QIWI plc
Q2 2016 Earnings Call Transcript

Published: 11 Aug 2016

[Operator:]

Good day, everyone, and welcome to the QIWI second quarter 2016 earnings conference call. Today's conference 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 QIWI second quarter 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, August 18, 2016. Access information for the replay is listed in today's earnings press release, which is available on our Investor Relations Web site at investor.qiwi.com. For those listening to the replay, this call was held and recorded on August 11, 2016. 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'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. In the second quarter our total payment volume decreased by 0.3% and was equal to RUB202 billion, driven by mix trends across market verticals with growth in E-commerce financial services and money remittance offset by declining volumes in Telecom and other market verticals. As of June 30, we have 16.2 million Visa QIWI Wallet accounts, a decline of 0.8 million as compared to the prior year, resulting from lower marketing spend. The decrease in the kiosk network in Russia in the second half of 2015 and overall economic downturn affecting consumer activity. Our physical distribution network continues to be negatively affected by strict regulations of agents business as well as adverse market conditions. And as of June 30, 2016, we had around 165,000 kiosks and terminals, including Rapida physical distribution points. Turning to our financial results. In the second quarter, total adjusted net revenue increased 4% year-over-year, reaching RUB2.6 billion. Payment adjusted net revenue was up 7%, driven by payment volume growth in our major market verticals offset by decline in volumes in Telecom and other market verticals, as well as decrease in net revenue yields in Financial Services market vertical. We continue to see pressure on our volumes in Money Remittance vertical, while shift in migration trends contributed to the decrease in demand for Remittance Services and extensive banking license through occasions by the Central Bank of Russia negatively impact the reach of contact acceptance network as well as in Telecom and other verticals, resulting from the contraction of our physical distribution network. Although, the consumer spending in Russia is still under pressure, we see strong trends in our E-commerce market vertical. I believe that we will continue to successfully execute our strategy and penetrate this diverse and technological market by offering demanded solutions to our customers and merchants. Adjusted EBITDA increased 11% in the quarter, primarily due to increase in adjusted net revenue. Bad debt effects, that Alexander will tell you more about shortly and efficient cost controls that we’ve implemented. Adjusted net profit grew by 23%. Further, I’d like to provide a brief update on our mid-term strategy. Although we see our payment business with unique infrastructure as a core of our future growth, and are committed to providing our merchants and customers with the most advanced and convenient technological solutions, we believe that any company engaged in Fintech market should constantly evolve and innovate. Lately, we’ve been evaluating different fields' adjustment to our core business in order to envision new products and services, where we can leverage our existing infrastructure in competence to the largest extend. Our strategic focus for the next three to five years, will be disrupting to consumer finance market with technological solutions by focusing on our existing as well as new users, providing unique affordable convenient infrastructure solutions fueled by cutting edge technology and rolling out successful financial models in our core markets. We believe that our market currently lacks easy to use consumer friendly solutions on both sides, investing money and obtaining money. We believe that we will be able to offer a diversified range of products that will satisfy the needs of our clients and given them access to services and opportunities that they previously lacked. We will follow up with product updates in the second half of 2016. 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. As Sergey just mentioned, we delivered stable financial results this quarter. Total adjusted net revenue increased 4% year-over-year, amounting to RUB2.6 billion. Total adjusted net revenue, excluding revenue from fees for inactive account, decreased 3% compared to the prior year. Payment adjusted net revenue increased 7% to reach RUB2 billion, up from RUB1.9 billion from the prior year, a result of the net revenue growth in our Money Remittance and E-commerce verticals, which grew 28% and 23%, respectively, offset by continued decrease in net revenue in Financial Services and Telecom verticals by 9% and 25%, respectively. While we see great potential in our key verticals, we believe 2016 will continue to be challenging. Our financial results were driven predominantly by payment volume growth resulting from consolidation of Contact and Rapida, offset by decreasing net revenue yields in Financial Services market vertical and decline in volumes in Telecom and other market verticals. Our payment net revenue yield has increased year-over-year as we’ve seen a substantial improvement in our yields in the last three quarters, resulting from our efforts to increase the yields of the businesses that we acquired and shift in product mix. Other adjusted net revenue decreased 6% to RUB607 million, down from RUB649 million in the prior year, mainly because of the decrease in cash and settlement services, interest revenue and overdraft provided to agents, revenue from sales of kiosks, triggered by the contraction of our physical distribution network, partially offset by the increase in inactivity fees. Moving to expenses. This quarter we managed to tightly monitor our cost. Adjusted EBITDA increased 11% to RUB1.6 billion, from RUB1.5 billion in the prior year. Adjusted EBITDA margin was 63% compared to 69% in the prior year. Adjusted EBITDA margin expansion primarily resulted from the net expected bad debt recovery in the amount of RUB1 million in the second quarter of 2016, as opposed to bad debt expense of RUB50 million in the second quarter of 2015, as well as lower advertising expenses. Adjusted net profit increased 23% to RUB1.3 billion, up from RUB1 billion in the prior year. Adjusted net profit was affected by the same factors as adjusted EBITDA. Finally, as you saw in our earnings release, following the determination of second quarter 2016 financial results, our Board of Directors approved a dividend of US$0.22 per share. Although we continue to pursue certain M&A targets, we remain committed to return the cash back to shareholders. Now on to our guidance. Given difficult macroeconomic and regulatory situation and lower visibility over the potential market environment changes, we downgraded our guidance for 2016. Adjusted net revenue to increase by 2% to 5% and adjusted net profit to increase by 5% to 10% over 2015. As already noted, given the difficult environment, we might see further impact on our key market verticals throughout the year. With debt and certain other factors beyond our control, we therefore arrived to revise guidance in the course of the year. With that, operator, please open-up the call for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bob Napoli with William Blair. Please proceed with your question.

[Robert Napoli:]

Thank you. I appreciate it. Sergey, talking about the -- going into the consumer finance market, I was wondering if you could give some thoughts around the timing of entering that market and what types of products you are considering?

[Sergey Solonin:]

Hi, Bob. On timing, we believe that to the end of the year we will show up with several new products that we plan to launch to the end of the year. In terms of what particular areas that we are now working with our client data lot and looking at the competitive market on the global scale, so we believe that we will be able to shop with some financial services for our consumers that are based on our knowledge of the consumer and that will be kind of small loans to consumer or merchants.

[Robert Napoli:]

Is it your thought that you would originate and sell those loans to investors, or keep those loans on your balance sheet? And if you keep the loans on the balance sheet, what are your thoughts on funding -- the funding you need to go into that business?

[Sergey Solonin:]

Well, in the beginning we think that that’s small amount, so we will do it from our balance sheet. In the future we look at the opportunities, different kind of opportunities within which also transferring into the other bank balances.

[Robert Napoli:]

And then, just last question on your core business. I mean, are all of the regulatory changes implemented in your business -- understanding the economic challenges, but from a regulatory perspective are there any more pressures to your business yet to come that you’ve -- you’re aware of either currently implemented or there could be new regulations?

[Sergey Solonin:]

Well, I believe that Fintech in general is an area where we will always be watching for different kinds of regulatory changes. So I think that in general in Fintech there will be new challenges in identification -- either identification fields or some other fields, but I don’t see anything that could hurt the Company.

[Robert Napoli:]

Thank you.

[Sergey Solonin:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question. Mr. Bespalov, it seems that your line is breaking up. Are you on the speakerphone?

[Vladimir Bespalov:]

Yes, do you hear me? Hello.

[Sergey Solonin:]

Yes.

[Vladimir Bespalov:]

Hello. Okay. Hello, I have first -- I have a question on your guidance. It actually implies that you’re going to accelerate your organic growth in the second half of the year, given that Contract and Rapida no longer effect here in numbers and so on. What do you think will drive this acceleration? And say on your profitability guidance, so it looks like your margins are going to go down in the second half of the year. Are you going to increase marketing spend or what’s going to be the reason behind this?

[Alexander Karavaev:]

Okay. So thank you. Vladimir, its Alexander. On the net revenue guidance, yes, we believe that in the second half of the year we will have a certain increase in organic growth. Its primarily driven by our understanding about what’s going to befitting from a macro point of view. As we’ve expected that we will hit the bottom in second quarter this year, which unfortunately haven't yet happened, but we believe that that will happen in Q3 or Q4. On the net profit guidance, again you’re exactly right. We believe our margins will go down. And the primary reason for that is our ongoing investments, especially in R&D, so in those products that we plan to launch in the second half of the year that Sergey just described in different fields, especially in providing the different financing option for our consumers.

[Vladimir Bespalov:]

Okay. Thank you. And one more question, just maybe you could provide some color on your physical distribution. The network of kiosks and terminals keeps shrinking when compared to the previous quarter. What is the reason? First, maybe it's not that profitable, or economically viable for your agents to install new terminals and this serves the expansion of the network? And you also mentioned that your market share is increasing, maybe you could give us some color on the market, and where your market share stands now, where the competitors are and so on?

[Alexander Karavaev:]

Yes, okay. Yes, we actually -- the recent report that we saw on the self service kiosks network in Russia, show that our market -- again, those reports are not yet have the quality of that we'd love to have, but generally we believe our market share went from somewhere around 45% last year to something around 55% this year. So based on the second quarter results, though the market itself decreased, obviously due to the regulatory changes. In terms of the number of self service kiosks, the number decreased just a little bit as of the end of Q2 as compared to Q1. So that number was not so much. Its more due to the mix [indiscernible] of the agents, so some of the agents actually quit the market while we had few new one. So this is not something that it would dramatic -- dramatically changes the whole landscape. In just our plans, again we still believe we have the capability to increase slightly the number of self service kiosks by the end of the year. Though we obviously depend very much on the macro in this market, so again let us see what’s going to be hitting, you will see and as soon as we will feel that the trend is rigorous than we will discuss and review on our next call.

[Vladimir Bespalov:]

Okay. Thank you very much.

[Sergey Solonin:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Svetlana Sukhanova with Sberbank. Please proceed with your question.

[Svetlana Sukhanova:]

Yes. Hi, everyone. It's Svetlana Sukhanova from Sberbank. Maybe I missed from your previous answer, but why your net -- your terminal network was down quarter-on-quarter, because it looks like yours around 3,000 terminals and kiosks on quarter-on-quarter basis?

[Sergey Solonin:]

Yes. We just lost a little bit. So its slightly less than that, so its 2000 point something. But again, these numbers are not that dramatical. It's -- as I explained to you, the fact that some agents has quit the market, but we also have the inflow from new agents. So, I mean, we’re going to see that the network of self service kiosks is stable now. So, it's -- the fluctuation of couple of thousand points of sales quarter-on-quarter is not something that we care much about. So it's not really huge numbers. Again going forward, we need to assess what’s going to be hitting macro wise. So we unfortunately are not really able to guide you exactly how many more kiosks we may be installing within the next several months, we just need to assess the data that we’re getting from our agents.

[Svetlana Sukhanova:]

Okay. So do I understand you right, when you were talking at the last conference call that you see that number of kiosks is growing into some of the regions. It was primarily offset by the decline of the number of agents in other regions. Is it the right way to think about it?

[Sergey Solonin:]

Yes, there is always some dynamics in agents. So some of them are going out or reviewing their rental agreements deal. So it's -- we think that it’s a temporary effect for few large agents who will be returned in some other form again in the market very soon.

[Svetlana Sukhanova:]

Very clear. Thank you very much. And my second question would be regarding, again [indiscernible] what kind of volumes, revenues, profitability should we expect from this Fintech strategy, say for the next year and I’m even more -- do you expect it to be profitable in 2017, or you expect to be a loss making and approximately in terms of revenue, how should we need -- significant do you think might be the contribution?

[Sergey Solonin:]

Well, in judging to some of the comparables we see the business itself can be quite scalable, so it's into 2023. It can be around half of our total net revenue. But in terms of the year, it is very difficult to say. As soon as it’s a new business, we do not foresee sizable profits or revenues.

[Svetlana Sukhanova:]

You do not see next year profit or you do not see profit by 2020? Apologies.

[Sergey Solonin:]

No, in 2020 as I said, we believe that it may constitute to half of our earnings. In 2017 [technical difficulty] …

[Svetlana Sukhanova:]

Okay, understand. That was about revenues, and what about profitability? What kind of profitability of this Contract [ph] business, should be, if you compare to your profitability of your core business?

[Sergey Solonin:]

Actually we’re looking at the project that that will provide approximately the same level of profitability that we’ve in our core business. At least, if you look about the project that are in the pipeline, then we would be switching on something that should be very similar to QIWI core business, as soon as those products get mature, but again on the at the early stage you will obviously be see, first of all, the investment to develop and launch those and that’s why we are decreasing the profitability for the second half of this year, simply because of the different types of investment that we need to spend just to launch those products. So that’s a general view.

[Svetlana Sukhanova:]

Okay. Very clear. And my last question, if I may, would be about your existing business. What kind of trends do you see across over the lines in Q3? I’m especially interested in Financial Services and Money Remittances. Do you see kind of acceleration in the financial services market recovery? Do you see in the Money Rem in Q3, do you see again, acceleration or expect the margin at same level?

[Sergey Solonin:]

I'd say no, in general, because some of the volumes do migrate to, for example, wallet to wallet transfers where we don’t have any commission. So, we believe that this trend may continue, but still on the overall volumes on Money Remittances, it will not be seen very much. But we don’t think that due to the following macroeconomic conditions, we will be able to increase yields as well. So, we think that it will be kind of stable to the end of the year.

[Svetlana Sukhanova:]

Kind of stable in terms of absolute volumes or in terms of volumes growth? So the trends which you’ve seen should have …

[Sergey Solonin:]

In terms of volume growth?

[Svetlana Sukhanova:]

In terms of volume growth, so we kind of expect [indiscernible]. Very clear. Thank you very much.

[Operator:]

Thank you. Our next question is a follow-up from the line of Bob Napoli with William Blair. Please proceed with your question.

[Robert Napoli:]

Thank you. Just wanted to see what your feelings are in your partnership with Visa and how that’s -- how that relationship is today versus what it was when you went public -- with the changes and the payment systems in Russia with the National Payment System and if there is any -- what type of things -- so maybe just comment on your relationship with Visa and any thoughts on how changes in the Russian Payment Market affects your -- could affect your business?

[Sergey Solonin:]

Thank you, Bob. Well, as for Visa, we’re planning to do new products together. So we will be -- we’re now in discussions on these products and we hope to be launching them together. In terms of the international strategy, it is -- right now it is postponed, so that we’re focusing mostly on our core markets for a while. So, we will do projects mostly internally. In terms of new things, we’re waiting for tokenization through [indiscernible] and waiting for new opportunities there.

[Robert Napoli:]

As far as new products or services, are you at all looking at the merchant acquiring space? Is that something that is interesting to you and its related enough to your core business?

[Sergey Solonin:]

Well, everything that is related to small and medium merchants. It's definitely our -- in the area of our interest.

[Robert Napoli:]

Okay. Thank you.

[Operator:]

Thank you. Our next question is from the line of Vladimir Bespalov with VTB Capital. Please proceed with your question.

[Vladimir Bespalov:]

Hello, again I have a couple of follow-up question. First, could you update us on your M&A activities. Are you considering, [indiscernible] what stage they’re advanced or not advanced? How it's going to be big acquisitions or small and say maybe with your new products you are going to launch in the second half, this is like internally developed products or you are going to make some acquisitions to boost your exposure to these new areas of business?

[Sergey Solonin:]

Thank you, Vladimir. Yes, mostly we’re right now considering our internal resources for new products. So, the first launches will definitely be on our internal resources and we are right now spending quite a lot to the end of the year and planning to spend for this new products. In terms of the M&A activity, yes we do still are looking at different opportunities and mostly we look at big ones, not small ones.

[Vladimir Bespalov:]

But are there any news at a pretty advanced stage or it's just pretty early stages at the moment?

[Sergey Solonin:]

I’d say it’s in the -- somewhere in the middle. I’d say that there are major discussions, but not like contracted.

[Vladimir Bespalov:]

Okay. And maybe one more question, if you could provide some color on the E-commerce growth, whether it's like tangible goods or intangibles and what is your strategy, how you are going to develop this business in the future?

[Alexander Karavaev:]

It's -- so the growth that we’re experiencing is still primarily intangible [indiscernible] goods. So we have reported during the last few quarters that the share of classical -- I mean, physical goods sold in line in our portfolio is growing. But now it's kind of stabilized so -- and as we’ve said, the majority of growth is still coming from our core markets, I mean gaming and the like in the virtual space. Although we believe that the classical E-commerce is -- has a huge potential in the future. So it's not yet gained a substantial market share in total in Russia. I mean the percentage of E-commerce in total rubles spent, it still will be low. So we'd really expect a change in that situation within the next three to five year, but not now.

[Vladimir Bespalov:]

Okay. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, we’ve come to the end of our time for questions. I'd like to turn the floor back to management for any final remarks.

[Sergey Solonin:]

Thank you, operator. Thank you very much for being in this call. And we’re looking forward to show you new products in the next quarter. Thank you. Bye-bye.

[Operator:]

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