QIWI plc
Q4 2015 Earnings Call Transcript

Published: 15 Mar 2016

[Operator:]

Good day, everyone, and welcome to the QIWI Fourth Quarter and Full Year 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Yakov Barinskiy, Head of M&A and Investor Relations. Please go ahead, sir.

[Yakov Barinskiy:]

Thank you, operator and good morning, everyone. Welcome to the QIWI fourth quarter and full year earnings call. I am Yakov Barinskiy, Head of M&A and 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 Tuesday, March 22, 2016. 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 15, 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 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. Our fourth quarter remained strong despite the challenging macro environment in our core market. In 2015, we continue to straighten our market position, completed a strategic acquisition in money remittance market and further increased our product awareness with consumers across both, physical and virtual distribution channel. Our total payment volume increased by 35% to reach RUB873 billion, fueled by the acquisition of Contact and Rapida in the second quarter of 2015, while payment volume in money remittance and eCommerce market verticals grew even faster by 146% and 53% to reach RUB164 billion and RUB115 billion respectively. As of December 31, we had 16.1 million Visa Qiwi Wallet accounts, a decline of 1.1 million as compared to the prior year, resulting from lower marketing spend into 2015 as compared to 2014, the decrease in the kiosk network in Russia in the second half of 2015 and the overall economic downturn affecting consumer activity. Our physical distribution network was negatively affected by strict regulation of Agents business as well as adverse market condition. And as of 31 December, 2015, we had around 170,000 kiosks in term. Out of those Contact and Rapida added 25,000 physical distribution points to our network broad and regions scope of our services we offer to our consumers. Turning to the financial results, in the fourth quarter, total adjusted net revenue increased 8% to RUB2.7 billion. Payment adjusted net revenue was up 7% driven by strong payment volume in turn offset by decrease in net revenue yields across all market verticals. We continue to see volume pressure in the financial services vertical, which is affected by weak consumer loan market as well as our money remittance vertical where a shift in migration trends contributes to decrease in the demand for remittance services. As we have previously highlighted in our guidance revision statement, the trends in our eCommerce market vertical in the fourth quarter of 2015 where weaker than the expected, driven by lower seasonal demand and shrinking consumer spending in Russia. However, I believe that we successfully continue to execute our strategy and penetrate this diverse and technological market by offering amended solutions to our customers and merchants. Adjusted EBITDA grew 34% in the quarter primarily effected by lower marketing expenses and certain other factors that Alexander will tell you more about shortly. Adjusted net profit grew by 44%, largely affected by same factors as adjusted EBITDA. Our Board of Directors has approved a dividend of RUB0.50 per share, which we'll distribute on March 31, 2016. This reflects our current understanding of liquidity requirements for the business and we will be reassessing our dividend policy on a quarterly basis in 2016. We're continuing to introduce new products and services across different vertical as well as looking for potential acquisition, but strictly focusing on the technological and infrastructural angle to the money remittance and eCommerce verticals. 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 discussed, we delivered strong operating and financial results in the quarter and the year. I will start with a discussion of our fourth quarter and full year financial results in more detail and then conclude by providing the guidance for 2016. Total adjusted net revenue increased by 8% to RUB2.7 billion, up from RUB2.5 billion in the fourth quarter of 2014. Total adjusted net revenue growth excluding revenue from fees for an active account decreased 1% compared to the prior year. Payments adjusted net revenue increased 7% to RUB1.97 billion, up from RUB1.84 billion in the prior year, as a result of the net revenue growth in our money remittance and eCommerce verticals, which grew 58% and 18% respectively, offset by continued decrease in net revenue financial services and Telecom verticals of 30% and 13% respectively. We continue to feel considerable pressure in the Russian retail loan repayment market. In the last quarter, the money remittance market in Russia exceeded significantly, both in terms of quantity of transactions as well as volumes. While we continue to show strong growth in this segment, though we believe 2016 will be challenging. Our financial results were driven by payment volume growth resulting from consolidation of Contact and Rapida offset by decrease in net revenue yield to cross all vertical as a result of the consolidation of Contract and Rapida, which historically occurred at significantly lower net revenue yield than the legacy business. Average planned net revenue yield was 0.82%, down 23 basis points from the prior year. Our total average net revenue yield was 1.11%, down 30 basis points from the prior year. Other adjusted net revenue increased 9% to RUB688 million, up from RUB630 million in the prior year, mainly as a result of higher inactivity fees and increase in increase in interest rate. Moving to expense, this quarter we managed to partly monitor our cost. Adjusted EBITDA increased 34% to RUB1.17 billion up from RUB911 million in the prior year. Adjusted EBITDA margin was 46% compared with 37% in the prior year. Adjusted EBITDA margin expansion primarily resulted from significantly lower marketing and advertising expenses, partially offset by increased bad debt expense. Adjusted net profit increased 44% to RUB860 million, up from RUB597 million in the prior year. Adjusted net profit was largely affected by the same factors as adjusted EBITDA. Moving to the full year results, total adjusted net revenue reached RUB10.2 billion, an increase of 16% as compared to RUB8.8 billion in the prior year. Payment adjusted net revenue increased 15% to RUB7.5 billion, up from RUB6.5 billion in the prior year. Other adjusted net revenue increased 17% to RUB2.7 billion from RUB2.3 billion in the prior year. Adjusted EBITDA for the full year was RUB5.6 billion, 17% growth over year-over-year. Adjusted EBITDA margin was 55.1%. Adjusted net profit was RUB4.1 billion compared to RUB3.5 billion in the prior year. Adjusted net profit excluding inactivity fees was RUB3.3 billion, a growth of 9% year-over-year. Now on to our guidance. Despite difficult macroeconomic situation and lower visibility over the potential market environment changes, we're providing the following guidance for 2016. Adjusted net revenue increased by 5% to 8% and adjusted net profit increased by 7% to 12% over 2015. As was already noted given the difficult macroeconomic environment, we might see further impact on our key market verticals throughout the year. With that and certain other factors beyond our control it's easier for us to revise guidance in the course of the year. With that operator, please open up the call for questions.

[Operator:]

Thank you. We will now 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.

[Bob Napoli:]

Thank you. My question is the outlook for 2015, and the trends that you saw so far in the first quarter, what is your expectation for payment volume growth by the key verticals? Do you expect eCommerce activity to show strong growth and then your revenue yield may pick up this quarter from last quarter, what are your thoughts on the revenue yield?

[Sergey Solonin:]

Hi Bob, thank you for your question. We expect 2016 growth coming primarily from money remittance and eCommerce. Generally speaking, we would expect that the net revenue yields will not be changing quite substantially though we may expect certain improvement of net revenue yields in money remittance that we discussed on the last call. If we would think about how the growth, how the guidance would be spread throughout the year; we would expect that Q1 would be probably the most challenging one and then we would expect to see a certain improvement in Q4 and then in the second half of the year. So that's our understanding on how 2016 will.

[Bob Napoli:]

Okay. The eCommerce segment, is there any change in mix between virtual and physical sales and do you expect the eCommerce segment to grow over 10% next year?

[Sergey Solonin:]

Yes. That's exactly right. So in terms of the mix, we do not really expect any substantial change in the mix or why I'd say that both virtual and physical are growing quite fast so far. And mix hasn't change a lot in 2015 and we do not expect that mix to be changing substantially in 2016.

[Bob Napoli:]

Last question. Just your terminals, your terminals increased from the third quarter to a much higher level than what I expected. What -- how do you view, how were you able to increase the kiosk in terminals and what are we now at a level, at a stable level as you expect that growth?

[Alexander Karavaev:]

Hi Bob. I think yes, now we're at quite stable level. So I am not expecting that the quantity of terminals will be decreased. May be you see the tact of repeating contact merger, because we added RUB20,000 to RUB25,000 point of sales with Rapida and Contract. And in QIWI terminals we dropped to an -- we dropped in September or October, I think. And right now we are quite stable and we believe that there is a space to grow in 2016.

[Bob Napoli:]

Thank you.

[Sergey Solonin:]

Thank you.

[Operator:]

Our next question comes from the line of Igor Gerasimov with Goldman Sachs. Please proceed with your questions.

[Igor Gerasimov:]

Hi. Thank you for your presentation. I have a few questions. First of all, could you please elaborate a little bit on the reasons behind the improvements in the net revenue yields and your eCommerce Financial Services and money remittance business lines? And then could you please discuss a bit OpEx? Your guidance implies improvements in average income efficiency in 2016, however OpEx increased quite substantially Q-on-Q in the fourth quarter of 2015. Could you please talk a bit about that? Thank you.

[Sergey Solonin:]

Okay, Igor, thank you for your question. I will start from the second question. So on the OPEX side, we are actually monitoring our cost quite closely and basically we have a program that we launched on keeping the cost under control basically in all the components. So, we are planning to keep a close eye on the headcount and salary cost which is primarily the largest cost component of P&L as well as any other G&A cost by the office space or the management and so on. So, we’re quite sure that we're going to be preparing skill set on the cost side. On the first question, so the improvement that we -- you're probably ensuring to a certain improvement of net sharing yields in Q4 as compared to Q3. That is primarily the shift of the integration activities that we took in Contact and Rapida. So we looked closely into all the commercial agreements that those companies had and brought some of those in line with key to practices. So basically we managed to increase the net sharing yield. That affect may continue to see in this year. So, on top of that we really belief and we discussed that a while ago few times that given that money remittance market is now subject to consolidation. Basically we're having less and less players in that market. We really see room for substantial improvement of net revenue yields in that market specifically on top of what we already have. So the timing is still unclear, so that might take several month or so probably up to couple years for the net revenue yields to go up in that segment, but we really believe that‘s going to happen.

[Igor Gerasimov:]

Thank you. May I just pull up two questions? First of all now half the expense more on your agents given this regulation from the CBR and second question is how do you see market share in money remit change in Q4?

[Sergey Solonin:]

So I think in terms of the agent yes, we have already increased the payouts to agent. They have and basically after we saw the impact on our agent network those new enforcement process of Central Bank. I would not expect that we’re going of increasing the payouts to agents in the near future. So we really feel that the economics of agents is now more or less stable. So again it might be the key that if we'll be in a position, to attack the market heavily and try to substantially increase the market share, we may be increasing the payout to agent. Well, this is something that we’re thinking but this is not yet, if they plan that we're going to be implementing anytime soon. On the market share of money remittance, we think quite frankly there are not reports sure of us that would size the money remittance market on a quarterly basis. Our own indication is that the share probably decreased slightly because of the deterioration of the agent network in Q4, but the extent of that, we are not really able to monitor as we have not seen the recent report of the Central Bank in that market.

[Igor Gerasimov:]

Okay. Understood. Thank you so much.

[Sergey Solonin:]

Thank you.

[Operator:]

Our next question comes from the line of Ulyana Lenvalskaya with UBS. Please proceed with your question.

[Ulyana Lenvalskaya:]

Good afternoon, gentlemen and thank you very much for the call. The first question will be about Contact and Rapida. It's now about eight to nine months since the deal was closed. Are you actually satisfied with the acquired assets performance? Was it bad or worse, versus your initial expectations back in May or June last year?

[Sergey Solonin:]

Ulyana, thank you for your question. Well, I believe that still strategically I think that the deal is good for QIWI as that allows us to jump into the money remittance segment more heavily. We introduced several products on messengers and social networks on money remittances and we are planning to do a lot on money rem vertical. So strategically yes. Financially I would say, no, I’m not happy and on expectation side, we had speaker expectations on money rem and mostly it happened because of the very big drop on money remittances due to the economical situation and that migrants were leaving the country. So few figures shown from the Central Bank was money remittance in general is dropping more than 30% right now and is not still is not very stable. So yes and no. Strategically yes, I believe that this is very important a very important capability for the company and important, vehicle to compete in the future. On transport of payments on payments within Russian but economically negative. So economically right now we see that it dropped much more than we expected. Thank you.

[Ulyana Lenvalskaya:]

Makes sense. Thank you. And my second question will be about the number of active QIWI Wallet accounts. What are the current trends in 2016 and what should we assume for the rest of the year?

[Sergey Solonin:]

Well, we have -- right now we have the effect on the yearly base. The decrease is in effect of dropping the marketing expense. So we're not -- we're not approaching new users and our current base is a little bit filtering from those who were coming on the marketing expenses of 2014 and 2015. So on the monthly base we’re growing two digits. So we’re quite happy with that and looking closely on what's going on and we will be deciding what to do for the rest of the year maybe in the second quarter.

[Ulyana Lenvalskaya:]

Okay. Thanks.

[Sergey Solonin:]

Thank you.

[Operator:]

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

[Svetlana Sukhanova:]

Thank you very much. May I please ask you about Kazakhstan market? It was several publications recently about changes in this market and my understand is the second largest -- their reaction for the outgrowing money transit. How does these kind of changes would be affecting your operation, if you can quantify it?

[Sergey Solonin:]

Well, right now we see quite a decent drop on Kazakhstan direction. So it's around 50% little more than 50% drop; so quite substantial. Still we think that it’s mostly due to the economical situation rather than any other factor.

[Svetlana Sukhanova:]

So looking on the current regulatory, clear. Thank you very much. My second question would be about your net cash position at year end if you might be able to disclose it?

[Sergey Solonin:]

So we -- after we pay the dividend that we have just announced, we're going to be paying slightly more than $70 million of free cash on our balance sheet.

[Svetlana Sukhanova:]

Thank you very much for this. And my very last question would be today about your long discussions your partnership with [DHgate.com]. I understand that it is ongoing, but I understand there is still no marketing investment into this partnership. Do you expect to have ex-promo on this or it's more like a start born baby?

[Sergey Solonin:]

We’re still evaluating and looking at the results. I think without strong marketing campaigns it is unlikely that it will be growing. Still we have a lot to do on the technological levels. So we are introducing new services and refactoring our software in order to fit to the demands of mobile operators. So we have some time but clearly yes, there is no sign that it will jump start if there will be no marketing efforts from the mobile operator side and still in 2016 I think the budgets will be still quite tight. So there will no big investment in that field.

[Svetlana Sukhanova:]

Very clear. Thank you very much.

[Operator:]

Our next question comes from the line of Brady Martin with Citi. Please proceed with your question.

[Brady Martin:]

Yes, good afternoon. Just wondering, if you could give us any more color on or guidance on how to look at dividends beyond the one you just declared and we've gone back and forth on paying dividends, not paying dividends, and you've note this dividend there's even a line in your press release saying, you might revise it based on deals. Like how -- can you just maybe elaborate more on how you look at dividends returning cash or do you think it's just going to be uncertainty every quarter or we're going to have the same type of comment, if there's a deal, we'll spend dividends? Thanks.

[Sergey Solonin:]

Well, we're -- I think for your question, we're really looking at the deals different kind of the deals right now. It’s very difficult to close the deal in the circumstances that we have very unpredictable and unstable currency rate. So we had the deals that were closed because of that. So, we’re still in a position that if there are no deals we will be trying to keep up with the current profits and this dividends from the current profit taken into account that I still believe that now it’s a very good time to make good deals in Russia and I hope that we will be able to find an interesting proposal, but we’re not in a hurry. We don’t want just to spend money. That’s why we are quite cautious and not quick maybe on that type.

[Brady Martin:]

Okay.

[Sergey Solonin:]

To the end of the year, we will be -- as usually, we're revising how much dividends we can pay and this happens in the first quarter every year.

[Brady Martin:]

Is there, the last question otherwise, is there -- so after this deal, the one-time you expect about little more than $70 million. Is there like a level of cash that you're -- or cash pile that you want to maintain or is there some kind of target that you think you need to have in order to be flexible enough for deals in the excess you distribute or is it literally just on a quarter-by-quarter basis you're going to decide this?

[Sergey Solonin:]

No, we will be deciding on the quarter-by-quarter basis depending on the opportunities and targets that we see. So as for now, we do see targets and we do -- now we have conversations about that on the Board and hopefully we will now think so…

[Brady Martin:]

Okay. Thank you.

[Operator:]

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

[Yakov Barinskiy:]

Thank you very much for participating in QIWI fourth quarter and full year 2016 earnings call. That would be it probably for today.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.