QIWI plc
Q4 2018 Earnings Call Transcript

Published: 28 Mar 2019

[Operator:]

Good day, everyone, and welcome to Qiwi Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn 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 fourth quarter and full year earnings call. I'm 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, April 4, 2019. 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 March 28, 2019. 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 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 consist of 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. Thanks for joining us today. Today, I'm excited to share our fourth quarter and full year results with you. This year, we demonstrated outstanding performance, especially in our payment services business, which delivered 31% segment net revenue and 26% segment net profit growth for the full year of 2018. Moreover, growth in our payments business was accelerating throughout the year. And in the fourth quarter, payment services segment demonstrated 35% segment net revenue and 28% segment net profit growth. We also reached an important landmark and surpassed RUB1 trillion in volumes this year. I want to thank my team for this incredible achievement. Our impressive growth was driven by strong performance in our key areas, payment services for betting related merchants, digital money remittances and projects we developed, self employed and B2B, B2C customers as well as by a more general expansion of our payments ecosystem. On top of that, our SME segment, which we operate through Tochka multi-banking platform showed strong growth trends. And glad to note [ph] that we were able to reaccelerate our business this year and I believe that we have a strong foundation for future growth. We will continue to enhance our key products and use cases and develop new projects in order to offer clients in our key markets and largest suite of convenience solutions and services. In 2018, we have invested heavily in the development of our ecosystem, including our retail and SME focused financial services project, service to Rocketbank and Tochka. I'll walk you through some latest developments in the corresponding segment in just a moment. We believe that our performance provides a solid foundation for the expansion of our ecosystem. The significant cash flows that are generated by our core payment business support our strategy and allow us to carry on within that new business lines and projects in order to further build up our ecosystem, diversify our operation, prolong the lifecycle of our clients and ultimately secure the long term growth prospects of the company. Now on to some operating highlights, for the fourth quarter of 2018, Our payment services segment volume increased by 31% to reach RUB329 billion, driven by significant growth in e-commerce and money remittance vertical, which grew 80% and 46% respectively. The growth was largely driven by the secular trends and development of our core categories, including sports based market, headed by our Football World Cup 2018 reinforced by the expansion of product offering for the betting merchant, to roll out our project we developed for our partners as part of our B2B, B2C strategy, development of self employed use cases and expansion of our B2B ecosystem. Our total consumer financial services segment payment volume reached RUB5.8 billion for the fourth quarter of 2018 and 16 billion for the full year. As of December 31, 2018, we have issued over 700,000 service cards and built a credit portfolio of over RUB5 billion. This year, we have significantly advanced in development and scaling our service project. We also significantly enhanced our service product offering by introducing a number of consumer paid value added options. Moreover, we have further improved in many key operating dimensions. We have built up and optimized our distribution channels, continuing to grow consumer acquisition cost and improved our cost of risk, reaching positive customer unit economics. We see an ample room for development going forward and have an impressive product pipeline for 2019. We will further focus on development of the SOVEST value proposition and testing multi-bank platform. Our SME segment, which we developed through Tochka multi-bank platform together with Otkritie Bank continued to demonstrate robust operating and financial performance in the fourth quarter of 2018, while we were investing in acquiring new customers and increasing market share. Positive volume dynamics in our key market verticals was converted into strong payment services segment net revenue growth and together with our SME segment, contributed to the overall robust performance of our business. Alexander will walk you through the fourth quarter numbers in more detail just in a moment, while I would like to walk you through some recent developments. This quarter, we have finalized the transfer of Rocketbank clients and processes to QIWI Bank. As of December 31, 2018, Rocketbank had over 270,000 active clients. Those transfers from complete and newly acquired were over RUB12 billion of current account balances. We believe that Rocketbank has a unique proprietary product offering and profound expertise in areas like digital marketing, IT targets and exciting audience, the millennials and has a good potential to increase our ecosystem. We are currently developing the strategy of Rocketbank, assessed the market and certain hypotheses regarding consumer behavior and preferences. We aim to provide the update of Rocketbank mid-term strategy by the end of the year. Last but not least, I would like to take the chance to thank Alexander, our CFO, who will be leaving the company this May, for his excellent work, dedication and all the contributions he made to the company. I am very glad we have shared this journey. Moreover, I would like to say that we plan to announce Alexander's successor promptly to ensure a smooth and efficient transition. With this, I will return 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. Just, I would like to provide an update on the segment presentation of our business. Based on our annual results, we have revised organizational structure and now distinguish four reportable segments as well as corporate and other category. Our key segments include payment services segments, represented by our core payments business; consumer financial services segment, represented by our service project, small and medium enterprises segment represented by the Tochka business and Rocketbank segment. Now, on to our numbers. Fourth quarter 2018 total adjusted net revenue increased by 41% to reach RUB5.8 billion, up from RUB4.1 billion in the fourth quarter of 2017. The increase was mainly driven by payment services and small and medium enterprises segment net revenue growth, slightly offset by negative net revenue contribution of Rocketbank segment. Payment services segment net revenue increased 35% to reach RUB4.7 billion to compare with 3.5 billion in the prior year. Payment Services payment adjusted net revenue increased 37% to RUB4.1 billion, up from RUB3 billion in the prior year. As a result of the net revenue growth in our ecommerce and money remittance verticals, which grew 54% and 37% respectively, offset by decline in net revenue in financial services vertical by 8%. Our financial result in this segment was driven both by increase in volumes that Sergey just described and the improvement of the payment average net revenue yield by 7 basis points year-over-year, as a result of shift in product mix, offset by slight yield decline in most categories. Payments services other adjusted net revenue increased 26% to RUB623 million as compared to 495 million in the prior year. Consumer financial services segment net revenue was 199 million for the fourth quarter 2018 as compared with RUB35 million in the fourth quarter of the prior year, showing the growth of the service project underpinned by the introduction of new consumer paid value added option. Net revenue of the small and medium enterprises segment increased by 83% and was equal to RUB1.1 billion in the fourth quarter 2018 compared with 0.6 billion in the prior year, showing attractive growth of the Tochka business. Although the joint stock company Tochka has been established in July 2018, the business operations of the new entity were not launched until February 1 2019 due to the routine legal procedure. But we continue to recognize Tochka project net revenues, which include mostly Tochka revenues from the formation and technology service agreements with Otkritie Bank, for providing service to Tochka clients to prepare their accounts for Otkritie Bank in full for the fourth quarter and full years 2018. We will begin accounting Tochka as an equity associate and correspondingly de-consolidate Tochka’s revenues in the information and technology service agreements with Otkritie Bank, starting from February 1 2019. Moving on to expenses, strong operating performance of our payment services business has continued to generate substantial cash flow, supported our investments in the development of our new project. These being said, adjusted EBITDA increased 53% to RUB1.5 billion, up from RUB1 billion from the prior year. Adjusted EBITDA margin was 25% compared to 23% in the prior year. Adjusted EBITDA margin expansion primarily results from adjusted net revenue growth, offset by several factors, including the increase in personnel expenses and related taxes, excluding effect of share-based payment, higher SG&A compensations put in place in July as well as increase in client acquisition and advertising expenses, all incurred mostly in connection with the developmental of the service in Tochka project as well as the acquisition of Rocketbank and credit loss expenses incurred due to scaling up of the SOVEST project. Group adjusted net profit increased 58% to RUB1 billion, up from 0.6 billion in the fourth quarter of the prior year. Adjusted net profit was largely affected by the same factors as adjusted EBITDA. Payment services segment net profit increased 28% to RUB2.6 billion compared to RUB2 billion in the prior year, driven primarily by Payment services segment net revenue growth. Consumer financial services segment net loss was 538 million in the fourth quarter 2018 as compared to a net loss of RUB647 million in the same period of the prior year, resulting from the expansion of the operation of the SOVEST project and improvement of user economics as Sergey previously mentioned. SME segment net loss was RUB281 million as compared with 64 million in the fourth quarter 2017 , driven mostly by loss recognized on the set up of associate in the amount of RUB267 million, resulting from the set up and launch of Tochka platform operations to just the company Tochka, our current entity with Otkritie Bank. Rocketbank segment net loss was RUB584 million for the fourth quarter 2018 as compared to a net loss of RUB309 million for the same period in 2017. The net loss was primarily driven by expenses incurred in connection to this transfer and operational launch of Rocketbank incurred, including primarily personnel expenses as well as client acquisition and marketing costs. Finally, I would like to provide a brief update regarding our dividend distribution intention. As you saw in our earnings release, our Board of Directors refrained from distributing the dividend for the fourth quarter and full year 2018. However, aiming to promote transparency in regards of our dividend distribution practices and considering our expectations about the performance of the group as well as our anticipated level of investment from 2019, the board decided to provide the dividend guidance for 2019 and set a target dividend payout ratio for the corresponding period. In accordance with the decision of the board, the company aims to distribute 60% to 85% of its adjusted net profit for 2019, starting from the first quarter of 2019. The board of directors reserves the right to distribute the dividends on a quarterly basis, as it deems necessary so that the total annual payout is in accordance with the target range provided, although the payout ratios for each of the quarters may vary and be outside of this range. It remains the long-term intention of the company to distribute all excess cash to the shareholders. Now, on to our guidance. Firstly, I would like to emphasize certain accounting changes and assumptions that are embedded in our 2019 guidance. We will stop recognizing part of Tochka revenues associated with information and technology service agreements with Otkritie Bank for providing services to Tochka clients that have their accounts with Otkritie Bank starting from February 1, 2019 after Tochka business is transferred to Joint Stock Company Tochka. Such revenues were recognized in full for the full year 2018; however, they will only be recognized for one month in 2019. For the avoidance of doubt, only the revenues related to Tochka clients that have their accounts with QIWI bank will be recognized as QIWI group revenues in 2019. We will correspondingly account Joint Stock Company Tochka as an equity associate going further. Further, we believe that the financial results of Rocketbank as well as underlying business trends and targets of this segment will be in line with the first half of 2019 throughout the year, and thus we include the associated full year forecasts in our guidance. However, we reserve the right to adjust the Rocketbank strategy and corresponding financial forecasts for the segment throughout the year based on the results of our review of Rocketbank strategy. Given all the above, we expect group adjusted net revenue to increase by 0 to 8% over 2018. And I would again stress that the accounting perimeter of revenue recognition in 2019 differs from 2018. Payment services segment net revenue to increase by 10% to 18% over 2018. Group adjusted net profit to increase by 15% to 25% over 2018. While payment services segment net profit is expected to increase by 8% to 16% over 2018. Although this year 2018 result was a solid foundation for future growth, [indiscernible] 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 Cris Kennedy with William Blair.

[Cristopher Kennedy:]

Hey, guys, thanks for taking the question. And Alexander, best of luck in the new opportunity. Sergey, I just wanted to follow up on SOVEST. You mentioned, you have positive unit economics in that business? And can you talk about the long term margin opportunity in SOVEST and kind of the roadmap for that? Thank you.

[Sergey Solonin:]

Sorry, can you repeat? I missed half of your question.

[Cristopher Kennedy:]

Can you talk about the long term margin opportunity in SOVEST and the roadmap to get there?

[Sergey Solonin:]

Okay. So, initially, we organized SOVEST on a presumption that we will reach a certain number of clients that will lead us to have a substantial part -- portion of the revenue for the merchant to be on the SOVEST behalf. So, for us, we thought that it will be around 10 or more percent of the revenue stream should belong to SOVEST. So with that, we planned that our average discount for SOVEST on the merchant side would be around 12% [ph]. And we're not there. So we're moving very slowly and because of the competition right now with [indiscernible], it seems that it is not very obvious if we were to reach this 5%. So, we started to do a different program that is based on different services, additional services that we give to the consumers, so that we have additional revenues from this stream. And today, if you look for today, we're much more – the project looks like much more like have to pay or firm in US, maybe that could be a good comparable to where we're in today. And also the average margins will be more or less the same, that’s how we think going forward.

[Operator:]

Our next question is from Vladimir Bespalov with VTB Capital.

[Vladimir Bespalov:]

Hello, congratulations on good results and thank you for taking my questions. My first question will be on Rocketbank. You mentioned that you developed the business strategy for this effort by the end of the year. But for the first half of the year, how much in net loss this business is going to generate, do you expect any revenue streams, maybe you could provide some color on that? And the second question that I have is on your guidance here, it's actually guiding that the margins in the payment services will be going down a little bit, given that the revenue trend probably looks stronger than the net income trend. So maybe you could also provide some color on why do you expect this deterioration of margins and why the growth is slowing down that significantly compared to let's say, to the fourth quarter of last year.

[Alexander Karavaev:]

So, thank you for your question. This is Alexander. So on Rocketbank, so we expect to have a net loss of Rocketbank of slightly more than RUB1 billion for the first half of the year. On the payment services, we don't really expect a substantial deterioration of yields. We just expect them to be stable for a while and longer term, it’s likely going to be declining, actually in line with the general commercialization of payments. But this actually historically was taking kind of lot of time and that's what we expect going to be happening in the future. And I'm sorry, I think I missed your third question.

[Vladimir Bespalov:]

It was on the slowdown of the revenue trend, if the growth that we've seen over the past several quarters, it was extremely strong, but the guidance for the full year implies that it will slow down quite significantly and maybe you also could provide some color on the trends in the first quarter, you guys were at the end of the quarter?

[Alexander Karavaev:]

I mean, generally, we [indiscernible] and again, we, as of now, would love to be – to continue to be conservative. Our kind of loss of this year in Q1 [indiscernible] still too premature to judge how the value will go, but I mean, in general, the trends from Q4 and from last year continue, both on the consumer engagement and in market trends. So I hope that is helpful.

[Sergey Solonin:]

And I will add that, actually, we really stopped the marketing activities on Rocketbank before we approved the strategy on the board. So we tested that all the mechanisms are working well. So as soon as we agree, we will start the campaign again and it will be -- it should be better, but before we agree with the strategy, we are putting conservative numbers right now.

[Operator:]

Our next question is from Svetlana Sukhanova with Sberbank.

[Svetlana Sukhanova:]

Good afternoon, everyone. A quick follow-up on SOVEST. First, on number of cards, do you dispose number of service cards issued?

[Sergey Solonin:]

Yes, we do it, so it's more than 700,000 cards as of the end of the year.

[Svetlana Sukhanova:]

700,000 cards at the end of the year. Thank you very much. My second question would be on service bank accounting. Since you made this multi-bank service model with [indiscernible] do you plan to the consolidated service and change accounting of it or not yet, as you need more partners to change accounting for multi-bank model.

[Sergey Solonin:]

No, actually no, I mean, we still continue to onboard a substantial part of first operation on to QIWI Bank. But I think the accounting will change as such if and when the multi-bank operations will gain a lot of traction, for real change in the way that we only going to be having just a part of the revenue, not the full revenue because of the associated cost of the revenue will go to the bank partner and a half of the cost essentially for the bank, something like handling cost and cost of risk will be taken by the bank. But given the deterioration [indiscernible] so we do believe that we will see a lot of accounting changes in this year at least.

[Svetlana Sukhanova:]

Very clear. Thank you very much. Can you please disclose how much, what's the amount of real cash, which you had on your balance, net revenue?

[Alexander Karavaev:]

Yeah. [indiscernible] 100,000, million [ph].

[Svetlana Sukhanova:]

RUB100,000 million.

[Alexander Karavaev:]

No, no, dollars.

[Svetlana Sukhanova:]

Dollars, okay. 100,000. Clear. Thank you very much. And what kind of investments should we anticipate in service in 2019?

[Alexander Karavaev:]

Well, we don’t, I don’t think we disclosed this number separately. It’s only a few billion rubles, but it’s really left in 2018, sorry.

[Svetlana Sukhanova:]

So if I heard you correctly, because line is not that good, you do expect investments in service in the current year around last year amount of investment, have I got you right?

[Alexander Karavaev:]

Yeah. Slightly less. So 2018 – correct.

[Svetlana Sukhanova:]

Slightly less. Understand. Thank you very much. And can you help us betting services, how much was it either of total payments of payment services or can you give us approximately the size, the significant part of the payment business as of now? Betting business, I mean, betting business?

[Alexander Karavaev:]

It’s a substantial part. It’s, I mean, it’s involved the payment gateways, it’s just around half of our business.

[Svetlana Sukhanova:]

Half of the payment business, in terms of payment volumes range of what? Is it half of ecommerce business or half of payment services business? Apologies.

[Alexander Karavaev:]

Half of payment services business.

[Svetlana Sukhanova:]

Payment services business. Very clear Thank you very much. Those are all my questions.

[Operator:]

[Operator Instructions] Our next question is from Andrey Mikhailov with Sova Capital.

[Andrey Mikhailov:]

Thank you very much for the call. I have a number of questions. I'll ask them one by one. The first one is on the breakeven potential of the new products, if you could update us with your plans for SOVEST and Tochka breakeven and on Rocketbank, I assume there are no specific plans right now.

[Sergey Solonin:]

On Rocketbank, we only have the guidance for the full year, but we faced all these assumptions that the Rocketbank business as a whole has kind of shaped up now. So, but I mean, we are in the process of performing certain experiments around the consumer behavior and the unit economics. So this may change throughout the year. And this is something that we want to be kind of taking for the few months to come, likely going to announce the [Technical Difficulty]

[Andrey Mikhailov:]

Thank you very much. And SOVEST and Tochka, if possible, any updates since the Investor Day on the periods and they can breakeven?

[Sergey Solonin:]

Tochka is already in the breakeven. So I mean, it’s going to be breakeven this year around that for the full year. And going further, it will be profit making. Again, we discussed it several times, I mean, the unit economic is working just fine in Tochka so their operation is our size for concurring the market share. SOVEST, we expect to break even 2019.

[Andrey Mikhailov:]

Okay, thank you. So that's 2020, right. That's better than your previous expectations for 2021, if I'm not mistaken?

[Sergey Solonin:]

I think we were guiding for ’19 and then we changed to ’20.

[Alexander Karavaev:]

Okay. So it is really dependent on the marketing project, how it will go, because right now, we have only few banks and some banks in line and it depends how fast this project will go, but right now, we're guiding for 2020.

[Andrey Mikhailov:]

All right, thank you very much. My second question is on Rocketbank, there were perhaps, there was a press release, I think, or maybe even a presentation by the new Rocketbank CEO who still have a few plan to launch the products based on Rocketbank platform this summer. Could you please elaborate on that if possible?

[Sergey Solonin:]

Yes. We hired [indiscernible] who was a former employee of Rocketbank as the CEO of Rocketbank and we really launched a new product that was jointly made in QIWI and Rocketbank and I think there are a few more products to come. So this year, we will be showing up some new things and interesting products.

[Andrey Mikhailov:]

Thank you very much. I have to ask whether any specific plans for the loan book on the Rocketbank, stemming from Rocketbank this year for loan book growth?

[Alexander Karavaev:]

We don’t have any specific plans.

[Andrey Mikhailov:]

Okay. Thank you. And my last question is on the balance sheet structure, with the heavy influx of customer account and deposits now, I was expecting you to invest more in to debt securities, and debt securities one and the balance hasn’t expanded as much. So it seems that this customer, the product inflow was mainly direct into cash and cash equivalents. Do you expect this to change?

[Sergey Solonin:]

Yeah. Right now, we are discussing different options, but not, it will not change materially the result, so yes, we are internally are expecting different options.

[Operator:]

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.