QIWI plc
Q1 2017 Earnings Call Transcript

Published: 17 May 2017

[Operator:]

Welcome to the QIWI First Quarter 2017 Earnings Conference Call. Today's call is being recorded. And at this time, I would like to turn the call over to Ms. Varvara Kiseleva, Head of Investor Relations. Please go ahead.

[Varvara Kiseleva:]

Thank you, operator and good morning, everyone. Welcome to QIWI First Quarter 2017 Earnings Call. I am Varvara Kiseleva, Head of Investor Relations. And with me today are Sergey Solonin, our Chief Executive Officer; and Alexander Karavaev, our Chief Financial Officer. A replay of this call will be available until Wednesday, May 24, 2017. Access information for the replay is listed in today's earnings press release which is available on our Investor Relations website at investor.qiwi.com. For those listening to the replay, this call was held and recorded on May 17, 2017. Before we begin, I would like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties. QIWI cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's most recent annual report on Form 20-F filed with the Securities and Exchange Commission for factors that could cause our actual results to differ materially from any forward-looking statement. During today's call, management will provide certain information that will constitute non-IFRS financial measures, such as adjusted net revenue, adjusted EBITDA, adjusted net profit and adjusted net profit per share. Reconciliations to IFRS measures and certain additional information are also included in today's earnings press release. With that, we'll begin by turning the call over to Sergey Solonin, our Chief Executive Officer.

[Sergey Solonin:]

Thank you, Varvara and good morning, everyone. Thanks for joining us today. We're glad to share our first quarter results, demonstrating solid net revenue growth as well as good adjusted net profit dynamics. This quarter, we have noted certain signs of improvement in the overall economic situation of our core markets which benefited our volumes. Moreover, we're happy to say that we're able to take advantage of the secular trends towards digitalization of payments by offering our clients convenient solutions in different market verticals. Although we maintained a cautious outlook for the year, our first quarter performance and the trends currently observed provide solid foundation for the guidance upgrade. We see many opportunities ahead and we'll continue to focus in executing our strategy and developing our new products. In the first quarter, our total payment volume increased by 8% to reach RUB208 billion, driven by growth in Money Remittance and E-commerce verticals which grew 71% and 11%, respectively, over the first quarter of 2016. Growth in these verticals was offset by decline in Telecom and Other verticals by 19% and 14%, respectively. We're especially pleased with the dynamics in Money Remittances vertical which was under substantial macroeconomic and competitive pressure for the past several quarters. In the first quarter, we saw that the growth in this vertical was further accelerated benefiting from secular trends towards digitalization of payments. The decrease in Telecom and Other market verticals were largely driven by the decline in our kiosk network, as well as high feasibility of our alternative commission prepayment channels. At the same time, growth in E-commerce Money Remittances, as I mentioned earlier, was largely due to shift of consumer preferences towards digital payment channels, where we believe we have one of the best product offerings in the market. As of March 31, we had at 18 million Visa QIWI Wallet accounts, an increase of 1.9 million as compared to the prior year resulting from our continued effort to grow and leverage our structure. Positive volume dynamics in our key market verticals converted into solid net revenue growth. Alexander will walk you through the Q1 numbers in more details in just a moment, but I would like to walk you through some recent developments. As we have announced, during our third quarter earnings call, we have launched our new paid-by-installment card project, SOVEST. We market in Spain and the rollout of the project started at the end of January 2017 in Moscow. And currently, we've began our federal rollout to contain with the aim to establish federal coverage by the end of the year. We're constantly fine-tuning our infrastructure, developing the product in order to provide our customers with the attractive product offerings and services. In the first quarter 2017, total SOVEST payment volume reached RUB182 million. In the meantime, we continue to see our payment business as core to our future growth and are committed by providing our merchants and customers with the most advanced and convenient technology customer solutions, broadening the scope and increasing the quality of our services we offer. With this, I will turn the call over to Alexander, who will take you through our financial results in more detail. Alexander?

[Alexander Karavaev:]

Thank you, Sergey and good morning, everyone. We delivered a strong set of financial results this quarter. Total adjusted net revenue increased by 16% to reach RUB2.9 billion, up from RUB2.5 billion in the first quarter of 2016. Total adjusted net revenue, excluding revenue from fees for inactive accounts and unclaimed payments, increased by 19% compared to the same period in the prior year, primarily as a result of growth in payment adjusted net revenue. Payment adjusted net revenue increased 18% to RUB2.4 billion, up from RUB2 billion in the prior year as a result of the net revenue growth in our Money Remittance and E-commerce verticals which grew 63% and 24%, respectively, offset by a decline in net revenue in Financial Services and Telecom verticals by 13% and 18%, respectively. Our financial result was driven both by increase in volumes, as Sergey just described and the moderate improvement of the average net revenue yield by 10 basis points year-over-year. Other adjusted net revenue increased 6% to RUB533 million, up from RUB505 million in the prior year, mainly because of the increase in interest revenue offset by the decline in revenue from fees for inactive accounts and unclaimed payments. Moving on to expenses. This quarter, we continue to tightly monitor cost in our core business. Although we incurred additional expenses connected to our SOVEST project. Adjusted EBITDA increased 4% while adjusted EBITDA margin was 52% compared to 58% in the prior year. Adjusted EBITDA margin contraction primarily resulted from the increase in personnel and office maintenance expenses as well as advertising expenses incurred due to launch of SOVEST project. Adjusted net profit increased 3% to RUB1.3 billion, up from RUB1.2 billion in the prior year. While adjusted net profit, excluding net expense associated with the SOVEST project, was up by 27% as compared to the previous year. Adjusted net profit was largely affected by the same factors as adjusted EBITDA. Finally, as you saw in our earnings release, following the determination of the first quarter 2017 financial results, our Board of Directors approved a dividend of $0.22 per share. Although we continue to pursue certain M&A targets and our dividend distributions are subject to our future cash flow and yields, including our cash requirements in connection with the new project, we remain committed to returning the cash back to our shareholders. Now on to our guidance. We're glad to announce the increase to our guidance for 2017 based on the results and trends that we have seen in the first quarter of the year. We expect adjusted net revenue to increase by 10% to 15% over 2016, with the expectation that there will be no material contribution from SOVEST project. Adjusted net profit, excluding SOVEST expenses, will increase by 12% to 17% over 2016 while adjusted net profit, including SOVEST expenses, is expected to decline 15% to 30% over 2016. Although we see our first quarter results as a solid foundation for future growth, certain other factors both negative and positive remain beyond our control. And hence, we serve the right to revise guidance in the course of the year. With that, operator, please open up the call for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Bob Napoli with William Blair.

[Robert Napoli:]

My first question is just on the revenue yield, the very strong revenue yield especially out of the E-commerce segment and so maybe if you could comment on the growth of E-commerce, up 14% which I think was in line with what we were looking for, maybe a little bit better. But the revenue yield way above is very difficult for us to understand what that revenue yield's going to be and it does move the numbers quite a bit. So a little commentary on the growth of E-commerce and the revenue yield, the very attractive revenue yield you were able to generate.

[Alexander Karavaev:]

Okay, thank you for the question, Bob. So on the net revenues uses, it's primarily due to 2 major factors. One is we're still benefiting from the product mix, so it's shifting towards higher-yielding categories, especially longtail of E-commerce plan. And secondly, once the yearly notice of certain improvement in macroeconomic point of view, we started to decrease slightly the priority to agents for top of the digital world. So those two factors primarily impacted net revenue. On the growth of E-commerce itself, it's basically the mix of macro and product-wise, we're, I mean, especially in digital growth where we historically, have been diluted. We're still increasing the market share, we believe especially like in gaining some other markets. On the net revenue, again going forward, we obviously believe that there would be fueling. So we at least now modeled through, we'll not be expecting any further substantial expansion of the net revenue yield, to be on the conservative side.

[Robert Napoli:]

Okay, but that's on the conservative side, so the mix is still improving. So you think the revenue yield that you attained this quarter is sustainable? At least sustainable with maybe some upside on mix, is that right?

[Alexander Karavaev:]

Yes. Yes, that's exactly right.

[Robert Napoli:]

Okay. And then just on the growth of wallets in the last 2 quarters. After a period of decline and stagnation in the number of wallets, you've had 2 straight very good quarters of new customer additions. What are those new QIWI wallets? What has increased and led to the acceleration there? And what are those new customers, do they look like from a -- do they look like the rest of the portfolio? The customer base?

[Alexander Karavaev:]

Yes, so I guess primarily, it's fairly connected with the question #1. So the majority of new wallets were flowing through Money Remittance and E-commerce segments. So basically, for those segments where we have demonstrated the most of the growth. And then generally, there's 2 factors. One is macro, generally, so the people are basically spending more online again and they're using our infrastructure. Secondly, we really felt, especially in Money Remittances, the secular trend is towards digitalization so who wouldn't say that the old-school type of Money Remittances are growing very fast, it's rather stable as well as the market is stable. Although the new channels, like all those kind of card-to-card and cash-to-card and all those digital, say, protocol are growing very fast and a fair amount of new wallets are coming from those services as well. So these are major 2 channels from where we're getting the new consumers.

[Robert Napoli:]

And last question is on the regulatory side of your business, what are you -- there's been a lot of regulatory changes over the past few years. What is your view on regulatory risk today? What are you looking for the most and where -- what other changes or do you feel like the environment is now stabilized?

[Sergey Solonin:]

Hi, Bob, this is Sergey. Well, on the regulatory change, we're working mostly right now together with other banks, we formed recently an association of banks that actually formed in the purpose of supporting new technologies in Fintech. So this Fintech association mostly will be focusing on several subjects like identification, like opening APIs, some new starts in global change system and also peer-to-peer payments, infrastructure in Russia. So we think that generally, all these tracks as soon as they're supported by the largest banks in Russia, like Sberbank, B2B bank and others are very good in general for the ecosystem, Russian ecosystem for Fintech. And as soon as we're one of these Fintech's, we will be, I hope, benefiting from those changes that we foresee. On the negative side, I don't have any information right now to say that there is something that -- as far as I know, nothing going to be out soon. So I don't see anything.

[Operator:]

Our next question comes from Ulyana Lenvalskaya with UBS.

[Ulyana Lenvalskaya:]

I have a few questions on SOVEST project. First of all, is the project guaranteed performing in line with your initial expectations in the guidance? And secondly, I wanted to know about the -- we see those -- the masters firm, advertising campaigns from Halkbank, the competitor of yours. What are the key advantages of your product versus Halkbank's, and do we see any big risks to the project because of those competitive pressures? And thirdly, what is expected advertising budget for full year? So that's RUB200-something million this quarter, what should be the total for full year?

[Sergey Solonin:]

Ulyana, thank you for the question. So on the SOVEST project, right now, the team is completely satisfied with the numbers. We're more or less in line, I think we're lagging behind, I think, 1 month right now on the plans, but the dynamics is completely the same that we were expecting. Yes, we have -- right now we have 1 competitor on the market who introduced Harwa and it's another bank's project. Generally speaking, it is more or less the same product. We had to a little bit change some of the terms to adjust it completely on to the same pricing model and everything is -- on the pricing terms is the same. The advantage for SOVEST right now is the bigger, very good group of merchants who joined the project as soon as were first and hopefully we will have generally more big chains and big merchants that are needed by our customers. So we think that this is one. In general terms, Halva is building on top of the traditional bank. So we think that we're -- our technologies are a little bit different from what traditionally you will have in the banking system. But that's I think details. In general, yes, this is a competitor. I think that this is still the option for this product on the market. So honestly, I think that it is very good to have competitor who is driving new product on the market with you because all these efforts lead to better knowledge of this type of product by the consumers. So generally speaking, I think that it is a very positive sign that someone came up and we were expecting that someone will because this was an interesting subject to deal with. And...

[Alexander Karavaev:]

So we're not disclosing the advertising budget for SOVEST. So we're just disclosing the total amount of investment that we believe will flow through our P&L in terms of [indiscernible]

[Sergey Solonin:]

Again, I can say that the biggest increase in advertising will be after our federal launch. So when we completely -- we will completely launch in summer all the regions, then we will start a more aggressive marketing campaign.

[Ulyana Lenvalskaya:]

Okay and very quick clarification question on Money Remittances volumes which grew really strongly in the first quarter. Is it really most a function of the underlying market acceleration? Or you also gained market share?

[Alexander Karavaev:]

It's primarily a function of the market growth. So we gained -- I mean, again, we have not yet seen the proper reports of the market size for Q1. We believe we gained probably 1% or 2%, but it's generally macro, I think that -- our views of now.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Anna Kazaryan with VTB Capital.

[Anna Kazaryan:]

I would like to ask 1 clarification question about Money Remittance vertical. Partially, as we see the acceleration of Money Remittance growth, it came from the introduction of some commissions for peer-to-peer payments. So I would like to ask how sustainable is this contribution? And what do you see -- what will be the growth on this vertical for the remaining part of the year?

[Alexander Karavaev:]

Yes, thank you. We believe it's fairly sustainable for -- based on the dynamics that we're noticing now. It's growth basically the [indiscernible] on SOVEST and even if they pay for it -- again, we're not providing guidance on special on separate verticals. So we, again, it's fairly difficult to provide you that numbers. But we believe that segment is generally growing very fast since we -- from a secular trends point of view, that's probably one of the most fastest growing at least for this year and next year.

[Sergey Solonin:]

And then the commission and yield is sustainable so we made a conscious choice and we think it is completely sustainable to have that.

[Anna Kazaryan:]

Okay. And then another question, could you provide any additional metrics on SOVEST, probably the number of cards issued, number of average purchases per month, something like this?

[Alexander Karavaev:]

Look, Anna, we -- I mean, not at this time. We probably will but for now it's just it's still premature. So we're still at the, let's say, testing phase. So we're not providing those. And then secondly, it will be that we have not have a competitor, [indiscernible] how else would we know how we're doing. So we're not able to share any deep data on that. But again, at this certain point in time, as soon as that project becomes complete, obviously we will publish a set of numbers.

[Operator:]

Our next question comes from Svetlana Sukhanova with Sberbank.

[Svetlana Sukhanova:]

My question would be about the new product to which was announced in the media with especially equipment. Can you elaborate -- can you elaborate please what's the current status of the project? How significant and how significant contribution do you expect the top line and bottom line from this project?

[Sergey Solonin:]

Yes, we worked with -- in this project, we work with one of the companies that is the biggest in selling the equipment for cashiers, cash registers. We work also with their competitors with the street. We work on the basis of joint venture. So we share profit with others who work just as a supplier of this service, so supplier of the payment service. So we believe that this project have a very good perspectives. But still, it's a little early to say because as far as the -- generally, the product will -- the law will come into force only in July so we will be able to say something up to July when everyone will be re-equipping their cashiers with the new cashiers and new services. So I think generally, we believe that it is good to talk about this project in the maybe beginning of 2018. So that we will already see the traction. So we already -- we'll go through the testing phase with the government, with all others. And it may have positive impact but still, the base is low so -- the product is bringing our services into off-line retail through will change their cashiers to a new one under that law, but this will happen only -- start happening in July. And most of it will -- most of the market will move to it in 2018. So we're waiting for this to start.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Sergey Solonin for closing remarks.

[Sergey Solonin:]

Thank you, Operator. So our first quarter results were very solid and provided good foundation for a more optimistic outlook for 2017 and beyond. So at this point, I would like to sincerely thank our team, the QIWI team, for their commitment, creativity and faith in the company. Thank you all. Bye-bye.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.