Qiwi PLC (QIWI) 2014 Q2 法說會逐字稿

Greetings, and welcome to the QIWI second-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I will now turn the conference over to your host, Mr. Yakov Barinskiy, Head of Investor Relations at QIWI. Thank you, sir. You may now begin.

Thank you, operator, and good morning, everyone. Welcome to the QIWI second-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 Thursday, August 14, 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 August 7, 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 for future performance are subject to known and unknown risks and uncertainties. QIWI cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call.

Please refer to the Company's most recent annual report on Form 20-F, filed with the Securities and Exchange Commission, for factors that could cause our actual results to differ materially from any forward-looking statements.

During today's call, management will provide certain information that will constitute non-IFRS financial measures, such as adjusted net revenue, adjusted EBITDA, adjusted net profit and adjusted net profit per share. Reconciliations to IFRS measures and certain additional information are also included in today's earnings press release.

With that, we'll begin by turning the call over to Sergey Solonin, our Chief Executive Officer.

Thank you, Yakov, and good morning, everyone. Thanks for joining us on today's call.

I am very pleased with our second-quarter results that concluded a very strong first half of the year. Our continued strong financial results demonstrate our commitment to execution, our ability to win share and our focus on delivering best-in-class services to our customers, merchants and partners.

Getting to the numbers, total adjusted net revenue increased 35% to more than RUB2.1b 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 62% in the quarter, reflecting top-line growth and continued operating leverage in our business. And adjusted net profit grew 64%.

In the second quarter, total payment volumes grew a solid 17% to RUB156b. Active Visa QIWI Wallet accounts grew 12% as compared with the same quarter of 2013, to reach 15.8m total active accounts on the annual basis, reflecting continued strong secular growth trends in our markets and the value of our unique network.

Now I would like to highlight a few important developments in our business. In June, we launched the interface of our Visa QIWI Wallet product to improve the user experience even further and eliminated consumer fees for mobile phone top ups.

With that step, we started actively promoting Visa QIWI Wallet to attract new users, and we are very pleased with the results to date, being more unit registration and more various transactions being successfully made by our users. This proves the most crucial point for increasing simplicity and convenience.

In addition, we have just started a promotion campaign in the money remittance segment by fully eliminating consumer fees. We expect this campaign to last for next few months, and we are looking forward to attract new consumers and to gain additional market strength in this promising segment.

Now I would like to spend some more time on potential M&A opportunities that we are foreseeing. E-commerce, financial services and money remittances are the key areas of focus, and I see that now is the right time to look at certain businesses that might be complementary to QIWI.

For instance, we are currently in dialogue with certain companies that are active in Russia and CIS money remittance markets. We are assessing various opportunities and have not entered into any binding agreements with any companies yet, so I will keep you updated on this process -- on this front.

And finally, we continue our cooperation with Visa. In May 2014, we have obtained VisaNet Processor status, which enables us to process Visa transactions on behalf of other banks. We believe VisaNet Processor status will contribute to our contemplated projects that we have in our pipeline.

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 just discussed, we delivered strong financial and operating performance in the second quarter. Beginning with revenue, total adjusted net revenue increased 35% to RUB2.1b, up from RUB1.6b in the prior year. Total adjusted net revenue excluding inactivity fees increased 46% compared with the prior year.

Payment adjusted net revenue increased 57% to reach RUB1.6b, up from almost RUB1b in the prior year. As Sergey mentioned, we have a strong revenue growth contribution from our e-commerce, financial services and money remittances verticals, which grew 65%, 112% and 145%, respectively.

Revenue performance was driven by solid payment volume growth and growth of the net revenue yields. Average payment net revenue yield was 1% sharp, up 25 basis points from the prior year, and our total average net revenue yield was 1.35%, up 18 basis points from the prior year. Total average net revenue yield excluding inactivity fees was 1.25%, up 25 basis points from the prior year.

Other adjusted net revenue decreased 3% to RUB550m, down from RUB566m in prior year. Other adjusted net revenue excluding inactivity fees increased 15%, mainly driven by growth in the interest income on cash and settlement services.

Inactivity fees amounted to RUB156m, compared to RUB223m (sic - see press release "RUB224m") in Q2 2013. It is important to note that Q2 2013 inactivity fees were abnormally high due to the catch-up effect for the six-month period ended last March 2013, during which inactivity fees were zero due to certain legal aspects. Moreover, other adjusted net sharing revenue was also affected by a decline of advertising revenues in the quarter, by 52%, to RUB54m in the second quarter of 2014.

Moving to expenses, we generally continued 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. Besides general operating leverage that we experience, we have spent around RUB130m less of marketing expenses in the quarter than we initially planned, and this amount will likely dispense in the second half of the year.

Adjusted EBITDA increased 62% to RUB1.3b, up from almost RUB800m in the prior year. Adjusted EBITDA margin was 61%, compared with 51% in the prior year. The increase in adjusted EBITDA was primarily driven by revenue growth and continued operating leverage in the business. Adjusted EBITDA margin excluding inactivity fees was 58%, compared to 43% in the prior year.

Adjusted net profit increased 64% to RUB899m, up from RUB546m 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 second-quarter 2014 financial results, our Board of Directors recommended a dividend of $0.46 per share. We remain committed to distribute all excess cash to our shareholders in the form of dividends.

Now, onto our guidance. Based on our strong second quarter and first half of the year results, we are raising the 2014 guidance provided on our last quarterly call. Net revenue to increase by 30% to 32% and adjusted net profit to increase by 36% to 38% over the last year.

We are confident with this new guidance, given the political and legislative landscape will not change any further, and we will continue to update you on our progress during our third-quarter earnings call.

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

(Operator Instructions). Bob Napoli, William Blair.

Thank you, and good afternoon, guys. A question on the revenue yields that have -- you've had very nice movement in the revenue yield in e-commerce, financial services and money remittances. Are those sustainable? And what is driving the higher revenue yield? Is it mix of product?

Hi, Bob. It's Alexander Karavaev. So it is basically a number of reasons in each of those segments. First of all, as we discussed during the Q1 conference call, we decreased the funding cost a little bit by cutting down the payout to agents for 20 basis points. In Q1, you only see the part of that effect, because we started that campaign in March. In Q2, that obviously was lasting for the whole quarter. That's why the effect is much more visible.

And the second reason is obviously product mix, and in each of those categories basically the merchant mix. What has happened is that we are generally increasing the long tail, and the long tail is usually paying the fees and commissions higher than the average. That is what was actually happening.

Going forward, we think that the levels we achieved are kind of stable, generally speaking, though they will depend much on the campaigns, on the marketing campaigns, in each of those segments, which we either started or are going to be starting soon. Like Sergey said, in money remittance, for example, we have just introduced a new campaign where we completely eliminated the consumer fees on money remittances. Money remittances segment, in those type segments where we have the payment gateways with the other money remittance companies.

That obviously will drive the net revenue yield down, though we expect substantial increase in volumes, actual acceleration of growth in this strategic segment. And that can happen actually in all the segments, depending on the campaigns that we're going to be launching.

Let's say mid to long term, we discovered also a few things. We really think that the processing fees and the acquiring commissions will go down, but that our stance towards it is that we're going to be replacing that by different value-added services.

Okay. Thank you. I heard you suggest you were doing some more processing for Visa for other banks. Is it possible that you would be a significant processor for Visa under their requirements to process locally in Russia?

Well, I think that we have some plans on processing for some specific areas and the specific things that are closer to mobile operators. Generally, for other banks, we don't have these plans in short term.

Okay. And then just my last question. You did, in your recent offering, raise some capital, and you mentioned that you're looking at many M&A targets, but yet you paid out a pretty healthy dividend. You're paying out a pretty healthy dividend. Just a little bit confused by that. And what is your capacity today for acquisitions? What kind of capital could you put towards the right acquisition?

Well, right now -- thank you for the question. Right now, we are evaluating different opportunities, and these are two processes that are not -- that are different in the Company. So first, the dividend payout ratio, which was historically close to 100%, and we continue this practice as usual. Second is our M&A activities that we foresee and that we discuss right now. We don't have any binding agreements up to now, so we cannot comment on the amounts or whatever, so we're in the process of discussions.

Thank you.

Thank you very much.

Georgios Mihalos, Credit Suisse.

This is Brian, filling in for George. I had a quick question on new Wallet user growth going forward. How should we think about the marketing spend going towards that? You said something in the prepared remarks about how that was driving it. And how should we think about the Wallet growth accelerating over the back half of 2014, 2015?

Yes. Thank you for the questions. I think, look, we look at this from two angles. First of all about the newcomers into the system. And basically, what we said in the press release, we a little bit underspent the marketing budget in Q2, and we believe that marketing spend is going to be moved to Q3 and Q4. We do not expect any kind of additional spend on top of that, so we are going to be, as we believe, within the budget.

We are not really guiding on the number of consumers, but we may expect that we will start getting the new consumers in the second half of the year. That is one angle.

Second angle is basically the activity of the users, because we do have already a lot of consumers in the system, more than 15m. And the second focus of activities, which is actually the more important, I to make those be more active, meaning to increase the average spend and to make those people use QIWI Wallet and all the functions that we can offer more often. And that process is also quite successful, so you may already see the increase in volumes, and that is primarily due to the increase in the average spend per wallet.

So those two angles are of the very kind of focus of the Company just now, and we believe we're going to be increasing both the number of newcomers and the activity of the users, as well.

Okay. That's helpful. And thinking about the growth in new Wallet, could you attribute -- it's decelerated, I guess, significantly from 2013. Can you help us attribute how much of that is due to a lot of large numbers? It's harder to grow off a larger base of Wallet users. And then is there any you can attribute to complication in the market?

Well, a certain portion of that is probably due to the complication from the market. We historically received quite a chunk of newcomers from the banks in our financial services segment, and now you obviously will see a slowdown in consumer lending in Russia. And that effect may be long lasting in the economy.

What we are trying to do, actually, to replace that inflow of new consumers in the system that we recently were getting from the banks through other channels, like gaming, and we have some success in the gaming market, where we started to gain a lot of newcomers. In money remittance segment, we believe that in the campaign that we just started we're going to be getting a bunch of new consumers. And many other segments, actually, in e-commerce as well.

So in answer to your question, yes, to a certain extent we may feel kind of a slowdown in the banking industry, in the banking segment in Russia, especially in the consumer lending. Other than that, we do not really feel yet any market slowdown.

Moreover, we believe that given that we are dealing really with a lot of no payment, where either they were propositioned to gain the share in that market, because many industries will try to reduce their costs. And to use us as the distribution network that is covering the whole Russia, it's actually a really good starting point to gain the market share in different segments.

Okay.

I hope that's helpful.

Yes, that's helpful. And one final question. Where are you guys in terms of securing the large telco partnership? You've spoken about it in the past. And in your view, is that necessary to achieve your long-term 20% revenue, 25% net income growth target for 2015?

Thank you for the question. First of all, in terms of our cooperation with one of the carriers, we continue to cooperate. We decided to make any announcement of that cooperation as soon as the product will hit the market, so hopefully it may happen in the end of Q4 or in the very beginning of Q1 2015.

In terms of our model, specifically towards the operator deal, we do not have any assumption on that deal in our current guidances. So independently on the deal, we have the guidances that we gave you before for 2015.

Okay. Thank you so much.

Thank you.

Nick Robinson, Renaissance Capital.

Hi. Good afternoon, guys. A quick question on advertising. Obviously still a bit weak in the second quarter, but I noticed earlier, in July you announced a campaign with Euro Bank of Reconstruction and Development, and that looks like -- to be a bit more of the -- in terms of advertising campaigns that you're talking about, using your data. Could you give us a bit of an update on how that campaign's going and what other activities you expect to be launching on the advertising front? Thank you.

Thank you very much, Nick. We just launched these campaigns very recently, so we don't have any particular data about these campaigns right now. By these campaigns, we are trying to recover some of the bank clients, and we are trying to still work with some of the banks on the advertising of products.

But the general strategy, key strategy is to -- to the end of the year, is trying to refocus a little bit from banks that were hit by some regulations, provisions and today's crisis towards new merchants and bringing some added value from the data that we have. You may expect some of the results to the end of the year, as I told you before, so we generally want to try to recover to the end of the year to our previous numbers. That's our internal goal.

Okay. Great. Thank you. Understood. And just one then question on the campaign, the money remittance campaign. Is that for a set period? Are you going to be running that for a month or two months, or is that something that's going to maybe roll on into the fourth quarter as well? Thank you.

Thank you very much. Right now, we started the campaign, and for sure it will last for a few months. Then, after that period, we decided internally to discuss the opportunities either to prolong the campaign or to stop it, depending on several factors, a potential M&A target that we are reviewing internally.

The mix in the sales that we will get from the foreign and local payment -- maybe, as you know, we have some additional earnings on some of the foreign payments on the ForExes, on the exchanges, so we have there commission that can be enough to support that kind of product for a longer period. So, generally, we will talk about that internally after we have some results from the campaign.

Right now, I see the current increase in the turnover on the volumes, so I'm clearly positive that the campaign should be successful. But let's wait for the results of the third quarter. We will see what is happening more precisely, and then we will be able to guide you and comment on that.

Great. Thank you very much.

Thank you.

Alexander Vengranovich, Otkritie Capital.

Yes. Good afternoon. A couple of questions from my side. So first, on the financial services side, so you've announced partnerships with [Humgrad] Bank, with UBRD, and as far as I understand, there are potentially more partnerships of that type which could follow. Can you please share whether we should expect any sort of that deals coming, being announced from your side this year, so in the fourth quarter, and whether they could be significant to drive, for example, the number of kiosks which you'll be having in your network? That's the first question.

The second question is do you actually see an increase of money transfers to Ukraine, and whether it had any sort of impact -- any significant impact on your money remittances revenues in the second quarter? And do you expect this also to accelerate going forward?

And probably the last question is, in case you have any update on regulation which could affect your business, can you please share it with us? Thank you.

Thank you very much. So for financial services, I think we can be under the effect of a global slowdown in financial services, so I think that we may feel this effect. In terms of new banks, most of the banks that are important for us are already connected to the system, so we're generally working on the promotional -- internal promotional campaigns with the banks.

So in the short term, I still feel that we will have some slowdown on the financial services segment, although in the long term I understand that due to the same reasons, due to the slowdown in lending, we may experience some demand from the banks to have some cost cutting on their side, so less offices, less people, regionally and federal level. So that means that we will have some of these volumes migrating to our system.

So it's very difficult to say how soon this effect will be visible, but right now, short term, I think it is more likely that we will have some slowdown because of that reason.

On the money transfers, we don't see any substantial increases or decreases on the Ukrainian direction, and more likely it is slightly decreasing right now. And this will not affect our total numbers and our performance. The same as in financial segment, in money remittances we have today a very, very small market share and a very high growth rate, so we expect that this fact -- Ukrainian factors will not really affect our growth.

And on the regulation side, we generally don't see any regulatory processes in our field. So the previous regulation is in place. It is already implemented in the system, and we do not expect any further developments on this side, at least for now.

Okay. Thank you. Helpful.

Dmitry Trembovolsky, Goldman Sachs.

Hey, guys. I just wanted to check with you. When I'm looking at your financial statements, I'm seeing that the growth in users is still relatively slow and the growth in volumes is actually slowing down. I'm looking at all the segments and their year-over-year growth has a slowdown in second quarter versus first quarter. And the way you obviously keep beating the numbers is constantly increasing yields, which I would assume is not completely a sustainable strategy. Would you discuss a bit whether we should expect a reacceleration of the usage and payment volumes versus increase in yields, or you just want to keep it like that for the time being?

Dmitry, thank you for the question. First of all, it's correct that the substantial growth on the net revenue side comes from the increase in the yields. But also on the volumes, it is not only driven by the number of consumers but actually by the average spend per consumer, or technically driven by what we may say, that we are trying to convert as many users into monthly active and weekly active out of our annual base. And this is, of course, one of our focuses.

And in this specific -- if you look from that specific angle, we can really increase the volumes many times, because still the average spend per wallet and average size of those transactions and also on the distribution side is not that high.

On the other side, we are obviously interested in getting more newcomers, and that's why we will develop that marketing campaign of different kinds. And in certain cases, like in money remittances, we discussed that we are dropping the prices to gain new users and market share. In certain cases, we develop different kinds of campaigns to promote ourselves within different segments, like in gaming and so on.

So our general response would be obviously to start increasing the number of newcomers into the system and to increase the loyalty of the users, to increase the usage per wallet and the average spend per consumer that we have in the system.

All right. Okay, Alexander. Understood. It's just that I'm a bit worried that, despite the effort, at least if you look in the second quarter or the first quarter, almost everywhere the growth was slowing down. Maybe it's just a bit of seasonality or whatever, but we are not accelerating the payment volume. We're pretty much accelerating the yield. Is it a fair comment, or not really?

It is obviously, yes. We've been discussing that. We are probably approaching the saturation point, so to say, from the standpoint of organic growth, because we never, ever had any substantial marketing campaigns, especially in QIWI Wallet, in Q2, and that we can actually expect to (inaudible) in Q3. It's a seasonality, because usually during the summer months the e-commerce segment is not that strong, because the majority of the people are on vacation.

But generally, still, our plans are to start increasing the number of newcomers into the system. So let's see how successful we can be. And again, based on our models, we would expect some acceleration in the number of users towards the end of the year.

Thank you very much.

(Operator Instructions). Meghna Ladha, Susquehanna.

Yes. Hi. Thanks for taking my questions. The first question is regarding the marketing expense. It seemed like it got postponed again this quarter, if you could just maybe talk about why. Was there any particular reason why it got postponed again?

And how should we think about the EBITDA margins in the second half?

Okay. The marketing expenses, it basically was not all of that. A certain proportion was postponed because we -- the focus of management was obviously switched to actually dealing with that new law that suddenly came at the beginning of the year. And with all those new sanctions and so on, we just really needed to actually develop a certain internal position how we deal with that. And that resulted in the fact that we already launched our main site, basically the front page of QIWI in June, so that's why we are even now starting all the major marketing campaigns.

On the EBITDA margins, I think that the level we achieved, around 60% EBITDA margin, would be sustainable. We obviously will not expect any substantial increase, but this is, we believe, a new level that we believe is sustainable in the longer term.

Got it. And then maybe, Sergey, if you could just talk about the competitive landscape for a bit, have you seen any new players enter the market, or maybe the existing ones getting more aggressive?

No, I don't see any substantial changes. There were some announcements, but generally, I don't feel this on the overall landscape. So we are looking at our numbers and our statistics. We also don't feel any kind of movement towards competitors, towards whatsoever. It is, although, quite difficult to review, because we don't have objective numbers from the market on the volumes of our competitors. But still, on my internal feeling, there is nothing really important happening on this side.

Okay. And just the last question on money remittance. Last quarter, you announced a partnership with Western Union, the largest money transfer company in the world. Did that help your volumes at all this quarter, or is it more second half where we should see benefit from that relationship? Thank you.

Well, this is more likely -- this is a strategic partnership, so we look forward and look at what will be important as our next step in money remittances. And that's why we think the partnership with Western Union is an important one, because Western Union covers many areas that local payment systems, money remittance systems, do not cover.

So we generally do not expect any effect on our financial statements of this particular relationship, although a much bigger effect that we expect will be on the side of our current marketing campaign on the payments in money remittances that are offered to our consumers for free. So we think that this factor will have a much bigger effect on our volumes in money remittances than our cooperation with Western Union, although, as I told you, we think that strategically this is a very important partnership for us. Thank you.

Anna Lepetukhina, Sberbank.

Yes. Hello. I have two questions. My first question is on M&A opportunities that you mentioned. Can you please probably talk about the rationale for doing M&As? Do you see value of assets declining, and for this reason you think that it's worth looking at acquisitions, or you think that in some segments, like money remittances, it's not possible to increase market share organically? So, basically, what is driving your willingness to do M&A?

And my second question, I just wanted to clarify on money remittances and elimination of consumer fees. In the press, it was reported that you reduced tariffs for money transfers to Unistream, Contact and some other payment systems. Was it tariff reduction in tariffs to these payment systems, or consumer fees were not eliminated for all payment systems? Can you just clarify? Thank you.

Thank you, Anna, for your question. On the M&A side, we generally -- the answer is yes. We generally think that in the current situation we have more opportunities which looks very interesting in terms of value for the Company.

Of course, we align these opportunities with the strategies that we have, and generally we analyze various opportunities from the strategic cost standpoint, where we think, for example, in money remittances that we do need -- for the further development, we do need to have some part under control on the recipient side so we will have some power on the tender side. And that means that we will review some of the opportunities in that particular segment.

On the current marketing campaign, this campaign is done only with two remittances systems, so it's not for all of the money remittances that we have. We agreed only with Unistream and Contact, who agreed to participate in this campaign on the terms we proposed. So we will do this experiment, and generally this -- strategically, of course, we hope to increase -- by this campaign, we hope to increase our market share in this segment.

And just a follow up, do you disclose how much Unistream and Contact account for current payment volumes? Is it a significant share?

No, I think we do not disclose that number. No?

No.

Okay. Thank you.

Ulyana Lenvalskaya, UBS.

Thank you, and good afternoon, gentlemen, and congratulations on quite strong numbers. I have a couple of follow ups. First, on this M&A -- potential M&A deal, do you see any potential risk for the dividend in case the acquisition happens?

Thank you for your question. It obviously would depend on the actual amount and the financing. So based on what we see on the market, we're likely going to be having enough resources, our own cash, both from operational activities and the primary component that we raised during the last [quarter]. If that would be the option we take, then it likely will not affect the dividend much. If we will have to take the debt, then usually one of the covenants would be eliminating the dividends or reducing their size.

So those are basically the two major options we're discussing, and probably it will depend on if and what that M&A would be.

Thank you. And my second question would be on distribution segment. It seems that the second quarter of 2014 was a year of significant addition to the number of kiosks. Could you please elaborate on the main reasons for that and what's the outlook for the second half?

Well, we generally are looking at our strategy right now towards 2015 on that side, so generally we see some positive signals in 2014 already. And if the previous strategy was a little bit to limit the number of points of sales in order to support the revenue and turnover for the agents, it may be reviewed, and recently I met with my managers, but we're still undecided. But we may review it, and we may put some bigger numbers towards the end of the year and towards the next year on the distribution segment.

So, generally, right now, it is more management effort and organic growth, but for the future we are deciding and trying to formulate our strategy. Again, my personal feeling is that we will be a little bit more aggressive towards increasing the number of self-service point of sales in the near future, because of this correction in the strategy.

Thank you.

Thank you. At this time, I will turn the floor back over to management for any additional or closing comments.

Thank you, operator. I would like to thank everyone for taking time and listening to this call.

Generally, I am really pleased with our results, which reflect great execution by our management. I feel very confident about the rest of the year and hope to see many exciting opportunities ahead. Thank you all.

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