Nebius Group N.V. (NBIS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2021 financial results call. I must advise you this conference is being recorded today, Wednesday, the 28th of July 2021. We'd now like to hand the call over to your first speaker today, Yulia Gerasimova, Investor Relations Director. Please go ahead.

Hello, everyone, and welcome to Yandex' Second Quarter 2021 Earnings Call. You can find our earnings release and supplementary slides on our IR website. The key speakers on our call today are Tigran Khudaverdyan, our Deputy Chief Executive Officer; Daniil Shuleyko, the Head of E-commerce and Ridetech Business Group; Svetlana Demyashkevich, our Chief Financial Officer; and Vadim Marchuk, our Chief Operating Officer. Yevgeny Senderov, Chief Financial Officer of Yandex.Taxi will be available on the Q&A session. Now I will quickly walk you through the safe harbor statement. Various remarks that we make during the call regarding our financial performance and operations may be considered forward-looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the Risk Factors section of our most recent annual report on Form 20-F filed with the SEC. During the call we'll be referring to certain non-GAAP financial measures. You can find a reconciliation of non-GAAP to GAAP measures in the earnings release we published today. And now I'm turning the call over to Tigran.

Thank you, Yulia, and hello, everyone. Let me give you a quick overview of the key highlights from the second quarter. I will start with e-commerce, which is a key area of focus for us at the moment. We are encouraged by the progress the team is making. Total e-commerce GMV grew 2.6x in the second quarter, which we expect to be ahead of our major competitors. Yandex.Market on a stand-alone basis continued to accelerate its G&A growth to 144% in Q2 from 126% in Q1. This is despite coming from a high base. Q2 last year was the strongest for Yandex market with GMV growing 3.5x. We have significantly expanded our assortment and logistic infrastructure, while also investing time and resources into improving the quality of our service for both customers and merchants. It's important to note that the investments we are making now will not only support our growth this year. At least half of what we spent in 2021 will form the basis for solid growth in the future. Daniil will talk more about our achievements in e-commerce later. I would just mention that thanks to the team efforts, we expect to grow faster this year than initially anticipated. And we believe that our new full year target of up to 3x GMV growth will help us to improve our market share and narrow the gap with our competitors. Our strong results in e-commerce were also supported by our subscription program Yandex.Plus. The total number of subscribers increased to 9.5 million in July. The team has been particularly focused on improving the share of paying subscribers, which exceeded 75%. Our strategic goal is to grow the paying subscriber base as fast as possible to cement our leadership in subscription market and to further expand the gap between us and our competitors. Relationships between Yandex.Plus and our key transactional services remain highly synergetic, especially for e-commerce. The segment contributes greatly to the issuance of Plus points and also benefit from the redemption. This improves our customer loyalty and business growth as Plus members generate more orders per customer and hence higher GMV. Plus subscribers generate around 50% of market in Eats GMV and over 70% of Lavka GMV. The success of Yandex.Plus is closely related to the development of our Innopolis content platform. One of our latest hits, a movie called Major Grom: Plague Doctor, which Yandex coproduced was sold on Netflix and was #1 in the Netflix global charts in July. We're very pleased. And in Q2 Innopolis became the leader in the video-on-demand market in Russia by both total as well as paying subscribers according to a recent GFK study. Let me give you a few words about our key cash-generating businesses, advertising and ride-hailing. Starting with advertising. Our core advertising business performed extremely well. We are seeing a recovery in our ad revenue growth on a normalized 2-year stack basis, driven by strong performance in search and other organics properties. This has been supported by macro recovery as well as improving search quality, our ad tech investments and progress with SMB. In June, we rolled out a new search engine update with more than 2,000 improvements, which among other things helped us to reach a record high share of 59.5% on Android in Q2 2021. We are encouraged by the progress with SMBs and our simplified subscription ad product, which already generates over 20% of all new ad clients for Yandex. Zen continues to be our key platform for video ad development. Video content has become the top generator in terms of time spent, outperforming articles. The share of video time spent increased from 25% in March to 28% in June, and is continuing to grow. We're also continuing to invest in ad tech to improve ad efficiency for our clients and to further increase our market share. We recently launched Campaign Wizard which not only helps advertisers to simplify the process of creating ad campaigns, but also demonstrates solid retention rate for new clients of Yandex ad business, higher than those achieved by the professional interface. With this and a number of other improvements, the share of our ad revenues based on CPA conversion strategies increased from 20% in April to 25% in June. Within the Yandex ad network specifically, the share went up from 30% to 40% in the same period. Thanks to these efforts, we have seen faster-than-expected growth of our advertising business, which again allow us to upgrade our expectations for the full year. Svetlana will talk about this in more detail. Continue with ride-hailing. Our year-on-year growth was obviously high, given the low base from last year. But what is important is that we are also seeing an improving 2-year stack growth for both rides and GMV. Daniil will share more details about this later. This quarter we disclosed the adjusted EBITDA margin for our ride-hailing business for the first time. I'm extremely proud for the progress we have made since they first became profitable at the end of 2018, making us the most efficient ride-sharing company globally with a margin of 3.5% of GMV. Overall, we are very confident in the growth and profitability prospects for the ride-hailing business as well as in our market position. Together, our high-margin advertising and the ride-hailing businesses should allow us to continue reinvesting into new attractive growth opportunities and to expand our total addressable market. And lastly, our self-driving group. We signed a partnership with Grubhub for robot delivery in the U.S. college campuses. Grubhub partners with more than 250 campuses across the U.S. with a population of over 3 million. Yandex will act as a delivery management company. The first 50 rovers are now being sent to Grubhub, and we will be rolling out the service at selected campuses later this fall. This partnership is an international validation of our technology and proof of its competitiveness versus other local and global players. It demonstrates the quality of our autonomous technology and shows that we can tap into a substantial addressable market beyond the existing ecosystem. In conclusion, I wanted to say that we are focused on investing in future growth across many verticals, including e-commerce, media services, cloud, self-driving and fintech. In all these segments we see an opportunity for Yandex to become one of the leading players, and we expect our investments to translate into market share gains and creating additional shareholder value. With this, let me turn the mic over to Daniil.

Thank you, Tigran, and hello, everyone. Second quarter was another excellent quarter for the e-commerce and [ ride-hailing ] business group. Let me start with e-commerce business. We have delivered strong JV growth of 155% of total e-com and 144 for Yandex.Market alone despite the tough comparison this prior year. And we have seen a further acceleration of growth rates in July. The total e-commerce GV increase of approximately 2.8 to 2.9x. In Q2 share of 3p GV in Yandex.Market increased to 70% compared to 56% a year ago. Yandex.Market orders were up 140% year-over-year and reached $6.9 million. More importantly, we have seen solid trends in all the frequency. The average orders per X customers in Yandex.Market increased by approximately 10% compared to the first quarter of 2021 and keep improving. We are continuing the active migration of merchant from price comparison to marketplace. Categories like consumer electronics and appliances, FMCG as well as significant part of kids category have been moved to CPA-only form during the quarter. As a result we expanded our positions in the top categories, especially in the capital cities. Based on our internal estimates, we have nearly closed the GV gap with our key competitor in Moscow. We have achieved an impressive expansion in assortment. In just 3 months since the end of the first quarter, total number of sales increased by 4.5x to almost $17 million. Please note that our price comparison experience allows us to more accurately avoid double count in the number of SKU compared to the standard market products. We have also made the material progress in logistics infrastructure. The total fulfillment capacity reached 257,000 square meters across 7 warehouses and another 32,000 square meters across more than 50 own and 3 PA outsourcing centers. As Tigran already mentioned, these investments will not only support our growth in the second half of the year, but will form the basis for rapid expansion of businesses in the future. The Delivery metrics also saw significant improvement. We finished the second quarter with over 70% of orders delivered by our own platform. This is compared with less than 50% in March. To remind you, all last mile delivery provides for the best customer experience and has lower defect rates, while higher share of our own delivery allows us to improve the quality of service for our customers. Improving the quality of service for our merchants is a top priority for us. We have streamlined the merchants onboarding process, and it now takes only 7 days to start selling on our marketplace. This is a 3-day improvement since January. As we saw encouraging results in the growth of audience, volume of traffic, improvement in efficiency of operations and merchant's experience of working with us we began to increase take rates. Since early July we have increased our base commission from 2% flat previously to a range of 2% to 9% depending on the category. Nevertheless, it's important to note that even with the new commission rates Yandex.Market remains the most attractive marketplace for merchants relative to our key competitors. We expect the take rate increase to help us gradually improve unit economics going forward. In conclusion, I want to highlight that we are confident in our strategy in e-commerce as we see good progress in JV growth and in other operation metrics. This indicates that our investments are beginning to paying off. To reflect our more big outlook on this business, we upgrade our full year guidance for total e-commerce GV growth to up to 3x from 2.5x previously. Moving to the Q2 performance of our FoodTech services. Despite high base comparison with the second quarter of last year, both Eats and Lavka demonstrated solid growth. Eats orders grew 50% and GV increased 53 year-over-year, where on the 2-year CAGR basis orders were up 74% and GV grew 87%. Growth was driven in part by our investment in user acquisition as well as by the growth of our Eats grocery vertical whose share is 14% in total Eats orders and 19% in JV in Q2. The introduction of 0 delivery fee for first orders of new users earlier this year facilitated solid growth of Eats user base. Eats monthly active users were up 43% in Q2 compared to Q4 of last year. According to internal estimated, our investment in user base and in Eats grocery vertical in particular, allowed us to grow faster than our competitors in Q2. We expect this investment to position us well to accelerate 2 years [ tax ] growth in the second half of 2021. Speaking about Lavka. By the end of Q2 Lavka operated 352 own direct stores, up 82 stores compared to Q1. Half of the new direct stores were opened in Moscow and St. Petersburg as an increasing number of stores have reached peak capacity due to a high demand in the capitals. Lavka orders increased 3x year-over-year in the second quarter, and 25% compared to the first quarter. Orders per [indiscernible] per day increased 45% year-over-year, while [indiscernible] older than 1 year grew much faster than average, in the range of 80% to 110%. Lavka order frequency per user has also grown. Approximately 20% of Lavka users order more than 8 times per month and contribute over 50% of Lavka GMV. Both Lavka and Eats benefited from enhancement of plus offering in these services. Currently 40% of Eats users and 70-plus percent of Lavka users are Yandex.Plus subscribers. GV per Yandex.Plus user is 24% high in Eats and 33% high in Lavka. Now to Taxi. Ride-hailing trends were very encouraging in Q2. On the year-over-year basis rides increased 104%, and GV was up 161% on the back of low comparison base. On the 2-year CAGR basis, our ride-hailing grew 57% in rides and 43% in GMV. In the second quarter GMV continued to grow faster than rides as driver supply and digital constraints persisted amidst a substantial recovery in consumer demand. GMV growth was also supported by growth in noneconomy tariffs, share of which increased by approximately 200 basis points in June versus March. As I mentioned on the earnings call in April, in Q2 we invested in driver acquisition in order to maintain the high-quality of the service and facilitates [ first ] penetration of ride-hailing in the daily life of our users. We see that drive-hailing has become a habitual mobility service used by 30 million people across all our geographies. On average, our [ average rider ] completed 6.5 rides per month. Our cohort continues to grow. 2018 cohort is currently at over 700 per month in Russia and approximately 11 rides in the CIS. While 2020 cohort is approaching 7 rides per month in Russia and 8 rides in CIS. We see better cohorts in the region with less developed public transport infrastructure. We expect cohorts to continue to improve in line with regional growth as well as with increasing frequency of use in our mature markets. Overall, we are very excited about the prospects of ride-hailing businesses. Now turning to Yandex.Delivery, our last-mile logistics solution for both individuals and business alike. Monetization model of our last mile delivery businesses is very similar to what we have in ride-hailing. We take a commission from the total transaction amount that we received from individual users and B2B clients for delivery services. This is an asset-light business, which is focused on building its own driver and courier supply. In June, we had over 24,000 active drivers and couriers per day, while the annualized deliveries run rate exceeded 73 million. On a daily basis, we did over 200,000 deliveries in June. 46% of which comes from B2B clients whose number reached 19,500 in June. This excludes SMB clients which are responsible for another 30% of deliveries. While we are in an average stage of delivery development, we see strong demand for such services across a wide range of industries like e-commerce, social e-commerce and general classified groceries and ready-to-eat industry as well as garden-variety business correspondence. These indices are expected to grow significantly over the next few years while we plan to increase our share in each of these indices up from the current level of low single digits. On the product side, the team is currently focused on developing the same-day and the next-day delivery services as well as significantly increase batching efficiency. We expect to reach 1 million delivers per day in 2023. Overall, I'm very proud of what we have achieved across the diverse collection of our businesses, all of which have exciting growth opportunities ahead. With this, I'm turning the mic over to Svetlana.

Thank you, Daniil, and hello, everyone. I would like to start with a comment on our approach to disclosure. Transparency as well as detailed and consistent disclosure is obviously crucial, particularly as the complexity of our business increases. We have taken an important step forward by disclosing all key performance indicators for different businesses within the Taxi group. We have updated our investor presentation materials which now include a significantly expanded range of key operating and financial indicators as well as more detailed disclosure by segments. And we also recently published our first sustainability report. We trust that this more robust disclosure will benefit our investors, and we will continue working on further improvements as we go forward. In terms of results, we delivered a solid 70% like-for-like revenue growth this quarter, driven by strong performance across many verticals. With rated recovery in advertising and ride- hailing not only because of the low base effect but also on the back of the economic rebound as well as our strong execution, which is reflected in steadily improving 2-year stack trends. We continued to see strong growth in Yandex.Market, Media Services and FoodTech, despite the high base effect of last year. Our 2 largest businesses, advertising and ride-hailing keep generating a high and stable cash flow, which we are able to reinvest in other attractive and fast-growing segments. We will continue investing, while of course maintaining financial discipline as well as stable or improving margins in these 2 businesses. Now let me walk you through the headline financial numbers for the quarter. Our Search and Portal revenue grew by 54% year-on-year. Such fast growth is obviously affected by low base effect from Q2 2020. But it's important to note that we also accelerated growth on a 2-year stack basis to 16% in Q2 from 13% in Q1. Industry-wise, this acceleration was primarily driven by the following sectors: IT and telecom, home appliances, consumer electronics and health care. As of now, only 2 industries remain in negative territory on a 2-year stack basis, travel and real estate. We are seeing continued solid growth in July. Though the year-on-year dynamic is lower than Q2 due to the visibly higher base from Q3 2020 when we began to see an improvement in ad revenue growth, 2-year stack remains around mid-teens. Taking into account recent trends and the stronger-than-expected performance of our ad business in Q2, we are upgrading our full year 2021 guidance for Search and Portal revenue growth to the mid-20s, up from our previous guidance in the high teens. The adjusted EBITDA margin for Q2 2021 came in at 46.2% versus 43% in Q2 2020, reflecting an improved operating leverage effect, partially offset by investments into ad tech, our Search market share and support of Yandex.Plus. We expect margin in the second half to be higher than in the first half due to seasonally stronger revenue and continued improvement of online ad industries. We are confident in our ability to deliver a stable margin in Search and Portal for the full year compared to last year. Turning to Taxi. In ride-hailing we delivered RUB 4.7 billion of adjusted EBITDA, which made a meaningful contribution to the group results this quarter. Our adjusted EBITDA margin, including all overheads, came to 3.5% as a percentage of GMV. On our estimates, this is the highest among all global public peers and reflects our solid execution and operational efficiency. It's important to note that these results were achieved despite a material increase in our investments into the stabilization of driver undersupply. In FoodTech we continued to demonstrate solid growth despite the high base effect, which we believe is related to a change in consumer behavior and habits and low penetration of the services in Russia. The adjusted EBITDA losses have peaked this quarter and amounted to RUB 3.1 billion. This is because of our investments into scaling up our grocery delivery model in it as well as an increase in delivery CPO on the back of courier capacity constraints. We expect the losses in FoodTech businesses to come down in second half compared to first half on the back of growing order density and improvements in efficiency. Turning to Yandex.Market. As Tigran and Daniil already highlighted, we have accelerated our GMV growth for Yandex market this quarter despite a high base effect. We expect to deliver faster growth in the second half, which is reflected in our upgraded full year guidance. To achieve such fast growth we have to increase our investments. Our spending is evenly split between customer acquisition and retention and our logistics infrastructure scale up. During the quarter we expanded our warehouse footprint by 70% and nearly tripled our owned and operated last mile capabilities. The utilization of this capacity is lower at the start, but will gradually improve as we grow the scale of our operations. With an adjustment to reflect the relative underutilization of new infrastructure in the initial period, our unit economics increased by 5 percentage points throughout the second quarter with improvements each month. We envisage this positive trend of improving unit economics to continue in the second half, supported by increase of take rates and capacity utilization. E-commerce remains one of our key strategic priorities, given its large total addressable market and attractive growth opportunities. We are confident in our ability to become one of the leading players in this space. Internally, we are very pleased with the progress achieved so far and are prepared to invest more, especially if these investments translate into an acceleration of growth, improving competitiveness of our product, operating efficiency and increased shareholder value. Apart from investments into our current stellar growth, this year we are investing into the foundation for future business expansion, including our fulfillment and logistics capabilities. Consequently, against the backdrop of the strong performance to date, we feel reassured that accelerated investments now will yield sustainable outsized growth going forward and thus plan to invest more than initially budgeted. Revenue of major services classified in all key verticals within other business units and initiatives have all more than doubled on a year-on-year basis, while cloud and devices are growing at 3x. Though the amount of investments across these businesses increased compared to last year, the unit economics improved for almost all of them. More details on these businesses are available in our press release. Let me finish with our 2021 financial outlook. We are upgrading our full year group revenue forecast to the range of RUB 330 billion to RUB 340 billion on the back of faster-than-expected growth across key business units. Revenue growth guidance for Search and Portal is upgraded from high-teens to mid-20s. And we reiterate our expectation for a stable segment margin for the full year 2021 compared to 2020. We now expect our total e-commerce JV to grow at 3x, which is faster than our previous guidance of 2.5x for the full year 2021. We expect our ride-hailing GMV to increase by around 60% for the full year. With this, let me turn the microphone back to the operator for the Q&A session.

[Operator Instructions] The first question we have today comes from the line of Vyacheslav Degtyarev from Goldman Sachs.

Two questions. I will start with the first one on the e-commerce. So you have an update on the e-commerce GMV outlook, which you increased. Is there a better visibility on the investments for this year? So it looks like directionally you are willing to spend more, but how would you contextualize versus your initial guidance of $400 million to $500 million of investments for 2021? And even probably more importantly, how do you see the investment outlook for the medium term? At least directionally, do you think investments will increase in absolute terms in the coming years or decrease?

Well, thank you all for your question. And to be honest, personally for me it was probably one of the most important questions for the last 2 months. At the moment, as you know, we are growing faster than expected versus our own expectations. And in our internal estimates, we believe we are outperforming the peers and gaining market share. It actually means that we plan to invest around $650 million this year, more than we previously guided. But it will allow us to grow 33% faster in terms of GMV this year as well as to cover almost half of the expected GMV growth next year. About half of these investments is on expansion of our logistics infrastructure, warehouses, sorting centers and delivery capabilities. We expanded our warehouse capacity by 1.8x during the quarter to 257,000 square meters. And we'll finish the year with over 300,000 square meters of just warehouse space. With sorting centers, total logistics capacity will likely to be even higher. Currently, we have 50 sorting centers versus 28 in the end of first quarter. We have invested in our own delivery platform and expanded our parcel volumes processing capacity by 4x since the beginning of this year and significantly improved our quality. At start, as I understand, all this new infrastructure is usually underutilized. But it's just a temporary issue. It puts pressure on our unit economics, but we already see positive dynamics. If we adjust one underutilization of new infrastructure in the initial period, our unit economics increased by 5 percentage points throughout the second quarter with improvements each month. We also invest in business expansions, processes improvements and warehouse automation. All these developments will help us to boost utilization and then our unit economics. It's also important to remember that investments we're making now not only allow us to demonstrate faster-than-expected growth this year, but also form the basis for the future rapid expansion of our operations. If we look at the next year and going forward, of course e-commerce is our biggest point of growth. And considering the growth of the business, size of the market opportunity as well as improvement in quality of offering and unit economics, we are committed to allocate substantial capital in our e-commerce initiatives. It's probably hard to estimate exact amount of investments we will make next year and beyond. But let me put this way. Taking into account infrastructure objects, lead time, trajectory of growth, competitive environment and again the size of the opportunity, it is reasonable to expect comparable spending on e-commerce initiatives in the near term. The exact amount of investment depends on many factors, including competitive environment and market situation, but you can be sure that we are reviewing our development on a regular basis and rationalize our investments against our progress. We are seeing promising trends in unit economics which adjusted for infrastructural out costs improved, as I already mentioned, 5 percentage points during the quarter, which [indiscernible] is a very good progress. We're also highly satisfied with the closely track -- and we closely track our progress in quality of operations, assortments and cohorts improvements, value creation through Plus as well as of course market share gains. Further progress in those metrics will warrant our ongoing commitment to investing into e-commerce further. Our strategic goal, as you know, is not only to become #3 player but to make sure we are constantly improving our market position and closing the market share gap with our competition. We need to make a journey, which took others many years, significantly faster. But the value of the opportunity justifies the speed and the investments.

Okay. My second question would be on the self-driving, basically the partnership with Grub on the [ rover Roberts ]. So would you consider similar type of international partnerships on the side of the self-driving technology, specifically on the side of the car segment? Is it more difficult to agree on those kind of partnerships on the self- driving side versus the rover side? Is it due to the complexity of the technology or lack of real use cases to apply? Or maybe any other reasons? So any color would be helpful.

This is Vadim. Let me take this one. So look, I think during the NDR earlier this summer we were talking about self-driving technology vis-à-vis rower technology, right? And one of the points we were making was that we believe that rovers use the product that is -- we can monetize earlier compared to self-driving cars. And this is due to the much more complex regulation that exists or frankly doesn't exist yet for self-driving cars. Rovers on the other hand, they travel much slower. They are much smaller. They do not present danger to humans, et cetera, et cetera. And therefore, the [ C ] Grubhub partnership is something that allows us to test at scale. The user case, whereby the roller will actually substitute a courier, right, for the last mile delivery of whether it's going to be food from restaurants or maybe like small parcels, et cetera, for e-com. And if you will look at the announcements itself, right, I mean, we did this partnership with Grubhub campus which operates at 250 university campuses in the U.S., which I think has combined of around 3 million students. The cool thing here, right, the rovers, the use is somewhat -- they have a more limited use case because they can only get to the building, but they cannot go up the stairs. And it works perfectly well in campuses because the couriers typically are not allowed to enter dormitories. And therefore, the students are used to come down the stairs and pick up food. So this is going to be a similar user experience, right? We're not going to sacrifice user experience in exchange for combining with rovers. Now going back to SDG, the self-driving group, right? Even though I did mention earlier that the regulation is going to take longer for us to get there, it depends country by country. At the same time, I do think it's important to mention that in Russia there is a new federal law that was recently signed which established a regulatory sandbox for, call it, digitally innovative products and projects. And we plan to use this opportunity to create regulatory sandboxes to, in some places to switch to completely and fully autonomous taxis and maybe even launch kind of fully autonomous taxi in one of the Moscow districts. The launches of those products or projects is a function of government approval of those specific projects.

We will now move to our next question from Cesar Tiron from Bank of America.

I'll ask my first question on e-commerce. What's your long-term ambition for 3P versus 1P mix? And how long do you think you need to get to that right mix because this is probably one we should start to see some reacceleration of e-commerce revenue. Not talking about GMV, but revenue.

This is Vadim. Let me take this one as well. Look, I mean, it's a very good question, right? And I think we wish we would know the future. We could debate like what is the ideal or what is the kind of the end-state model would be for any large marketplace and what the proper combination. The way we think about it, obviously, from a perspective of -- from a perspective of kind of the user experience, right, in order for us to -- and from perspective of our economics in order for us to maximize our P&L and our kind of unit economics we would, obviously, would want to have more of 3P compared to 1P. At the same time, we're going to be focused on balancing the revenue mix to maximize customer satisfaction, user experience, assortment growth and economics. At the same time, we do need to have 1P in order to make sure that we fully cover the whole shelf of SKUs and the highly demanded and highly thought-for products are present on our marketplace. And therefore we do need to have some of 1P in order to drive 3P in the correct direction.

That was very clear. And then just a follow-up on e-commerce. What was -- what has been the initial response from merchants and your competitors as well on the increase in take rates? And do you think there's room to further increase those take rates in the future?

This is Vadim yet again. So look, we did increase our take rates, right? And this is coming after a significant decrease back at the beginning of the year. And I think we spoke, again, the same roadshow that I referred Slava to, that we had with you earlier this summer. The way we think about take rates, right? This is just one of the components of overall product for merchants, right? So you shouldn't only look at kind of monetary terms, you also need to look at how much traffic we're providing, how much support for them, how easy it is to get onboarded on our side, how easy it is to actually list the products on our properties, et cetera, et cetera. So when we think about take rates, right, as we improve other components of our like merchant platform, we feel that we can increase our take rate as well. So if you were kind of around 2% flat across the categories, now we're between 2% to 9% depending on the category. And that increase happened since July. The way -- the response from the merchant so far has been fairly constructive. We more than doubled, and the way to think about it, right, we more than doubled the amount of business for them since the beginning of this year. And our other components of our offering to the merchants continued to improve. And therefore, on-boarding improved, we continue to streamline our processes. So frankly, we haven't seen that much of kind of complaining and they're fine with that. In terms of what can be done in the future. So look, let me say the following. We still remain the most attractive in terms of pricing on the market right now. Obviously, how far we can go in the future is very much is the equation of what our competitors are going to do. And at the same time, how well we're going to improve other components of our merchant offering.

And we'll now move to our next question from Vladimir Bespalov from VTB Capital.

Congratulations on the number. I actually have 2 questions. One is on ride-hailing and profitability profile. We see some decrease in the EBITDA margin in the second quarter compared to the first quarter, even though the margin is still very high. So maybe could you provide some color, what is behind this? And in general, how you are going to manage and to balance investments, managing competitive pressures growth and things like this? Plus, in addition to this, is the margin that you showed in the second quarter kind of sustainable in the short term? Or in general, how do you see the trajectory, let's say, over the next 1, 2 years for ride-hailing? And my second question will be on e-commerce. If we split your e-commerce exposure into Yandex.Market and the grocery, Yandex.Market is accelerating. But in grocery, if we look both year-and-year and quarter-on-quarter, there is some kind of slowdown. Maybe could you comment what is going on? And this looks a little bit counterintuitive. And given that you expect a further acceleration of the total GMV in e-commerce in the second half of the year, how this is going to be split between Yandex.Market and the grocery exposure?

It's Yevgeny. Good to hear from you. Let me tackle your question on ride-hailing, and I'll pass it on to the rest of the team on e-com. So let me walk you through to sort of the trends of what's happening in the second quarter. You may remember that on the call last quarter we mentioned that profitability was very high, but it was also held by unusual even for Russia, snowing, cold conditions for a long period of time in the first quarter. And it certainly helped profitability. And we said it's unlikely that it will stay that high for the year. And then in the second quarter we also invested RUB 1.4 billion in driver incentives and acquisition and also vaccination initiative sort of to address the increasing level of undersupply in the system. And driver undersupply remains a significant issue for us in the whole market. The borders remain closed. And we're also now facing seasonal competition from other industries such as construction and agriculture. But given our initiatives combating this, we think we brought undersupply down to 20% level versus what it would have been, something like 40%, if we haven't done anything and haven't invested. This RUB 1.4 billion does not include the cost of competition with Didi. In the second quarter we don't really break down for obvious competitive reasons how much we invest in that. But Didi launched in 2020. In the cities where the sort of the initial launches happen, we think their share has come down to half of what it was at peak times there. They recently launched in 20 new cities in May in Russia, and that probably represents something like 10% of our total GMV. But as you've seen, we've been very efficient and effective in competing with them across all geographies. I think this will remain the case. Obviously competition comes with additional cost, but I think our experience demonstrates that these costs are limited in time and they actually expand the total market. And market leaders actually benefit from sort of trip inflation and pressure on smaller players. So ergo in June our rides grew 76% in those 20 cities where they launched, while total rides grew something like low 60s year-over-year. But all in all, our EBITDA margin, including overhead costs, as we already mentioned on initial remarks, it came in at 3.5% of GMV. And we believe if we're not the most efficient, we're certainly one of the most efficient ride-hailing companies globally versus our public peers, our operational expenditures and HR costs, half of our closest public peer as a percentage of GMV. And this allows us to be one of the most profitable ride-hailing companies since 2018. And that's despite us maintaining a low effective take rate of 10% or below. Now looking to the second half of the year, we will invest in driver supply. We will invest in vaccination initiatives and we will focus on key new social initiatives for drivers and couriers as well. However, all things being equal, we think adjusted EBITDA margin as a percent of GMV in 2021 will increase versus 2020. Of course barring any sort of very significant changes in the competitive landscape or any severe adverse COVID related measures, we believe looking forward that ride-hailing has substantial room for growth in Russia and beyond. And going forward, we will continue to improve operational leverage and benefit from our efficient cost structure. We will reinvest a portion of that in growth. But we target to improve profitability each sequential years in the next 2 years, again all things being equal. And as you know, we have a successful track record in balancing investment versus growth and ride-hailing, and we plan to maintain them.

Vladimir, this is Vadim speaking. Let me take your second question with respect to FoodTech and e-com. So look, I mean, it's -- I mean, we see your point, right. The thing what you do need to consider is that there was multiple effects, right, that are kind of combined in the numbers that we reported. So when you think about our FoodTech, it essentially consists of 3 lines of business. So the first one is Yandex.Eats, which the usual delivery of food from restaurants, right? The second one is Lavka, our hyperlocal dark stores. And the third one, which is kind of the new business that we have is the e-grocery component of Yandex.Eats whereby users can order groceries from kind of the retail chains that they're used to. Now they all have somewhat different dynamics. So first and foremost, do keep in mind that Lavka and Yandex.Eats, the restaurant component, were beneficiaries from the COVID situation last year. So when you look at the growth rates this year, you do need to keep in -- just understand that we are comparing to pretty tough comps last year. And therefore we're already growing from pretty high base. The second thing here is that as we already -- our guidance suggests, we expect that -- we expect that overall our e-commerce GMV, which includes our marketplace, Lavka and Yandex.Eats portion of e-grocery delivery is going to grow overall 3x year-over-year. We don't really disclose the split between businesses. And we would prefer not to give such a detailed breakdown line by line.

And we'll now take our next question again from Cesar Tiron from Bank of America.

Just wanted to ask also on taxi regulation. There's been a couple of press articles suggesting some potential limitation to driver working hours and a couple of other regulations. Do you have anything to say on these things?

Well, let me take on driver hours, and then I'll speak more generally about the initiatives. But sort of we believe that Moscow and other municipalities will follow the best practice measures in line of those that have been implemented in a number of markets around the world, including U.S. and Europe. And assuming the system develops along those lines, this was definitely contributed to increase in safety, and we support this. But we also think it will continue to be satisfactory from an economic standpoint for drivers, fleet management companies and for us platforms. As for sort of a wider ride-hailing social benefits discussion and initiatives, first of all, we're monitoring driver earnings on region-by-region basis. And it's very important to note that. Income received by our drivers and couriers significantly exceeds minimum wages in Russia and often matches or exceeds the average income in a particular region. And in terms of social benefits, we have already pioneered a number of measures. We think those will set the standard for the industry as a whole. So for example, in March this year we started to provide an option for self-employed to voluntary join an insurance program which provides payments covering sick leave. And going forward, we plan to provide a number of insurance with other products with varying degrees of coverage which self-employed will be able to choose depending on what their personal needs are. And remember, Russia already has universal health coverage. That's not the only example. We were at the forefront of developing the self-employment concept together with authorities. Now on our pool we have nearly 100,000 self-employed drivers and couriers on our platform. In Russia, the total number is approaching 3 million. We were the first ride-hailing company in the country to introduce accident insurance for drivers and passengers, significant coverage despite this not yet being a legal requirement in the industry still. And so we're in constant dialogue with authorities at all levels over these issues. And we believe our relationship with them is constructive and efficient.

And let me add a little bit to this. This is Vadim speaking. So look, I mean, as Yevgeny just kind of pointed out and listed a set of examples, look, the key -- obviously all of us kind of seeing what's happening in China right now, right? And I assume like a lot of investors and you guys have questions in your mind whether something similar will be happening in Russia, et cetera, et cetera. And the way we think about it and the way we approach it, the key to all of those discussions is to be proactive, right? So taxi is a perfect example where we actually were kind of initiated discussions and stayed proactive and tried to prevent or foresee some of those kind of conversations and come with a solution to the state, right? And overall, on the broader kind of group level, we're seeing no changes in our relationship with authorities. The relationship remains open and constructive. I mean obviously, in Russia, as in any other country, there is a lot of discussion right now around digital platforms, digital ecosystems. And this is understandable because digital platforms are becoming a larger and larger part of everyone's life whether it's going to be related to data, whether it's going to be related to social activity, et cetera, et cetera. What's happening in Russia right now, the authorities obviously would like to, their focus on building a clear framework to resolve any conflicts to help innovation and accelerate the development of the digital economy. And at the same time, the state bodies are quite explicit in their statements that the national economic development requires the support for local service ecosystems because we do need to compete with global tech platforms. And if Russia wants to maintain their uniqueness of a tax sector going forward, the state understands that and they're willing to support the platforms here.

We will now move to our next question coming from Kirill Panarin from Renaissance.

Two questions, please. Firstly on Search profitability. So you've raised your Search revenue guidance already twice this year. And I just wonder why that didn't translate into a stronger margin outlook versus your initial expectations. Are there new investment areas which you didn't plan in the beginning of the year? That's the first question. And then secondly, on Yandex.Plus, the number of subscribers was flat quarter-on-quarter. Is that explained by seasonality or maybe you've seen increased churn? Any color there, please? And also could you share some data around the mix between single and multisubscriptions? What's the share of multisubscriptions? And what's the average number of active users to per multisubscription?

So to start on ad revenue growth. There is still uncertainty around COVID. And the cases started to pick up in June, as you know. So we have not seen so much of an impact yet, but still possible if situation escalates and the pace of vaccination will be slower. So second half is seasonally stronger than first half, which is reflected in our guidance. We also CPC -- we also see our CPC revenue decline further, also part of revenue growth. In Search and Portal margins, we expect margin in second half of the year to be higher than the first half due to seasonally strong revenue and continued improvement of online ad industries, cost optimization and efficiency improvements.

And [ Sveta ], if I may continue, just to wrap up the first question. So look, I mean, Kirill, your question is right, right? I mean if you're growing faster, you would -- obviously, every additional ruble of our revenue comes with kind of -- was a greater incremental margin, right? One of the things that we try to do as well is to continue to reinvest for future growth. At the same time, keeping our Search and Portal margins pretty stable at the current levels. And one of the things that we kind of mentioned during our script is some of the initiatives that we have, whether it's new ad tech and focusing on the CPA-based conversion instruments, whether it's going to be Campaign Wizards for kind of our smaller clients that kind of -- that are asking for simple instruments, et cetera, et cetera. And we're seeing results of those kind of investments into additional growth. So for example, the share of CPA-based conversion instruments is already exceeding 25%, right? And this is something that the advertisers are paying for a specific action that they want to optimize as opposed to for a simple click. That is much easier to understand and more transparent tool for advertisers. And therefore what we're also seeing, we're seeing that our share in their wallets, right, is increasing because they're understanding very well what they're paying for using our ad services. Similarly, like Campaign Wizards, right, it's super simple, well significantly simpler tool to manage the process of creating ad campaigns. And what it really helps, it helps with retention. So our clients are staying longer compared to those that use kind of the professional interface. Finally, also we talked -- we kept talking about the kind of simplified products for small and medium-sized businesses, right? And this is something that we cover through our subscription product. And right now, over 20% of all our new clients are already the clients that are coming to the subscription services. Another investment that we make in our ads kind of segment is focusing -- we are focused on improving our monetization by increasing market share on iOS devices. And together with kind of those system, the search and some preinstallation laws, we also do targeted investments into increasing our share on Apple and iOS devices. And that's kind of all in all, this is the answer to your question. We are growing faster than expected. We maintaining our margin and reinvesting the additional cash we generate into Search kind of initiatives. Now going to your second question with respect to Plus. Yes, you're right, the growth in this quarter, in the second quarter in Yandex.Plus subscribers did slow down. It is a seasonal effect. Overall, like in the second quarter, typically, people tend to spend more time outdoors compared to the periods when it is cold outside. And if you were to look at what happened last year, you would see exactly kind of similar slowdown which would pick up in the second kind of towards the latter part of the year.

Great. Any color on the multisubscriptions, please?

Question then. What exactly is multisubscription? Just let's agree on the definition here because this is not something…

Yes, I mean I think -- yes, I think you have some kind of family subscriptions which allow several people to use one subscription for all the benefits of Yandex.Plus?

Look, I mean, we do have those numbers somewhere. I don't have it on top of my head. How about we come back with it afterwards? I mean from kind of personal experience, I have a subscription and all members of my finally use it. And I have a suspicion that many people do the same for their households.

We will now move to our next question from Miriam Adisa from Morgan Stanley.

The first one is just a follow-up on e-commerce again. Just on fulfillment services this time. What are you currently providing for merchants? And how does your pricing on that compare to peers? And how should we think about the ramp-up of that? I guess if we look at some of your peers they're at sort of 50% of 3P GMV. What are your own targets in terms of the share of GMV done through your own fulfillment, let's say, by the end of next year?

This is Vadim. Let me take this one. So look, a couple of things. But with respect to the kind of the fees, right, this is something that was covered by the question asked earlier, right? How much are we charging. We are still more attractive in purely -- like in dollar terms, if you will, compared to our major competitors. The way that our growth is supported now, right, and this is actually quite interesting, right, because we've been talking about the -- we've been talking about the significant increase in our SKUs, right, as a choice. One of the reasons we were managed to achieve that was because of the conversion from -- because of the conversion from CPC to CPA model, right? So that allowed us to significantly increase our SKUS. The reason we were able to do it so fast is because we introduced a new model which is called drop ship by seller. And this is something that we don't store, and therefore we don't really charge the fulfillment fees. But this is fully kind of full field and delivered by the merchant itself. So some of those pieces, we've seen kind of quite a significant growth there. Approximately 20% of our GMV is currently done via drop ship by seller. The trends in that particular category, we do expect that it will continue to grow, but we will be shifting some of those -- we will be adjusting and optimizing our mix to maximize and maintain the customer satisfaction and user experience. At the same time, focusing on the unit economics and capital allocation. Because keep in mind the drop ship by seller, this is a profitable channel for us already today because we just get a commission on the sale without having to fulfill or deliver it.

Got it. Then my second question is just on grocery. So you seem to have ramped up the number of dark stores again in the quarter. So how should we think about sort of further expansion from here, particularly expansion outside of Moscow and St. Petersburg? And then also, if you could just share your latest thoughts on the different models in grocery, so the 1P versus 3P model. Do you have any changes in your approaches to that? Or how are you thinking about the mix between the 2 models over time?

This is Yevgeny again. So Lavka is currently our hyperlocal instant delivery from dark stores model, is currently focused on dark store expansion, growing number of orders per dark store. I think in our sort of, let's call it mature regions like Moscow we see unit economic improvement. I mean we actually expect Moscow to turn profitable in less than a year from now or a year from now. And we think in that business sort of the profitability level will be in line with off-line grocery retailers longer term. As far as the grocery vertical, again, take rates in this business are lower than in restaurant delivery, but higher average checks, but we already talked about it. Density of orders and use and demand have not achieved mature levels in this business. CPO is very high, especially we also started offering Q2 not only delivery but pickers and stores. And that also negatively affects CPO given the low order density and low -- currently low utilization rates. But we're making a lot of efficiency improvements targeted at decreasing CPO. And these improvements are allowing us to decrease CPO each sequential month. So for example, in June, the CPO was 10% below April levels. And again, unit economics is a top -- unit economic improvement is a top priority for us in the grocery vertical. We think it will continue to improve along with our efficiency initiatives as the business grows and as the order density increases. And our view on long-term profitability of the growth vertical should be in line with leading global peers which recently have just turned profitable on EBITDA level.

And Yevgeny, let me just add one point. Miriam, I think you also asked about the increase in Lavka stores locators, right? So most -- the very significant portion of that increase actually coming from the increase, from the opening of new dark stores in the capitals because our existing stores already reached their capacity. So the way to think about it, right, you have kind of a certain radius, right, and Lavka operates there. Once it hits the kind of the maximum theoretical throughput, you do need to open another store to serve still the same kind of radius, right? It has 2 components there because it does improve the delivery time because the radius become smaller for that particular Lavka, right? And you're able to kind of shift some of the orders that the first Lavka was having difficulties serving, right, to the newly open location. So most of the dark stores that were opened in the capitals, in the regions, we do -- we have opened in some of the cities because of the economic conditions it's got to be somewhat a different product, and we are focused on figuring out the right mix for the regions right now.

We will now move to our last question. That will come from Ildar Davletshin from Wood & Company.

Yes, my question was on -- one was on international expansion on kind of addressing -- answering new markets. So this Grubhub deal is very, very encouraging. I'm wondering, within your products and services, and quite a few of them are highly competitive on the global scale, which ones are you also thinking about and also which potentially areas or regions are you thinking about? And maybe on the reverse side, are there any regions where you may want to limit your exposure to improve economics of the overall vertical? I'm talking particularly about ride-hailing because I think you are in about 15 countries. That would be my first question. And if I may, I missed part of the call, so I apologize if it was already addressed. The situation around undersupply of the drivers, it seems like it's one of the reasons behind weaker or sequentially a reduction in profitability of the ride-hailing. And I'm wondering how much of it is structural versus temporary. So lack of migrants and closed borders, which probably is less the case now versus just overall rush to get all this delivery business by all kind of players which increases demand for couriers and drivers overall. So I'm just wondering if you see the situation improving with supply of drivers in the midterm?

Yevgeny again. Let me start. And I'll start with ride-hailing. We've actually -- if we come look at our sort of portfolio across the taxi business in particular, we've actually seen a number of very encouraging developments in some of our markets. So we're very strong, obviously, in the former of Soviet Union. But we've seen, for example, in Finland, become -- it's not a huge business, but its economics have improved significantly over the past year. So we will look selectively and very carefully, but at certain markets where we think we have a competitive edge or competitive advantage in entering. Same thing, our drive business, for example, has developed certain ancillary skills which are actually becoming very valuable, very interested in a global market as a whole. For example, we have leading fleet management software as well as hardware developed, and we think we have actually a very globally competitive product that we have some initial inbound interest in. So we'll approach international expansion very carefully. We're focused on our core markets. But certain interesting ideas or certain markets where we think it could be interesting we will develop.

And Ildar, let me add to this. This is Vadim speaking. So look, I mean, I think probably kind of if you were to think about international opportunities for us in more general terms, kind of the bigger picture. I mean you did bring up the Grubhub kind of partnership that we signed earlier last month. The way we think about our opportunities or the windows of opportunities for us, we do think that in places whereby there is kind of, call it, new business models, so for example, Lavka, right? This is something that is currently being developed in Western Europe, in the U.S., actually somewhat later that it started being developed by us here in Russia. And we do think that we could have an edge with our ability to kind of route the couriers to the warehouse, the small warehouse management system, et cetera, et cetera, or whether -- so this is one category, the new kind of business models that are actually emerging right now. The second one where we think we could have an edge is kind of cutting-edge technologies, no pun intended, where everybody is -- there was no established market yet. So for example, rover or SDG would be a good example. A third category is kind of a very high-tech R&D-heavy businesses such as cloud. Because what we understand our product offering is very competitive, and not only in Russia, but also in international kind of scene. So at the same time, going to the places which are already quite crowded, so for example, ride-hailing in kind of well-developed markets like U.S. or U.K., et cetera, et cetera, it's obviously going to be blood bath. And we don't necessarily have a competitive edge. So we're going to be very smart when we look at the kind of international expansion opportunities and see where we have kind of in-built advantage and try to explore it to the first.

All right. And maybe on the…

No, quickly. I think I wanted to add to your question about sort of the structural profitability of ride-hailing. So drawing in some of the earlier comments from me and the rest of our team, I think we are if not the most efficient then one of the most efficient structurally ride-hailing operators globally when we examine ourselves against our public peers. I think this is -- and again, our plan is to continue to grow but also to improve EBITDA profitability each year for the next several years versus previous levels. And this year we plan to improve profitability, EBITDA profitability versus 2020. And again, we will reinvest a portion in our future growth. But that forecast of improving of profitability accounts for that reinvestment. Again, barring any seismic events such as COVID quarantines or very significant competitive landscape changes where we will aggressively defend our market leadership.

This concludes today's question-and-answer session. So I'd like to hand back to our speakers now for any additional or closing remarks.

Yes, this is Yulia again. Thank you very much for all your questions. If there are any more questions, please reach out to IR team. We'll be able to help you. Thank you, and have a good day.

Ladies and gentlemen, this does conclude the conference for today. Thank you for participating. You may all now disconnect.