Qiwi PLC (QIWI) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the QIWI fourth quarter and full year 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 fourth quarter and full year 2013 earnings call. I'm Yakov Barinskiy, Head of Investor Relations and with me today I have Sergey Solonin, our Chief Executive Officer and Alexander Karavaev, our Chief Financial Officer.

A replay of this call will be available until Wednesday, March 19, 2014. 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 12, 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 certainties. 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 risk factors on [Form-4 to 4B-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 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 everyone for joining us today. Our strong fourth quarter results capped a great first year for QIWI as a public company. Our fourth quarter and full-year results demonstrate both the value of our truly integrated payment network and the continued execution of our growth strategy by our entire team.

In 2013 we continued to build on our position as the leading provider of next generation payment services in Russia and the CIS. For the year, the number of active Visa QIWI Wallet accounts on our network grew by 35% or 4m to 15.4m accounts. Visa QIWI Wallet payment volume grew by nearly 68% in 2013 to RUB255b.

Our growth not only reflects the strong secular growth trends in the payments market we serve but also the value we deliver to our customers, merchants, and partners every day.

Turning to our financial results, in the fourth quarter, adjusted net revenue increased 35% year over year reflecting strong growth of our Visa QIWI Wallet segment by 108%. We continue to penetrate the rapidly growing e-payments market in Russia and expect the solid momentum we've built in our virtual wallet business to continue throughout 2014.

As expected, the growth of our QIWI Distribution business was affected in the fourth quarter by declining advertising revenue primarily due to the changes in customer -- in the consumer banking landscape which we discussed with you on our last quarterly call. Looking to 2014, we expect to launch new products which we believe will compensate for the outflow of advertising clients in the second half of 2013.

Adjusted EBITDA in the fourth quarter grew 30% year over year and our adjusted net profit increased by 33%.

In the fourth quarter we announced consolidation of 100% in Blestgroup Enterprises. Blestgroup holds a long-term contract on terminal placement in over 1,200 spaces of X5 retail network in Russia. This deal further strengthens our QIWI Distribution business by providing our agents with some of the best kiosk locations across Russia.

For full-year 2013, we delivered revenue of RUB6.17b and adjusted EBITDA of RUB2.98b, up 48% and 61% respectively from the prior year. Our adjusted net profit of RUB2.17b was up 66% and our fully diluted adjusted net profit per share was RUB41.44.

As you saw this morning, we also announced that our Board of Directors has recommended a divided of RUB0.32 per share to be approved by Annual General Meeting. Our dividend payment is a reflection of QIWI's significant financial flexibility supported by our strong free cash flow and balance sheet. We remain committed to the prudent return of capital to our shareholders.

Now, I would like to briefly discuss with you the current anti-terrorism legislative initiatives in Russia. First and foremost, let me point that we welcome any measures aimed at effectively fighting terrorism. We have and will continue to always help the (inaudible) anti-terrorist activities in the Russian Federation. QIWI is open to any form of cooperation with Russia's legislative bodies and with the professional community to help develop a proper legal framework of a safe and transparent payments industry in Russia.

Regarding recent developments, the first reading on the proposed bill took place on February 28, where a Duma committee discussed the current language of the document and provided their comments. The financial market community has 30 days to amend the document so that it accounts for the simplification of identification procedures required for the usage of electronic payments system and potential removal of limits for socially important payments.

We expect the second reading to take place at some point in April where the financial market community will present the proposed changes to the bill.

Looking forward in 2014, we remain focused on the execution of our growth initiatives which we discussed earlier. At the same time, we will continue to invest in our user base through a number of marketing activities that we initiated in the fourth quarter of 2013 in order to support continued growth of our business in 2015 and beyond.

We will continue to leverage our leadership position, unique network, differentiated value-added services and key business partnerships to expand the number of participants on our network, increase the utilization of our services and continue to drive the adoption of Visa QIWI Wallet.

I will now turn the call over to Alexander who will take you through our financial results in more detail. Alexander?

Thank you, Sergey and good morning, everyone. As Sergey discussed earlier, QIWI delivered strong financial and operating performance in the quarter and year. I will spend some time going through our fourth quarter and full year financial results in more detail and then conclude by reviewing our financial outlook for 2014.

Adjusted net revenue increased by 35% to RUB1.7b, up from just under RUB1.3b in the fourth quarter of 2012. Adjusted net revenue growth excluding revenue from fees for inactive accounts increased 24% compared to the prior year.

By reporting segment, QIWI distribution net revenue declined 4% to RUB807m. The decline in net revenue was mainly driven by a 26% decline in advertising services revenue, partially offset by solid 10% growth in payment volumes at our kiosks and terminals to approximately RUB145b.

The decline of advertising revenue was mainly attributable to lower revenue from our bank partners, which we discussed with you last quarter.

Moving to Visa QIWI Wallet, Visa QIWI Wallet net revenue more than doubled to reach RUB859m. Revenue growth was primarily driven by the following three factors; kiosks, an increase in active accounts and payment volumes.

We increased our active Visa QIWI Wallet accounts by 4m or 35% versus the prior year to 15.4m accounts. Our Visa QIWI Wallet payments volume grew 47% to reach RUB78.6b in the fourth quarter.

Next, an increase in net revenue yield. Visa QIWI Wallet net revenue yield was 1.09% in the fourth quarter, up from 0.77% in the prior year period. The increase in Visa QIWI Wallet net revenue yield was driven mainly by an increase in volumes, in payment volumes as I said with higher revenue generating transactions such as e-commerce, one and higher customer fees from inactive accounts. These fees totaled to RUB157m in the fourth quarter, up from zero in the prior year period.

While we expect to continue recognizing these revenues going forward, we anticipate though that inactivity fees in 2014 will affect revenues to a lesser extent as compared to this year.

Moving to expenses, we have generally continued to experience positive operating leverage in our business which affected our EBITDA and net profit. Adjusted EBITDA was RUB733m in the fourth quarter, up 30% compared to RUB565m in the prior year.

The increase in adjusted EBITDA was primarily driven by revenue growth and continued operating leverage in the business, partially offset by an investment in marketing and advertising activities as well as certain other non-recurring items such as reorganization costs, primarily consisting of severance payments and expenses associated with relocation to the new office building.

Adjusted EBITDA excluding the effect of revenues derived from inactive accounts was RUB596m, up 5% as compared to the prior year. Although if we add back the non-recurring items that I just mentioned as well as the loss incurred as a result of the unauthorized activity in our system that we mentioned in our Form 20F, adjusted EBITDA would grow 52% year over year and the adjusted EBITDA margin would grow to 56.2% as compared to 48.6% in the previous year.

Adjusted net profit was RUB567m, up 33% compared to the prior year.

Turning to the summary of financial results for the full year 2013. Total adjusted net revenue was RUB6.2b, up 48% compared with 2012.

QIWI Distribution net revenue was RUB3.2b, up 12% from the prior year driven primarily by an increase in payment volumes.

Visa QIWI Wallet net revenue was RUB2.9b, up 132% predominantly driven by increases in active wallets and payment volumes, higher average net revenue yield and higher fees from inactive accounts.

Adjusted EBITDA for the full year 2013 was almost RUB3b, up 61% from 2012, driven by top line growth and continued operating leverage in our business.

Adjusted net profit was RUB2.2b, up 66% from 2012 and adjusted net profit per diluted share was RUB41.4.

Finally, as Sergey mentioned, we announced today that following the determination of fourth quarter 2013 results, our Board of Directors has recommended a dividend of RUB0.32 per share to be approved by Annual General Meeting. This is in line with our policy to distribute all excess cash to our shareholders in the form of dividend.

Now we will review our financial outlook. We reiterate the mid-term guidance we provided to you during our IPO of adjusted net revenue growth of 20% plus, continued moderate adjusted EBITDA margin expansion and adjusted net profit growth of 25% plus.

Within the framework of our mid-term outlook, for 2014, we currently expect adjusted net revenue to increase by 20% to 22%. Our guidance is based on both secular trends in electronic payments and e-commerce and continued adoption of our Visa QIWI Wallet by new customers.

Based on our 2014 revenue growth outlook and our expectations for continued modest margin improvement, we expect adjusted net profit to increase by 25% to 27% over 2013.

We are pleased to note that even though 2014 is a year when we start to heavily invest in our consumer base and new products, we are confident to reiterate our mid-term guidance in respect of 2014.

With that, operator, please open up the call for the questions.

(Operator Instructions). Bob Napoli, William Blair.

Thank you. Good morning or good afternoon, your time. A question on your guidance. First of all, nice execution in the quarter. With the anti-terrorism legislation, has that resulted in any slowdown in momentum in the business in the first quarter? How should we be thinking about the first quarter trends versus the fourth quarter? Do you expect growth? So is there any effect on your business? And what do you have in your guidance? What are you assuming the outcome of that legislation is in your guidance?

Thank you very much for your question. So, so far we have not really seen any effect of the new legislation on the market. And basically as Sergey said in his speech, we'll expect that the law will be basically adopted in a way that will likely not damage the industry landscape.

As for the guidance we are basically counting on a certain slowdown in the consumer area. Although as we reiterated a few times in our earnings calls, we are basically a little bit under-monetized I would call it and we believe that we really have a lot of levers to pull in order to -- basically to complete the guidance that we are providing.

Great. Then a question on just on -- I guess a significant customer Tinkoff to -- I think their business is slowing down. And they also talk about forming their own wallet although I think it's only focused on P2P. First of all, how significant of a customer is Tinkoff and do you expect a slowdown from their business in 2014, from business from Tinkoff?

(Multiple Speakers).

Okay, go ahead, Alexander.

Sergey, go ahead, please.

Okay. So Tinkoff is not a significant customer in our portfolio, so I think he's less than 1% or something like that. And we -- actually we talked recently with Oleg and we think that he will be in the next year quite stable for us. So we already calculated for this effect in our guidance.

Great. And then the last question and I'll turn it over, is just on the advertising. You said advertising was 8% of revenue in the fourth quarter. What does that -- what was that a year ago? And what do you expect to spend on advertising in 2014?

We actually expect that likely we will be able to compensate the advertising revenues -- to compensate the outflow of the advertisers that we experienced in Q3 and Q4. To achieve that, we're now developing and launching a few new products that will target actually different segments not just the banking segment.

So we were not really bullish on advertising revenues. But given the point of the lifecycle of the Company we are still testing the waters of what advertising model will be the appropriate one for us. So we will see how those products will perform and as soon as we see a traction we certainly launch them on scale. So all in all we have built in our guidance a kind of -- the moderate increase in advertising revenues in 2014.

Okay, that's very helpful. But I'm sorry I was -- to confuse you. But I was asking on the expense side. You had an investment. Your operating expenses were up in the fourth quarter because of --

Okay, understood. Understood. Yes, so basically what we started to spend in 2014, it's not really the advertising though advertising is a part of that. But it's more kind of all kinds of studies on the consumer behavior, on the partners, how the consumers are using our system and so on to basically better understand on how to approach them both from the standpoint of acquiring new consumers and secondly, to convert the newcomers into the loyal users where we get the majority of the revenues.

Having said that, that expense that has been incurred in the fourth quarter 2013 is more or less non-recurring. I would expect going forward in 2014 we still really plan quite substantial investment in the advertising and marketing. That will be more targeted towards the acquisition of new consumers in those segments that we consider to be key for us this year.

Okay, thank you very much.

George Mihalos, Credit Suisse.

Hey, guys, thanks for taking my questions. Can you hear me okay?

Yes.

Okay, great. So maybe just sort of starting off on the distribution side, you commented about some slower advertising growth. How should we be thinking about the revenue yield in distribution throughout the year? Will it be at a similar level to the fourth quarter, first half of the year and then expand in the back half given some of your investments?

Yes, that's basically how we think about that. Again, I would basically stress again that we are not guiding on the net revenue yields of any specific segment. But how we see that that we are likely going to be keeping the net revenue yields and distribution on a stable level and probably experience some slight increase towards the end of the year.

Okay, okay that's helpful. And then you commented about lower inactivity fees in 2014 versus 2013. Can you just remind us what the normalized weight of inactivity fees are? They've been a little bit elevated I think the last two or three quarters.

Yes, that's exactly right. So basically in Q4 we already have started to come to something that we really feel is a normalized level. So historically we experienced around from RUB30m to RUB40m per quarter of inactivity fees and what we believe is going to be happening in 2014 is probably around same around. So per quarter we really would expect something from RUB30m to RUB50m of inactivity fees.

Okay that's helpful. And then also just for modeling purposes as we think through the increased investments in the business that you're making, I assume we should be thinking about margin expansion skewing again a little bit more to the back half of the year relative to the first half. Is that how you're thinking about it?

Yes, that's exactly right as well, yes. First of all about the seasonality so I have, as you know, the first quarter and fourth quarter are usually the strongest ones from a standpoint of revenue and that we believe we are going to experience this year as well.

And that's exactly right we mainly expect some slight increase in the margins towards the end of the year.

Okay great, and just last question from me, guys, you've been growing wallet roughly about 1m active a quarter. That seemed to slowdown a little bit in the fourth quarter at least sequentially, I think you were up about 0.5m. Anything to read into that was there anything different in the fourth quarter that impacted the business or was it just timing?

Not really, actually how we see that. The whole growth in then number of wallets that we experienced last year and then in 2012 was basically driven by the products, so virtually it was bringing the new products to the market and that primarily was due to word of mouth. We never really had the kind of comprehensive advertising campaign of QIWI wallet.

And what we think we are probably approaching kind of saturation from the standpoint of natural organic growth of QIWI Wallet. That's why again I'd like to stress we've planned a whole load of activities in 2014 to attract new consumers and to continue those who we are attracting to be the loyal users for QIWI wallet.

So again we are not guiding on the number of wallets but according to our estimations the rate of increasing the number of QIWI Wallets on a quarterly basis will still be quite high throughout 2014.

Okay, thank you.

Anastasia Obukhova, VTB Capital.

Hi, this is Anastasia Obukhova. I have a question regarding your guidance. Would it be different if you had provided in the start of the year so does the recent macro, weakening macro indicators impact your number that you expect for the full year both for the top line and the bottom line so that now you expect. So will you be more positive for example in the beginning of the year?

And the second question regarding guidance, does it include the potential impact from the launch of your software, for example, as part of the potential agreement with Visa?

And do you expect that you also might see some positive improvements suggested by market participants, for example, for the document that is being prepared for the second reading. Can it be -- can it support -- can they support the environment as well for you? Thanks

Okay, thank you very much for your questions. On the first question we do not really believe that the guidance would be changing much if we were providing that like (background noise) months ago. So what we believe, again historically our business proves to be not cyclical. We are dealing really with the future amount of consumers and usually small checks and the elasticity of those payments is quite high, so usually we have not really experienced slowdowns due to overall economic environment.

On the second question that's a very good one, on soft -- the guidance does not include any effect of any new strategic alliances or actually the revenues driven by the existing strategic alliances. So everything which -- the any revenues that might come in addition to basically what we have in our guidance due to any strategic alliances or partnerships will be on top of that.

Though I would like to stress that the projects that we are currently developing together with Visa and some other strategic partnerships they are more long term. So they likely will not see any tangible financial results in 2014, so it's rather a story about 2015 and beyond.

On the competition side basically it does not also include any new competitors on the market. But again we see the situation right now in a way that we likely do not really have any competitive pressure. And basically you may actually compare to [the names] of some other companies that you would think can be the competitors of QIWI like PayPal and (inaudible). And the market is so huge that it's not really yet about the competition.

So we do not really feel any competitive pressure even if some new participant or new entrant will enter the market like PayPal a few months ago we are just not feeling any competitive pressure like we'll not have any this year.

Okay, thank you very much.

[Alexei Gogolev] with Goldman Sachs

Good afternoon. [Greetings] for presentation. I have the following two questions. My first question is related to your potential partnership with one of the mobile operators. Could you please update us on what's happening with this partnership? When should we expect it to materialize? And do you have any understanding of the potential impact on your financials and number of active e-wallets? That's the first question.

And my second question is related to the dividend policy. So, do you expect any changes in your dividend policy or you would prefer to stick to almost 100% payout in the foreseeable future. Thank you.

Thank you very much for your question, Alexei. So, on our mobile operator partnership we are still in negotiations that I hope will continue for maybe a few weeks to a month. We are in negotiation of some commercial aspect of the deal, so we are not finished. And as you know part of this deal is Visa so we are also talking to Visa and talking a lot about this partnership. So hopefully we will have something to say on our first quarter earnings call so -- as I said before.

And on the potential impact on our revenues, again as I said before we are not expecting very big growth on our revenues with this deal for us. This is more the deal to understand how to work with the operator to make a few new products for customers and for merchants, and to have the result of this project on the table so that we can discuss future growth with other operators and go maybe abroad for these products.

So for this case I would not expect really a big growth. And we right now we are not putting any expectations on additional [clients] in our guidance so that's (inaudible)

Okay, understood, and regarding the dividend policy.

Yes and your second question on dividend, well, as for now we expect that we will pay out all the dividend that we historically paid for our shareholders. So as we announced earlier we will distribute dividends every quarter and the maybe in the end of the year we will make some corrections so that we will be able to distribute as much as possible.

Okay, excellent. And just one last follow-up question on these advertising revenues, could you please state in millions of rubles what was the advertising revenue in absolute terms in the fourth quarter in adjusted net revenue terms?

So in Q4 it's [RUB88m].

Okay, understood, thank you.

Bob Napoli, William Blair.

Thank you. Just the -- are you going to give -- change your -- the structure, the format of your presentation beginning in the first quarter I think as you had discussed a year ago and breaking out more by product if you would. And I was wondering if you could tell us how much -- what percentage of your payment volume was e-commerce this quarter versus last quarter?

Yes, that is still our plan and we are working on it. So likely enough the Q1 results will be already issued in the new format where we will not be breaking down the volumes and net revenue by business units but by market segments, so it's in process.

Okay, and can you give me any feel for e-commerce, the rate of growth of your -- of e-commerce what percentage of the business is e-commerce today?

So it's currently in -- it obviously depends on how you define e-commerce, so we define it very broadly so including all the virtual goods, so all in all it should be around a quarter as of now and its one of the fastest growing. But I quite frankly would not like to predict we just will issue all the data in the Q1 results.

Okay and that's about a quarter of the QIWI Wallet volume?

Yes, that's exactly right.

Okay. And just one last question, the kiosks, you haven't grown the kiosks for a while. They've been relatively flat, and I think I sense some change in your strategy that you're maybe thinking about growing the number of kiosks again, is that correct and why is that?

Yes, it is correct and we expect that we will grow our kiosk business in 2014. As soon as we understand now that our proposal on the market is really much better than any of the competitors. So we right now are feeling some demands on the kiosks, on the hardware level so some kiosks are being bought and we expect some growth. It will not be that big but I hope that it will be close to 10% plus percent.

10% that's a lot. That's kind of a change in strategy, Sergey. What promoted that change in strategy?

Well, first of all, as you actually saw this year in the end of the year we closed the deal with [Expi]. We are preparing a few more deals this year. So we are not operating these kiosks but here helping our agents to have good locations on a federal level, and QIWI is the only company I think right now in Russia who can operate on a federal level with this quality and support.

Great, thank you.

Thank you.

Anna Lepetukhina, Sberbank.

Yes, hello. I have a question on the draft law. I do understand that it's too early to talk about the implications but maybe you made some internal estimates. So if we assume that changes are introduced to the draft law and only person-to-person transactions will be banned for non-personalized account, how it will impact your revenues growth and also expenses. And also do you intend to extend the number of partners where people can personalize accounts and how it can impact your expenses.

Well, thank you for your question. If, as you say, if we see the changes that will allow people to -- that will put (technical difficulty) for peer-to-peer payments, and altogether payments will be as they are now, we will not have any changes in our revenues because for today we are not charging (technical difficulty) payments in our system are free of charge.

So even in the case that we don't (technical difficulty) that the consumer will have (technical difficulty) hard identification so he will have to come to the office and show his passport, come himself. So even in this case we will not have a big impact on our revenues, so we will not have any impact on our revenues although we will see the slowdown on our -- of our wallet peer-to-peer payments volumes.

In this case we think that for those people, for those customers that we have today, we already have enough points, where 1,000 points around Russia where you can come and where he can register (technical difficulty). Although I don't think that it's not (technical difficulty) the law, I am hoping that the changes will foresee the soft type of identification and the consumer will have other means to identify himself. So in this scenario we will not have any impact of this law.

Sorry, and I have a follow up, so to understand correctly that you do not plan to expand the number of partners and also you do not generate revenues from peer-to-peer transactions, but at the same time you generate revenues when people transfer money to bank accounts basically for money transfers. So as a result of this there should be some impact at least on your money transfer payments. What about this -- these payments?

Well, money transfers is a really very small stream for today, so if you look at money transfer business we are a little 1% market share so this is really small for us. Although, yes, it may impact money transfers, I think. But again you don't have (technical difficulty) today, so if your alternative is to go to any money transfer center then it is also possible that you will (technical difficulty) center for [register] and showing the identification.

And we will have some several programs on money transfer, so we think that we will be able (technical difficulty) through all these restrictions (technical difficulty) the partners we have already today.

Okay, thank you. And one more question if I can and what was revenues from advertising in the fourth quarter of 2012?

Just one second please. It's been [RUB18m].

Thank you.

Thank you. It appears we have no further questions at this time and this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.