QIWI plc
Q3 2014 Earnings Call Transcript

Published: 11 Nov 2014

[Operator:]

Greetings and welcome to the QIWI Third Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I will now like to turn the conference over to our host, Mr. Yakov Barinskiy, Investor Relations for QIWI. Thank you. You may begin.

[Yakov Barinskiy:]

Thank you, operator and good morning everyone. Welcome to the QIWI third quarter earnings call. I am Yakov Barinskiy, 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 Tuesday, November 18, 2014. Access information for the replay is listed in today's earnings press release, which is available in our Investor Relations website at investor.qiwi.com. For those listening to the replay, this call was held and recorded on November 11, 2014. 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 of 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. I am very pleased with our third quarter, as we continue to demonstrate strong operational and financial results, which reflects great execution so raising market share in key verticals, and our focus on delivering best-in-class services to our customers, merchants, and partners. Turning to the numbers. Total adjusted net revenue increased 57% to more than RUB 2.3 billion in the second quarter. Payment adjusted net revenue was up 57%, driven by strong payment volume and net revenue yield growth in our e-commerce financial services and money remittances verticals. Adjusted EBITDA grew a strong 92% in the quarter reflecting top-line growth and continued operating leverage in our business and adjusted net profit also grew 92%. In the third quarter, total payment volumes grew 15% to RUB 164 billion. Volume growth in our key market verticals e-commerce financial services and money remittances together comprised 56%, which demonstrates continued market share increase. Active Visa QIWI wallet accounts grew 10% as compared towards the third quarter of 2013, to reach 16.5 million total active accounts on the annual basis. Looking back into the last three quarters we were having an average of 200,000 new users per quarter. This quarter we have added 700,000 as compared to the end of the last quarter, which reflects the efficiency of our marketing campaigns and growing awareness of our services. Now, I would like to walk you through some important recent developments. During this quarter we launched a variety of different marketing campaigns, which include discounts on goods and services with leading merchants, various custom acquisition programs, fee elimination for certain payment categories, as well as some new cross sell programs for recurring customers. All these together have resulted in growing royalty of existing user base together with addition of 700,000 new customers as compared to the end of last quarter. At the same time, we have significantly grown our network of kiosk by executing wholesale rental agreements with large federal retailers. Not only do these agreements deepen our countrywide presence but they also provide an additional security for the agent network by bringing higher than average volumes. Just recently we have announced partnership with eBay, which is a very important milestone in the history of the company. It proves the value of our system to largest international ecommerce companies, fuels ecommerce vertical growth, and opens new opportunities for strategic partnerships with large international merchants. I'm very proud of my team that was working on the project, which took just over nine months. This is incredible result. 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 financial and operating performance in the third quarter. Beginning with revenue. Total adjusted net revenue increased 47% to almost RUB 2.4 billion, up from RUB 1.6 billion in the prior year. Total adjusted net revenue excluding inactivity fees increased the same 47% compared with the prior year. Payment adjusted net revenue increased 57% to almost RUB 1.8 billion, up from RUB 1.1 billion in the prior year. As a result of the strong revenue growth in our ecommerce financial services and money remittances verticals, which grew 70%, 128%, and 95% respectively. Revenue performance was driven by solid payment volume growth and growth of the net revenue yields. Other adjusted net revenue increased 24% to RUB 626 million, up from RUB 503 million in the prior year. Other adjusted net revenue, excluding inactivity fees, increased 18%, mainly driven by growth in the interest income and cash and settlement services, partially offset by a decline of advertising revenues and our ongoing investments in call centre, which we include in other net revenue. Moving to expenses. We generally continue to experience positive operating leverage in our business, which continues to drive our adjusted EBITDA and net profit growth in excess of our revenue growth. Adjusted EBITDA increased 92% to RUB 1.5 billion, up from almost RUB 800 million in the prior year. Adjusted EBITDA margin was 64% compared with 49% in the prior year. The increase in adjusted EBITDA was primarily driven by revenue growth and continued operating leverage in the business. Adjusted net profit increased 92% to almost RUB 1.2 billion, up from RUB 605 million in the prior year. Adjusted net profit excluding inactivity fees net of tax more than doubled compared with the prior year. Finally, as you saw in our earnings release, following the determination of the third quarter 2014 financial results, our board of directors recommended a dividend of RUB 0.38 cents per share. This is a record breaking dividend in Russian rubles, although it is less in terms of cents per share than the dividend declared and paid for Q2 2014 results due to the devaluation of the Russian ruble in the recent past. In general, we remain committed to distribute all excess cash to our shareholders in the form of dividend. Now, on to our guidance. Based on our strong third quarter results, we are raising the 2014 guidance provided on our last quarterly call. Net revenue to increase by 32% to 40% and adjusted net profit to increase by 60% to 70% over 2013. As we say in our earnings release we face the market economic slowdown in Russia, which can potentially negatively affect some of our key verticals, and especially financial services vertical. We have, as of now, low visibility as to effects of the slowdown in our volumes and revenues in Q4 and in 2015. We therefore provided the short-term guidance that broader than usual intervals between low and high ends of the guidance range. We will monitor the situation closely and we'll report to you our newest dimensions, in case we will see that the current guidance may no longer be relevant. It is also important to stress that our 2014 guidance include the shifts of our ongoing investments in our key verticals, which include but are not limited to at least more consumers marketing campaigns, promotional activities without key merchants, and launch of new products. We anticipate that this investments will flow from both our top-line by virtue of introduction of better than market peers and different options and discounts in certain new verticals, as well as through marketing and advertising expenses. We also are now running our models to estimate the volumes and revenues in 2015 in order to prepare the 2015 budget timely. We'll come to you with our 2015 guidance as soon as we get our 2015 budget finished, and we have reasonable estimation for volumes and revenue in 2015. With that, I pass it back to Sergey for a closing remark.

[Sergey Solonin:]

Thank you, Alexander. Though the macro situation may affect some of our verticals in the short-term, we really see a great potential in current environment to increase our market share, as well as to attack new market segments that otherwise we're not in focus. We believe that we have the unique opportunity to build a great basis for the future growth and we have to invest in that basis here and now. We are currently more than ever committed to expand our operations and build a platform for our growth in the future using our advantages in the current environment. With that operator please open up the call for the question. Thank you.

[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 Georgios Mihalos with Credit Suisse. Please proceed with your question.

[Ryan Davis:]

Hi, guys. This is Ryan filling in for George. Congratulations on the quarter. My first question is stems around the long-term guidance; is there any change to your thoughts around the long-term 20%, 25% revenue net earnings growth?

[Alexander Karavaev:]

No, look as we said, we just need to see how that market slowdown will affect our volumes and revenues for the next couple of years. So generally speaking we remain positive on the market and we believe we can gain share, though we really face that 2015 can be a tough year and let us do our homework and we will come to you as soon as we have the real estimation of the wallet revenues.

[Ryan Davis:]

Okay. And I guess third quarter to-date -- may be from our fourth quarter to-date may be from what you can say. I mean has there been like a material slowdown in third quarter?

[Alexander Karavaev:]

We see certain slowdown in financial services, obviously other than that not yet really.

[Ryan Davis:]

Okay, perfect. And then my second question can you kind of help us frame what the eBay deal means for ecommerce volume growth and net revenue yield. And are you guys pursuing more fiscal online partnerships?

[Sergey Solonin:]

Well yes, we think that eBay deal will push our volumes up in the next year. So it is I don't think that we will have this impact immediately. So I think that as it was with Alipay before the volumes will really grow throughout the whole year. And we do have some efforts in connecting to other big players in physical ecommerce market as soon as we are focusing on that particular segment.

[Ryan Davis:]

Okay. And my final question revolves around the financial services net revenue yield, is it reasonable to expect that to contract a little bit moving forward, correct me if I'm wrong but I believe it's the merchant fee was cut in a lot of those transactions?

[Alexander Karavaev:]

Yes, exactly right. So we really expect the stabilization of the net revenue in financial services. On top of that we -- again as we told we really see great opportunity to gain the market share now. So what we may be doing is not the kind of effect, we may decrease the prices for certain banks just to acquire new consumers and new volumes that obviously will affect the net revenue yield. But generally we really see the net revenue yield and that vertical should be stable.

[Operator:]

Thank you. Our next question comes from the line of Bob Napoli with William Blair. Please proceed with your question.

[Bob Napoli:]

Good morning, good afternoon depending where you’re at. It's a great thing last week Sergey said Money 20/20. Nice quarter, just a question on the growth of the acceleration and growth of ecommerce and the pickup in the ecommerce revenue yields, what were the drivers to the acceleration in that vertical?

[Alexander Karavaev:]

Actually we are still gaining market share in that and -- especially if you remember the majority of that volumes to comprise the (inaudible) the ecommerce let's say the social network gaming and so on. We see a great traction in let's say classical ecommerce, meaning online sales, physical goods that is one of the reasons especially those large players like Alibaba with whom we're partnering in Russia. And we're still gaining the market share we believe over the last few months in the -- via chagos so that's on the volumes. On the net revenue let's say it's all thresholdship it's a product need. So basically as soon as we gain a long stay well let's stay those guys would usually be playing higher commissions than the large players and that's what is driving the net revenue yields up.

[Bob Napoli:]

Okay. And just the real relationship with Alibaba and Alipay, how long has that been in place and can you give any metrics around that or how was that grown?

[Sergey Solonin:]

We actually started the preparation like a year ago and actually took us one year just to run all those marketing campaigns. And so we do not disclose the volumes specifically for that merchant. But we can say that the preparation was very successful and Alibaba is now one of the top merchants of QIWI overall. So it was gaining share in our volumes and developing quite fast in terms of the volumes and number of the consumers who are using that service.

[Bob Napoli:]

And essentially it's -- that service would be Russian consumers purchasing goods Chinese goods or on Chinese gains or what products are you -- are going through Alipay, Alibaba?

[Sergey Solonin:]

Well mostly its physical goods product so it's the small physical goods below I think U.S. $100 for a part so that are being sent to Russia from China.

[Bob Napoli:]

Okay. And I mean the eBay relationship with may be probably be smaller than the Alipay relationship, are there any differences, I mean that the eBay has announced that the Visa QIWI wallet, whereas Alipay is not this is eBay is that relationship, a different type of relationship?

[Sergey Solonin:]

It's very similar because you can pay with Visa QIWI wallet on the website of Alipay. So on the website where you order the goods you will be prompted to checkup with QIWI and in technical speaking this is very similar. Well, in eBay we expect to have the average check which will be larger than from Alibaba, that's the only difference I think.

[Bob Napoli:]

Okay. And just on remittances, remittance business is -- do you still think that that's, I mean the growth is very good 77% slowing off a very high numbers but you think that the remittance business, well how much potential does that business have?

[Alexander Karavaev:]

It has great potential and just how you see that. So again given that macro slowed down the market itself cannot be growing as fast as we would wish at least for the next several months. But in terms of the market share, we gained substantial market share over the past few months given all the campaigns that were launched and also the pricing that we decreased. So we continue to take that market this year and next year.

[Operator:]

Thank you. Our next question comes from the line of Alexander Vengranovich with Otkritie Capital. Please proceed with your question.

[Alexander Vengranovich:]

Yes, good morning. A couple of questions. First on the cost side. So I have noted there is a decrease of G&A expenses year-over-year of around 10%. Can you please like comment how much of this was really a one-off effect? And second, I've noticed that you've substantially increased your advertising campaign on T.V. in the fourth quarter in Russia. So should we expect a major increase in the G&A expenses in the fourth quarter, quarter-over-quarter and what should be the like normalized level for G&A going forward in the absence of a major partnerships in case you announced them? And second question to you on the cost side. So I have noticed there was also reduction of the effective tax rate. So could you please also comment on that?

[Alexander Karavaev:]

Okay. On the cost side there are fewer shifts actually some of the sales that we are facing a microeconomic slowdown we are obviously are keeping the cost under control and that has been always the focus of the company. So that is probably the major effect. Now, a part of that we really put in place additional procedures in the process of how we grant the credit limits -- credit support limits to our agents. And that is how that in effect that we had much less bad debt expense that we would usually would have and that is a second large factor. In terms of what's going to happen in Q4 and going forward, yes, obviously we see a great momentum now to actually invest in advertising and marketing campaign because we -- I mean at least those have proved successful. So we may expect certain amount of advertising to flow through P&L in Q4. Those at least based on our estimation (inaudible) will not be much different from what we had in Q3. So I wouldn't really expect a hike in expense in Q4. And again what we're going to having in 2015 there, let us choose to run our models on the revenue side than the number of consumers. But again our policy remains to stay under -- having the cost to stay under control. On the effective tax rate, yes, I mean it is generous to push up expenses of scale effect obviously we -- our best practices in the intergroup are perhaps in a way that we achieve the kind of the savings on taxes. Again, generally speaking, as we've always told we would really believe that kind of normalized tax rate that doesn't hidden for such type of business should be around 25% and that is probably something that you have to incorporate in your models growing forward.

[Alexander Vengranovich:]

Okay. Good. And just a second question on the partnerships and potential M&A's. So a quarter ago you're talking that you are considering some M&A. So can you please give us an update of what's happening here and also on the partnership with one of the mobile operators should we really expect that you will launch some visible product by the end of the year?

[Sergey Solonin:]

Well, yes hopefully we will be announcing something to the end of the year with mobile operator. And on the other partnerships and M&A's we're still looking at the deals. So we're not in a hurry. We're trying to find the best deal as possible. So we have few of them on the table. So we have to be sure that it is a strategic business for the company and fully accreted to our share price. So we will look -- we want to use some more time to think about that and then need to do something.

[Alexander Vengranovich:]

Okay. Good. Thank you. And John, just a final question in connection to that. So I've noticed like there is still a huge amount of the cash fit in on your balance sheet since the IPO. And as far as I understand, you reserve it for the future potential M&A's. But in fact for example in case you see that probably it's not a good moment to do any M&A's. Would you in any situation consider the usage of this cash either for -- either to increase the dividend or may be to do some buybacks? And was this anyhow discussed by the board yet or not?

[Sergey Solonin:]

Yes. If we see that there is no deal available or we decide not to do the deal then we will distribute money as dividend.

[Operator:]

(Operator Instructions). Our next question comes from the line of Meghna Ladha with Susquehanna. Please proceed with your question.

[Meghna Ladha:]

Yes. Hi. Thanks for taking my question. And Sergey, it was good seeing you as well last week. Can you talk a little bit about the trends in average spent per wallet? I know you don't disclose that metric but it would be good to just get some color what you saw this quarter given that you spent a lot in marketing and promotions, what's is historically, what that look like?

[Sergey Solonin:]

Actually, the spent was growing across several quarters so it is still growing. And the primary reason was actually the growth in the money remittance and financial services where you obviously would see much larger either checks than for example in ecommerce. So and what's going to be happening with other checks generally, I mean they obviously will be affected by the inflation. But that would very much depend on the product mix. So still we would see money remittances to be one of the growth drivers and that obviously will drive the Visa QIWI Wallet up. Again, if you're talking about each of those royalty cost, then I would say that the spent per wallet in each specific royalty call is more or less stable of now and we expect that to continue.

[Meghna Ladha:]

Okay. And then, with respect to advertising and marketing, last quarter you talked about spending about RUB 130 million in the second half, how much of that was spent in the Q3?

[Sergey Solonin:]

Well, I mean we do not disclose that exact amount but we really think that it's RUB 130 million that we have mentioned after Q2 call that was actually the amount that we under spent in H1 and that one we believe we'll go on top of what was planned for second half anyway. So but -- I mean, again compared to our revenue those amounts are not that significant. So generally speaking, you would not see any kind of substantial in some of the expenses in Q4.

[Meghna Ladha:]

Okay. And then, I know you asked about the tax rate and you're seeing some benefits this quarter. How should we think about the tax rate as we exit the year? I know the normalized tax rate you said about 25% going forward which I would assume is 15%. But how should the 2014 tax rate look like?

[Sergey Solonin:]

I mean 2014 should be probably slightly below than 25% but that difference would not be that material so.

[Meghna Ladha:]

Okay. And then, just lastly, you talked about -- and I'm saying a potential partnership with the mobile operator at the end of the year. But can you help us understand the revenue opportunity for QIWI, if a partnership is announced? Thank you.

[Sergey Solonin:]

Well, I would not expect really jump -- real jump in revenues because of that partnership. So we are -- we will be starting. And as soon as we are working -- we will be working on the profit share model so it will be a gradual increase. It's more about I would say protection of our future growth targets than a real upside of these targets for the next two years.

[Operator:]

Thank you. Our next question comes from the line of Anna Lepetukhina with Sberbank. Please proceed with your question.

[Anna Lepetukhina:]

Yes. Hello. I have several questions. My first question is on money remittances. I'm just trying to understand whether you're seeing that there is a lag between campaigns that you launched in August with some payment services and the growth in payment volume. So I do understand that there was kind of macroeconomic effect. But kind of is this the growth that you expected given kind of all the campaigns that were launched? My second question is on personal expenses. Can you please provide some color on what growth you see, where that is growing in line with revenues and whether kind of going forward you need to expand in plain number? Thank you.

[Alexander Karavaev:]

So okay on money remittances yes we obviously saw actually the good efficiency of the campaigns that were launched. So and we obviously see that in volumes and we still deliver that specific vertical is very price sensitive. So we're likely to continue with good pace and we'll continue to gain the market share in that so that is our estimation. On the personal expenses, yes, we've historically had those under control especially now where we face some slowdown. We will not be expecting that I mean historically the growth was something like 15% on average so we were gaining like 5% in jobs of new headcount around 10% of our average inflation of salaries. For 2015 that can be a bit more conservative and that would our kind of deliberate policy to work on the cost side, though generally in the market I think what we've been doing so far will be the trends for the next few years.

[Anna Lepetukhina:]

And just one more question advertising revenues, can you please disclose what was the number in third quarter if possible?

[Alexander Karavaev:]

Sorry I don't have that numbers in my hand but it was lower than last year. So we still, that market especially now is declining. So everyone feeling bad and we're developing let's say new expenses on how we're going to be attacking this market form a standpoint of small or medium enterprises. So as soon as I have any feasible estimates on how that's going to evolve next year, we'll come to you and explain.

[Operator:]

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

[Ulyana Lenvalskaya:]

Thanks and good morning gentlemen. Most of my questions were already answered. May be given we are in the middle of November now, could you please elaborate if you see the same trends in the number of new wallets as in the third quarter continuing now supported by the marketing campaign or not?

[Sergey Solonin:]

Yes, we are still gaining new comers so we still see that our companies are efficient to-date.

[Ulyana Lenvalskaya:]

So can you may be quickly on the quite visible growth in numbers of terminals, what are the drivers behind and what should we expect by the end of the year?

[Sergey Solonin:]

Well we have signed quite important agreements with few big retailer.

[Ulyana Lenvalskaya:]

Yes, yes.

[Sergey Solonin:]

And we announced that. So I expect for through the end of -- this year next year expect that we will have a decent growth numbers in the physical distribution as soon as the turnovers have grown quite much and for the wallets. So we expect that we will need to increase the number of terminals in the next year.

[Operator:]

Thank you. Our next question comes from the line of Dmitry Trembovolsky with Goldman Sachs. Please proceed with your question.

[Dmitry Trembovolsky:]

And so my questions have been answered just may I would just come back to the advertising revenues which I think Sasha said that there is no clear estimate he has had. I mean do you -- would you guys -- would you mind to giving us the numbers may be later on, on the calls or may be after this call, because we would use it in the model if it's possible?

[Sergey Solonin:]

Thank you for your question. We obviously would disclose all the numbers as soon as we file 20-F Annual Report so you'll see everything there.

[Dmitry Trembovolsky:]

When is that roughly?

[Sergey Solonin:]

We don't have yet an estimation but it usually would take us 60 days after the year-end to prepare the report and publish that.

[Dmitry Trembovolsky:]

All right. So you'll no longer disclose quarterly advertising revenues as you did in the past just for us to be clear about that?

[Sergey Solonin:]

As long as these do not comprise the majority of our revenues, no.

[Operator:]

Thank you. Our next question comes from the line of Lea Chaftari with Janus Capital. Please proceed with your question.

[Lea Chaftari:]

Hi congrats on a great quarter. Could you please elaborate in detail on the regulation issues on identification of your client that was mentioned by one of the brokers recently and please tell us if there is any risk on the business whatsoever from the issue? Thank you.

[Sergey Solonin:]

Thanks for your questions. We believe that we are compliant to a maximum level possible given the deficiencies of the gateways that are provided to us by governmental authorities as of today. Our level of procedure is the same as other electronic wallets -- in other electronic world systems and we do not expect any problems with regulators with whom we work closely on these issues. Thank you.

[Operator:]

Thank you. Mr. Solonin there are no further questions at this time. I'd like to turn the floor back to you for any closing and final remarks.

[Sergey Solonin:]

Thank you very much, operator. Well I want to congratulate everyone with these results. I think our team made a very good effort this quarter and looking forward for good results in the fourth quarter. Thank you all and good luck.

[Operator:]

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