Qiwi PLC (QIWI) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the QIWI second-quarter 2013 earnings conference call. Today's conference is being recorded.

At this time I would like to turn the call over to Yakov Barinskiy, Head of Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to the QIWI second-quarter 2013 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, September 3, 2013. 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 of this call, it was held and recorded on August 27, 2013.

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 prospectus on Form 424(B)(4) filed on May 3, 2013, from our Initial Public Offering 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.

Thank you, Yakov, and thanks to everyone for joining us. QIWI delivered another quarter of strong operating and financial results. For the second quarter, our adjusted net revenue grew 62%, driven by strong growth in payment volumes, particularly in Visa QIWI Wallet, where we continue to see solid momentum in both new customer adoption and increased usage from our existing account holders.

Our adjusted EBITDA grew 88%, reflecting revenue growth and continued operating leverage in the business; and our adjusted net profit grew 57%. Our financial performance in the second quarter was boosted in part by one-off effects from the reintroduction of fees charged for inactive wallets. Alexander will walk you through this in more detail in a few moments.

Overall, our results for the second-quarter and first-half 2013 demonstrate the value of our proprietary network and comprehensive suite of differentiated payment services, as well as the continued execution of our strategic growth plan. Heading into the second half of the year, we continue to see positive trends in the underlying growth drivers of our business which, combined with our strong first-half results, gives us the confidence to raise our revenue and adjusted net profit guidance for 2013.

Alexander will provide you with more detail on our results and guidance in a moment, but first I would like to share with you some business highlights of the second quarter as well as some important recent corporate developments.

First, as I mentioned, we continue to see strong growth in our Visa QIWI Wallet business. The number of Visa QIWI Wallet accounts grew by over 50% to approximately 14 million, and payment volumes grew by 80% compared to the second quarter of 2012. We believe our customers truly recognize the value and the convenience our electronic wallet provides.

Second, as you are aware, in July we appointed Alexander Karavaev as our CFO and Anna Stoklitskaya as the head of our Visa QIWI Wallet business. Alexander brings a number of years of experience to the CFO role, including his experience as CFO of a large public company; and, as you know, he was previously our Chief Operating Officer.

Anna brings more than 15 years of strategic and production marketing experience to us from Procter & Gamble. The appointments of Alexander and Anna to their respective roles reflects our commitment to position QIWI to capitalize on the wide range of growth opportunities available to us, as well as our transition to a public company.

Finally, we announced today that our Board of Directors approved a dividend of approximately $16.6 million or $0.32 per share. Our dividend payment underscores QIWI's significant financial flexibility, supported by our strong free cash flow and balance sheet, and our commitment to enhancing total shareholders' value.

In summary, I am very pleased with our second-quarter results. As we look to the second half of 2013 and beyond, we remain focused on our growth initiatives of increasing the number of participants in our network, by enhancing our value proposition to our customers and partners, introducing and driving the penetration of new value-added services, and expanding our network distribution and market presence over the long term.

Now I will turn the call over to Alexander, who will discuss our financial results in greater detail. Alexander?

Thank you, Sergey, and good morning, everyone. As Sergey mentioned, QIWI generated strong financial and operating results in the second quarter of 2013.

On a consolidated basis, our total revenue increased by 36% to RUB2.9 billion, compared to RUB2.1 billion in the second quarter of 2012. Our adjusted net revenue for the quarter increased by 62% to RUB1.56 billion, compared to RUB0.97 billion in the second quarter of 2012.

By reporting segment, QIWI Distribution net revenue grew 16% to RUB782 million. Revenue growth was driven primarily by 12% growth in payment volumes, to approximately RUB124 billion, and to a more limited extent by an increase in our net revenue yield, supported by the growth of our high-margin value-added services and other auxiliary services that we provide to our network participants.

For example, the revenue from advertising increased by 26% in the second quarter of 2013 as compared to the same period in 2012, to reach RUB134 million. You may see that advertising revenue significantly outpaced the growth of QIWI Distribution net revenue.

We also wanted to re-emphasize that in prior periods the increase in the payment volume of QIWI Distribution is fueled by the significant network effect, and [of which] increasing volumes of Visa QIWI Wallet reloads drive volumes and driving up QIWI Distribution. To illustrate this fact, the intergroup revenue of QIWI Distribution, which primarily comes from QIWI Wallet reloads, in the second quarter of 2013 constituted approximately 34% of the total gross revenue of QIWI Distribution for that period, up from approximately 19% for the corresponding period in 2012.

Visa QIWI Wallet net revenue increased 185% to RUB755 million. Revenue growth was primarily driven by three factors -- first, an increase in active accounts and payment volumes; second, an increase in net revenue yield; and third, a change in the way the Company charges for inactive accounts. [Idle] gift cards issued is another.

Visa QIWI Wallet payment volumes grew a strong 80% to almost RUB59 billion due to the factors described by Sergey. Visa QIWI Wallet net revenue yield was 1.29% in the second quarter of 2013, up from approximately 0.81% in the corresponding 2012 period. The increase in Visa QIWI Wallet net revenue yield was primarily driven by an increase in payment volumes associated with higher revenue-generating transactions such as eCommerce as well as a change in the way the Company charges for inactive accounts, mentioned before.

Lastly, beginning in March 2013, QIWI introduced a fee for inactive wallets that was temporarily discontinued in October of last year. These fees amounted to RUB224 million in the second quarter of 2013, up from approximately RUB29 million in the same period of prior-year.

While we expect to have these revenues to be recurring going forward, the amount in the second quarter of 2013 is the result of effectively a catch-up of the inactive balances accumulated starting from the last year, when we temporarily discontinued to charge these fees. And we therefore expect the amount of these revenues to decline in the near future to levels we've seen historically before the discontinuance.

The year-on-year growth rate of adjusted net revenue, adjusted EBITDA, and adjusted net profit in the second quarter of 2013, excluding the effect of revenue derived from inactive accounts, were 43%, 48%, and 13%, respectively. I would like to highlight that even when excluding these one-time benefits, Visa QIWI Wallet net revenue still more than doubled when compared to the second quarter of 2012.

Now moving to the expense side of our income statement, first of all I would like to mention that we have generally continued to experience positive operating leverage in respect of the majority of our expenses. Now I will walk you through major items with significant fluctuations year over year.

The first item is bad debt expense, which increased in the second-quarter 2013 almost 8 times as compared with the same period in 2012, to reach RUB73 million, as compared with RUB9 million in 2012, due to the fact that we booked an additional provision for doubtful accounts in respect to [shorter watch] overdrafts to agents.

Secondly, profit of foreign exchange gain of RUB4.2 million in the third-quarter 2013 versus a foreign exchange gain of more than RUB51 million in the corresponding period of 2012, which primarily resulted from gains on launch [efforts] in the [United] in US dollars and euro held by QIWI [deals] here the second quarter of 2012.

And third, we recorded RUB93 million of share of loss of associates, together with the impairment of investments in associated in the second quarter of 2013, as compared to RUB6 million loss in the corresponding period of 2012. The increase in share of loss of associates and the corresponding impairment was predominantly caused by one associate, [Ging Airline], and investments which we have completely written down to zero due to the deterioration of its operating results.

The carrying amount of investments from associates is zero on our balance sheet as of now. Consequently, we do not expect any significant further losses arising from those this year.

Finally, Sergey mentioned we announced today that following the determination of second-quarter 2013 financial results, our Board of Directors approved a dividend of $16.6 million, or $0.32 per share. Please note that the amount of dividend was also positively affected by the one-time effect of the revenues we generate from inactive wallets.

The determination of future dividend amount will depend on the fact [of] circumstances after the end of each particular quarter; and the final decision rests with our Board of Directors. The dividend's record date is September 9, 2013, and the Company intends to pay the dividend on September 10.

Now I would like to review our 2013 guidance. Based on strong results for the first half of 2013, we are raising our adjusted net revenue and adjusted net profit guidance ranges. We now expect adjusted net revenue to increase by 27% to 30% over 2012, versus our prior outlook of 21% to 26% growth. And we now expect adjusted net profit to increase by 35% to 40% over 2012, versus 27% to 32% previously.

With that, may I comment the operator to open up the call for the questions.

(Operator Instructions) Bob Napoli, William Blair.

Thank you. Good morning, or good afternoon. The question on the pay, the QIWI Wallet, what percentage of the payment volume is coming from eCommerce?

And what is the trend? What would you expect that trend to be over the next year or two?

Hello. It's Alexander. Thank you for the question, Bob.

Look, we are not disclosing the percentage of volume that comes from eCommerce, but generally speaking we have emphasized that in the past -- and we can re-emphasize -- that the eCommerce is one of the fastest growing segments in our portfolio in Visa QIWI Wallet. Actually we expect to continue to increase our share in eCommerce in Russia over the next few months.

Okay. Maybe a question on the inactive accounts, the RUB224 million that you earned this quarter. What would be a normal run rate, I guess, for that? And what was the reasoning behind halting the fees and then re-adding them?

Okay. Thank you very much. We have discontinued the -- let me start by saying that historically that has been, let's say, a normal revenue stream. And usually what is happening is that people after some period of activity would never be coming again; and actually we historically charged for inactive accounts.

We have discontinued that revenue stream in October of last year because we transferred the operations of QIWI Wallet from a commercial (inaudible) within the Group to a bank due to the new law that was coming in force in Russia. And due to the legal implications we actually needed to have a six-month period until we might introduce that policy again.

I think we communicated previously that that [write-off] with the introduction of these fees was in our budget starting from Q3 of this year, while we started in on legal [forms]; we have got the clearance from the legal point of view. So effectively what happened is that we catched up those inactive wallets, inactive accounts that [working away] since the kind of time when we discontinued.

Going forward, we actually expect that amount to be recurring, though it should come to more normal levels that we have seen in the past. Historically, as we presented in the press release in Q2 of 2012, that amount was approximately RUB29 million.

Generally speaking, we are not really providing the guidance on exact amount of those revenues, because it is not [easy] to predict it. It certainly depends on the churn and on the activity of the user. But though we expect that that amount would not be that significant in Q2 2013, but it rather could be close to something you have seen in Q2 2012, going forward.

Okay. And Sergey, the competitive environment, I mean PayPal is making more noise about entering Russia. I know it is not going to be easy for them. I am just wondering if you could comment on any changes in the competitive environment from either the likes of PayPal or Yandex Money or other new competitors?

Well, no, we did not feel an effect from PayPal or the competitors, although I know that recently their bank announced some program to increase its presence in retail on self-service kiosks. But I am not sure about that.

Okay. So you are not seeing any -- your outlook on the competitive environment is --?

No changes. And also we introduced measures a few months ago, when we stopped providing QIWI services on competitors' self-service kiosks. So we think that QIWI now in a quite favored position in retail, as soon as -- the turnover on kiosks is quite substantial for Visa QIWI Wallet.

Right. Thank you.

Alexei Gogolev, JPMorgan.

Hello, everyone. My question relates to the guidance that you provided. Could you maybe quantify how much of the guidance increase came from the additional benefits or one-off of the inactive accounts, and how much of the guidance increase was on the back of your general better outlook for the year?

Thank you very much for the question. (technical difficulty) We are not really quantifying those effects in our guidance. What I can say is that certainly this one-time benefit that we have had in Q2 helped us to increase the guidance, though we are optimistic about our outlook for the rest of the year. And we generally see good trends in acquisition of new customers in Visa QIWI Wallet and in the activity of our customers.

Though as we have previously communicated, we are still in investment mode. We reiterate that we may be [investing somewhat rules] for P&L both for the top line, by adding some of the new products that will not produce huge revenues for us, though we will increase the consumer base.

And as well, on the OpEx side, we may be investing some more in the education of the consumers, in the advertising and in promotion campaigns that we feel will increase the number of users that are using our QIWI Wallet. And we also plan to invest certain amounts into our development that will go through our operational expenses, like the project with Visa that we need to develop certain protocols, as well as some other stuff. So, those are probably the major programs behind the guidance for the rest of the year.

Dave Koning, Robert W. Baird.

Yes, hey, guys. You mentioned that momentum continues to be pretty good after Q2. We are already about two-thirds of the way through Q3, and I am just wondering. Can we expect wallets and volume and pricing and average yield, all of those metrics to continue to be up sequentially in Q3? And maybe you can refresh us a little bit on seasonality in Q3 as well.

Thank you, David. Thank you for the question. Yes, indeed, this year is probably the first year when we can feel some seasonality in the consumer (technical difficulty) in the volumes and average volumes (technical difficulty) wallet.

It is actually a usual slowdown that you would see in the companies like Internet companies, when the people usually use less -- I mean Internet usage is less than using the rest of the year. So given that in Q3 we actually have July and August, those months are usually the summer vacation months. What you may expect is a certain slowdown in the usage of QIWI Wallet and the total volumes of payments.

We are not, though, guiding on each particular quarter. Our guidance is for the rest of the year.

And again, given our experience, what you may expect is the ramp-up of the revenues and usage of the QIWI Wallet starting from September and onward. So all in all, we probably would not expect Q3 to be -- to have the huge increases in terms of the usage, net revenue, and net income.

But I mean, given Q4 outlook, we are pretty confident in the guidance that we provided for the rest of the year.

Okay, so if I heard you right it sounds like we would expect some growth sequentially in Q3, just not as big as we have seen sequential growth the last few quarters; and then Q4 should be the bigger growth.

That's correct.

Okay. Then I guess my second question -- it looks like revenue and earnings guidance were nicely raised. But it also looks like really the raise was mostly just due to the Q2 benefits from the inactivity fees and that the second half is basically about as we would have expected it to be with the old guidance.

Is that the right way to look at it? Or do you feel like the second half, the core guidance is also better than you had expected in the past?

Well, as I talked previously, we really feel that from a fundamental point of view we are perfectly on track, and really see the expansion of the market, and the fact that we are likely gaining share in some of the segments of the markets which are more interesting, though we are now very much concentrated on developing a long-term step plan to invest in our future in 2014 and 2015.

And how we see that is that we would like to get as many users as we can and to increase the loyalty and the usage of QIWI Wallet as much as we can. That is why we basically would like to have the flexibility for the rest of this year to invest in the consumer base, both by actually investing in -- for the consumer base both from the OpEx and from the top line as well by adding those low-margin products which we believe will drive the audience. So that is actually the ground behind the guidance.

Okay, great. Well, thanks. You guys are doing a great job.

David Ferguson, Renaissance Capital.

Hi, good afternoon, everyone. Just two questions, please. Firstly, could you update us on where you are in terms of the progress on the multibank issuer model? Will we see any banks issuing cards either in Russia or anywhere else in the near-term?

Then similarly, on the last call you did talk about some fairly significant strategic partner agreements that you might do. Has the situation changed? Is there any update there since you last spoke to us? So that is the first question.

And then the second question, I know it is very early to talk about 2014, but maybe you could just say where you are happy for consensus revenue estimates to sit at this stage, consensus revenue growth estimates to sit at this stage for 2014. That's it. Thank you.

Okay, on multibank issue, we are planning to do one more bank in Russia to the end of the year. Also, we are introducing Visa QIWI Wallet with a bank in Kazakhstan also this year. I think we are now in the testing period in Kazakhstan, so it is already available as a service for Kazakhstan clients.

On our strategic partnerships, we are moving with Visa; we have in past said that. And we already connected to Visa processing directly.

So we are working on that and effect will be for -- we will be working on that all 2013 and I think 2014 as well, and you will see some products on the way.

And I will ask Alexander to answer the revenue question.

On the long-term guidance, look, during the IPO, during the roadshow we presented our mid-term guidance of a top-line growth of more than 20% and the bottom-line growth of 25%. And we actually do not see any reasons why we would not be sticking to that guidance as of now.

Though we're certainly going to be starting our budgeting process pretty soon to develop a budget for 2014 and the like, actually we may be, as you were saying, [with] some outlook for 2014 after we report the Q3 results.

Okay. That's great. Thank you.

Alexei Gogolev.

Hi, again. Thank you for the follow-up question. Could I find out whether or not there has been any progress regarding the potential partnership with one of the big restaurant/food retail chains?

We are in some talks with one of the big food retails, but we are not disclosing this information yet.

Okay, great. Thank you.

Ryan Davis, Credit Suisse.

Hey, guys. This is Ryan filling in for George. A few questions. What exactly changed with the inactivity fees? I guess compared to the second quarter of '12, does fee go up?

Then, more on that. What is a sustainable revenue yield in the wallet business moving forward?

Okay. Thank you very much for the question. In terms of the second part of the question, for going forward, we are not guiding towards the net revenue yield. But if you strip out the one-time effect, you will see something like 0.91% of net revenue yields in Q1; so that is probably something that we are going to be having going forward.

It can go up a little bit or go down due to some of our investments. So top line I mean it actually will not be changing substantially in the near future.

As for what exactly change it was, it is the following. We have discontinued the charging for inactive wallets last year and introduced that fee this year. This actually was publicly available information; you might see that in our public offer.

What we've been doing last year is that we were charging RUB16 -- it's approximately $0.50 -- per day of inactivity after the expiration of 6 months of inactivity. When we re-introduced these fees in March of this year, we decreased the price. So we are charging RUB10 for each day of inactivity after the expiration of 6 months of total activity of the account.

Okay, okay. Thank you. Could you guys give us some insight into the revenue derived outside of Russia and the growth rates there?

Excuse me just for a second.

Excuse me?

Could you please repeat the language?

The revenue derived from outside Russia, the growth rates and what you are seeing?

Okay. Thank you very much. I know we're not guiding separately on the revenue outside of Russia, but as Sergey mentioned, we may be having some new projects that we are going to be launching in the CIS potentially this year. Some -- one of those projects, it is in the testing phase now; so hopefully we are going to be seeing some increase in the revenue outside of Russia.

Though as we told during the IPO, the international expansion is one of the strategic, long-term initiatives, but we are not really expecting any significant monetary effect any time soon. So how we see that is from a financial point of view, from a point of view of revenues and not income.

The international expansion will only be visible starting from 2015 and beyond. And until that time we just will be investing in the consumer base and in the product in those countries.

Okay, okay. One more question and I will get back in the queue. As far as the value-add services in the Distribution piece, how high could that get as a percentage of total Distribution revenue? (multiple speakers)

If you are talking about the, let's say, pure kind of new type of value-added services, not related to payment volumes like the advertising and so on, it should be more than 10% of total Distribution revenues. And as you see on that, percentage was growing.

What we note, that this year as actually many of the industries, the advertising is subject to seasonal slowdown during the summer months, though strategically we actually expect that revenue stream to be one of the growth drivers. And we will expect that revenue stream to ramp up again and then in Q3 and onwards.

Okay. Thanks, guys.

(Operator Instructions) Bob Napoli, William Blair.

Thank you very much. Just a question on the -- your medium-term financial outlook, 20%, 25%. You are benefiting this year from the catch-up, I guess, in the inactive account fees. Is it your thought to grow 20% and 25% -- that your ability will be to grow that in 2014 off of this year's numbers, including those fees?

Yes, we believe we will still have a decent growth in (technical difficulty). Certainly when we are going to be reporting the 2014 numbers, then we will be actually able to make the numbers comparable, to see both including and excluding the one-off effect. Though again that one-off effect, if -- given that there will be, I mean, [flooding] throughout the year, will not be that huge for the whole-year result.

What we see is that other drivers like the increasing the number of QIWI Wallet users and the increasing share of eCommerce provide us the confidence that the growth projected in 2014 will likely continue.

Okay. Let's see, when you -- just a question. When you have these inactive accounts that you are charging these fees to, do you see a number of those accounts start to reactivate? Or -- and is it difficult to collect those fees if they are not active?

They are usually -- our strategy shows that as soon as the -- I mean, any strategic account was inactive for like a few months, and inactive means really inactive, so be careful never, I mean send any SMS or logged into the system, top-up. The account [placed] through the QIWI or Visa QIWI Wallet and so on.

And usually after the 6 months of inactivity, quite majority of those accounts will be inactive forever. Again, that usually would mean that the person probably has changed the cellular number, and this is how we see that.

Okay. Then last question on bad debt expense. The increase this quarter, is that -- can you give a little more color on that and what your expectations are? How to manage -- how you are going to manage that bad debt expense, what we should think about as normalized levels of bad debt expense over the long-term.

Well, actually, the bad debt expense, [they're] potential, and they have until the end of this year. We have already included in our guidance.

So what we are trying to achieve is actually to be [sense] relative. We actually reject some [large] accounts of the agents that we feel potentially may not be collectible, though it does not necessarily mean that those accounts are completely lost.

It is just our (technical difficulty) [mention]. And in certain cases we may be reserving some of the reserves, I mean the allowances, as soon as we see that the agent is (inaudible) back on track.

Going forward, it is really very difficult to predict. Certainly we have all the procedures in place to limit the credit risks, although it is given the [accretional] model (inaudible) Distribution, it really might [entail] (inaudible) risk. We disclosed that to quite a substantial dividend in the prospectus, with all the details.

Well, we believe that whatever happens with the bad debt expense we certainly are confident that we are going to be achieving the guidance. But (technical difficulty) stands we are doing everything in house that we can to manage that expense.

Great. Thank you.

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

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