QIWI plc
Q4 2016 Earnings Call Transcript

Published: 22 Mar 2017

[Operator:]

Good day everyone, and welcome to the QIWI Fourth Quarter and Full Year 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 the QIWI fourth quarter and full year 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, March 29, 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 March 22, 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'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. Our fourth quarter results were in line with our expectations despite the challenging environment in our core markets and we managed to increase both our adjusted net revenue and our adjusted net profit. Though in 2016, our total payment volume decreased by 2% we saw positive trends in E-commerce and Money Remittances verticals, which grew in 2016 21% and 14% respectively over 2015. Growth in these verticals along with moderate growth in Financial Services vertical was offset by declines in telecom and other verticals by 25% and 22% respectively. We are especially pleased with the dynamics in the Money Remittances vertical, which was under substantial macroeconomic and competitive pressure for the past several months as its growth has accelerated in the fourth quarter 2016 to 28% over the fourth quarter of 2015. The decrease in telecom and other market verticals was largely driven by the decline in our kiosk network, while growth in E-commerce, Financial Services and Money Remittances 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 December 31, we had 17.2 million Visa Qiwi Wallet accounts, an increase of 1.1 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 a slight net revenue growth in 2016 despite the challenging environment as full year 2016 adjusted net revenue grew 4% over 2015, which together with our cost control program resulted in growth of adjusted net profit by 14% year-over-year. 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 important recent developments. As we have announced during our third quarter earnings call, we have launched our new pay by installment card project SOVEST. The marketing campaign and the rollout of the project SOVEST took place in January 2017 in Moscow and currently we see positive dynamics in terms of consumer interest in the product. We are constantly fine tuning our IT infrastructure developing the product and expect to start the roll out at federal scale in the second half of 2017. We will start providing key operating metrics for SOVEST project starting first-quarter 2017. SOVEST is an important step in implementing our Fintech strategy and disrupting the consumer finance market with innovative, affordable, convenient and transparent technological solution. We believe that by providing more diverse and convenient services to our customers, we will be able to leverage our existing base and infrastructure as well as attract new users and penetrate new areas of the market. In the meantime, we continue to see our payment business as core to our future growth and are committed to providing our merchants and customers with the most advanced and convenient technological solutions, broaden the scope, and increasing the quality of our services that we offer. I'm also happy to announce that we have completed the acquisition of Flocktory, a software as a service platform for customer lifecycle management. With this transaction we are aiding a new angle to both our merchant and consumer relationships, especially in the e-commerce market. Flocktory currently offers its clients a variety of instruments aimed at increasing the efficiency of consumer targeting and driving sales. The key products offered by Flocktory include personalized [Indiscernible] web push notifications and e-mail, customer [journey] personalization, predictive algorithms for consumer segmentation and targeting, and post-checkout referral marketing instruments. We expect to enrich Flocktory data analysis instruments with our consumer data, which we believe will help us to improve lifetime value and consumer loyalty in our co-products over the long-term as well as further enhance the solutions that Flocktory offers to its clients. I would like to highlight that besides advanced technology and [demand] product offerings an exceptional management team will be joining QIWI to further develop and enhance solutions that Flocktory offers. In terms of the numbers, we expect 2017 revenue in the range between RUB 220 million and RUB 240 million, and net profit margin of at least 20%. With this, I will turn the call over to Alexander, who will take you through our financial results in more detail.

[Alexander Karavaev:]

Thank you, Sergey, and good morning, everyone. As Sergey just noticed, our financial results this quarter were in line with our expectation. Total adjusted net revenue increased by 6% to reach RUB2.8 billion, up from RUB2.7 billion in the fourth quarter of 2015. Total adjusted net revenue, excluding revenue from fees for inactive accounts and unclaimed payments increased 15% 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 21% to RUB2.4 billion, up from RUB2 billion in the prior year as a result of the net revenue growth in our Money Remittances, E-commerce and Financial Services verticals, which grew 55%, 22% and 14% respectively, offset by a continuous decline in the net revenue in Telecom and Other verticals by 16% and 12%, respectively. Our financial result was driven by both increased [Indiscernible] just described and the improvement of the net revenue yields across our key market verticals resulting from shift in product mix in higher yielding categories of merchants, as well as new commissions introduced in certain types of peer-to-peer money transfers that contributed to the increase in our Money Remittances revenue, partially offset by declining volumes in telecom and other market verticals. Our payment net revenue yield has increased year-over-year by 19 basis points as we’ve seen a improvement in our yields across all market verticals. Other adjusted net revenue decreased 57% to RUB452 million, down from RUB688 million in the prior year, mainly because of the decrease in revenue from physical inactive accounts and unclaimed payments due to the effect of changing the company’s policy for recognition of revenue for unclaimed payments, as well as declines in revenue from cash and settlement services, advertising revenue and revenue from sale of kiosk, slightly offset by increase in interest revenue. Moving onto expenses. This quarter we managed to tightly monitor our cost in our core business, although we have incurred additional expenses connected to our service project. Adjusted EBITDA increased 4% to RUB1.3 billion, up from RUB1.2 billion in the prior year. Adjusted EBITDA margin was 45% compared to 46% in the prior year. Adjusted EBITDA margin contraction primarily resulted from the increase in personnel and office maintenance expenses incurred due to launch of SOVEST project, offset by lower bad debt expenses as compared to the same period of 2015. Adjusted net profit increased 9% to RUB940 million, up from RUB860 million in the prior 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 fourth quarter 2016 financial results, our Board of Directors approved a dividend of 0.19 per share. Although we continued to pursue certain M&A targets and our dividend distributions are subject to our future cash flow, including our cash requirements in connection with the new project, we remain committed to returning the cash back to our shareholders. Now onto our guidance. We expect adjusted net revenue to increase by 2% to 5% over 2016 with an expectation that there will be no material contribution from the SOVEST project. Adjusted net profit, excluding SOVEST expenses, is expected to increase as well by 2% to 5% over 2016, while adjusted net profit, including SOVEST expenses, is expected to decline by 25% to 55% over 2016. As we already stressed given the difficult environment, we might see further impact on our key market verticals this year. With that and certain other factors beyond our control, we just expect to revise our guidance. With that, operator, please open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from Bob Napoli of William Blair. Please proceed with your question.

[Robert Napoli:]

Hi. Thank you. I appreciate it. First question on the announced partnership between Sberbank and Alibaba, I know that you have had – that QIWI has worked with Alipay, and I just wondered if this partnership is going to have an affect on your business as it relates to Alibaba or otherwise?

[Sergey Solonin:]

Thank you Bob for your question. This is Sergey. First of all I want to say that – as far as I know there is nothing still signed between Alibaba and Sberbank, so I cannot comment on this. From the perspectives point of view what is already definite is that there will be no restrictions with this partnership on the payment partners. So, still this partnership will work with all the players in the market. That is definite for me. It was discussed and some aspects publicly.

[Robert Napoli:]

Okay. So you don't feel like that will have any effect on your business?

[Sergey Solonin:]

No. We don't feel that it will decrease our volumes or partnership with Ali.

[Robert Napoli:]

Okay. The acquisition of Flocktory, what is the revenue from that business that is in your – that you will get in 2017?

[Alexander Karavaev:]

So we expect – hi, bob. This is Alexander. We expect the revenue to be in the region of slightly more than RUB200 million. So it is not so much yield will be the revenue of the group.

[Robert Napoli:]

Okay. Ho are you working that into your business? How are you going to use that technology?

[Alexander Karavaev:]

Well, if you look at the rationale and [Indiscernible] of this move first of all, we see that in general the competition create an environment where finally, maybe long-term finally, we will not be able to get any revenues or commissions on payments. So I believe that in the long-term, long-run we will not be able to benefit on high commissions. So I think that commissions will be lower due to payments finally will be for free, and we were looking on the board on the subject for monetization for the revenue streams, and we understood clearly that one of the big things on the commission being paid is not settlement, not just payment for the merchants, but in other words, more in-depth work with the merchants together with – [Indiscernible] and some other aspects. So this was the initial strategy of QIWI from the beginning, but we really didn't manage to go deep on that. So now we are buying one of the best solutions in the market and best players who do that, who can optimize finally our streams of clients together with additional revenues from our side. But we are just in the beginning of this work. So I think that we already have some cases that we did with Flocktory internally. So we see that these cases are successful and our management goal will be to scale this experience to our merchants and to our clients.

[Robert Napoli:]

Thank you.

[Operator:]

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

[Vladimir Bespalov:]

Hi, hello. I have a couple of questions. First is on your guidance, if you look at the 2016 numbers, the growth trend for your payment adjusted net revenue looks quite good, but for 2017 you expect like a major slowdown. Could you decipher a little bit your guidance – what is behind it, do you expect some pressure on yields and things like this? And my second question is on SOVEST, again when I look at your 2017 guidance, it looks like the negative effect on the net profit from SOVEST currently estimated roughly at the same level you provided last time or even a little bit higher, what is behind this? Do you see any like headwinds to this product or maybe an increase in spending on things like this? Thank you.

[Sergey Solonin:]

Thanks. So as for the guidance, in general, if you look in general this reflects our approach or our intention to be much more aggressive in 2017 in terms of volumes, so in terms of affecting the markets, taking some segments and somewhere decreasing some yields internally. So as soon as we want to be more aggressive this will cost some revenue yields. And also I would say for now that this guidance is quite conservative. So I think we will be re-guiding maybe after first quarter towards up. Okay, on the second question.

[Alexander Karavaev:]

On the SOVEST guidance, initially we were estimating the SOVEST expenses [Indiscernible] and we have slightly amended our initial estimation. So that change is not really material. So we do not really expect the SOVEST expenses to differ materially from what we told you last time. In terms of the dynamic, I mean so far we have seen a fairly good client – dynamic with clients – clients like the products. We have a constant inflow of request to [Indiscernible]. Although we feel it is immature yet to comment on its results. As we said in the press release we will start providing the [Indiscernible] starting from Q1 of this year.

[Vladimir Bespalov:]

Thank you very much.

[Operator:]

[Operator Instructions] [Operator Instructions] Our next question is coming from [Indiscernible]. Please proceed with your question.

[Unidentified Analyst:]

Hi, good afternoon. Thanks a lot for hosting for questions. I have a question on your new acquisition, Flocktory, can you maybe give us an indication in terms of this new acquisition contribution is in the top line or it maybe bottom line, so we can understand how sizeable is that for the QIWI business? Thank you.

[Alexander Karavaev:]

Thank you. So the estimation of the top line in 2017 is slightly above 2016 [Indiscernible] while we expect the net income margin to be around 20%. So that is the number.

[Unidentified Analyst:]

This is great. Thank you very much.

[Alexander Karavaev:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Bob Napoli of William Blair. Please proceed with your question.

[Robert Napoli:]

Thank you. So on SOVEST, I think so you are about RUB1.2 billion of expenses in 2017, I think that is around where you had suggested last quarter?

[Alexander Karavaev:]

Yes, Bob. That is exactly right. So we have not really – we have [certain reasons] of the budget because we are doing that [Indiscernible] each quarter, but right now we have not changed our estimations materially. So it is fairly close to what we reported last time.

[Robert Napoli:]

And then revenue from SOVEST that you – you have started making loans, right. So you are getting some revenue, what type of revenue do you expect? So what is the net loss for SOVEST?

[Alexander Karavaev:]

Essentially it is immaterial in the group. So the cost here could be quite complicated because a part of the interest income was having a certain expense and we will – we view them as revenue. So the overall effect for 2017 should not be material. That is our estimation as of now.

[Robert Napoli:]

The interest. I'm sorry, the interest income will be offset by amortization of origination cost? Is there something like that, you have in there?

[Alexander Karavaev:]

Yes. By some other [Indiscernible].

[Robert Napoli:]

And then, how are you, I mean, and as you sit here today, I know it's very early, but you're taking credit risk on this product and what is your, what are your thoughts, what are you seeing, how comfortable are you on the credit risk side and what point would you pull back the investment or what point would you accelerate the investment and what are your thoughts still over the next several years for what so best could deliver to QIWI?

[Alexander Karavaev:]

Well, it's quite honestly it's premature to discuss that. So, we I mean generally we had seen actual decline then and its meaning there are very checked. Our reach payments have still amount slightly above of what we have in our model. We haven’t found that it hasn’t problems in our kind of I mean technical systems that propose the issuance of the [Indiscernible]. Those kind of our technical want through default. So, generally we do not have anything yet that would change our view to what's kind of global, that's set for that project. So, all the more we would say that as it's more or less in line with our expectation that we deliver to last time.

[Sergey Solonin:]

Well yes, and Bob and from my perspective, we this year we will do a lot of experiments as well. So, as soon as the more how we want it processed is really different from the original bank model. We will do a lot of different kind of experiments, transactional scoring models and some other things that will definitely lead to some answers that we will be able to give to the end of the year. So, we will be more like more sure more certain about how this business will go on. I think on the, hopefully the end of 2017.

[Robert Napoli:]

Okay. Looks like you're in activity fees though a fair amount in the fourth quarter, is that right? And or that is not correct, and what are your thoughts on in activity fees in '17?

[Alexander Karavaev:]

Well, we it's actually I think the peak of the inactivity fees work like a few two three of last year. So, we now we expect that amount to give or include it according our estimation, it's held just slightly decreasing in 2017. Again, you probably seen that we haven’t been suspend with the number of digital wall. So, we just need proceed with the [Indiscernible] which of those newcomers going to be chance out and which will stay. But generally, in our guidance and in our budget we do not expect substantial kind of change of that the amount in '17.

[Robert Napoli:]

Okay. And then just last question. As you look at growth by sector next year, payment volume essentially continuation of the same trend. Now e-commerce being the strongest growth and you got some pretty good pick-up in money transfer growth in the fourth quarter. What caused that and so you're looking at those two sectors being the leading growth drivers in '17?

[Alexander Karavaev:]

Yes, that's right. So, we do expect you just correct that now that we have substantial increase especially in Q4. So, we say the acceleration of money that needs to look like busier trends that the users are more into work digital channels and we'll expect that trend to continue. We are still in slightly better on the financial services side. So, again we probably would not be expecting substantial increase, but it certainly will be a utilization. Again, our kind of in telecom segments we would not be as we're expecting in any kind of substantial change. There probably should be a continue to slighter decrease. And e-commerce has decelerated but [Indiscernible] in '17 as well. So, not to that extend as many as for example but we're still adding new merchants and gaining some market share in the vertical.

[Robert Napoli:]

Is the e-commerce, what percentage of e-commerce is virtual goods versus physical goods today?

[Alexander Karavaev:]

It's still that majority about 80+ as virtual.

[Robert Napoli:]

80+ as virtual.

[Alexander Karavaev:]

Yes.

[Robert Napoli:]

Then last question on revenue yield. E-commerce was up or high. I know you said you're going to bring revenue yields in some areas down, which sectors are -- is it e-commerce? What should we expect from revenue yield and decline?

[Alexander Karavaev:]

And as primarily the [Indiscernible]. So, we really saw kind of inflow of new consumers and the good that is our product. So, we probably are in a position to affect this market steadily. We're going to get back the prices and ensure quieter sales and products. Otherwise, we'll probably see certain utilization of winner sharing the yield. Probably, we may have just a slight decline in e-commerce but not really crucial so far. So, expect for money, then '17 should be probably more or less in line within that the yield that we achieved last year.

[Robert Napoli:]

Sorry, one last one on the regulatory front. Is that we had a point where the regulatory environment is stable or are there other potential effects on your business and what are you watching on the regulatory side that could affect your business?

[Sergey Solonin:]

And as for now, I don’t see anything that is already being discussed. But in general, the regulatory feels it's quite unstable in rush I think.

[Robert Napoli:]

Okay. Continues to be unstable, is?

[Sergey Solonin:]

Yes. It's just continues to be unstable as soon as there are a lot of things that are being seeing discussed about internet, about some other things, about while there be --.

[Robert Napoli:]

But as it directly affects your business, at this point what are you most concerned about?

[Sergey Solonin:]

I don’t know exactly. So, at least for now I don’t see anything material. I mean, I don’t see anything in increase. I just see that the Duma is the new, the Duma is said to be active, more active risk, risk find so there will be more initiative that will come to Duma within next few years. So, that's in general give you a little unpredictable market on regulatory sites. So, this is our seat. So, a lot more lower initiate that will be on the table. But generally, we feel quite involved in that. I became the General Manager for the Bank Association forcing that. And this is also the structure that is very close to the end and aligns the directions with Central Bank and the other government institution. And at least we will definitely be very involved in those discussions if they --.

[Robert Napoli:]

Great, thank you.

[Operator:]

[Operator Instructions] Our next question is coming from [Spata Thicanova] of Sberbank. Please proceed with your question.

[Unidentified Analyst:]

Good afternoon, everyone. Would you please elaborate what is impairment of intangible assets in [indiscernible]?

[Alexander Karavaev:]

That revised [Indiscernible]. So, basically it's the adjustment that we have to book in the -- because we really believe the -- be it's pretty technical, you're my actually is in now 24 and now reporting. So, we have four in our reporting. So, we have quite expensive paragraph describing all the inputs in the model [Indiscernible] for us. And that'll cancel that model should we show what the deciding amount of those intangible assets is less than the realizable. That's where the impairment is coming from.

[Unidentified Analyst:]

Okay. And just look for more details and things [indiscernible]. My second question would be about your evolving. As you mentioned in the press release and the [Indiscernible] your volume increase, in Q4 congratulations with it and two questions here. Two, why will you maintain active campaign or was this new incremental [indiscernible]. Where it come from. My second question would be when do you and if you overall expect to report your volume on three months part of the --.

[Sergey Solonin:]

And Thica, the increase was basically coming -- it is probably two next term, the inflation of certain market stabilization, probably we'll see the people are moving kind of back into the structure as well as during our kind of shift to digital channels in the impairment space. It's about exactly what so that we look we will be around there are lot of different types of campaign the initial there. We are not really providing the breakdown of where the regeneration of those new wallet is coming from. But generally, the key growth would be money [indiscernible]. So, the service would be most potential site.

[Unidentified Analyst:]

Okay, very clear. And about three months, this initiative for evolve -- definition?

[Sergey Solonin:]

I mean, we're still debating this with internally we don’t yet have a on that. It probably depends I mean on how we're going to look in like in Q4 this surmount how will affect the remaining. Let's see, we don’t know yet.

[Unidentified Analyst:]

Okay, clear enough. My last question would be on the block chain which I already also mentioned. But we're still in years that you're still block chain in the separate entity. Should we need anything special into it that or it just a second -- inside the group?

[Sergey Solonin:]

No, it's more technical reorganization is still I wanted to as soon as there are lot of too many discussions that are going on block chain and also we have some contracts and from third parties on block chain solutions and something. So, we decided technically to move it out of this scope of core business, so that no one is involved in that except the team that is dormantly working on block chain solutions. So, it's more technical in terms of the management.

[Unidentified Analyst:]

Clear, and thank you very much for your answers.

[Sergey Solonin:]

Thank you.

[Operator:]

Thank you. Our next question is coming from [Olga Nithanova] of BCS. Please proceed with your question.

[Unidentified Analyst:]

Thank you, very much, for taking my questions. I have a couple more details I would like to learn about facilitates to our of course you don’t have too much on the operating back of that you can share in that right now. Could you tell us who are mostly the saw this decline potentially? Are you looking more for regional expansion or if you will still focus on capital as you do for now. And what are the profiles of the clients that you're looking for? And my second question about it would be are you expanding the merchant base for the service project or it is where it was when you first announced it?

[Alexander Karavaev:]

Okay. Thank you, for your questions. If we say suggestion on the -- instinct client profile because we are targeting. It's we actually in the first place, it was starting with our existing consumer base, which is actually huge. And we're just at lying different types of effort to figure out the consumer base that we believe is more susceptible to such type of product. On top of that we're using kind of collective power to take an initial, but kind of the initial banking is tremendously inspired those consumer. And so from that point of view it's probably much different from what retail banking are doing. So, we are probably have few more hours on the reporting side, I mean gave a this caused us a deflation. Geographically, we have just opposite in Moscow.

[Sergey Solonin:]

That compiles the we will reach region. So, this program is federal, if not it's not the program from Moscow. And we are launching other regions in the second half of the year.

[Alexander Karavaev:]

And on initiates, yes sure we are prepared kind of we are at the new near term basically it works. When you thought from our site. Again, this is probably not let's say the core kinds of activities, we do believe that we do have a substantial mutual break for the start of that project. That is obviously one of the key pipelines for the project.

[Unidentified Analyst:]

And also, do I understand it correctly that it will be regulated in a similar way that other as other bank credit card products or otherwise any specifics to the regulations that you have. I don’t know how would your total cost of credit for example will be have any or because it's an instalment card, it's not applicable. How else that sustains work?

[Sergey Solonin:]

No, there is no special regulation for the installment size. So, we are under the same regulatory involvement as other cars.

[Unidentified Analyst:]

Okay. And your color for the cost of credit and how your total cost of credit I'll calculate, or is it zero because it's an instalment and well the customers and they?

[Sergey Solonin:]

Technically, 0.001, something like that. But the rebates is created by the commission of merchant. It's not like it's not based on client pay, paying interest.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Thank you. At this time I would like to turn the floor over to management for any additional or closing comments.

[Sergey Solonin:]

Thank you very much all, and looking forward to good results in the first quarter. Thank you, bye-bye.

[Operator:]

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