First, a recap of its quarterly results and business summary:
Revenue met estimates, rising 34% to $284 million
Earnings beat estimates with non-GAAP EPS of $0.28 and GAAP EPS of $0.27, 47% and 50% higher, respectively, than last year’s results
Paid clicks increased 29% and cost per click increased 5%
Yandex’s business
Yandex NV (NASDAQ:YNDX) is an internet search and content provider operating primarily in Russia, Ukraine, Belarus and Kazakhstan. It entered the Turkish market two years ago. Its business model is similar to Yahoo!‘s, in that ads on its own sites account for the bulk of revenue (73%).
Yandex NV (NASDAQ:YNDX)’s share of Russian search was 61.7% last quarter, up from 60.3% in the previous year. Russia is one of the very few markets where Google Inc (NASDAQ:GOOG) doesn’t dominate search. China is another, with China’s Baidu reigning supreme with about a 70% market share.
Yandex has a 2.5% share of Turkish search, but launches in that country have been delayed due to political unrest.
On a global basis, Yandex surpassed Microsoft’s Bing to capture the No. 4 search engine spot (behind Google Inc (NASDAQ:GOOG), Baidu, and Yahoo!) earlier this year.
A company the size of Yandex NV (NASDAQ:YNDX) ($11 billion market cap) that can hold its own vs. behemoth Google Inc (NASDAQ:GOOG) ($302 billion market cap) has to have a pretty solid moat. Google Inc (NASDAQ:GOOG) partially retreated from the Chinese market a couple years ago, making Baidu’s main threat there another domestic player, Qihoo 360.
The moat? It’s largely attributed to the native language advantage. However, there’s no doubt the company has to be very well run to keep Google at bay.
Reason 1: Russia is Europe’s largest internet market & still growing
Russia surpassed Germany as the European market with the highest number of unique visitors online in late 2011.
Internet penetration in Russia is 47% to 52% (depending upon the source). Russia has a large population — 143 million. So, there’s still room for growth.
Source: Darussiafile; data from Public Opinion Foundation
This graph would look very similar to the U.S.’ and select Western European countries’ internet penetration graphs — though about a decade behind.
As one would expect, there’s a big gap between Internet use in the cities vs. rural areas. In Moscow and Saint Petersburg, Russia’s two largest cities, about 71% of citizens use the internet regularly or occasionally. Mid-size cities have rates in the 50%-60% range, and many rural areas have sub-40% rates.
Reason 2: Browser benefits
There are two browser developments which should benefit Yandex NV (NASDAQ:YNDX).
Yandex developed its own (desktop) browser last year as a defensive measure against Google Inc (NASDAQ:GOOG). Google’s Chrome is the most popular browser in Russia, and its search default is Google. Yandex began rolling outs its mobile browser in June — it covers the iPad and Android-powered phones (the iPhone and Android tablets will follow).
Additionally, Apple’s iOS 7 — slated for consumer launch later this year — includes Yandex NV (NASDAQ:YNDX) as a search option in Russia, Turkey, and the Ukraine. This is a first for iOS.
