Yandex Topping The Russian Internet

According to Moscow-based Association of Communication Agencies, online advertising in Russia grew 51% from 2008–2010 to reach 26.65 billion rubles (~$940 million). During the same period, spending on print ads in the country fell 41%, radio ads declined 21% and television ads fell 6%. And, it is not just online advertising. The country was named by the Boston Consulting Group as the one with the largest internet industry in Europe after Germany. The Internet industry is expected to amount for 3.7% of GDP by 2015, more than double the contribution in 2009. Yandex, the online Russian search engine, is among the companies benefiting from the market’s growth. Known as the “Google of Russia,” the company launched their IPO in the U.S. earlier this year.

Yandex’s Financials

Yandex (Nasdaq:YNDX) launched the popular yandex.ru search engine in 1997. The company was co-founded by Arkady Volozh and Arkady Borkovsky. According to Alexa, yandex.ru is the most popular Web page in Russia. With sites in Belarus, Kazakhstan, and Ukraine, Yandex claims to attract more than 56 million users worldwide. They are the biggest search engine in Russia with 64.6% of the Russian search market as of last quarter. Compare that to Google’s share in the country, which is estimated to be about 21.9%.

Yandex recently reported second-quarter earnings with revenues growing 57% over the year to 4.5 billion rubles (~$161.7 million). Adjusted EBITDA of 1.9 billion rubles (~$68.2 million) grew 32% over the previous year.

During the quarter, text-based advertising revenues remained the leading contributor of revenues and accounted for 88% of total revenues. Paid clicks on their own sites and partners’ websites grew 47%  over the year with the average cost per click increasing 8% during the same period. Display advertising revenues accounted for 10% of total revenues during the quarter while online payment commissions accounted for 2% of the revenues.

The search engine result pages for their website grew 60% over the year and the number of advertisers, now more than 144,000, reported growth of 41% over the year and 13% over the quarter.

Yandex’s International Expansion

To continue to grow internationally, Yandex recently launched in Turkey with the Web portal yandex.com.tr. According to Yandex, Turkey has a “a well-developed internet market, a growing Web user audience and a lot of local language content,” making it a clear choice for their decision to launch. With Turkey, Yandex now has portals for five nations, including Russia. According to comScore, Turkey’s 35 million internet users spend an average 29.4 hours per month online, making them the third largest country in Europe spending time online. Further, the country has an internet penetration of 45%. Surely, there is a big market opportunity. But Google already claims to have almost 95% of the Turkish market. I am not sure, though, why they have any kind of competitive advantage in Turkey and how Yandex plans to catch up with Google.

Yandex’s Market Expansion

To continue to gain market in the country, Yandex is launching additional services within the existing markets. They recently launched Yandex.Market, a comparison shopping service. In addition, they rolled out their services on mobile devices. Now, search and Yandex.Mail are available on iOS devices and their map service along with the popular panoramic views of Russia through Yandex. Panorama is available on the Android OS devices.

Further, they purchased the social newspaper service, The Tweeted Times, to enter into the social networking market. Similar to Flipboard, The Tweeted Times app helps to create a newspaper-like view of Web stories shared by Twitter contacts. Yandex is expected to leverage the team to strengthen their offerings for social networks.

The stock is trading at $27.96 with a market capitalization of $9.03 billion. The stock was priced at $25.00 a share when it listed in May and had reached a high of $42.01 soon after. However, it touched its low of $26.02 last month.

comScore data estimates that broadband penetration in Russia reached 60 million people last year, reporting growth of 15% over the year. The company is expected to surpass Germany’s Internet market within the next two years. Yandex is well poised to tackle this high-growth market.