our CPA, right? The share, our CPA conversion strategies that the clients actually be seeing really accepting rather widely, it's already 30% of our revenues today. I think it was in approximately 20% range in spring. We are seeing that on the numbers that we run together with the clients that the return on their marketing investments is much higher than when compared to the CPC strategies. Overall, similar kind of exercise for the Yandex business subscription, you know, for the smaller businesses. We are seeing a pretty high, you know, kind of reception or, well, we see that 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 Yandex.Direct. and that essentially we're giving them kind of, you know, a tailored product just for them, whereby we actually optimize their return on investments on marketing investment. And that's pretty much it. I mean, it's really difficult to kind of separate all the different factors and their impact.

Appreciate it anyway. Thank you very much.

The next question comes from Anna Koprianova of Gazprom Bank.

Good afternoon. Thank you very much for the opportunity to ask questions. I will have a couple of very quick follow-ups. When we discussed your logistics business, you gave us breakdown of B2C, B2B, but maybe you can also mention which part of your logistics revenues is coming from internal group deliveries. This is my third question. Second quick question will be on your FinTech update. You mentioned that you will be prepared to start active operations 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 EdTech or cloud business. Which of them do you see most potential as maybe next driver of FinTech? one to yet period. That's it. Thank you very much.

Hi, Anna. I quickly answer your question. Probably I would say low double digits. I think that's the area we're working with.

Low double digits is a share of internal deliveries, right?

Correct, yes.

Okay, thank you.

Anna, hi, this is Vadim. So let me take the FinTech question. So it's essentially what we've been saying before, right? We are building the infrastructure to launch both the client-facing products as well as kind of, you know, as well as they kind of call it banking as a service to our internal services. And we'll be ready to report more, you know, call it next year, I would say, you know, not early in the year. Other than that, we've reported before that we launched a limited experiment with 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've seen quite encouraging results.

Okay. Thank you very much. And on other businesses, reports, Val?

I'm sorry, can you repeat the question then?

So my third question was regarding your other bets and experiments where you have Zen, cloud, and some other things. Which of them do you see as the next potential maybe driver of your revenues over next two, three years period? Which develops the best? Where do you see most potential? Where would you like to focus your investments operations in future? For example, maybe it's EdTech as a next potential target for Yandex as a group in 2021, 2022.

Well, honestly, we like all our other best and experiments, because otherwise we wouldn't be doing them. But probably out of many favorite children, we would like to highlight our cloud initiative. We are seeing extremely encouraging results. It's three times year-on-year revenue growth this quarter and 25% quarter-on-quarter. We continue onboarding 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 key advantages why we think we would take or be the leading player in this market. Number one, it's 100% in-house technology platform. We are the only cloud provider in Russia you know, hyperscaler with 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 we are compliant with all the laws and requirements for the data storage of Russian users, unlike of some of the other foreign competitors within the segment. And then finally, you know, this is kind of, you know, an interesting title, but I think we are – the most certified cloud in Russian market, i.e. we received 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 in financial industries and state-owned enterprises, et cetera.

Thank you. That's great. And do you plan to actually develop your Etsy, maybe to push something? more efforts into this area? Or you don't see it as a priority for your business development at this stage?

I'm sorry, AdSec as in advertising technologies?

No, sorry, it's education.

Oh, education. Well, look, I... We've been kind of saying I think for the past number of years that we see it as an important kind of national wide project, 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's going to be in mathematics or whether it's going to be in programming, et cetera. And this is what we're doing and investing quite a lot in. And our practicum... which is the professional, this is the online courses for people that are looking at changing professions, is gaining superb traction, and we think this is probably the best product on the market, and we are very excited about it.

Okay, but you don't plan any other investment specific like M&A in this segment, given this very good momentum for ETF development currently in Russia?

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

Okay. Thank you very much. Thank you.

And that concludes our question and answer session. I'd like to hand the call back for any additional or closing remarks.

Yes, that's Yuri Grishin, our Head of Investor Relations. Thank you very much for all dialed-in participants and all your questions. We hope that the answers were helpful. If anything we haven't discussed, please feel free to reach out to our team. Thank you so much, and goodbye.

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