QIWI plc
Q2 2015 Earnings Call Transcript

Published: 2 Sep 2015

[Operator:]

Greetings and welcome to the QIWI Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Yakov Barinskiy, Head of M&A and Investor Relations. Thank you Mr. Barinskiy, you may now begin.

[Yakov Barinskiy:]

Thank you operator and good morning everyone. Welcome to the QIWI second quarter 2015 earnings call. I am Yakov Barinskiy, Head of M&A and Investor Relations and with me today I have Sergey Solonin, our Chief Executive Officer and Alexander Karavaev, our Chief Financial Officer. A replay of this call will be available until Tuesday, September 8, 2015. 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 September 08, 2015. 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 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 Yakov and good morning everyone. Thanks for joining us today. The second quarter 2015 was solid despite the challenging economic situation in Russia and decrease in consumers' disposable income. We added new businesses of Contact and Rapida to the group, continued to gain market share, deepened our strategic relationships and launched new products. Our total payment volume increased by 31% to reach RUB204 billion, while payment volume in money remittance and e-commerce market verticals grew even faster by 130% and 53% to reach RUB35 billion and 27 billion respectively. As of June 30 we had 17 million Visa Qiwi Wallet accounts and around 177,000 kiosks and terminals. There are certain verticals that are continuing to suffer from the economic situation in Russia that’s partially mitigated by ongoing growth in other, primarily e-commerce markets. In these circumstances we see many opportunities to gain market share in the existing markets by executing new partnerships and introducing new products and services as well as entering into new markets which are complementary to our core business. I am also very glad to see that the e-commerce vertical continues to be the largest vertical in terms of net revenue. This makes us believe that we continue to execute our strategy well. Turning to the numbers, in the second quarter total adjusted net revenue increased 20% to RUB2.5 billion. Payment adjusted net revenue was up 20% driven by payment volume growth across all verticals, especially our e-commerce and money remittances verticals. It was partially offset by the decline in net revenue due primarily as the result of the acquisition and consolidation of Contact and Rapida which operate on significantly lower net revenue yields than QIWI standalone. In financial services vertical, we continue to suffer from the slowdown in the Russian banking sector. While addition of Rapida allowed us to demonstrate growth in volume this quarter, we still saw a 14% decline in payment adjusted net revenue in this vertical year-over-year. We expect the financial services vertical to start growing once the economic situation stabilizes. Adjusted EBITDA grew 13% in the quarter primarily driven by increased advertising, bad debt and office maintenance expenses as well as certain other factors that Alexander will tell you more about shortly. Adjusted net profit grew by 9% largely affected by the same factors as adjusted EBITDA as well as increased depreciation and amortization expenses. 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. I will now walk you through the detailed financial results of the quarter that Sergey just described. First of all I would stress that from now on we present the financial results including the acquired businesses of Contact and Rapida in accordance with IFRS. That means that we consolidate the entire volumes, revenues and cost of the acquired businesses starting from the acquisition date of June 1, 2015. Total adjusted net revenue increased by 20% to reach RUB2.5 billion, up from RUB2.1 billion in the second quarter of 2014. Payments adjusted net revenue increased 20% to RUB1.9 billion, up from RUB1.6 billion in the prior year as a result of the strong net revenue growth in our money remittance and e-commerce verticals which grew 71% and 50% respectively. Our financial services vertical demonstrated the 12% growth in volume mainly as a result of consolidation of Rapida starting June 2015. Although we still feel the pressure in the Russian banking sector, which does not allow us to demonstrate higher growth for now, net revenue across these key verticals decreased primarily as a result of the consolidation of Contact and Rapida which created significantly lower net revenue yields than QIWI standalone. Telecom vertical trends remained mostly unchanged with a slight increase in volumes and a decrease in yield driven by general yield conversion in this market. Average payment net revenue yield was 0.92%, down 8 basis points from the prior year. And our total average net revenue yield was 1.24%, down 11 basis points from the prior year. Other adjusted net revenue increased 18% to RUB649 million, up from 550 million in the prior year mainly driven by growth in the interest income and agent overdraft. Moving to expense, adjusted EBITDA increased 13% to RUB1.5 billion, up from RUB1.3 billion in the prior year. Adjusted EBITDA margin was 59% compared to 62% of the prior year. Adjusted EBITDA margin compression primarily resulted from higher advertising expenses as well as increased bad debt and office maintenance expense. Adjusted net cost increased 9% to RUB1 billion, up from 951 million in the prior year. Adjusted net profit was largely affected by the same factors as adjusted EBITDA, though pressured affected by an increase in depreciation and amortization expenses due to our investment in security and IT infrastructure. Finally, as you saw in our earnings release following the termination of second quarter 2015 financial results our Board of Directors recommended not to pay a dividend for this quarter. We remain committed to distribute all excess cash to our shareholders in the form of dividends once we realize that the window of opportunity in the M&A field is closed. Now on to our guidance, we have reviewed our guidance and now provide it on a consolidated basis. Meaning that we include now 2015 results the financial performance of Contact and Rapida starting June 1, 2015 in accordance with IFRS. Having said that, we expect both adjusted net revenue and adjusted net profit increased by 18% to 22% over 2014. We would like to stress that our 2015 guidance does not require any substantial scale effect on the bottom-line as a result of our ongoing investment in our key verticals which include acquisition of consumers' marketing and promotion campaign and launch of new products. We feel it's crucial to strengthen our market position this year in order to be prepared for driving future growth once the consumer confidence is back. With that operator, please open up the call for questions.

[Operator:]

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question from Bob Napoli of William Blair. Please go ahead.

[Bob Napoli:]

Thank you, good morning or good afternoon. I guess on the additional regulation on the kiosks, what effect is that going to have on your business as you look at your guidance and you think about the additional regulation, how much is the -- if you took out the Contact and Rapida additions, how much of an effect does that agent regulation have and what is going to happen to that market? Is there going to be a consolidation as part of your acquisitions looking to consolidate other players in that business as there are struggles? Or a little color there would be very helpful.

[Sergey Solonin:]

Thank you, Bob. So about the regulation on agents, I believe that the regulations on the specialty accounts are increasing a little bit cost of operations for agents today. So we think that it can have a temporary slowdown in the agent network and it can affect of course their operations in the short-term. The problem now that generally we are solving and our agents are solving is the payment rent. So, we believe that these payments should be lower and the reason is that definitely there is the capacity in the rental payment today on the market. So we see lately last month or so they're changing very rapidly. So we believe that these purchases will take maybe another two to three months to stabilize. And within these two to three months with that, for agents it will be a quite shaky time. And it will be difficult because some of the agents, the only way for some of the agents to decrease the rental fees is just to stop the terminal at the specific point and sometimes if the landlord agrees then to put it again. So we think that we will see a temporary decrease in the network. It may be continuing throughout the third quarter. But to the fourth quarter we think that it will be finally we will have more or less the same point of sale and better conditions for our agents. In terms of the consolidation of course this is for QIWI we think it may be positive, but we think that any regulation in our sales is making more barriers for entry and is making much more difficult for small players to play in the market than for big ones. So we think that many small players will not be able to survive in this market. So we think that we will definitely increase our market share. And yes, we are looking for-- it's very, very early to say but we are thinking about doing some deals.

[Bob Napoli:]

Thanks. And just on Contact and Rapida, the acquisition now that you have that closed I think before you had thought that that would add 15% to both revenue and operating income. Now that you've closed the acquisition is there any change to your view on the addition to income and revenue from Contact and Rapida and what is the growth rate, what would you expect the growth rate of those businesses to be?

[Sergey Solonin:]

We are now busy consolidating these businesses in the group. So we are still optimistic about the businesses themselves. As you've seen they added quite a bit in our turnover volume. So we think that it has affected in some way our yield because the yield for these businesses were slightly lower. So we believe that we will be able -- in 2016 we will be able to increase this yield and keep the volume. So we think that we are very optimistic about what will happen then in terms of revenues and profits to our business. So we've got the market share now and we will increase, internally increase binary prices in order to have benefit for the company.

[Bob Napoli:]

Thank you.

[Operator:]

Thank you. The next question is from Ulyana Lenvalskaya of UBS. Please go ahead.

[Ulyana Lenvalskaya:]

Thank you and good afternoon gentlemen or good morning in the states. First, technical question, do you plan to publish a standalone Contact and Rapida financials and if yes, when should we expect it?

[Alexander Karavaev:]

It's Alexander. Yes we are planning to publish those standalone financials. That should happen sometime in August but we are now in preparation to get all the data and put that away over the next couple of months when we will be a position to publish those.

[Ulyana Lenvalskaya:]

Okay. So we will see a standalone volume yields et cetera. Thanks. The second question is -- yes? My second question will be -- excuse me.

[Alexander Karavaev:]

Go ahead.

[Ulyana Lenvalskaya:]

My second question will be for Sergey. Could you please comment on the reasons of basically of production and number of e-wallets in the third quarter as compared to second?

[Sergey Solonin:]

Well the basic reason is that we -- if you look in 2014 -- in the end of 2014, beginning of 2015 we were working much more on attracting new users. So we were attracting a new user base and were trying to convert this new user base into loyal users, so some of these new users that we've got at the end of 2014 and beginning of 2015 they were converted into loyal but some of them were not. So we stopped this campaign at the end of the first quarter 2015. So we stopped doing marketing expenses and slowed down our advertising campaign. And we focused mostly on bringing loyal from our current base. So if you look on the three months date and one month date that the users they are still growing quite rapidly, but the total yearly base of decline is starting to decline because of that. Because we have this impact on fourth and first quarters, so now we are cleaning up the base from those temporary accounts.

[Ulyana Lenvalskaya:]

And when would you expect that to be over with the cleaning?

[Sergey Solonin:]

Well, I think if we say if we start a new campaign then we will grow again definitely. We are hesitating to do this now because we want to see the pulling back of macro problems and see how it really impacts our users and our loyal base. So we will definitely continue to focus on our loyal users and maybe we will start to disclose that base next year. So it depends on how we will play with marketing budget. But I believe that third quarter should be the last point or fourth quarter will be -- we will get our true figures and go forward from there.

[Ulyana Lenvalskaya:]

Thank you.

[Operator:]

Thank you. The next question is from Vladimir Bespalov of VTB Capital. Please go ahead.

[Vladimir Bespalov:]

Hello. I have a question for your new guidance since you don't separate the contribution of Contact and Rapida but based on what you mentioned previously it looks like your guidance for QIWI business excluding Contact and Rapida was decreased somewhat. Is this the correct impression that I got? Even if this is true what is the reason?

[Alexander Karavaev:]

That's actually correct. This is Alexander, and this is obviously primarily the macro situation in Russia. So you've probably seen in the volume especially in financial services. So we're continuing to see [indiscernible] experience a slowdown or drop in volumes in certain segments. And that remains [indiscernible].

[Vladimir Bespalov:]

And my second question is basically you have consolidated Contact and Rapida just for one month in the second quarter results. And you mentioned that there is some pressure on use coming from overall use of Contact and Rapida. Should we expect more pressure on use in the coming quarter maybe and you can provide some indication on the trends that you see in the use for the third quarter?

[Alexander Karavaev:]

Yes, that's exactly right. You will see the more pressure on the yield given that we will begin to consolidate the Contact and Rapida in Q3 for actually for all three months. That is one reason. The second reason would be our ongoing investment in the [indiscernible] Postal. We may be decreasing the prices voluntarily for some of the services so take the market and the situation, so that can be the second business. So yes overall in Q3 and Q4 you'll see the yield declining as compared to Q2.

[Vladimir Bespalov:]

And the last question if you carry out acquisitions how are you going to finance those like by equity like you did with Contact and Rapida by cash, by debt, what do you see as the options? And out of the cash that you have on the balance sheet how much is the cash which belongs to clients and how much is cash that you can use for whatever purposes?

[Alexander Karavaev:]

The financing opportunity will obviously be dependent on the size of the transaction. Actually as soon as we close Rapida and Contact we are obviously looking for any other opportunities on the market. But nothing is definitely yet on the table. As soon as we have something then we will decide. Primarily, the primary source of funds would probably be equity and cash but we still have around $90 million of cash that we arrive at the last year. And that cash position remains largely unchanged, so we have not planned a 10-year out of it so that's fully sourced for the new acquisitions. Given that we've stopped the dividend for a while we may be accumulating quite healthy cash cushion in the next few quarters as well. And I mean that looks fair enough for us to really view all the targets that are now out there in the market. If that cash position will not be sufficient to finance then we may be thinking about raising a debt rubles given the netted debt in the market. That is obviously a tough market and the prices are quite high but we believe it's possible. And equity financing cannot be ruled out as well so it really would depend on the circumstances.

[Vladimir Bespalov:]

Okay, thank you.

[Operator:]

Thank you. The next question is from Brady Martin of Citigroup. Please go ahead.

[Brady Martin:]

Yes, good afternoon. Two questions; first, I don't know if I missed in the press release but did you mention an average yield for this Contact, Rapida just so we maybe could estimate the impact for the rest of the year? And second just some more clarity on the change in the dividend policy. You didn't pay a dividend for Q4 last year, then resumed in Q1 and now saying you're not going to pay for the rest of the year. I mean was there something specific that changed since the Q1 results? And second is there what kind of segments or what I mean you probably wouldn't release what targets you're looking at but what segments or businesses do you think there are viable M&A opportunities in? Thanks.

[Alexander Karavaev:]

Okay, thank you. On the first question on net revenue yields of Contact and Rapida, we are not disclosing those separately under IFRS, we have consolidated the numbers and likely will not be disclosing those separately going forward. And on M&A strategy I defer to Sergey.

[Sergey Solonin:]

Yes, we are still looking at the few things that we are looking at our own payment segment. So we believe that as they raise the capacity for consolidation in our field. So we're looking for some targets that could help us consolidate markets and be the biggest and the most important player in the Russian market for a long time in the future. And then we are also looking some segments that are close, very close to what we do and have additional values. So I don't think I can speak about that right now but I think soon if something will happen we will definitely let you know.

[Brady Martin:]

Okay. And then just the other question about I mean what's significantly changed in the last three months? You resumed the dividend policy, I mean you resumed paying dividends in Q1 and then I mean the macro situation has not really changed that much. I mean what changed in the market that made you think you should not pay dividend?

[Alexander Karavaev:]

Okay, I see your point. So I mean what really changed at least our view in the market is that I mean when we started to plan an M&A strategy last year then we were thinking that we would probably have let's say the window of opportunity is like six months long given the prices that are going to be lower within that period of time and there's going to be a lot of distressed assets, so to say that would be of interest. And that is why basically we resumed to pay dividend considering that window of opportunity may be kind of closing a bit now. Now as we actually advance throughout the year in 2015, we realize that the crisis is much more long lasting. So let's say we have not yet probably seen the bottom. Likely 2016 would be a very difficult year from a macro point of view. And we believe the window of opportunity for M&A is actually much wider and much longer that one point of view. And secondly we really see a lot of very kind of interested companies that may be for sale in that market for relatively cheap prices. At least based on our kind of changing of the market exercise we see that we are able to talk to the companies that we would not be talking like in a normal kind of course of business a year ago. Now we see that real estate much more opportunity in the M&A field. So that's again this probably last this year and at least part of the next year. So that's why we really believe it's a good idea now to accumulate a healthy cash cushion to attack that market from an M&A angle.

[Brady Martin:]

Okay, that's clear. Thank you.

[Operator:]

Thank you. The next question from Igor Gerasimov of Goldman Sachs. Please go ahead.

[Igor Gerasimov:]

Hi, thank you for the call. I'd like to firstly clarify a few replies that you've given earlier and then I will follow-up with my questions. I guess I just wanted to clarify the reason why you expect a decline in the user base. We have saw a contraction in the number of e-wallets this quarter compared to the second quarter, the first quarter of 2015 and do you think the contraction will continue through 2015 or probably until 2016? That's my first question.

[Sergey Solonin:]

I think that -- thank you for the question. I think that this contraction may continue during the third quarter but we expect that it will begin to increase again in the fourth quarter of this year and first quarter of next year. And also it is dependent on the marketing budget how we will spend it, so if we start using marketing budget it can be recovered earlier like third quarter depending on what we do but we're still very cautious on doing marketing right now.

[Igor Gerasimov:]

Okay, understood. And do you think that the decline in the user base that you incurred right now is linked to the stop or termination of your marketing campaign, correct?

[Sergey Solonin:]

No, no, no. The situation is that we increased our base in the fourth quarter of the previous year because we made aggressive marketing campaign at that time. And as soon as we calculate these clients on the yearly base some of these clients are dropping off, so we didn't convert all of them to the loyal base client or just a few percent that you convert to real loyal users. So we control our loyal user base on a monthly they should pay on a monthly and three-month basis and these two bases are still growing. And we are okay on the conversion of the total users to loyal but we're not okay on the total numbers because of absence of the marketing.

[Igor Gerasimov:]

Okay, understood, that's very clear. Thank you. My second question is on the potential impact of the latest regulation for your agent network. I just wanted to check with you, do you expect that now your agents will be cutting their OpEx or you think that they might survive if they will be imposing higher fees on customers how they will cope with the present situation in your view?

[Sergey Solonin:]

If you look on the agent economic then you will see that 70% of their costs are still in the rental. So we believe that just cutting down the rental fees which will happen because the competition in that field will -- is declining already, so we see this for at least one month. And we think that it will be enough just to cut sharply cut the rental fees, which is happening right now. And that in some way will decrease and it is decreasing the quantity of terminals because the only way to really decrease the rental fee is to terminate the agreement and build a new one. So it takes time, but I don't remember the time on the market when hardware and the terminals themselves were on the warehouses for a long time. So definitely merchants and those who have this more shops and real estate they will be interested to attract agents at any possible rental fee primarily. So we think that these shaky times will be for another two, three months and then we will see that the agent network is completely adjusted.

[Igor Gerasimov:]

Okay, understood. Thank you. And lastly could you please maybe provide us with at least approximate estimate of what would have been your payment volumes and your adjusted net profit for the second quarter of 2015 without Contact and Rapida?

[Alexander Karavaev:]

Well, we unfortunately are not able to comment on that. But we starting from now on only present the consolidated numbers.

[Igor Gerasimov:]

Understood. No problem. Maybe then you could have mentioned what sectors of your adjusted payment net revenue were affected by the consolidation apart from the money rem and the financial services?

[Alexander Karavaev:]

E-commerce to a certain extent was affected because that Rapida and Contact, Rapida was processing a certain portion of our volume for the e-commerce. That probably would be the major [indiscernible] yes.

[Igor Gerasimov:]

Okay so the effect of e-commerce financial services, again it is related to Rapida and of course money rem, mainly Contact. Correct?

[Alexander Karavaev:]

Yes, that's exactly right.

[Igor Gerasimov:]

Thank you very much.

[Operator:]

[Operator Instructions] And the next question is from Olga Naydenova of BCS. Please go ahead.

[Olga Naydenova:]

Hello guys, thank you for the call. My question is again about this regulatory pressure that your agents are now facing. My understanding is that it's more on smaller agents who will be more pressed with maybe with additional cost but also probably with the requirements to use special accounts that some of them may not be using or something. Can you please disclose the proportion or the distribution of your revenue between your agents, what is the proportion of those small agents in your revenue flow?

[Sergey Solonin:]

Well, I don't think that the small agents would -- I would say the vast majority of the agents in either portfolio I would say are relatively small. The only difference here would be that on average we can compare ourselves against any other payment system like cyber player, company or any local. On average see the agents would be let's say approximately twice as large as any other agents of other payment systems so very [indiscernible]. This is actually why we think that QIWI more but it can be more stable in that environment compared to other payment systems. But generally speaking we still keep quite substantial number of agents around 7,000 agents that historically has been our strength.

[Olga Naydenova:]

7,000? I'm sorry…

[Sergey Solonin:]

Yes, approximately 7,000 agents. It is the [indiscernible] compared to a situation of a couple of years ago when we were having 9,000-plus, basically our agents on average became a little larger than there has been. But still we have a lot of agents.

[Olga Naydenova:]

Yes, thank you very much. And my other question is about possible synergies that you're planning to receive from the recent acquisition. What do we -- when should we expect how fast this should be visible on your P&L and when should we expect complete integration of the businesses so that we will see some cost reduction?

[Sergey Solonin:]

Well, I think the [indiscernible] I think this is full [indiscernible] will be around a year or so, that situation will take a bit longer. So the -- we hope that we will see some of the results from added values from this merger in 2016. So we believe that in 2016 the programs that we are now doing and those technical things we are hoping to take will have its results again. So generally cost savings if you look at the cost side we think that the cost more than 20% of the residents Contact volume on average. So we think that it will not [indiscernible]. And for those values that we received are not yet fully realized. But we of course it's worse for already worse for identification identifying in Contact network of physical presence in the past time network. So we're quite happy and they're in line with our [indiscernible].

[Olga Naydenova:]

Okay. Thank you very much.

[Operator:]

Thank you. At this time I would like to turn the conference back over to management for any additional comments.

[Sergey Solonin:]

Thank you very much and looking forward to better results through the end of the year.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.