QIWI plc
Q2 2017 Earnings Call Transcript

Published: 15 Aug 2017

[Operator:]

Good day, everyone, and welcome to the QIWI Second Quarter 2017 Earnings Conference Call. Today's call is being recorded. 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 the QIWI Second 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 Tuesday, August 22, 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 August 15, 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 statements to reflect the events that occur after this call. Please caution that 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 will begin by turning the call over to Sergey Solonin, our Chief Executive Officer.

[Sergey Solonin:]

Thank you, Varvara, and good morning, everyone. We are glad to share our second quarter results, demonstrating solid net revenue growth, as well as good performance in our core business. This quarter, we continue to see signs of improvement in the overall economic situation in some of our core markets, which we noticed earlier this year. Moreover, we are happy to see 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, and especially in Money Remittances and E-commerce. At the same time throughout the first half of 2017, we have been investing in the rollout of our new projects, SOVEST and plan to continue further with our investments in SOVEST and potentially other projects and partnerships. Given all of the above, we see our first half performance as a solid foundation for the future growth. We see many opportunities ahead and we'll continue to focus on executing our strategy and developing our new projects. In the second quarter, our total payment volume increased by 6% to reach RUB217 billion, driven by growth in Money Remittance and E-commerce verticals, which grew 58% and 13% respectively over the second quarter of 2016. Growth in these verticals was partially offset by decline in telecom and financial services verticals. We're especially pleased with the dynamics in money remittance verticals which was under substantial mico-economic gain competitive pressure last year. In the second quarter we continue to see substantial growth in this vertical that was triggered by secular trends towards digitalization of payments. The decrease in telecom market verticals was largely driven by the decline in our kiosk network, as well as high accessibility of alternative commission prepayment channels while financial services market vertical was mostly affected by lack of underlying market growth, as well as the ongoing license withdrawal campaign of the Central Bank of Russia. At the same time, growth in E-commerce and Money Remittances, as I mentioned earlier, was largely due to the shift of consumer preferences towards digital payment channels, where we believe we have one of the best product offerings in the market. As of June 30, we had 18.5 million Visa QIWI Wallet accounts, an increase of 2.3 million as compared to the prior year, resulting from our continuous efforts to grow and leverage our infrastructure. Volume dynamics in our key market verticals converted into solid net revenue growth. Alexander will walk you through the second quarter numbers in more details just in a moment while I would like to walk you through some recent developments. For the second quarter 2017, total SOVEST payment volume reached RUB314 million. The marketing campaign and the rollout of the project started in January 2017 in Moscow, and currently we're in the process of federal rollout and the aim to establish federal coverage by the end of the year. As of the second quarter 2017, we have connected more than 11,000 retail locations in both off-line and online, including some of the most well-known Russian retail chains and providers. We have also noted that there is substantial interest towards installment card projects from other players in the banking sector, which means that the value solution is recognized by the banking sector and from our point of view, can provide support in terms of consumer and market specification. Currently, our plans are focused on fine-tuning of our IT infrastructure, risk management practices and make business model of the project, broadening our network of partners and developing the product in order to provide our customers with the most attractive product position. 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. Although investing heavily in our new projects have demonstrated strong growth this quarter primarily due to [indiscernible] of our core business. Total adjusted net revenue increased by 12% to reach RUB2.9 billion, up from RUB2.6 billion in the second quarter of 2016. Total adjusted net revenue excluding revenue from fees for accounts and unclaimed payments increased by 17% compared to the same period in the prior year, primarily as a result of growth in payment adjusted net revenue. Payments adjusted net revenue increased 23% to RUB2.5 billion, up from RUB2 billion from the prior year. As a result of the net revenue growth in our Money Remittance and E-commerce verticals, which grew 58% and 31%, respectively, partially offset by a decline in net revenue in Financial Services and Telecom verticals by 12% and 15%, respectively. Our financial results was driven both by increase in volumes as Sergey just described, and improvement of the payment average net revenue yield by 16 basis points year-over-year. As adjusted net revenue decreased 24% to RUB463 million from RUB607 million in the prior year, mainly because of the RUB68 million net loss of the SOVEST project as well as a decline in revenue from accounts and payments, partially offset by an increase in interest revenue. Moving on to expenses. This quarter, we continue to tightly monitor our and our core business although we have incurred such expenses connected to our SOVEST project. Adjusted EBITDA decreased 16% while adjusted EBITDA margin was 47% compared with 63% in the prior year. The adjusted EBITDA margin contraction primarily resulted from the increase in the personnel expenses, as well as bad debts expenses incurred due to the rollout of the SOVEST project. Adjusted net profit decreased 15%, RUB1 billion [indiscernible] on RUB1.3 billion in the prior year while adjusted net profit excluding net expenses associated with the SOVEST project was up by 31% as compared to the previous year. Adjusted net profit was largely affected by the same factors as adjusted EBITDA. Finally, as you've seen in our earnings release, 4 determination of the second quarter 2017 financial results. Our Board of Directors approved a dividend of $0.21 per share. In the second half of 2017, we have incurred certain significant investments in connection with the launch and rollout of our new project. Pacing current investment as well as our future funding requirements for the new project, capital expenditures for potential M&A, written or right to review, modify or suspend our distribution and determination to pay dividends in the third quarter and going forward is subject to the capital needs of the company, including the company's strategic plan and growth initiatives. Now on to our guidance. Based on our current performance and the [indiscernible] reiterate our guidance for 2017. 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 increased by 12% to 17% over 2016 while adjusted net profit, including SOVEST expenses, is expected to decline by 15% to 30% over 2016. Although we see our second quarter results as a solid foundation for future growth, certain other factors remain beyond our control and hence, we reserve 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:]

Just the SOVEST, Sergey, I mean, obviously, taking a lot of investment. You're getting some momentum and you're getting acceptance. But how confident are you at this point in the business model for SOVEST? And the likelihood of success? And what is your outlook for continued investment in that business as we move through '17 and to 2018?

[Sergey Solonin:]

Bob, thank you for the question. Well, in general, we are happy with the dynamics of the project. So we see good trends on total volumes and so we think that on average, every quarter, we will be more or less doubling the volumes with some acceleration. On the business model side, we're still working hard on optimizing the model and on doing a lot of work on the experiments. So I think that we will still be in the experimental phase throughout 2017, so we will do some experiments with the clients, with the commissions, limits and et cetera. We're also developing still in the evolution of our distribution channels. So we've just opened, we are opening El Dorado now and EU and other retail partners. We are working on the risk management models, so we're improving our risk management side. And well, it is still, I think, a little premature to make conclusions as we don't have enough real statistics from the project. But we will continue to develop the projects and we will provide an update as soon as it is possible. In general, I'm quite happy with the project and we are moving forward.

[Robert Napoli:]

And just follow-up question on the segment trends, that the payment volume by segment. Obviously, E-commerce and Money Remittance posting some good trends with nice revenue yields at E-commerce. The -- as we think about next year, we really, is that going to be those 2 segments are going to be the growth drivers and Financial Services and Telecom are going to continue to become less important? And is there any change in the mix of E-commerce between physical goods and digital virtual?

[Alexander Karavaev:]

Bob, it's Alexander. Thank you for your questions. I mean, that's right, we would believe that E-commerce and Money Remittance will be the growth drivers in '17 -- in '18 as well. On Telecom, yes, as well, we do not expect any substantial change to the trend so we may stabilize the flows, but we would not be expecting growth. On Financial Services, it's still kind of in the dark so we feel that, that segment generally I mean, from a market economy point of view, has stabilized. We feel that there's a chance that the consumers, they are migrating from small private banks to large banks and governmental banks. If and when that will result in an increase in the segment, we don't know. We, again, we quarter-on-quarter previously, we feel like it's stabilized. In Q2, we have not seen any further degradation although compared to Q1, but again, let's see what happens in Q3. On the mix, no, we do not yet see any substantial change in the mix of E-commerce. Still in our portfolio, the majority of volumes is represented by the goods, but we see have a lot of, kind of thinking, I mean, from [indiscernible] that are the classical E-commerce players, how they love to act on the Russian market base. You have probably seen in the press there is a kind of a joint venture between Alibaba and Zurich Bank, but we don't know, I mean when, how that will play out, but bank had issued a press release, that they are going to be making a joint venture [indiscernible] a lot of things is happening around this E-commerce segment. Generally, we would expect that portion to increase, but we are not really in a position to make any statements of when that's going to be happening.

[Operator:]

Our next question comes from the line of Ulyana Lenvalskaya with UBS.

[Ulyana Lenvalskaya:]

My first question will be on SOVEST, a follow-up. Could you please comment on the financing of the project, I mean, the balance sheet for the partnership, how should we think about this for 2017 and more importantly, for the future?

[Alexander Karavaev:]

Yes, well, look for '17, you've seen we published the amount of total outstanding loans, the amount is not different. We like to it going to continue to finance that by our own cash this year. Next year, we are having several options we discussed them with you, it can be bond or syndicated loans from the banks. So we have like several options. We have not yet decided, which one would be the best one. Sorry, yes. Well, one of the initial options is also on the table when we determine the product throughout other banks. So this is still in discussions and we think that next year, we will show up some projects on that as well.

[Ulyana Lenvalskaya:]

So the partnership with the banks, is the key priority, right?

[Alexander Karavaev:]

Well, it's -- right now, it's one of the options so we don't think that we are ready still on this year because to do that, we need to have a very sounding business model for the banks. So I think next year, we will be able to show up something and we have preliminary agreements with some of the banks to do that.

[Ulyana Lenvalskaya:]

And if I may, just to follow-up again on the volumes in Financial Services. Now we have like 4 consecutive quarters of decline in volumes in this segment. Well, the market has stabilized. The Central Bank data suggest like 0 growth. Should we think about like this segment as more structural decline for you rather than cyclical and being the next Telecom segment?

[Sergey Solonin:]

Well, I wouldn't say so. Right now, we see a very -- some of the banks in our portfolio who are growing. And some of the banks who are falling and the difference that we see today is mostly generated by those banks, which are closing. So in -- I definitely think that in those medium-sized banks, we have a market share bigger than in a large governmental bank. So if you look at it from this perspective, it would be completely structural. And those banks who are growing in loans, we see them growing in our portfolio as well.

[Ulyana Lenvalskaya:]

And sorry, another one, if I may. There was an announcement about the corporation with Tochka. How should we think about potential volumes for you or what are the synergies between the two?

[Sergey Solonin:]

Well, I think, it's a little bit too early to say. We're talking about this for a little bit more than a year. And right now, we are just launching these services and doing some work on that side. So for us, it is an interesting segment, so we're -- we want a service that can be used and provide broader services for our clients, for merchants and for partners. And also, we think that Tochka is a perfect example of a digital banking service that also fits very well into our portfolio. So I think it's a little bit too early to say how big volumes will be there and so we have to start first.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Vladimir Bespalov with VTB.

[Vladimir Bespalov:]

I have a couple of quite technical questions. First, on E-commerce. Your yield in E-commerce is quite high and it has been increasing for 4 consecutive quarters. So should we see the current level as sustainable going forward? Or it's just driven by one-offs? This is the first question. The other question is on your kiosks carrying terminals. The network is continuing to shrink. Is this due to the -- to your strategic focus probably shift into some other areas and you're paying less attention on this trend, this network is less important for your business? Or there are some other reasons behind this? And the second one is, if I may on SOVEST also, a brief one. There is a negative contribution to net adjusted revenue from SOVEST, but when do you expect this to change and this contribution to net adjusted revenues to become positive? Or is it going to be this year or later?

[Alexander Karavaev:]

Okay, so on SOVEST. Yes, we expect that next year, we will be on the positive side of net revenue. Today, we're negative because we invest a lot of money into product call centers and [indiscernible]. So we'll see next year, positive net revenue from SOVEST, I believe. Then about the number of kiosks, what we see what is happening is that more and more clients -- our clients, sorry, are going for the wallet solution, so more and more terminal turnover is connected to with the top up of the wallet through terminals. And also we see very intensive growth in cards, so when our clients top up for their wallets by cards, so in general, what it brings for our agents is diminishing commissions. So when you have on the agent side, the commissions that are falling, what happens is that they optimize the network so they decrease a little bit, decrease the quantity of terminals and have more or less the same revenues from those terminals that stay. So from our perspective, we believe that terminal network and this was one of the reasons why we changed our accounting segments. So for us, it is more and more service for our wallet customers. So it's becoming kind of a service for our customers, for our wallet customers that they have throughout Russia. And with that, we also have in mind some optimized figures on a number of kiosks, but we -- I wouldn't say that I'm sure about where it will go the next quarter or 2. And your first question was?

[Vladimir Bespalov:]

On E-commerce and yields.

[Alexander Karavaev:]

Yes, look, I mean, this general trend is that we are still gaining the return yields due to the structural shift so we are gaining more kind of first of all, subsegments in that. So whether or not it is sustainable, although, it still depends on how much we will develop so in the short and medium-term, we believe these yields are more or less sustainable. They can kind give a drop just a little bit. In the longer term, we just need to see, I mean, generally, we are believers that the -- I mean, payments will become modified and enhance that yields will go down in the long-term. I mean, went to what extent that will happen is still unclear.

[Operator:]

[Operator Instructions]. Our next question is a follow-up from the line of Bob Napoli with William Blair.

[Robert Napoli:]

A follow-up on Bank, the investment in QIWI. They attempted to do, they were going to buy stock at 28, and then I think just bought -- decided it made more sense to buy it in the open market, but they become a much bigger shareholder. How are you -- what is the -- what are your thoughts on the, a partnership with them? Or their ownership in QIWI and what that means over the medium-term?

[Sergey Solonin:]

Well in generally, I look at the Otkritie partnership very positively, so I think that, we signed a partnership in 2015, and we have been discussing many different ideas and projects that can generate synergies for both QIWI and Otkritie there, so some of these ideas, as you know, Tochka, for example, are being discussed lately, and we see many potential synergies between digital businesses for Otkritie group and QIWI. So we are still in discussions of several projects, however, it's still too early to go into any details. In general, I feel that Otkritie is a good partner. I am sorry that their offer didn't go through. But well, we'll see what will be happening further on.

[Robert Napoli:]

What types of thing are you working on together? I mean, how is that partnership -- how would that work? I mean, what value do they bring to the table?

[Sergey Solonin:]

Well, we have for [indiscernible] value of our distribution network. So we plan to use terminals so some of the SMB use, well, from Otkritie's side, they have some digital products that they can pour into the QIWI platform and QIWI can bring to the table a wealth of experience in IT and managing the projects. So in general, this is both ways, we're still in a lot of talks around different projects. So I think, we'll see where it will go.

[Robert Napoli:]

Okay. And last question. Just on SOVEST. Has the product -- how are you tweaking the product? What has surprised you? What is working? What have you done to adjust? What is SOVEST, at the end of the day, what is SOVEST going to be?

[Sergey Solonin:]

Well generally, in the very general terms, in terms of positioning, we're still at the same, at the same place. So we think that it's a very good project -- product for clients to have these installments for free and very good exploiting our abilities, capabilities to work with a lot of merchants. So we're taking, as you know, commissions from the merchants so we're not -- we're not transferring these commissions to our clients. So generally, it is a competing special segment, competing mostly with, I think, offerings with those banks. But in general, create clients are focusing mostly on getting money from clients through interest. And our product is focused on bringing clients to merchants so that merchants can give additional commissions to us, so we compensate the costs of funding by that. So when we see also that throughout our launch, we see already two payers, two banks who are trying to start playing in the same field. So generally, we think that this also shows you that our model is quite interesting and it is being through examination of other banks. So I think it is a positive thing because in general, we are trying to push a new category on the markets. So and this new category is accepted by several banks already. So our perception that it goes very well. On the business model side, the product is quite complex in terms of the -- a lot of levers that change in numbers so we are playing with different so it's quite difficult to predict that a certain model will work long term. So we're doing a lot of experiments, as I said, with tariffs, with the merchants, with limits, with approvals so, so many factors that influence the final results. So we really -- we're on track. I'm sure that we will get there, but we're still trying to find a solution and we're on track with that, so we're moving forward.

[Operator:]

Mr. Solonin, there are no further questions at this time. I'll turn the floor back to you for final comments.

[Sergey Solonin:]

So thank you very much for joining us today. See you next quarter. Thanks, and bye-bye.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.