Leading Russian search engine operator Yandex (NASDAQ:YNDX) reported third-quarter earnings this morning that impressed investors and helped assuage fears about the company's reliance on the fragile economy of its home nation. On the market's open, shares of Yandex were up as much as 8%.
A deeper dive into the earnings, however, reveals some troubling trends that investors need to be aware of. Read on to find out what those trends are.
But first, the good news
The headline numbers for Yandex were solidly positive. Quarterly revenue grew 28% to $332 million, significantly exceeding analysts' expectation of $312 million.
Adjusted earnings per share registered at $0.34. That's down almost 10% from last year, but ahead of analyst projection of $0.32. The year-over-year shortfall resulted from increased spending for product development -- a theme that has become common among the world's leading search engines.
Furthermore, both paid clicks and cost per click were up -- 19% and 8%, respectively -- for the quarter. Larger global players such as Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Baidu (NASDAQ:BIDU) haven't been able to keep cost per click growing, but that's largely because they are relying increasingly on mobile advertising, for which they charge lower rates. As the mobile advertising market grows in Russia, don't be surprised to see this metric head south for Yandex as well.
Yandex also moved the midpoint for revenue expectations slightly higher for 2014, from 27.5% growth to 28.5% growth.
But that growth is slowing
With the good news out of the way, it's worth noting that the company showed signs of slowing in some key areas. Prior to today's earnings, I pointed out that Yandex has averaged 41% growth in text-based advertising over the preceding four quarters. During the third quarter, that growth slowed considerably to 29%.
That's still a very solid figure, especially when you consider that sanctions on Russia are pinching the wallets of the average consumer. But it's clear, for the first time, that the effects of the crisis in the Ukraine and the subsequent actions by the international community against Russia are starting to impact Yandex.
Furthermore, the company had been growing its base of advertising partners by about 5% on a quarter-over-quarter basis for the past year. But in the third quarter, its customer list only increased by 1.7%, to 300,000.
The big problem that should concern long-term investors
As I stated above, the slowing growth in advertising customers and text-based ads needs to be taken in stride. The Russian economy is in a tough spot right now, and it's difficult to tell how long that will be the case. I have confidence that the situation in the Ukraine will ultimately be resolved, though, and that the Russian economy will bounce back.
When that time comes, however, investors must have confidence that Yandex is still the dominant search engine in Russia.
During the third quarter, Yandex averaged a 60.3% search market share in Russia, including mobile. That's down from 61.6% in the preceding quarter and 62% one year ago. Google, on the other hand, crossed the 30% threshold for the first time to firm up its place as the No. 2 search engine in Russia.
That's not a great sign for Yandex shareholders, but it's not a signal to panic, either. Internet penetration in Russia is still only at about 50%. There's lots of room for the overall search pie to grow, and if Yandex can maintain its share above 60% it will capture huge servings of that pie.
If, however, Google uses its financial might to slowly take away market share, Yandex could suffer an extended death.
Only time will tell how that plays out, but Internet search market share remains one of the most important metrics for investors to watch moving forward.
Brian Stoffel owns shares of Baidu, Google (A shares), Google (C shares), and Yandex. The Motley Fool recommends Baidu, Google (A shares), Google (C shares), and Yandex. The Motley Fool owns shares of Baidu, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.