Growth Drivers

KWPMP
1. Structural Shift towards Online Advertising Yandex NV – 1-year target price: $34.5
Growth Rates 2008 2009 2010 2011
Software &
TV 22.7% -18.1% 14.9% 18.2% Industry EV/EBITDA13 16.62x
EDP services
Radio -3.7% -29.8% 12.0% 14.6%
Press 14.1% -44.2% 6.7% 6.3%
Home
United States P/E13 27.34x
Outdoor Advertising 13.4% -44.0% 17.9% 15.5% Country
Internet 38.0% 19.5% 50.6% 56.0% Listed on NASDAQ PEG 0.98x
Other 35.0% -18.5% 40.9% 32.3%
LT EPS
Total 18.0% -27.5% 17.3% 20.4% Current Price $24.70 25%
growth
2. Russian Ecommerce Growth LT Sales
Market Cap $8000 MM 30%
growth
Investment Thesis
Technology in emerging markets is lagging that of developed
markets. North America saw consumers shift their preferred
way of getting information from TV and print to online, a shift
that was closely followed by advertisers in the 1990s. Today,
advertising in Russia is going through the same fundamental
changes that North America went through over a decade ago.
The addressable market for online advertisers in Russia is
worth $8 billion and growing over 30% a year. Yandex, which
3. Growing Broadband Internet Penetration has over 60% of the online advertising market share, is a key
beneficiary of this structural change. Aside from strong
industry fundamentals, here is why we should own Yandex:

1. Dominant Market share: Yandex has the strongest brand

among search engines in Russia, which is made obvious
through their leading and constant market share of over 60%.
In addition, Yandex operates the largest ecommerce site in
Russia.

2. Strong growth profile: With projected, and conservative,

industry growth of 30% Yandex is bound to see revenues grow
at the same rate. In addition, Yandex has the opportunity to
Catalysts
expand to other CIS markets.
We believe that Yandex will see significant price
3. Incredible profitability with upside: With EBITDA margins in
appreciation in 2013 as investors’ fear of Google
excess of 40% Yandex has a proven business model. In
calms as Yandex successfully defends its long-standing
addition, there is still room for margins to expand based on
dominance on the Russian online advertising market.
operational leverage – it is not unrealistic to see EBITDA
Other catalyst includes successful results of the
margins over 50% in the medium term.
Turkish launch, gains in mobile markets, and
continued ecommerce success. In the long-term, we
4. Powerful innovator ahead of the curve: Yandex is already
see Yandex as a possible multi-bagger as they are the
investing past basic search with investments in emoney,
dominant player in a huge and fast growing market.
content, cloud, and mobile.

Samuel Nasso Franco Perugini

Fund Manager Healthcare & Technology Research Assistant
Fund Manager Fixed Income
 KWPMP
Industry: Online Advertising in Russia = Structural Change

History

Online advertising grew at CAGR of 60% between 2005 and 2011, resulting in it being the fastest growing
advertising medium in Russia. Albeit, at lower pace than the online segment, the overall advertising industry
grew at a CAGR of 13% over the same period. Thus, not only is online advertising growing because of
structural changes in the media industry (i.e. more Russians are online), but the media industry is also
growing. However, as the term structural change implies they are some losers: outdoor advertising, press, and
radio all grew at a CAGR lower than that of the overall Industry.

Growing Piece in a Growing Pie

2005 2011
Internet Other
Internet 41.8 Bn 2%
2.5 Bn 16%
Other
2%
1%
Outdoor
Advertising
20%

TV Outdoor
Advertising TV
43%
13% 50%

Press Press
28% 15%
Radio Radio
6% 4%

Total Advertising Total Advertising

Industry worth 129 Bn Industry worth 263 Bn

Source: AKAR

Further evidence of structural change is the fact that online advertising grew 20% in the hardest hit year of the
financial recession, while the rest of the advertising mediums lost an average of 31% of their value. This fact
exemplifies that advertisers are choosing online over other forms, even on a shrinking budget.

Segment 2005 2006 2007 2008 2009 2010 2011

Growth Rates
TV 34.5% 30.5% 31.7% 22.7% -18.1% 14.9% 18.2%
Radio 27.0% 27.5% 33.3% -3.7% -29.8% 12.0% 14.6%
Press 25.3% 22.3% 24.5% 14.1% -44.2% 6.7% 6.3%
Outdoor
Advertising 50.0% 25.0% 26.0% 13.4% -44.0% 17.9% 15.5%
Internet 78.6% 116.0% 100.0% 38.0% 19.5% 50.6% 56.0%
Other 50.0% 55.6% 42.9% 35.0% -18.5% 40.9% 32.3%
Total 34.6% 28.7% 31.1% 18.0% -27.5% 17.3% 20.4%
 KWPMP
Ecommerce Growth

According to Euromonitor, Russia’s ecommerce represents 2% of retail sales, significantly lagging the global
average of 7%. Ecommerce in Europe and the US represented 2% of total retail sales in 2004. Today, Brazil and
China have Ecommerce penetration rates of 5%. So why has Russia lagged? (1) Lower broadband penetration
(2) low usage of credit cards (3) and limited product offering. However, as Morgan Stanley points out, there is
a vibrant ecommerce ecosystem emerging with local companies like Avito (classifieds), KupiVIP (payments),
Oktogo (Travel ), and Ozon (online auctions). Much like their North American counterparts, these companies
are attracting customers to the web with lower prices. Morgan Stanley forecasts Russian ecommerce growth
of 44% CAGR to 2014.

Morgan Stanley predicts that Russian Ecommerce will represent 4% of retail sales by 2016

Yandex will benefit from the growing importance of ecommerce in 2 ways. Firstly, Yandex operates an
ecommerce business (Yandex.Market) which will directly benefit from the astonishing growth. Secondly,
ecommerce growth will increase clickthrough1 rates and attract new advertisers to Yandex’s advertising
business. Clickthrough rates in Russia are as low as 2%, compared to 6%-7% for the average ad in North
America.

Broadband Penetration

According to Emarketer, broadband penetration in Russia is approximately 25%, which is significantly lagging
other emerging markets like China, which had 25% broadband penetration rates back in 2008. The average
broadband penetration rate in the developed world is well over 70%. According to various white papers, the
key reason for Russia’s poor performance in developing broadband is the lack of investments in infrastructure
and the challenge of reaching a population that is relatively spread out outside of Moscow and St-Petersburg.
However, realizing the importance of broadband connections in the global economy, Russia’s government has
set the ambitious goal of reaching 60%-80% penetration by 2016 by investing $3Bn in infrastructure. In
addition internet service providers are expected to invest more than $12bn in broadband infrastructure.

1
Adwords defines Clickthrough rates as “a ratio showing how often people who see [an] ad end up clicking it. CTR can be used to
gauge how well keywords and ads are performing.”
 KWPMP
However, looking at the numbers closely, to reach the low end of the projection it would mean that
broadband adoption would have to grow at 25% annually for the next 5 years, which seems unrealistic even if
investments increase significantly. Russia’s average 2010-2012 growth rate for broadband adoption is 12%, in
a low investment period, with peak growth of 15%, therefore to remain conservative we will assume that
growth will be 15% annually – resulting in 44% penetration in 2016 and 75% by 2020 (which is consistent with
the 10 year gap Russia has with the developed world).

We see broadband adoption to continue growing slightly faster than the past 3 years
thanks to higher investments

The benefits of higher broadband penetration for Yandex are obvious: more people go online the more they
shop online and the more advertisers allocate their budget online. UBS did an analysis on internet penetration
and add spending per user for various countries and found an exponential relationship.

Internet penetration (not only broadband) is exponentially related to ad spending per

user

Source: UBS
 KWPMP
Mobile Search

The underdevelopment of a 3G network and the fact that it is relatively more expensive to own and operate a
smartphone has made Russia a laggard in terms of 3G and smartphone penetration. However, large
investments being made in networks (LTE to be launched in 2013 in Russia), and rising competition among
data providers are expected to act as a catalyst for both mobile internet access and smartphone penetration.
A study commissioned by Google found that internet access through a mobile penetration is currently 34%
and expected to hit 46% by the end of 2013 mainly driven by expected smartphone unit growth of 30% and
40% growth in tablet units sold. Thus, a key success factor for a company operating in Russia is a well-planned
out mobile strategy.
About the Company
Yandex is Russia’s leading search engine and the 5th
largest search company in the world. Often referred
to as Russia’s Google, Yandex has over 25 verticals
ranging from search, mail, location-based services,
marketplace, file hosting, TV, and blogs. Essentially,
Yandex makes money when a user makes a search
and clicks on an ad.
Segments
Segment 2011A % of Gross
revenue
Context advertising 87%
Display advertising 11%
E-payment 2%
Strengths
1. Leading search engine brand in Russia.
2. Strong history of being an innovator and
successfully competing with Google.
3. Most popular website for online news and maps.
4. Leading position in ecommerce and epayments.
5. New and growing proprietary browser.
6. Debt free balance sheet.
Opportunities
1. Online advertising growth.
2. Yandex.Money and Yandex.Market are stars
nearing inflection point.
3. Yandex.Drive and Yandex.Music are investments
that can support growth in the long-term.
4. Yandex App Store set to gain popularity in mobile.
5. Expansion to other CIS countries where there are
no dominant players apart from Google.
Weaknesses
1. Yandex is not pre-installed on many high end
smartphones.
2. Major advertisers are from cyclical sectors.
3. Not a global player (less scale, but more
specialization).
Threats
1. Increase in competition from social media and
Google.
2. Rising TAC rates.
KWPMP
Yandex
Competitive Advantages
Strong knowledge of local culture: This competitive advantage
should not be underestimated. It is widely recognized in
Russia that Yandex provides better search results than Google
because of Yandex’s knowledge of the idiosyncrasies of the
Russian language. Google’s market share gains have been with
a more educated and English speaking Russian in St.
Petersburg and Moscow. However, as broadband penetration
and ecommerce is much more penetrated in these major
cities, the vast majority of the future growth will come from
Russia’s regions, where education and knowledge of the
English language is lower and thus giving Yandex the upper
hand.
Technology: Yandex prides itself on its culture of innovation
which the founders have created; The Yandex founders and
early employees have applied mathematics and data analysis
backgrounds, and they still have a strong presence on the
management team. The company specializes on highly-
targeted and sophisticated web search and information
retrieval services based on world-class technologies like a
proprietary machine-learning method named MatrixNet.
Market share & scale: Yandex`s market share is a result of
previously mentioned competitive advantages but has grown
to a competitive advantage in and of itself. More specifically,
Yandex`s ~50M unique monthly visitors allows Yandex to offer
great prices per unique visitor.
Network effect: The next major growth phase of Yandex will
be from Yandex.Market and Yandex.Money. Just like Ebay,
these verticals benefit from the network effect of having a
dominant user base in a market (the more people use Paypal
for transactions, the more people need Paypal to make
transactions)
Understanding the business
Most of Yandex’s revenues originates from text-based
contextual advertising, which uses keywords, selected by
clients, to deliver targeted ads based on a particular search
query, the content of a website being viewed, or user
behaviour. Contextual advertising is delivered to both
Yandex’s own search results and verticals (83% of contextual
advertising revenue in 2011) and third-party websites from
the Yandex partner ad network. Contextual ads are placed
 KWPMP
through the Yandex.Direct service, where advertisers bid for desired keywords. The second-biggest revenue stream is
display advertising: graphical ads that appear on specific web pages. The ads are separate from the organic search
results and from the content of the web pages on which they appear. The majority (more than 50%) of display
advertising revenue is derived from Yandex’s main page.

Yandex’s major costs are: (1) traffic acquisition costs (TAC), which include partner TAC, which is paid for distributing ads
in the partner ad network, and distribution TAC, which is paid for distributing products (i.e. browsers) with pre-installed
Yandex search; and (2) product development costs, which are mostly comprised of labour.

Strategy
Yandex’s mission is to expand its position in the Russian and CIS online advertising market by improving their
technology, and launching new products. More specifically, Yandex’s strategy is to (1) expand its mobile presence (2)
grow its share in browser market (3) expand in new CIS markets and (4) launch new verticals.

Yandex is currently growing its mobile presence by launching various mobile services. Firstly, Yandex launched, in
FY2012, its Apps Market which currently has 40,000 apps. In addition, Yandex has an agreement with Apple in which
Yandex provides location based services (i.e. maps). Yandex has other agreements with Windows, the most popular
mobile operating system in Russia, and Bada based phones to be the default search browser on these systems. We also
believe that Yandex will soon launch its own mobile OS to directly compete with Google, as they have done with their
browser. Yandex estimates that mobile revenue accounted for 11% of revenue in 3Q12.

Yandex launched its own Browser during FY2012, and has had tremendous success since its launch; since its launch
there has been 1.5 million downloads and has been able to steal 4% of market share. Yandex’s management says the
browser launch is very important as it will improve margins (lower TACs) and it competes directly with Google’s browser.
Although Yandex’s management does not disclose excessive information on the browser due to competitive concerns of
the young product, we know that they believe their browser will have great success as it makes Yandex’s services easier
to access and leverages the Yandex brand.

CIS expansion will most likely begin no sooner than the end of FY2013 as Yandex is waiting for the results of their Turkish
launch before expanding to other countries. Yandex launched in Turkey in the Fall of 2011, and based on the latest
statistics has over 3 million unique monthly users. Yandex’s strategy for CIS growth is to expand in countries where
Google has a monopoly, and thus management expects to get 20%-30% of market share. The plan in Turkey is to start
monetisation when it attains 5%-10% share. In addition, the required investments of expanding to new markets are low
as algorithms for search and verticals have already been created. In addition, Yandex has been operating an
international index since 2010 due the heightened demand for Russian search globally, which allows Yandex to identify
new markets to enter.

Among the important new verticals are Yandex.Money, and Yandex.Market. Yandex.Money is a virtual payment system
(like Paypal) that lets users have a virtual wallet used to pay for items purchased online. Yandex.Money is the most
popular online payment service in Russia with over 120,000 payments processed every day. Albeit, the actual revenue
contribution from Yandex.Money is relatively small (2% of revenue), the strategic importance of having the dominant
online transaction service (in a country where credit card usage online is unpopular) should not be undervalued. As
Russian ecommerce continues to gain popularity, Yandex.Money will likely be the service of choice. A new joint-venture
with Sberbank, Russia’s largest bank, has the goal on growing the online payment solution. Yandex.Market is a price
comparison service that aggregates price, product and availability information from over 6,000 retailers, which also
provides product reviews and customer ratings. Yandex.Market is monetized on a cost per click basis and thus is a direct
play on growing ecommerce in Russia.
 KWPMP
Technology2
The Yandex search engine responds to user queries with relevant web documents it finds on the internet. However, the
size of the internet is currently being calculated in terms of exabytes – quintillions, or billions of billions, of bytes of data.
Needless to say, Yandex Search does not search through this enormous pile of data every time it responds to a new
search query; the system does its homework. To perform a search, Yandex uses a search index, which is basically a
database of all the words and their locations known to the search engine. The index system allows Yandex to return very
precise and speedy results for every query submitted on the system.

However, an index is not perfect on its own. The problem is the size of this index is still too large. To solve this problem
Yandex performs every search simultaneously on portions of the index distributed among thousands of servers. Each
user query first goes to 'metasearch'. The metasearch system analyses each search term in real time, looking at a
number of qualities, such as its region, type, or grammatical form. After that, the metasearch checks its cache memory
for search results that might have already been delivered for the same search query before. Instead of looking for search
results to one and the same query each time someone makes it again, metasearch saves results for some of the popular
searches in its cache and keeps them there for some time for future reference. Each of the basic search servers responds
with a list of web documents that contain words matching the terms of the user’s search query. Metasearch, then, pools
these documents, ranks them using MatrixNet, and delivers them to the user as links on the search results page.

MatrixNet, Yandex’s proprietary ranking technology, was launched in 2009. MatrixNet ranks search results based on
machine learning. Yandex’s search engine processes more than 120,000,000 queries every day. To deal with this load of
questions successfully, a search engine has to be able to make decisions based on the previous experience, that is, it has
to learn.

A key feature of MatrixNet is its resistance to overfitting3, which allows the Yandex’ search engine to take into account a
very large number of factors when it makes the decision about relevancy of search results. But now, the search system
does not need more samples of search results to learn how to tell the ‘good’ from the ‘not so good’. This safeguards the
system from making mistakes by finding dependencies that do not exist.

MatrixNet generates a very long and complex ranking formula, which considers a multitude of various factors and their
combinations. Alternative machine learning methods either produce simpler formulas using a smaller number of factors
or require a larger learning sample. MatrixNet builds a formula based on tens of thousands of factors, which significantly
increases the relevance of search results.

Another important feature of MatrixNet is that it allows one customize a ranking formula for a specific class of search
queries. Incidentally, tweaking the ranking algorithm for, say, music searches, will not undermine the quality of ranking
for other types of queries. A ranking algorithm is like complex machinery with dozens of buttons, switches, levers and
gauges. Commonly, any single turn of any single switch in a mechanism will result in global change in the whole
machine. MatrixNet, however, allows adjustments to specific parameters for specific classes of queries without causing
a major overhaul of the whole system.

About 20% user queries on Yandex are ambiguous. A query like “apple” might mean either a fruit or a consumer
electronics company. Thus, for every search there is a wide array of potential meanings and the task may prove to be
almost impossible if the user does not specify what it is they are looking for. Yandex’s solution to this issue is Spectrum,
which was developed and implemented by Yandex, and allows the return of a whole array of search results matching

2
Summarized and directly compiled from: company.yandex.com/technologies
3
Overfitting: “An algorithm that overfits its data is like a sophomore medical student who diagnoses himself with every possible
symptom he has read about in his manual. Not having been exposed to the real practice yet, he makes up causes for the natural
things he observes.” - http://company.yandex.com/technologies/matrixnet.xml
 KWPMP
different user intents based on the frequency of user searches. Spectrum is based on query statistics. The system
analyses users’ searches and identifies objects like personal names, films, books or cars. Each object is then classified
into one or more categories. Search query analysis performed by Spectrum is fully automated. Using the power of over a
thousand processor cores, each time Spectrum analyses about five billion search queries. To keep its database up-to-
date, the system performs query analysis several times a week. In addition to search log statistics, Spectrum also uses
information from reference sources and encyclopedias, such as Wikipedia. This helps the search engine to recognize
new objects, learn about new meanings that do not fit any of the existing categories and add new categories.

Yandex has seen strong growth in the number of paid clicks, indicating that Yandex’s search is becoming more
efficient/relevant for users. In addition, cost per clicks have been declining or growing at a much lower rate thanks to
Yandex’s MatrixNet and Spectrum technologies.

Yandex has been experiencing strong growth in paid-clicks thanks to their proprietary
technology

What is most impressive is that Yandex’s technology is classified among the world’s best, and when combined with
their high specialization of the Russian language and culture of self-improvement results in a tremendous advantage
over competitors; Yandex has been able to fight Google for over 8 years
 KWPMP
Risks

The key risk in investing in Yandex is Yandex failing to preserve their market share. The main concern of lost market
share would be competitive pressures from Google. Since, Yandex’s main customers are companies from cyclical sectors
like automobiles, economic slowdown is of concern. TAC inflation can also damage the profitability of Yandex by eroding
gross margins; TAC inflation should be a concern in a scenario that we foresee new entrants that will bid up TAC prices.
Also, profitability and valuation are at risk that Yandex will need to spend more on CAPEX to fend off competition. More
generic risks include technological issues, infrastructure failures, and change in Russian regulation.

Financial Overview – Value Drivers

Top Line Growth

Advertising revenue to grow on par with overall industry as we expect Yandex to remain the dominant player in Russian
online advertising based on their various competitive advantages. More specifically, we forecast an average growth rate
of 30% to 2015.

We expect payment revenue (Yandex.Money), although growing from a small base, to grow faster than advertising
revenue as Russian ecommerce and online payments are still nascent relative to the advertising market. To remain
conservative we are forecasting 45% growth, in line with Morgan Stanley’s expectations on ecommerce growth.
Significant upside exists here, when we consider the importance of online payment and the vast advantages Yandex has
in this segment.

Profitability

Approximately 20% of Yandex’s costs are TAC, the only variable cost in Yandex’s business model. Our view on TAC’s is
that they will grow slightly faster than sales, increasing to 18.5% of advertising revenues, marginally above their
historical rates, as Yandex’s operating environment is not expected to change in the future (no new major players).

Starting in 2006, Yandex began investing in R&D in order to improve and expand their product offerings, leading to
downward pressure on the EBITDA margin; in 2006 the EBITDA margin was 61% and in 2011 it was 46%. In addition,
Yandex’s management has said that for the medium-term it expects to reinvest gains in operational leverage back into
the business to fuel growth, thus guiding to 48%-50% EBITDA margins in the medium-term. However, in the long-term, it
is very possible to see EBITDA margins back to 60% as only 20% of Yandex’s costs are variable.
 KWPMP

Investments

In terms of CAPEX, we foresee continued investments in growth. More specifically, major investments include servers,
data centers, and other infrastructure to support growing number of product offerings and traffic growth. However,
major upgrades to the infrastructure was already done in 2011, thus going forward we see CAPEX as a percentage of
revenue to be 20%, slightly higher than its historical average.

Working capital investments are minimal in Yandex’s business model as it holds no inventory and has fast collection
period.
 KWPMP
Valuation

Competitive Advantage Time frame

We forecast abnormal growth up to 2025 as Yandex is a young company in a fast growing market with sustainable
competitive advantages. Building a 5 year DCF for Yandex would be comparable to building a DCF for Google in 2003
with 5 years of growth which then reverts to GDP growth.

Base Case DCF Analysis

As a relatively young, high-growth company, Yandex is valued on the basis of Discounted Cash Flow showing strong, but
slowly declining top-line growth rates. Between 2012 and 2015 we project growth of roughly 35%, 30% and 25%.
Between 2016 and 2025 we drop growth to 20% and it declines progressively (1.5% slowdown YoY) until it reaches a 5%
terminal growth rate in 2026. In the short-term (2012E-2015E), we project stable gross margins resting at around 80%,
along with EBITDA margins at roughly 45%. We believe the SG&A costs will remain constant as a percentage of total
revenue and grow proportionally to the business. As Capex and revenue growth begin to slow (2016-2025), we project
conservative margin expansion, first to 46% and then to 48% (not shown on Summary Income Statement). Projecting
these Cash Flows forward and using a 12.5% discount rate and a 5% perpetual growth rate, we determine a value of
$34.67 (40% upside) for the shares of Yandex. We also note that a more conservative Terminal Growth rate of 3% would
still yield a price of $30.70, representing 24% upside.

2009-2015E Summary Income Statement - YNDX

RUR m (Except per Share) FY2009A FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E

Gross Revenue (Incl. TAC) 8,729 12,499 20,033 28,997 39,153 50,976 63,914
Advertising 8,466 12,188 19,608 28,321 38,234 49,704 62,130
Payments 201 263 383 541 784 1,137 1,649
Other 62 48 42 135 135 135 135
Traffic Acquisition Cost 1,305 1,573 2,999 4,865 6,691 8,947 11,494
Net Revenue (excl. TAC) 7,424 10,926 17,034 24,132 32,462 42,029 52,420
Other Cost of Revenue 191 142 176 291 392 510 639
Content and Outsource 131 173 448 655 783 1,020 1,278
Total COGS 322 315 624 946 1,175 1,529 1,917
Gross Profit 7,102 10,611 16,410 23,186 31,287 40,500 50,502
Margin 81.4% 84.9% 81.9% 80.0% 79.9% 79.4% 79.0%

Personnel Costs 2,062 2,670 4,280 6,054 7,831 10,195 12,783

Rent and Utilities 835 1,121 1,881 2,707 3,720 4,843 6,072
Other SG&A 448 655 1,012 1,369 1,958 2,549 3,196
Depreciation and Amortization 912 1,181 1,874 2,996 3,915 5,098 6,391
Total Operating Expenses 4,257 5,627 9,047 13,127 17,423 22,684 28,442
EBIT (Before Stock-Based Comp) 2,845 4,984 7,363 10,060 13,864 17,816 22,061
Stock Based Comp 208 160 329 573 783 1,020 1,278
EBIT 2,637 4,824 7,034 9,487 13,081 16,796 20,782
EBITDA 3,549 6,005 8,908 12,483 16,997 21,894 27,174
Adj. EBITDA 3,757 6,165 9,237 13,056 17,780 22,913 28,452
Adj EBITDA Margin 43.0% 49.3% 46.1% 45.0% 45.4% 44.9% 44.5%
Interest Income 67 156 222 902 - - -
Other Non-Operating Income (23) 24 62 (29) - - -
Pre-Tax Profit 2,681 5,004 7,318 10,360 13,081 16,796 20,782
Tax Provision 672 1,186 1,545 2,295 3,140 4,031 4,988
Net Income (GAAP) 2,009 3,818 5,773 8,064 9,942 12,765 15,795
Margin 23% 31% 29% 28% 25% 25% 25%

Shares Outstanding 303 304 315 336 336 336 336

Diluted Shares Outstanding 308 309 328 337 337 337 337
Period-End Shares 304 304 324 337 337 337 337

GAAP Diluted EPS 6.52 12.36 17.60 23.93 29.50 37.88 46.87
GAAP Adj. EPS 7.20 12.87 18.60 25.63 31.82 40.90 50.66

Capex 987 2,199 5,566 5,799 7,831 10,195 12,783

% Revenue 11% 18% 28% 20% 20% 20% 20%
 KWPMP
Historical Ratios / Growth FY2009A FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E
Advertising Growth 44.0% 60.9% 44.4% 35.0% 30.0% 25.0%
Payments Growth 30.8% 45.6% 41.2% 45.0% 45.0% 45.0%
Net Revenue Growth 47.2% 55.9% 41.7% 34.5% 29.5% 24.7%
TAC % Advertising 15.4% 12.9% 15.3% 17.2% 17.5% 18.0% 18.5%
Other Cost of Revenue % Rev 2.2% 1.1% 0.9% 1.0% 1.0% 1.0% 1.0%
Content/Outsource % Rev 1.5% 1.4% 2.3% 2.3% 2.0% 2.1% 2.1%
Personnel Costs 23.6% 21.4% 21.4% 20.9% 20.0% 20.0% 20.0%
Rent and Utils 9.6% 9.0% 9.4% 9.3% 9.5% 9.5% 9.5%
SBC 2.4% 1.3% 1.6% 2.0% 2.0% 2.0% 2.0%
Other SG&A 5.1% 5.2% 5.1% 4.7% 5.0% 5.0% 5.0%
D&A 10.4% 9.4% 9.4% 10.3% 10.0% 10.0% 10.0%
EBIT Margin 30.2% 38.6% 35.1% 32.7% 33.4% 32.9% 32.5%

DCF Analysis
2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
EBIT 9,487 13,081 16,796 20,782 27,611 32,719 38,281 44,214 50,404 59,855 66,439 72,751 78,571 83,678
Less: Taxes (2,135) (3,140) (4,031) (4,988) (6,627) (7,852) (9,187) (10,611) (12,097) (14,365) (15,945) (17,460) (18,857) (20,083)
Plus: D&A 2,996 3,915 5,098 6,391 7,670 9,089 10,634 12,282 14,001 15,751 17,484 19,145 20,677 22,021
Less: Capex (5,799) (7,831) (10,195) (12,783) (11,504) (13,633) (15,950) (18,423) (21,002) (18,902) (20,981) (22,974) (24,812) (26,425)
Less: Change in NWC (142) (167) (191) (208) (194) (230) (250) (267) (279) (284) (281) (269) (248) (218)

Unlevered FCF 4,407 5,860 7,476 9,195 16,955 20,092 23,526 27,195 31,028 42,056 46,716 51,193 55,331 58,974
% Change - 33.0% 27.6% 23.0% 84.4% 18.5% 17.1% 15.6% 14.1% 35.5% 11.1% 9.6% 8.1% 6.6%

PV at 0.125 Discount Rate 4,407 5,209 5,907 6,458 10,585 11,150 11,605 11,924 12,093 14,570 14,386 14,013 13,463 12,755

Discount Rate
34.67 10.5% 11.5% 12.5% 13.5% 14.5%
3.0% 41.1 35.2 30.7 27.0 24.1
Terminal Growth Rate

DCF Valuation 4.0% 44.8 37.7 32.4 28.3 25.1

5.0% 49.7 41.0 34.7 29.9 26.2
PV of Cash Flows 148,524 5.5% 52.9 43.0 36.0 30.9 26.9
Terminal (2025) 825,630 6.0% 56.8 45.4 37.6 31.9 27.7
Plus: PV Terminal 178,568 6.5% 61.8 48.3 39.4 33.2 28.5
Enterprise Value 327,092
Less: Net Debt (21,701) FX Conversion
Equals: Equity Value 348,793 34.67 1.4% 2.4% 3.4% 4.4% 5.4%
3.0% 12.4 21.5 30.7 39.8 49.0
Terminal Growth Rate

Diluted Shares Outstanding 337 4.0% 13.1 22.8 32.4 42.1 51.8
Equity Value per Share (rub.) 1,035 5.0% 14.0 24.3 34.7 45.0 55.4
$US/Share 34.67 5.5% 14.5 25.3 36.0 46.8 57.5
Current Price 24.7 6.0% 15.2 26.4 37.6 48.8 60.0
Potential Upside 40.4% 6.5% 15.9 27.7 39.4 51.2 63.0
2015-2020 Revenue Growth
34.67 16.0% 18.0% 20.0% 22.0% 24.0%
25.0% 22.1 24.9 28.1 31.8 36.1
2013 Revenue

30.0% 24.5 27.7 31.3 35.5 40.3

Growth

35.0% 27.1 30.6 34.7 39.4 44.8

40.0% 29.9 33.8 38.3 43.6 49.6
45.0% 32.9 37.2 42.3 48.1 54.8
50.0% 36.1 40.9 46.5 53.0 60.4