Yandex - Sensitivity to FX and Macro Volatility

We estimate that Yandex has low sensitivity to FX and macro volatility. The company derives most of its revenues in Russia, while most of its costs (including personnel costs, which were 18% of revenues in 2019) are in rubles as well. We think that some FX-denominated expenses, including HQ rent (around 2% of 2020E revenues) are naturally hedged by FX-denominated cash on the books. We reiterate our BUY on Yandex shares.> Social spending to support household consumption and thus the ad market. The online ad market was the beneficiary of a reallocation of ad budgets in the downturn year of 2015 from offline to online. As a result, despite an 8% decline in the ad market and 14.5% drop in the TV ad market in 2015 (triggered by a 10% drop in household consumption), Russia's online ad market increased 15.8%. The share of online in the overall ad market increased from 28% in 2014 to 35% in 2015 (see the charts on the next page). We estimate that the share of the online ad market reached 49% in 2019, and we think that further structural share gains are possible, including from a reallocation of some marketing budgets (as BTL and hyper local promo) to online. Our macroeconomics team believes that private consumption will grow 2.0-2.5% in real terms in 2020, supported by government social spending and progress on the "national projects." > In tough times advertisers prefer search performance ads to ads on social networks. They imply a higher conversion into purchases. In 2015, Yandex's ad revenues climbed 16.1%, including 12.6% for its own sites and 27.1% for the network. Mail.ru Group's ad revenues excluding VK rose 7.6% in 2015, on our estimate. VK ad revenues grew by 61% but that was from very low, under-monetized, base (VK ARPU was R60 in 2014 versus around R210 for OK, on our estimate), as the deal for VK was closed just in September 2014.> Yandex has low sensitivity to FX movements. The company derives most of its revenues in Russia, while most of its costs (including personnel costs, which were 18% of revenues in 2019) are also in rubles. We understand that Yandex's key talent is compensated in rubles with salaries that are not FX-linked, while a sizable part of the compensation is share-based (share-based compensation expenses were 6% of Yandex's revenues in 2019, 19% of adjusted EBITDA and 42% of adjusted net income). We do not rule out, though, that Yandex might have to increase salaries above inflation in 2020 to keep key personnel happy. The company has some FX-denominated expenses, including HQ rent (around $60 mln per year, or circa 2% of 2020E revenues), some content expenses in media services and for production of its AI-powered consumer equipment ($23 mln revenues in 2019 or below 1% of total revenue). We think that these FX-based expenses are naturally hedged by the FX-denominated cash on Yandex's books.> Yandex raised $1.25 bln in convertible debt. The bond is due 2025 and has a conversion price set at $60.0751, representing a 63% premium to yesterday's close. Thus, we do not see an immediate risk from FX debt.