Oct 27, 2016
Executives
Katya Zhukova - IR Alexander Shulgin - COO Greg Abovsky - CFO Mikhail Parakhin - CTO
Analysts
Alex Balakhnin - Goldman Sachs Edward Hill Wood - Morgan Stanley Lloyd Walmsley - Deutsche Bank Cesar Tiron - Bank of America Vladimir Bespalov - VTB Capital Alex Balakhnin - Goldman Sachs Mitch Mitchell - BCS Vladimir Bespalov - VTB Capital
Operator
Good day, ladies and gentlemen. And welcome to the Third Quarter, 2016 Financial Results Conference Call.
Today's conference is being recorded. And at this time, I would like to turn the conference over to Katya Zhukova.
Katya Zhukova
Hello, everyone and welcome to Yandex's Third quarter 2016 Earnings Call. We distributed our earnings release earlier today.
You can find the copy of the press release on the company’s Investor Relations website and on Newswire services. On the call today, we have Alexander Shulgin, our Chief Operating Officer; Greg Abovsky, our Chief Financial Officer; and Mikhail Parakhin, our Chief Technology Officer.
The call will be recorded with the recording available on our IR website in a couple of hours. We've also prepared a few supplementary slides currently available on the IR website.
Now, I will quickly walk you through the Safe Harbor statement. Various remarks that we make during this call about our future expectations, plans and prospects constitute forward-looking statements.
Our actual results may differ materially from those indicated or suggested by this forward-looking statements, as a result of various important factors, including those discussed in the risk factors section of our Annual Report on Form 20-F dated March 21, 2016 which is on file with the SEC and is available online. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.
Although we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.
During this call, we will be referring to some non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with U.S.
GAAP. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings release we issued today.
And now, I am turning the call over to Alexander.
Alexander Shulgin
Thank you, Katya and hello everyone. Thank you for joining our third quarter earnings call.
Q3 was another strong quarter for us with revenues up 25%, ex-TAC revenues up 28% and adjusted EBITDA margin up 36% despite our increased investments in our core products and in our business units. In Q3, we saw continues stabilization in the overall economic environment.
Monthly, year-on-year inflation figures improved throughout the quarter and so did growth in retail sales. Looking at advertising categories in a bit more detail.
Travel and consumer electronics categories showed the weaker than Yandex grown at low single digits, while other Ad categories including order and financial services grew in the high teens to low 20th year-on-year. Our search and portal segment benefitted from overall content stabilization and do not bob new at tech initiatives.
I will let Mikhail discuss this in more detail in a few minutes. Our business units are steadily gaining share in our overall revenue structure.
Yandex.Taxi is actively being taken new geographies. In Q3, we launched this service in Georgia, Armenia and Kazakhstan.
And yesterday Yandex.Taxi launched in Kyiv, Ukraine. Overall Yandex.Taxi is now present in 40 cities across Russia and five neighboring countries.
Yandex.Taxi has tremendous potential. We will continue to aggressively invest in this business unit going forward.
Another exciting business opportunity for us is Yandex.Market. In late September, we accelerated the transition to a take rate based market base model.
We shifted a large portion of our product categories to a take rate only in Moscow. Today, approximately 11% of all orders on Yandex.Market, our take rate based.
And then your future, we're applying into add new categories to market place more than Moscow and will begin to transition Russian regions to a take rate based module next year. In general e-commerce interaction is still in its infancy but offers enormous potential.
We'll continue to invest in Yandex.Market to go after this opportunity. Turning to classifieds.
We have continued to demonstrate solid revenue growth while introducing new products. Such as the spare parts category that was launched recently.
In Auto.ru we recently changed the pricing models for latencies for auto dealers, resulting in good acceleration of revenue growth from value added services. And our real-estate vertical is enjoying solid growth driven by new construction and will be straighted to our desktop and mobile sites.
Now, let me spend a few minutes discussing our search share. In Q3, our overall search share averaged 55.9% compared with 57% in the previous quarter.
On desktop, which constituted 70% of our search traffic in Q3, our search share is staged at 64%. On mobile, which constituted 30% of search traffic in Q3, our overall search share is in the low 40s.
As you know the difference is mainly due to limited distribution opportunities on android and iOS mobile platforms. With respect to android specifically, as we note it on the Q2 call, we started gaining share on android and on late June and July driven by games on smartphones.
In September, however this gains on android do partially offset by games made my Google search app. Market shares on mobile platforms are curiously noisy and our current best estimate use at our share on android is around 38%.
Going forward, so the progress on android depends on a number of factors such as our ability to provide high quality of mobile services and our ability to gain mobile traffic, through pre-installations and mobile operators. Another important sector is implementation of the FIS.
To update you on our progress in distribution. In Q3, we added a few more distribution deals to those, which were mentioned on our Q2 call.
This devices with our services pre-installed, I expect it to ship in November/December this year. All-in-all, we expect positive impact from these activities on our share on android devices over the next six to 12 months.
Now, a quick update on the Antitrust Case. Last year, FAS issued its unprecedented decision prescription to Google to cease anti-competitive practices.
This decision was upheld by the Court of First Instance and subsequently by the Court of Appeal. In August, FAS ruling came into force.
However, Google has not implemented the FAS prescription. As a result FAS opened administrative investigation considering Google's noncompliance was zeroed in.
We are closely monitoring the station and will update you as it evolves. Now, turning into announcement that we made early September concerning our decision to walk away from the agreement to acquire our Moscow headquarters.
Greg will go into more detail but we feel good about our decision and are currently evaluating our options after our current is expires in 2021. Now, let me hand the microphone over to Mikhail Parakhin who will cover ad-tech in more detail.
Mikhail, please go ahead.
Mikhail Parakhin
Thank you, Alexander. And hello everyone.
In our Q2 call, I spoke about our philosophy of maximizing the total economic value of an ad for our advertisers by calling out less relevant ads.
Alexander Shulgin
It demonstrate solid revenue.
Mikhail Parakhin
In Q3, we greatly improved our broad match capabilities both on the Yandex search and in our advertising network. In September we began to automatically display heads for queries synonyms or whole key words.
Subsequently recombined our search technology and our expertise in language parsing newer networks to match indirect information that help out users with their search queries to cover their unspoken interest. This feature is extremely helpful for advertisers who want to significantly broaden their reach through search advertising.
On the ad network side, we launched relevant match technology, where we show ads to users based on their look alike statistics. As a result of these implementations, we manage to dramatically increase conversion rate of ads on search and in ad network while decreasing the bounce rate.
These launches also allowed us to grow the number of paid clicks while simultaneously reducing ad coverage on search which I mentioned in our Q2 call. The combination of these releases should help us offset the comping effect from the introduction of VCG auction in September of last year.
Another feature we introduced in the ad network front in Q3 was bit correction. During the Q2 call, I spoke about the significant improvement in our relevancy forecast that allowed us to predict the quote over potential click.
In case the formula suggest that traffic from our ad network partner to win advertiser site is not of high enough quality. Bit correction either dramatically reduces advertises bid or chooses not to show the ad at all.
While this reduces our potential revenue, it significantly increases advertisers trust and loyally and motivates our publisher partners to focus on improving their quality of their traffic. Turning to mobile.
In Q3, mobile traffic constitutes 30% of our total search traffic versus 27% in the quarter earlier. Mobile revenues reached 24% of our search revenues compared to 22% a quarter earlier.
Including the revenue from our mobile ad network, mobile now generates 27% of all their base revenues. In Q3, monetization of smartphones improved compared to Q2 levels, aims to adjustments to VCG formats for small screen devices and changes were made in ad layout in June 2016.
Outside of search, in Q3 we started our experiments with monetization of Yandex navigator. This is an early stage project here but we see interest from a number of offline businesses to be promoted within Yandex.Maps and our navigator.
In addition to these more significant releases, in the past 12 months there were a number of smaller ones such as private marketplace, a tool for private deals between advertisers and publishers, priority placement for video ads on the Yandex video website, CPI ads for promoting mobile applications, smart banner performance ads with dynamic content personalized for individual users. And Yandex audience, our feature client and look alike targeting tool.
While those products did not materially contribute to the revenue in Q3, in aggregate they already reached approximately RUB 800 million revenue run rate. With this, I turn the microphone over to Greg.
Greg Abovsky
Thank you, Mikhail. And thank you all for joining our call today.
We delivered another solid set of results. Our consolidated revenues grew 25% year-on-year and reached RUB 19.3 billion.
Online advertising revenues accounted for 96% of total revenues in Q3 and increased 22% year-on-year. Yandex websites which include our text based and display revenues grew 21% year-on-year.
Our ad network grew 27% year-on-year and comprised 26% of total revenues in the quarter. Yandex ad network revenue growth was driven by an increase in inventory that are advertisers allocated to Yandex direct on desktop and on mobile, as well as a result of addition of new partners and improvements of our targeting capabilities and increased quality of ad selection algos that we implemented a quarter earlier.
In Q3, we saw a growth of ad budget across all advertising categories. However, as expected revenues from travel segment and consumer electronics continue to be soft.
The most rapidly growing ad categories were real-estate, apparel, eating out, that FMCG. Auto also grew nicely, up around 25% year-on-year this quarter.
Other revenues grew 130% primarily driven by the growth of Yandex.Taxi. Trust acquisition costs related to the partner advertising network grew 19% slower than ad network revenues.
The mean factors remain the same as in previous quarters. A change in our partner mix, an improvement of revenue sharing terms with some of our partners.
As a result, in Q3, our partner TAC comprised 55.5% of our ad network revenues down from 59.3% a year ago and slightly down from 55.7% in Q2. Traffic acquisition costs related to distribution partners increased 1% year-on-year and constituted 7.1% of advertising revenues from Yandex site, compared to 8.5% a year earlier and 7.3% in Q2.
Total TAC grew 14% year-on-year and constituted 19.3% of total revenues. 200 basis points lower compared with Q3 of last year and 40 basis points lower than a quarter before.
Paid clicks grew 12%, while cost per click increased 10% year-on-year. Turning to our cost structure.
Total OpEx excluding TAC and G&A grew 40% in Q3. Excluding stock based comp, expenses grew 42%.
Growth was primarily driven by growth in advertising and marketing expenses in our business units, such as Tax, ecommerce and classifieds, salary increases implemented in early 2016 and new hires. Personnel costs still remain the largest cost item.
In Q3, our headcount was up 9% compared with September 30 of last year and up 6% from June 30 of this year. In Q3 our personnel costs constituted 20% of revenues.
Stock based comp increased 17% and constituted 4.1% of revenue. In Q3 the growth rate of stock based comp declined significantly as Forex stabilized compared to the previous year.
G&A expense for the quarter increased 16%. Our adjusted EBITDA increased 14% year-on-year.
Growth rate of our consolidated adjusted EBITDA slowed down compared to previous quarters because of sharp increases in advertising and marketing expenses mainly devoted to our business units, growth of salaries in early 2016 and new hires. To remind you we are actively investing in search, Yandex.Browser and our business units specifically in Yandex.Taxi.
Our consolidated adjusted EBITDA margin was 35.7% in Q3. But just to give a sense of the magnitude of the investment we are making in the Yandex.Taxi, if one were to exclude both the revenue and losses of Yandex.Taxi from our consolidated results, our adjusted EBITDA margin would have been 40.2%, 450 basis points higher.
This quarter the impact from Forex was a loss of RUB432 related to dollar denominated assets and liabilities in our balance sheet following the appreciation of the RUB from 64.3 on June 30 to 63.2 on September 30. Adjusted net income was up 8% and adjusted net income margin was 19.7%.
Our CapEx was RUB2.5 billion or 14% of Q3 revenues in-line with Q2. We continue to expect CapEx as a percent of revenue to be in the mid teens on an annual basis.
Turning to performance of business units. Search and portal revenues were up 21% driven by growth of your own websites and the advertising network.
On September 1, we anniversaried the launch of VCG auction. However, September revenues were only partly impacted by this anniversary as the full uptick of the new bidding system took some time to rollout in 2015.
Adjusted EBITDA of search and portal grew 24% in Q3 and adjusted EBITDA margin reached 42.8%, up 90 basis points from Q2. Revenues of Yandex.Market were up 45%.
In Q3, adjusted EBITDA of Yandex.Market decreased 11% year-on-year and its adjusted EBITDA margin was 32% in Q3 as a result of increased advertising and marketing activity as well as hiring. As Sasha mentioned before, we expect that in the short term the transition to a take rate base model will slowdown the revenue growth rate of Yandex.Market.
We are willing to make these investments as we believe that ecommerce opportunity is significant and that our marketplace base model will be of a significant benefits to us in the future. Turning to Yandex.Taxi.
Revenues of Yandex.Taxi were up 151%, the growth was driven by the addition of new geographies and an increase in the number of rides. In late September we significantly lowered Yandex.Taxi tariff in Moscow and reduced search pricing.
At the same time we began guaranteeing minimum checks to taxi drivers. As a result the average check in Moscow declined while growth in a number of rides accelerated.
These new tariffs had a limited impact in Q3 results, will be more material going forward specifically under US GAAP these minimum guarantees reduced the revenue that we booked from Yandex.Taxi in those regions where we have turned on modernization. So going forward the revenue growth of Yandex.Taxi will slowdown as this new Moscow tariff is observed holding all else equal.
This change has a very limited impact on GMB growth rates or the long term prospects of this business. As we have discussed in the past, we will continue to make significant investments in the Yandex.Taxi.
In Q3 adjusted EBITDA of Yandex.Taxi was negative RUB633 million. Revenues of classified business grew 45% supported among other factors by change in the pricing model and as a result growth of non-advertising revenues on Auto.ru.
Adjusted EBITDA classifieds was RUB26 million down 69% from Q3 of last year. The main drive of decline in EBITDA was growth in advertising and marketing activities as we continue to invest for growth.
We are also making investments in our exponential businesses represented by media services, Yandex.Turkey, YDF and discovery. These revenues grew 98% primarily driven by the growth in media services and in discovery.
Now getting back to corporate matters. As Sasha said a few minutes earlier in September we executed the option to terminate the agreement to acquire our Moscow headquarters.
Decision was made due to a combination of factors including improving macroeconomic conditions, stabilization of exchange rates and other factors. The termination fee reimbursement of the sellers’ expenses is capped at RUB45 million or approximately $725,000 at current exchange rate.
In Q3 we resumed our convertible bond buyback program and repurchased another 4.6 million face value of the bond followed by additional repurchases made in October. Since the inception of the program we have bought back approximately 320 million face value of the bonds.
We ended the quarter with approximately RUB66 million in cash and equivalents which is approximately $1.05 billion using the exchange rates as of September 30. Now turning to guidance.
We are increasing our revenue guidance for 2016 from 19% to 22% range provided previously to 22% to 24% revenue growth on a year-over-year basis. And with this I will turn the call over to the operator for the Q&A session.
Operator
Thank you. [Operator Instructions] We take the first question now from Alex Balakhnin from Goldman Sachs.
Please go ahead. Your line is open.
Alex Balakhnin
Yes. Good afternoon and congratulations on good results.
Two questions from me. One is on your revenue guidance, so it looks like it implies between the 6% and 12% revenue growth in the fourth quarter.
And do you think this is sort of the steady state growth rate you will be delivering going forward? And will you as a management team be happy with that type of growth rate?
And well, I appreciate the rollout was gradual throughout September but maybe what sort of growth rate you saw in the very end of September and maybe beginning of October as we all have three weeks into the month? My second question is on your 350 new hires it looks like they were skewed to the product development but can you probably elaborate what sort of projects got those new headcount and whether you expect to continue hiring with that run rate?
Thank you.
Greg Abovsky
Hi, Alex it's Greg. I will take the first part of the question and then Sasha will try to answer the second part.
On the question of revenue guidance obviously it depends on what kind of assumptions you want to make. Look our guidance historically has been conservative and we feel pretty good about the guidance that we put out today.
We don't see a significant slowdown in terms of our business and it continues to be growing nicely both September and October are demonstrating sort of similar pace of growth. I guess, I am not going to get into the exact detail of what month over, year-over-year growth looks like for September versus October but they are fairly comparable like I said.
And as far as next year obviously we are not going to put out guidance for next year right now. We will do that on the Q4 earnings call in February but we sort of expect that general trends to continue and we see a good traction from a number of products that Mikhail’s team has introduced on the advertising technology front as well as in a variety of business units.
I will hand it over to Sasha to answer the second part of your question.
Alexander Shulgin
Hi Alex this is Alexander. So on headcount first of all we are excited about the opportunity that we see to grow our business.
That's in business units, taxi, market and also in app tech and search. Our headcount for the last eight quarters as you probably noticed was more or less flat plus or minus 100 people up or down from quarter-to-quarter.
Now we see good opportunities to grow our business, revenue is performing well. And market, taxi and app tech have very high potential, so headcount is allocated between those units that I mentioned and also some goes to commercial function and to admin services to support the growth.
So major part goes to the business units, smaller part goes to core business in app tech, search and admin functions.
Alex Balakhnin
Okay. Thanks so much.
That's very clear.
Operator
We take next question now from Edward Hill Wood from Morgan Stanley. Please go ahead.
Your line is open.
Edward Hill Wood
Yes, good afternoon. My question goes around Yandex.Taxi, you hope to ramp up investment in the business in Q3 and you are going to do in Q4 as well.
Could you give us an idea of sort of payback you’re seeing on that traction in terms of any metrics to give us in terms of market share right value, right growth anything to indicate that you are, in fact traction reserve to get more place. And secondly going forward as the level of investment increases and [indiscernible] with the growth business margin becomes more extreme do you think that it makes sense potentially to look at ways in that investments?
Greg Abovsky
Hi Ed, it's Greg. I will try to answer your question.
As you can appreciate there is probably a lot of sensitive information that I cannot disclose about the exact metrics of the business or the payback or things like that. I will give you one interesting tidbit that will give you a sense as to why we feel as good about the business as we do and why we are going to be investing more and more capital into this business going forward.
And that is just an acceleration that we are seeing in the pace of growth in the number of rides. Just on last four months the growth accelerated by 100%, so if you took the rate of growth of rides call it five months ago or four months ago versus today that pace of growth is now a 100 percentage point faster than before.
As we think about sort of longer term does this thing need external capital. I think the answer is potentially, yes.
We wanted to do whatever is in the best interest of our shareholders and as we continue to gain traction with this business we will look to fund it both on balance sheet and potentially off balance sheet. We have over billion dollars of cash in the balance sheet and we tend to generate a fair amount of cash as we go along.
So we see this as a very large strategic opportunity that we are going to keep pursuing. Hopefully this answers your question?
Edward Hill Wood
It does Greg, and maybe just followup on that on some margin you haven't taken the opportunity to update on potentially what might be the margin for the year, I mean on the last where you said, it could be down a couple of 100 basis points and given that margins were up month-by-month, you have very significant decline I Q4 margin headwind in which revenues -- even though you are investing heavily actually [indiscernible] as with the revenue guidance of the margin guidance could be –
Greg Abovsky
Sure, I assume you are asking us about consolidated EBITDA margins for the business as a whole including taxi and the other business units. On that basis as you recall kind of early on in the year we sort of assumed that margins could compress as much as 300 basis points.
In the last call I was saying probably some of the incremental revenue growth that we are generating will allow the margins to compress a bit less call it 200 basis points. I think from where we stand now margins might be down, but only slight call it a [indiscernible] as we do plough some of the incremental margin into growth – into incremental margin generation but the business units will continue to take up significant investments as you heard me in the prepared remarks just in Q3 taxi alone dragged down our consolidated margins by 450 basis points.
So where we are today we expect margins for the year to be down call it a hair as we continue to invest.
Edward Hill Wood
Okay. Thank you very much.
Operator
We take next question now from Lloyd Walmsley from Deutsche Bank. Please go ahead your line is open.
Lloyd Walmsley
Thanks. I am wondering if you guys can talk about kind of customer adoption for custom audiences and look alike targeting and kind of what impact you are seeing from signs you’re adopting this in terms of budget growth or maybe how it's impacting CPC?
And then, second one if I may on the android share outlook, how should we think about kind of the time line for handset or wireless carrier deals and then the adoption of new handset and with Yandex services per-installed and then kind of what can you do to drive share within existing android devices that are already on the market. And I guess what kind of across both of those elements what can you do now and what will require to actually comply to kind of unlock some of these things if that makes sense?
Thanks.
Mikhail Parakhin
Yes. Hi is Mikhail Parakhin.
I will take the first part of the question and then Alexander will take the second one. So, on all of our new products that we released in past 12 months including Yandex.Audience and others we actually see very strong adoption.
We see continuous growth as I was mentioning in my statement in aggregate like five of the product that we released there, they already have run rate of around RUB800 million right now and they are continuing to grow nicely. So we actually expect them to be a significant portion of the growth next year.
The adoption is basically very strong. Sasha?
Alexander Shulgin
Hi Lloyd.
Lloyd Walmsley
Hi, there.
Alexander Shulgin
Yes, sorry. I was confused a bit.
So on Android market share I will give you just quick update on overall and then android. So our overall share as I said is 55.9% for Q3 that's on average.
On desktop our share was flat so it compares to previous quarter but actually when we look month-by-month between August to September our market share on this compares were actually increased so we have some positive expectations for Q4. On android share was slightly down compared to previous quarter because of Google increased activity around the [indiscernible] application through notifications and other activities.
So our reply is of course to invest more behind product, investing more and develop in Yandex search application integration our services in the Yandex sure-ship so it becomes an indispensable part of everyday life for our users. That's one product and we are committed to make as good product as we can.
On distribution activity we are making progress. Of course, it takes time between striking the deal and having the sizable share of new devices with our better placement to be used by people.
So it's a lengthy process but ultimately it has impact on our market share. So for example when you go now to retail stores you would find devices by sizable brands like ZTE, Samsung, Micromax with our products placed better than they were placed before.
So opportunities are now open to increase our share on these devices and names that I mentioned on those devices our share is over 50%. In Q3 we also made a progress striking deals with sizable OEMs with some of the devices actually being already in retail stores like some of Huawei models are now available in retail with Yandex better place.
So all in all, as I said in my prepared remarks we expect our share on android to be improved by those distribution deals and we are not certain on this, we’re continuing to make distribution deals with Yandex better place. Yet, as I said our goal has not yet acted on FIS and typically placement or source on the search screen is still problematic for us because of Google's restrictions.
FIS has opened administrative procedure so we gave Google formal compliance with the rue and when Google finally acts on it I think we will be even better place on the home screen of devices. Arkady will add some remarks on android market share as well.
Arkady Volozh
Just one comment from what we know FIS is definitely enforcing the solution.
Lloyd Walmsley
And I guess as a follow-up do you think this is kind of a technological issue where Google is working on something to comply or do you think they are just generally opposed and would like to dig in and see what happens. How you guys think that plays out?
Alexander Shulgin
Frankly, it's very difficult to comment on computer section so I think we would refrain from commenting on this.
Lloyd Walmsley
Okay. Thanks a lot, very helpful guys.
Operator
We take next question now from Cesar Tiron from Bank of America. Please go ahead your line is open.
Cesar Tiron
Yes, hi. So, basically two questions from my side.
On the first on the core search margins for the first nine months of the year, I mean, they were up quite significantly although I think you expected them to be flat for the full year. Can you please explain what has pumped the EBITDA, the margin level in the course of the business and then finally CapEx was down also quite significantly for the first nine months?
Should I conclude that it will be down by the same amount for the full year? Thank you so much.
Greg Abovsky
Hi Cesar, it's Greg. On the core search margins some of it has to do with timing of when we hire people, when we have certain advertising and marketing actions take place.
We do continue to invest in core search, we invest both on technology front as well as on the product front such as with the Yandex.Browser, you have seen Yandex.Browser grow very nicely over the last couple of years, currently 21% market share on desktop, 11% market share on mobile, 17% or 18% share overall. So it's doing quite well.
And I think going forward the degree of margin pressure or expansion within the core search business will just be driven by timing to certain extent, by investments in new initiatives to a certain extent when and if those come about and also by revenue growth. Obviously, to a large extent in the short term your cost effects while revenues are a product of your technological advancements Mikhail’s has done an amazing job last year with introduction of VCG.
They have rolled out a number of new features this year which should contribute both later in Q4 as well as next year. So to some extent that is a question of timing and when the revenues come in against the cost structure that you put into place.
I would say overall our sort of picture in terms of where we want to be doesn't really change. We want to keep our core search margins roughly flat.
What actually happens to them in the short term is just a function of those introductions. Did that answer your question?
Cesar Tiron
Yes. Thanks so much.
And on the CapEx?
Greg Abovsky
On the CapEx, we still expect it to be sort of in the mid teens more or less, call it around 15%. This year we are building a datacenter in Russia.
It's going to be finished up over the course of early next year and then it's going to be starting to be filled in by servers and obviously the benefit of that is it's much more modern facility. It's considerably more efficient I would say in terms of global comps.
It's probably at the very bleeding edge in terms of what’s possible to be achieved from a utilization standpoint.
Cesar Tiron
Thank you.
Operator
We take next question now from Vladimir Bespalov from VTB Capital. Please go ahead your line is open.
Vladimir Bespalov
Hello. Thank you for taking my questions and congratulations on good results.
First I have a question on CPA, on your switch to CPA in Yandex.Market, could you provide some color first of all on what is this fleet of revenues between CPC and CPA models at the moment and given that many big clients are not very happy with the switch, how you are going to balance the transition not to lose revenues, not to lose big clients and things like this. And my second question is as we now like two months when we can compare apple-to-apples in terms of your transition to ECG or auction how this affects your revenue, so what do you see like because it gave a strong boost to your revenues when you switch to this option, but now how are the things developing?
Thank you.
Greg Abovsky
Hi, Vladimir. I will take the first part on CPC, CPA and Yandex.Market and I think Mikhail will take the second question on VCG.
In terms of the transition, so roughly 11%, we estimated somewhere between 11% and 15% of the entire GMB of Yandex.Market is going through the CPA/take rate base model. I think some customers are very happy frankly with what we have done.
I am sure there are some that are not happy and just in terms of your understanding of what are the differences with a take rate base model Yandex.Market acts as a marketplace where the goods are presented on our site or in our app, the checkout takes place on our site or on our app and rather than traffic being shifted off to the websites or whatever of our ecommerce clients. We think ultimately this has a lot of benefits both for consumers, for our ecommerce clients and for us.
But obviously you can't make everybody happy. The way we are going to continue handling the transition is we are going to switch more and more categories to be take rate based only.
We started with Moscow where we took a number of categories and we basically communicated to our ecommerce clients that starting from this date only take rate based offers will be available in Yandex.Market so if you would like to continue working with us you will have to present your product in the form of a take rate based sale as opposed to cost per click and we will do more and more of that going forward. In my prepared remarks I mentioned that we are willing to sort of slowdown the pace of growth of Yandex.Market in order to accelerate this transition and I think that's our intention.
And with that let me hand it over to Mikhail to comment on VCG.
Mikhail Parakhin
Yes. So just to reiterate last year we released VCG on September 1, but it wasn't switch flip kind of thing.
It actually took maybe all the way through November or maybe even later to achieve the full strength. So the impact was gradual and this year in a similar fashion we just released the few things that I outlined in my statement on both network side and search side and we feel pretty good about them and we believe that combination of the things that we gradually rolled-out this year especially in Q3 will help us offset the compound effect from the introduction of VCG auction last year.
Thanks.
Vladimir Bespalov
Okay. Thank you.
Operator
We take next question from [indiscernible] please go ahead. Your line is open.
Unidentified Analyst
Thank you for presentation. I have two questions.
The first is regarding your buyback program. Could you please clarify what are plans regarding the buyback program and going to continue and what are you going to do with your treasury stock.
And the next question is regarding the cash by your balance sheet what are your plans for cash in the balance sheet? Thank you.
Greg Abovsky
Hi, Anton, it's Greg. Let me try to take those questions.
Couple of comments on the buyback program, so we have been over the last few quarters for the most part buying back our convertible bonds and we will continue to do so opportunistically when we buy them we cancel them right away to the extent that these convertible bonds are due in December 2018 and we get to retire them at a discounted phase. We feel pretty good about that.
If you are asking about the general repurchase of stock we haven't bought stock back in some time, but we will reevaluate it from time to time. The use of treasury stock that we bought back is to manage dilution and so all of the treasury shares that are currently held on the balance sheet will be used to offset dilution from the issuances of RSU to our employees over the next few years.
And then, in terms of cash in general I would refer to the same statement that we made on the Q2 earnings call where we have said that the economic environment is still uncertain while Yandex has performed extraordinary well over the last few quarters, GDP growth as a whole in the country is still negative and we will like to wait and see for Russia as a country to return to GDP growth so that we see like there is incremental stability in the system before we reevaluate what to do with the cash obvious uses of cash or dividend buybacks or M&A.
Unidentified Analyst
[Indiscernible]
Greg Abovsky
Absolutely, dividend is certainly one of the options that we consider in addition to that as I mentioned earlier we see the cash pile that we have as a very strong strategic asset that we can deploy to the betterment of our business unit such as Yandex.Taxi. We see a massive opportunity ahead and we are willing to use that fairly large cash pile to invest in that business but dividend is certainly another item that is being closely considered by our Board of Directors.
Unidentified Analyst
Okay. Thank you.
Operator
[Operator Instructions] We take next question now from Alex Balakhnin from Goldman Sachs. Please go ahead your line is open.
Alex Balakhnin
Yes. Good afternoon again.
Two more from me. Greg mentioned that this guaranteed payments in taxi will have some impact on the revenue growth.
Can you elaborate what sort of magnitude of slowdown shall we expect in the near future or maybe alternatively like what would be the growth rate in taxi should those practice has been placed in the third quarter whatever is here? And my second question is your payroll to revenue ratio has been hovering over just 20% and how shall we think about that is this in your normal thing it will gradually come down to like 20% you have been talking about before?
Thank you.
Greg Abovsky
Hi, Alex. On taxi I am not sure I can say more rather than what I said.
So the way that these guaranteed minimum work is that essentially taxi drivers receive a certain amount from us for very short ride and it's essentially meant to us that the fact that very short rides could be not very economical for taxi drivers but they are important to create overall liquidity in the system. And so, they will subtract from the revenues that we book in Moscow and therefore in terms of a comping from 2015 to 2016 that overall growth rate will come down.
But as I mentioned the number of rides is accelerating dramatically and the GMB is actually growing nicely as well. So from our standpoint of view it's just a sort of a more of an accounting issue than anything else.
Furthermore I would say it's actually been evolving and the amount of those guarantees that we end up paying out has declined overtime as people change their behavior somewhat and as we also fine tune the system. So that's I guess that’s it is where it is and we will see kind of how Q4 shapes up.
In terms of our payroll ratio I think it's been fairly consistent going back nine or ten quarters at around 20% and generally that's kind of what we feel fairly good about. I think going forward you will see a lot more headcount growth in the business units and in our experiments than you will in the core business.
I think there is a lot of appetite in terms of increasing the investment in the business units specifically in market and taxi to a small extent in classifieds and our discovery business is actually, is going to be potentially the next new gem and we would like to invest in that as well.
Alex Balakhnin
Yes that's very clear. Thanks Greg.
Operator
We take next question now from Mitch Mitchell from BCS. Please go ahead.
Your line is open.
Mitch Mitchell
Hi, I think I Alex sort of asked my question already, but let me rephrase it and see if we are on the same page. I just wanted to make sure I understood the way the guaranteed payments work in taxi.
So what you are saying is it's not that the cost will go up if we were just thinking about how the financials will look it's not that the cost will go up and the revenues will go down. Is that – am I understanding correctly?
Greg Abovsky
At a high level, yes. Essentially it's marketing expense that gets moved up into the revenue line.
Mitch Mitchell
Okay. And just generally speaking, do you feel that you are still in the phase of ramping up the investments in taxi and market at this point or are you sort of comfortable with the levels where they are now?
Greg Abovsky
I think we are still in the ramp up phase.
Mitch Mitchell
Okay, great. Thank you.
Operator
We take next question now from [indiscernible]. Please go ahead your line is open.
Unidentified Analyst
Hello gentlemen. Congratulations on great results, my question is about Yandex.Market.
Could you please indicate how big is this share from electronic sense through the Yandex.Market and recently there was a news about – some video and other retailers are trying to organize in their own virtual marketplace for electronics specifically how big is the competition is this for you, how difficult do you think it's going to be to compete against those retailers? Thanks.
Greg Abovsky
Hi, let me try to take that on the Yandex.Market, so consumer electronics is roughly 20% maybe a quarter of the business maybe a quarter of the business. In terms of how we think about the competition I think that competition makes all the other player stronger and encourages them to improve their service dramatically.
What we are actually seeing in the market is we are typically competing with non-consumption. To a large extent Russia had not had an ecommerce revolution as of yet and I think it's one of the greatest opportunities ahead of us going forward.
Currently I think ecommerce penetration in Russia is roughly 3% for whole host of reasons everything from low use of credit cards to difficult logistics to lack of infrastructure for delivery and so on. And so, look the more players that are in here the better.
I think they will all invest in infrastructure. They will make consumers more likely to buy online than offline and we will benefit from that shift.
Unidentified Analyst
Okay. Thank you.
Operator
We take next question now from Vladimir Bespalov from VTB Capital. Please go ahead.
Your line is open.
Vladimir Bespalov
Thank you for taking. I have two more questions.
First is on taxi. I would like to ask you what is the time frame when you expect to complete the rollout of your taxi business throughout all target regional markets.
When do you think this is going to be like, the country is going to be covered by the service and you start monetizing it and focus on margins? And the second question is on your real estate which you walked away.
After canceling this deal, do you see an opportunity to start negotiations with the landlord to lower your rates, lease rates in exchange for like longer term commitment to run the same office. What are the opportunities here?
Thank you.
Greg Abovsky
Hi, Vladimir let me answer your questions in order. On the taxi front what we found is actually the opportunity again is much larger than we thought at first and so we see that the service is scalable and feasible in much smaller cities.
I think we are currently in something like 40 or 41 cities across five countries. We think that there is a lot and lots of room to go in terms of penetrating smaller and smaller cities in Russia and also looking at other nearby markets.
We are currently in Armenia and Georgia and Kazakhstan and Ukraine and Belarus and there is probably more markets that we can go after that are nearby us. And so probably the right way of looking at it is what is the margin structure of the mature markets, mature cities versus the new cities and while I will not comment on them, I could tell you that we feel pretty good about where existing cities are versus new cities and the payback characteristics.
On the real estate deal since we have walked away and I do feel like we have done the right thing here there has been a number of opportunities that have been presented to us and we are evaluating all of them. I think it's a good time right now from number of options ahead of us.
Vladimir Bespalov
Thank you.
Operator
It appears there are no further questions at this time. I would like to turn the conference over back to your host for any additional or closing remarks.
Katya Zhukova
Thank you all for joining our call today. Please feel free to reach out to us and hope you are able to join our Q4 and full-year 2016 earnings call in February 2017.
Thank you. Good bye.
Operator
This concludes today's call. Ladies and gentlemen thank you for your participation.
You may now all disconnect.