QIWI plc
Q3 2017 Earnings Call Transcript

Published: 16 Nov 2017

[Operator:]

Good day, everyone, and welcome to QIWI Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mrs. Varvara Kiseleva, Head of Investor Relations. Please go ahead.

[Varvara Kiseleva:]

Thank you, operator, and good morning, everyone. Welcome to the QIWI Third 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 Thursday, November 23, 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 November 16, 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 statements. 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. Thank you for joining us today. We're glad to share our third quarter results, demonstrating strong net revenue growth and robust performance of our core business, which was in line with the trends of first half of 2017. This quarter, we continued to benefit from the secular trends in our underlying markets, including the digitalization of payments. We also saw to develop our key products in order to offer our clients convenient solutions in different market verticals, especially Money Remittances and E-commerce. At the same time, during the last three quarters, we have been investing heavily in the SOVEST project. Currently, we plan to continue further with our investments in SOVEST and other projects and partnerships. Given all of the above, we believe that our performance serves as a solid foundation for future growth. We see many opportunities ahead, and we'll continue to focus on developing and executing our strategy, building wider digital infrastructure and enriching our product offering. In the third quarter, our total payment volume increased by 8% to reach RUB236 billion, driven by growth in Money Remittances and E-commerce verticals, which grew 47% and 17%, respectively, over third quarter 2016. Growth in these verticals was partially offset by decline in Financial Services and Telecom verticals. We're especially pleased with the dynamics in the Money Remittance vertical, which was under substantial market -- macroeconomic and competitive pressure last year. In the third quarter, we continued to see substantial growth in this vertical that was triggered by secular trends towards the digitalization of payments. As of September 30, we had 19 million QIWI wallet accounts, an increase of 2.5 million as compared to the prior year, resulting from our continuous efforts to grow and leverage our infrastructure. Positive volume dynamics in our key market verticals converted into strong net revenue growth. Alexander will walk you through the third quarter numbers in more detail just in a moment, while I would like to walk you through some recent developments. For the third quarter 2017, total SOVEST payments volume reached RUB879 million, up from RUB314 million for the second quarter of 2017. As of September 30, we had connected more than 20,000 retail location in both off-line and online, including some of the most well-known Russian retail chains and providers. We have also noted the intensifying competition and an increasing interest towards installment card projects from other players in the banking sector. Thirdly, I would like to provide some details in our recent transactions with Otkritie Bank. In August 2017, we have executed a series of transactions to acquire the brand software and hardware on Tochka and Rocketbank from Otkritie Bank for a total consideration of close to RUB700 million. We have also entered into a number of operational agreements with Otkritie in connection with these transactions. Currently, as part of the tendered resolution procedures, all transactions and agreements are under the review of the temporary administration of Otkritie Bank by the Central Bank. We do not expect any definite conclusion on the above-mentioned transactions and agreements, at least till the end of 2017. Acquisition of Tochka and Rocketbank assets, if approved by the temporary administration, is an important step in our strategy of developing QIWI into a digital service platform, focused on building wider digital infrastructure and leveraging our existing network. We believe that both Tochka and Rocketbank fit very well with our key products and will allow us to extend the life cycle of our existing clients. Launch of these services on QIWI platform will also help us to establish larger presence in certain digital banking niches, including digital services for small and medium businesses and deposit services for retail clients, although we do not anticipate any significant effect of these transactions on our net revenue in 2017, while they're likely to contribute around RUB700 million to our expenses until the end of this year. As far as all transactions and agreements will be under review of temporary administration of Otkritie till the end of this year, we're not in the position to provide any estimates of the potential midterm contribution of these businesses. However, we strongly believe that 2018 should be a year of investments in both existing and future projects. Lastly, as we have previously mentioned in our annual report in November 2017, our strategic agreement with Visa will terminate, given our current strategic objectives with tie-in corporations through different types of agreements to be more fruitful for both companies. We will continue working closely with Visa within the framework of separate agreements in a number of areas, including prepaid and installment card emission and development of Visa Direct service. 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, we have demonstrated strong growth this quarter, especially in our core business. Total adjusted net revenue increased by 22% to reach RUB3.2 billion, up from RUB2.7 billion in the third quarter of 2016. Total adjusted net revenue, excluding revenue from fees for inactive account and unclaimed payment, increased by 25% compared with the same period of the prior year, primarily the result of growth in payment adjusted net revenue. Payment adjusted net revenue increased 26% to RUB2.7 billion, up from RUB2.1 billion in the prior year as a result of the net revenue growth on our Money Remittance and E-commerce verticals, which grew 49% and 38%, respectively, offset by a decline in net revenue in Financial Services and Telecom verticals by 10% and 9%, respectively. Our financial results were driven both by increase in volumes, as Sergey just described, and an improvement in the payment average net revenue yield by 16 basis points year-over-year. Other adjusted net revenue increased 4% to RUB577 million from RUB557 million in the prior year, mainly because of the increase in interest revenue. Moving on to expenses. This quarter, we continued to tightly monitor cost in our core business, although we incurred substantial expense connected with the SOVEST project. Adjusted EBITDA decreased 21%, while adjusted EBITDA margin was 41% compared to 63% in the prior year. Adjusted EBITDA margin contraction primarily resulted from the increase in advertising and personnel expenses as well as bad debt, tax and office maintenance expenses incurred due to the investments in the SOVEST project. Adjusted net profit decreased by 16% to RUB1 billion from RUB1.3 billion in the prior year, while adjusted net profit, excluding net expenses associated with SOVEST project, was up by 32% 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, our Board of Directors decided to refrain from distributing the dividends, while we're incurring significant investments in connection with the launch and rollout of our new projects. We expect that throughout the next 12 months, we will concentrate on investing into our future growth, while long term, we remain committed to distributing all excess cash to our shareholders. Now onto our guidance. Based on our current performance and the trends that we see, we have raised our guidance for 2017. We expect adjusted net revenue to increase by 12% to 16% over 2016 with the expectation that there will be no material contribution from SOVEST project, Tochka or Rocketbank. Further, we upgrade net profit guidance for our core business due to strong performance up to date. Adjusted net profit, excluding SOVEST, Tochka and Rocketbank expenses, to increase by 30% to 40% over 2016. Adjusted net profit, including SOVEST, Tochka and Rocketbank expenses, is expected to decline by 17% to 27% over 2016. Although we see our third 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 is from Ulyana Lenvalskaya with UBS.

[Ulyana Lenvalskaya:]

I've got several questions. First, could you please talk about the peer-to-peer volumes and the outlook for the transactions in 2018? So should Money Remittances' growth normalize next year?

[Alexander Karavaev:]

Yes. Ulyana, thank you very much for your question. So we believe that trends will continue. So generally, we discussed several times on the previous calls, we believe that the fair amount of those volumes are connected to also small businesses collecting the payments. And we really believe this is something that this small business uses a new type of payment infrastructure. Based on current estimations, we would believe that 2018 would also be a good year for that vertical.

[Ulyana Lenvalskaya:]

Okay. Could you please tell me what is the balance of cash at the company's accounts? So what are the proceeds from STL left, given the investments into Tochka and other stuff?

[Alexander Karavaev:]

So I mean, if you talk about the short-term cash that's available for investments and we strip out all the clients, then we, as of now, are having around $50 million.

[Ulyana Lenvalskaya:]

50, 5-0.

[Sergey Solonin:]

Yes, correct.

[Ulyana Lenvalskaya:]

Okay. And maybe you will be able to talk about the number of wallets, which is growing quite healthy. What is the key driver behind?

[Sergey Solonin:]

It's primarily a two-key vertical. So first of all, it's Money Remittances that we just touched basically. Whenever kind of people feel that, that new types of digital payment are really seamless and useful, we really see a substantial inflow from wallet from that vertical and obviously, E-commerce, so it's in all the key categories within E-commerce. We really see a quite substantial inflow from the merchant side, so both from classical merchants, like AliExpress and few others, as well as operating [ph] and many other things. So to certain extent, it's more cyclical. So basically, people came back to online trades and really feel that -- again, talking about the future, we really believe that trend shall continue in Q4 and next year. So hope that helps.

[Operator:]

[Operator Instructions]. Our next question is from Vladimir Bespalov with VTB Capital.

[Vladimir Bespalov:]

So my first question would be on SOVEST. There is a good decrease in payment volumes that you mentioned. Could you provide us maybe some guidance what do you expect to happen with volumes in the fourth quarter and maybe going a little bit further into 2018? And could you maybe discuss also the negative contribution to the net profit, which you expect next year from this product? And when do you expect it to turn profitable?

[Alexander Karavaev:]

Okay. Well, thank you for the question. So if you heard about the payment volumes, they obviously are going to be increasing. So in Q3, just on quarter-on-quarter dynamics, it's more than doubled. And basically, based on the new cards that we issued as of now, I mean, SOVEST cards, we mainly believe that the trends shall continue for a number of quarters. Again, we have to further resume -- kind of experiment more. So we really serve different types of channels, different types of strategies to work this mitigation. So that's why we've made kind of slight decrease the issuance of cards in the quarter, a slight decrease. But again, so the total number of cards will expand, while the number of consumers is growing. So we really shall be expecting a substantial growth. On the negative net income contribution, so I think we were quite clear on that contribution for this year, so you may see that from the guidance. On the next year, we do not yet have any -- sorry, while we do have an estimation, but we have not completed our budgeting process. So unfortunately, as of now, we're not in a position to provide any number. Just in general, we obviously will continue to invest next year. So it shall be a substantial amount, but we will come back to you in due course for the guidance for next year.

[Vladimir Bespalov:]

Okay. And when do you expect the product to be profitable in your models, in your assumptions?

[Alexander Karavaev:]

Yes. Well, based our on model, it should break even in 2019. But again, it's fairly premature to draw any conclusions.

[Vladimir Bespalov:]

Okay. My second question would be on Tochka and Rocketbank. You mentioned that there will be expenses associated to it with your acquisition of the brands and the software. But theoretically, if we assume that the deal is rigorous by the temporary administration or whoever, are you going to recover these costs, these investments? Or how it's going to work? How do you see it?

[Alexander Karavaev:]

So actually, different types of expenses. So first of all, we obviously paid an amount for the intangible assets and intellectual property rights. So again, the transactions will be reviewed and those amounts shall be rejoined based on the law. On top of that, we have a certain investment amounts that, again, would not be recurrent, but just the expense of QIWI. But again, generally speaking, we do not believe that the gross of that transaction is very likely the scenario. [Operator Instructions]. Okay, ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.