Qiwi PLC (QIWI) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the QIWI third-quarter 2013 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 Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to the QIWI third-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, November 26, 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, this call was held and recorded on November 19, 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. (inaudible) in 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 statements reflecting events that occur after this call.

Please refer to the Company's most recent risk factors on Form F-1 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 adjustable net revenue, adjusted EBITDA, adjusted net profit, and adjusted net profit per share. Reconciliations for 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, everyone, for joining us today. I am pleased to report another strong quarter of financial and operating results. For the third quarter, our adjusted net revenue increased 49% year-over-year, reflecting strong growth across both our QIWI Distribution and Visa QIWI Wallet segments. Adjusted EBITDA grew 46% in the third quarter and our adjusted net profit increased by 56%.

Our results for the third quarter reflect continued strong secular growth trends in the payments markets we serve as well as the successful execution of our growth strategy. I am pleased with the progress we are making in driving the adoption of our Visa QIWI Wallet as well as with the progress we're making in further penetrating our target markets with our complementary suite of value-added services.

I would like to thank our management team and all of our QIWI employees for their continued dedication to making QIWI the leading next-generation payment service provider in our market. Alexander will walk you through our results and guidance in just a moment, but first I would like to share with you some business highlights, market development as well as some important recent corporate developments with a particular importance of QIWI.

First, we continued to see strong growth in our Visa QIWI Wallet business. The number of Visa QIWI Wallet accounts grew by over 50% to approximately RUB15 million and payment volumes grew by over 60% compared to the third quarter of 2012. We believe our customers truly recognize the value and convenience that our electronic wallet provides.

Second, we announced today that our Board of Directors approved a dividend of approximately $16.7 million or $0.32 per share. Our dividend payment is a reflection of QIWI's significant financial flexibility supported by our strong free cash flow and balance sheet and our commitment to enhancing total shareholder value.

Our Board of Directors approved the declaration of intent with respect to future dividend as you can find in the earnings release.

Next, we have seen in (inaudible) bank which used our advertising platform due to a structural change in the retail banking segment. In addition, certain mobile carriers substantially increased the fee for delivering (inaudible) to our clients. As a consequence of these two factors, we expect our revenues to continue to decline in Q4 on a year-over-year basis. In response to the changed market conditions, we expect in 2014 to substantially shift our focus in advertising to more (inaudible) types of advertising, the financial effect of our (inaudible) ability in 2014 is yet to be determined.

Also we moved to a new office in October, which simplified communications between business units and improves overall attrition. Finally in October, we completed a 9.4 million share (inaudible) offering from certain of our shareholders. I would like to thank our existing shareholders who participated in the offering for their continued support and to welcome our new shareholders. Alexander?

Thank you, Sergey, and good morning, everyone. We continued to deliver strong financial operating performance during the third quarter. I will now spend some time going through our results in more detail, starting with our revenues.

Our cost of revenue in the third quarter increased [33%] to approximately RUB3 billion, up from RUB2.3 billion in the third quarter of 2012. Our adjusted net share in (inaudible) was 49% to reach RUB1.2 billion, up from approximately RUB1.1 billion in the third quarter of 2012.

For reporting segments, QIWI Distribution net revenue grew 13% to RUB835 million. Revenue growth was primarily driven by 12% growth in payment volumes to approximately RUB133 billion. The increase in QIWI Distribution payment volume was principally driven by an increase in the Visa QIWI Wallet users reloading their wallets through the QIWI Distribution network. Due to risk factors that Sergey mentioned earlier, revenues from our value-added advertising service decreased by 12% in the third quarter of 2013 to reach RUB133 billion.

Moving to Visa QIWI Wallet, Visa QIWI Wallet net revenue increased 134% to RUB764 million. Revenue growth was primarily driven by the following three factors. First, an increase in active accounts, as Sergey mentioned, and [consistently] payment volumes growth. As a result of Visa QIWI Wallet payments and volumes growth, our 63% reached RUB64 billion in the third quarter.

Second, an increase in net revenue yield. Visa QIWI Wallet net revenue yield was 1.19% in the third quarter, up from 0.83% in the prior year period. The increase in Visa QIWI Wallet net revenue yields was driven primarily by an increase in payment volumes associated with higher volume-generating transactions such as e-commerce and through our higher customer fees for inactive accounts. As we discussed with you last quarter beginning in March 2013, QIWI introduced fee for inactive wallets but it (inaudible) continue in the summer of 2012. These fees for inactive accounts were RUB134 million in the third quarter up from RUB38.5 million in the prior year period.

While we expect to continue recognizing these revenues going forward, we anticipate the amount of these revenues to continue to deploy in the near future to levels we experienced historically before it was continued.

Total QIWI adjusted net revenue growth excluding revenue from fees for inactive accounts increased 42% compared to the prior year. Also I would like to highlight that even when excluding this year's Visa QIWI Wallet accounts, again almost doubled when compared to the third quarter of 2012.

Now moving to the expense side of our income statement, our selling, general, and administrative expenses increased to RUB684 million, up approximately 66% compared to the prior year period. SG&A expense in the third quarter was primarily impacted by a one-off, a one-time nonrecurring increase in overhead expense resulting from our transition to a new office building as well as to (inaudible).

Overhead expenses associated with the transition to our new office building as well as QIWI's (inaudible) will not significantly affect the profitability of our operations in the future.

Adjusted EBITDA was RUB793 million in the third quarter, up 46% compared to RUB542 million in the prior year. The increase in adjusted EBITDA was primarily driven by revenue growth. Adjusted EBITDA excluding the effect of revenue derived from inactive accounts was for RUB659 million, up 31% as compared to the prior year.

Adjusted net profit was RUB605 million, up 55% (sic - see Press Release, "56%") compared to the prior year period. Adjusted net profit excluding the effect of revenue derived from inactive accounts net of tax increased 39%.

Finally as Sergey mentioned, we announced following the determination of third-quarter 2015 results, our Board of Directors has approved a dividend of $16.7 billion or $0.32 per share. The maximum future dividend amount will depend on the fact that circumstances after the end of each particular quarter and the final decision rests with our Board of Directors.

The dividend record date is November 29, 2013 and QIWI intends to pay the dividend on December 3, 2013.

Now I would like to give you our 2013 guidance. (inaudible) performance is to date and our insight for the remainder of the year. We are raising our adjusted net revenue and adjusted net profit guidance ranges. We now expect adjusted net revenues to increase by 42% to 45% over 2012, versus our prior guidance of 27% to 30% growth. And we now expect adjusted net profit to increase by 50% to 55% over 2012, versus 35% to 40% previously.

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

(Operator Instructions). George Mihalos, Credit Suisse.

Congratulations on another good quarter. Just wanted to start off, Sergey, you made some comments about some banks getting off of the platform. Is there a way to ballpark that impact heading into fourth quarter and maybe when it began? Should we be thinking then that your wallet volume will slow in the fourth quarter but that the net revenue yield will be going up overall?

I think that we will not be able to justify the fourth quarter by any very good actions. I think in 2014 we will definitely do that because the banks were quite a big chunk in the revenue of advertising so to switch to another territory or another advertiser, it takes some time. So I don't think that it will be that quick.

In terms of the impact on the total volumes in wallets, I don't think that it will have impact because we will have some seasonal impact on volumes in December, so we will see quite a big increase I think -- seasonal increase in the end of the year on the volumes, so it will not affect that much our revenues.

Okay, so we will see more of this in 2014 as opposed to 2013. Is that --?

That's true, yes.

Okay, okay. And then looking at the net revenue yield, the underlying yield of 1.19%, which is up quite nicely, is that sort of a sustainable run rate going forward?

George, it's Alexander. So we think that's a sustainable run rate. Actually we were thinking that our mid- to long-term target in terms of net revenue yields should be around 1% so we reached that a little bit quicker than we planned. So we generally speaking do not have any immediate plans to substantially increase the yield, so we are still in the let's say investing mode. So we are going to be adding new products that will not produce a specially high yield for us but will produce these for a few consumer and we believe that net revenue yield into your wallet will be sustainable in the midterm.

Okay, great. Then just last question from me as it relates to the Visa relationship, can you kind of denote the progress that you are making in terms of the integration into Visa Net and the shift to the multibank issuer model? Maybe anecdotally how that is progressing. Thank you.

We have met a new team of Visa so that they made some changes in the team for Russian territory, so we met with them and now we have another meeting very soon when we will make some plans on 2014. So I would say we are progressing not as quick as we wanted but still we are on some changes on both sides we are moving our offices. Visa were changing some stuff and we were adding marketing, so I think we will be able to tell something in the first quarter of 2014. Right now we are just making plans and putting some figures into that plan. As I said before, the results or the impact on P&L will have only -- we think that we will have only 2015 and so it's all progressing and we will be progressing throughout 2014.

Okay, great. Thank you.

David Ferguson, Renaissance Capital.

Good afternoon, two questions, please. Number one, you've talked in the past about the potential to do some kind of deal with one of the Russian mobile operators. Can you update us on whether negotiations are still going on in that regard and if so how close are we to being -- to reaching any kind of an agreement? That's the first question.

And then number two, I know looking into sort of midterm you've talked about revenue growth of 20% to 25% but I guess that's an average over a couple of years. As we think about 2014, where are you happy for market expectations to be at this point? That's it, thanks.

Thank you, David. As for our negotiations with the sellers, we are keeping them going, so we are I think progressing quite good on that. The contract itself is kind of complicated so it's not (inaudible) for us and we are still in the progress. We are already doing something internally on our side and on the seller side to support this project but I don't think that we will be able to release anything before the end of the year right now. So I think it will be moved to the beginning of the next year.

On the 2013, we are basically are now in the budgeting process for next year. We have one Board meeting with the -- where we discuss the strategy and key parameters of the budget that we would like to achieve in 2014 and beyond. That process is not yet completed. Though we remain confident that we basically would like to reiterate the midterm guidance that we provided at IPO that our net revenue will be growing at 20% plus year-over-year and net income at 25%. We need to put out some of our some things in our revenues and expenses something like the changing landscape in the banking industry that Sergey gave to us so we will be coming back to you with 2014 guidance after we issue our 20-F for 2013.

Okay, all right, thanks a lot.

Dave Koning, Robert W Baird.

Guys, great job again. My first question I guess is last year when we look at net revenue growth in the fourth quarter, it was up a little over 15% sequentially. This year the way that you are guiding for the full year guidance, you are kind of implying a flat sequential Q4 if we exclude the extra 138 million of inactivity fees from Q3. And I'm just wondering, are you attempting to be conservative with the Q4 kind of implied guidance? Just because it seems like Q4 would have a nice seasonal ramp.

Yes, exactly. On Q4, yes, we would like to be conservative for this. We provide the guidance that we believe is perfectly achievable and we for Q4 from the standpoint of our core operation in QIWI Division, QIWI Wallet, we are quite confident about the growth rates and those are quite visible. But as Sergey discussed, we had that change of landscape in advertising revenue line and that's let's say an amount (inaudible) so far, so we are now reiterating what impact that's going to be having in Q4 and going forward so that's why we cannot really estimate exactly the share on the net revenue of that specific line item. That's why I would like to be conservative.

Okay, that makes sense. My other question is I guess in the QIWI Distribution business, volume growth continues to be very strong and I think 12% growth again this quarter. Is that something that you do expect to get closer to the mid-single digits over the next few quarters? Because it has continued to hold up so well.

Look, frankly speaking as we discussed, we are likely going to be changing the composition of the segments and QIWI Distribution is becoming just one of the channels for QIWI Wallet. So we are not really guiding separately on QIWI Distribution growth rates.

Though the effect of the actual off year, QIWI Wallet is now feeling the quite substantial degree of the growth of QIWI Distribution while (inaudible) [profitability]. Again internally, we would expect that QIWI Distribution will continue to be fueled to a substantial degree by the growth of QIWI Wallet though it is not a matter of all of the guidance so we will actually going to be representing three years the products and categories rather than business units separately the QIWI Distribution and QIWI Wallet.

Okay, how much of QIWI Distribution's revenue now comes from advertising and maybe how has that changed over the last several quarters now?

It's been growing quite substantially but in Q3 it actually is decreased a little bit due to the effects that we discussed. As of now, total net revenue from advertising in QIWI Distribution is less than 5% of total QIWI Distribution revenues. In Q3 -- (multiple speakers)

Okay, thank you.

Chris Kennedy, William Blair.

Thanks for taking the questions. Solid quarter. I guess two questions. One, just going back to the revenue yield, can you talk about the business mix and kind of how e-commerce grew and kind of what percentage of total volume that it represents now?

Look, we are not disclosing that. Again, as I said, we are now rethinking our understanding of what the segments of the Company should be and we may be disclosing that next year but we reiterate that e-commerce is one of the fastest-growing segments and that is primarily the reason for growing yields.

Okay, great, and any update on the regulatory environment in Russia? A few things are going on. Can you just comment on that? That would be great, thank you.

We think that there may be some regulatory changes in the banking segment, so we foresee -- there can be a further increase in the reserves rates and maybe it will affect things. So if the bank effect will be big, we will still continue to see some decreases in this segment or not that fast growth that we experienced before on for example, loan repayment programs. But again, it depends on what will be the reaction of the market on these changes and will the changes be. So we don't foresee any regulatory changes in our particular segments of other wallets or e-money.

Polina Urgyumova, Morgan Stanley.

Good evening, gentlemen. Thank you for taking my questions. I have three of them. First, your new guidance on revenue implies a slowdown of revenue growth in Q4 down to 25% on my estimations. I just wanted to make sure that this does not include any significant impact from macro slowdown in Russia.

So to rephrase this question, do you see any impact on your business from the continuing macro slowdown in Russia or not? This is number one.

Number two, can you please roughly disclose the size of the cost which related to moving to the new office or just give me the rough impact on EBITDA margins in basis points.

And number three, on advertised revenue, am I right in understanding that the revenue was declining year-on-year in Q3, it was minus 12%, right? And if yes, I understand that was the year-on-year growth in the previous two quarters. What would you expect in terms of the dynamics in Q4 for the advertising revenue? Thank you.

Thank you very much. On the guidance, again very conservative on the guidance. From the macro impact, we do not really see so far that macro impact. That may come sometime but from the payment volumes and average spend per wallet and that's actually our main drivers of the growth. We do not feel that so far again some changed landscape in the banking can have some impact on us but we are not really in a position now to estimate what that impact can be.

On the second question, for the total impact on the EBITDA margin of both nonrecurring and the cost to move into the new office amounted to approximately 3.3% and actual demand has been [RUB240 million.

And revenue from advertising, in Q3 the advertising revenue actually decreased on a year-over-year basis just from the last three years and we can expect that it will be declining on a year-over-year basis in Q4. Again to what extent we are still estimating, so it certainly depends on the -- on what effect the SMS limitations enforced by telcos will have on that but it can be quite substantial.

Okay, great. Thank you very much.

(Operator Instructions). Dmitry Trembovolsky, Goldman Sachs.

Thanks for the presentation. Just have a couple of follow-ups to what my colleagues were asking. First question I have is, can you please give us the exact revenue estimate for the advertising? I think Serge said it's 133 million. Is that correct or was there another figure?

Exactly, that was the (inaudible) in Q3.

Okay, can you just give us a similar amount in third quarter last year? And if possible in the fourth quarter last year, just so that we have the basis?

Basically the similar amount of last year was 12% higher as we said on the (inaudible). And then again going forward, look, approximately half of the advertising is due to -- it's actually two effects. One is there are small banks that used to advertise with us. And secondly, would be the limitation from SMS traffic and the SMS advertising is a substantial part of our advertising revenue, so we really just estimating what effect that will have on us. We are (multiple speakers) seeing the advertising will be declining in Q4 on a year-over-year basis.

What I was actually asking is -- so for me to get to the third quarter itself in 2012 advertising revenues, I just need to decrease the amount you have now by 12%. Now can you just give me the fourth-quarter numbers so that I had a basis for the fourth-quarter 2013 estimates. I need fourth-quarter 2012 revenue figures from advertising if you have them.

I don't have it right now. I don't think that we've ever disclosed that so we are going to be disclosing that one when we issue the full-year results.

All right, and can I use your prospectus full-year revenues minus the nine months that you just reported or they are not consistent? Because this -- (multiple speakers) there are growth --

They are consistent, of course.

Very good. So did I understand correctly that you had two issues. First of all you had higher costs on the estimates. So pretty much you have to pay more to the network operators for the estimates that you are sending. And second, you had some banks just canceling their programs with you. And then these are then separate? And one does not depend on another, this is just two effects coming altogether, correct?

That's exactly right.

Okay, and from the banks' perspective, what is happening? They are just seeing the slowdown in the consumer loan growth and that's why they don't need as much of the advertising they needed previously or are they just saying they are following effectiveness of the campaigns they've been running through you? Do you know what was that?

I think it's both, so first of all, they are right now reviewing their policies and their strategy on consumer loans because of the regulations, new regulations that are incoming. And second, they leave only most efficient channels. For example, if they already have clients, they would rather all to their current clients or previous clients to try to give them loans instead of searching for new ones.

Understood. Can you maybe talk just a bit about any other projects, maybe not necessarily advertising like what you call a value-added services that you could launch, which could substitute potentially the advertising revenues, say next year? Is there anything you can talk about like just the products?

Look, we certainly have some products in the pipeline and again strategically, what we think we are going to be doing in 2014 and our strategy is unchanged in this particular stack. We even have (inaudible) of revenue this year. We were always communicating that that is not really the advertising that we would increase a long-term goal. However, our strategic idea was to move towards the more targeted and smart types of advertising. That change of landscape is basically the reason for us to pick up that kind of work. The exact products and instruments we are going to be using, we have a few of them, we are utilizing them internally and we will announce to the public as soon as we launch them.

Do you think they already will be commercially launched by 2014 or that's unlikely?

Some of the products at least in the testing phase will certainly appear in 2014, that's for sure.

Also the advertising revenue will come back again but not from bank, maybe from other merchants. So it will be substituted somewhat.

All right, okay, thanks a lot. Just one other thing that I wanted to ask you guys is on these fees from inactive accounts. For the second quarter in a row, you keep them actually quite high, although I think you reflected that the previous quarter that they are going to decline. They declined just a bit but they haven't really come back to RUB30 million, RUB40 million level that you said are sustainable. When should we expect these revenues to really decline substantially or we should not?

We are expecting internally these revenues will be declining so we will see what is going to be having in Q4 but certainly in 2014 that revenue will come at least now on the steady with our model with much more normal level. We just need some time to see statistically what's happening with the user space to make appropriate estimation for all this revenue.

All right, and normal level is RUB30 million, RUB40 million per quarter, right?

Yes, historically if you're looking to our Q1 and Q3 and Q4 last year before we discontinued charging for an activity, there has been around RUB30 million a quarter so adjusted to actually increase and adjust the number of wallets and increase volumes and (inaudible) we may expect something like, I don't know, RUB40 million, RUB50 million by around the (inaudible) quarter and again, when we come to that level, we just need to estimate and for that to happen, we certainly need to get some more statistics.

All right, okay. Thanks, guys. That's it.

Anna Lepetukhina, Sberbank.

Thank you for taking my questions. I have two. Sorry if it was asked but I just couldn't connect. I just wanted to understand what was the reason for such a slowdown in growth in average volume per QIWI Wallet account? Is it just 6%. Can you please explain?

And my second question is a follow-up on the fees from inactive accounts. Do I understand correctly that you didn't charge for inactive accounts in fourth quarter 2012 and first quarter 2013 and therefore we should see kind of growth from basically zero in the following two quarters and this should support also the growth?

On the first question, we really saw some slowdown in average spend per wallet in Q3 so we basically have two reasons for that. We will obviously have some announcement when we break out the users of QIWI Wallet by different categories, but in general what was happening, first of all, it's seasonality for -- in Q3 we have July and August and those markets are usually very weak on e-commerce and online activities for the people. That's one reason.

Secondly, we are probably approaching kind of the natural growth ceiling and it is obviously that basically every new consumer for the joint QIWI Wallets is generating less volumes. And the response to that actually to our strategy that we are not only keen to acquire new consumers but basically the consumers, the existing basically loyal ones, the average spend. And for that we have kind of a big program for next year.

So we are going to be analyzing the volumes and provide a different category for the US and work on that.

On the second question, again I am not sure that we have ever disclosed inactive accounts for last year ever, so I'm not sure I am able to -- give them out.

Okay, thank you. But can I just ask a follow-up? You mentioned approaching growth ceiling. This is for average volume or active QIWI Wallet accounts?

For average volume, we are still basically acquiring quite essential number of new users of newcomers into QIWI Wallet. It's simply quite complicated structure but you may understand that every new user, the newcomer is usually producing less volume than the loyal one and then that's actually a lot of the (inaudible) inside the (inaudible). That is how we feel about this.

So we really would expect that we still have some potential to grow from Q4 in the next year but we are not really dragging on the exact number of average spend. But we will report them to you as soon as we have the actual data.

Okay, thank you. One more question. In October you signed an agreement and now in Moscow, people can pay for parking through PV terminals. Do you think that this can provide a boost in revenue in payment volumes in QIWI Distribution? Or this will just offset a decline in other services and you think that the growth will maintain at the current level?

Yes, we did announce the corporation with a multiparty and also in not only Moscow but in others we are working with the current projects that they are making in parking. But in terms of the total revenues, it is so small that you will not see an impact on our net revenues or any yields.

Okay, thank you.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for any closing remarks.

Thank you very much. We are remaining very excited as to the confidence of our growth and growth opportunities. We thank everyone for your support and we look forward to discuss our year-end results and we will provide more insight into 2014 on our next quarterly conference call. Thank you very much.

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