Qiwi PLC (QIWI) 2014 Q3 法說會逐字稿

Greetings, and welcome to the Qiwi third quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host Mr. Yakov Barinskiy, Investor Relations for Qiwi. Thank you. You may begin.

Thank you, operator. And good morning, everyone. Welcome to Qiwi third quarter earnings call. I am Yakov Barinskiy, Head of Investor Relations. And with me today are Sergey Solonin, our Chief Executive Officer and Alexander Karavaev, our Chief Financial Officer.

A replay of this call will be available until Tuesday November 18, 2014. Access information for the replay is listed in today's earnings press release, which is available on our investor relations website at investor.qiwi.com. For those listening to the replay, this call was held and recorded on November 11, 2014.

Before we begin, I would like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for the future performance are subject to know 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 undertaken 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 today. I am very pleased with our third quarter as we continue to demonstrate strong operational and financial results, which reflects great execution, accelerating market share in key verticals, and our focus on delivering best-in-class services to our customers, merchants and partners.

Turning to the numbers, total adjusted net revenue increased 47% to more than RUB2.3b in the second quarter. Payment adjusted net revenue was up 57% driven by strong payment volume and net revenue yield growth in our e-commerce, financial services and money remittances verticals.

Adjusted EBITDA grew a strong 92% in the quarter, reflecting top-line growth and continued operating leverage in our business. And adjusted net profit also grew 92%.

In the third quarter, total payment volumes grew 15% to RUB164b. Volume growth in our key market verticals, e-commerce, financial services and money remittances together comprised 36% which demonstrates continued market share increase.

Active Visa Qiwi wallet accounts grew 10% as compared with the third quarter of 2013 to reach 16.5m total active accounts on the annual basis. Looking back into the last three quarters we were adding an average of 200,000 new users per quarter. This quarter we have added 700,000 as compared to the end of the last quarter, which reflects the efficiency of our marketing campaigns and growing awareness of our services.

Now I would like to walk you through some important recent developments. During this quarter we launched a variety of different marketing campaigns which include discounts on goods and services with leading merchants, various customer acquisition programs, fee elimination for certain payment categories, as well as new cross-sale programs for current customers.

All these together have resulted in growing loyalty of existing user base together with addition of 700,000 new customers as compared to the end of last quarter.

At the same time, we have significantly grown our network of kiosks by executing wholesale rental agreements with large federal retailers. Not only do these agreements deepen our countrywide presence but they also provide an additional security for the agent network by bringing higher than average volumes.

Just recently, we have announced a partnership with eBay which is a very important milestone in the history of the company. It proves the value of our system to large international e-commerce companies, fuels e-commerce vertical growth and opens new opportunities for strategic partnerships with large international merchants. I am very proud of my team that was working on the project which took just over nine months. This is an incredible result.

With this, I will 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 third quarter. Beginning with revenue, total adjusted net revenue increased 47% to almost RUB2.4b, up from RUB1.6b in the prior year. Total adjusted net revenue, excluding inactivity fees also increased by the same 47% compared with the prior year.

Payment adjusted net revenue increased 57% to almost RUB1.8b, up from RUB1.1b in the prior year as a result of the strong revenue growth in our e-commerce, financial services and money remittances verticals, which grew 70%, 128% and 95% respectively. Revenue performance was driven by solid payment volume growth and growth of the net revenue yield.

Other adjusted net revenue increased 24% to RUB626m, up from RUB503m in the prior year. Other adjusted net revenue, excluding inactivity fees, increased 18% mainly driven by growth in the interest income and cash and settlement services, partially offset by a decline in advertising revenues and our ongoing investments in call center which we include in other net revenue.

Moving to expenses, we generally continue to experience positive operating leverage in our business which continues to drive our adjusted EBITDA and net profit growth in excess of our revenue growth. Adjusted EBITDA increased 92% to RUB1.5b, up from almost RUB800m in the prior year. Adjusted EBITDA margin was 64% compared with 49% in the prior year. The increase in adjusted EBITDA was primarily driven by revenue growth and continued operating leverage in the business.

Adjusted net profit increased 92% to almost RUB1.2b, up from RUB605m in the prior year. Adjusted net profit excluding inactivity fees net of tax more than doubled compared with the prior year.

Finally, as you saw in our earnings release, following the determination of the third quarter 2014 financial results, our Board of Directors recommended a dividend of $0.38 per share. This is a record-breaking dividend in Russian rubles, though it is less in terms of cents per share than the dividend declared and paid post-Q2 2014 results, due to the devaluation of the Russian ruble in the recent past. In general, we remain committed to distribute all excess cash to our shareholders in the form of dividend.

Now onto our guidance, based on our strong third quarter results we are raising the 2014 guidance provided on our last quarterly call. Net revenue to increase by 32% to 40%, and adjusted net profit to increase by 60% to 70% over 2013.

As we said in our earnings release, we face the macroeconomic slowdown in Russia which can potentially negatively affect some of our key verticals, and especially financial services vertical. We have as of now low visibility as to effects of this slowdown in our volumes and revenues in Q4 and of 2015. We therefore provided the short-term guidance with broader than usual intervals between low and high ends of the guidance range. We will monitor the situation closely and we'll report to you our new estimations in case we will see that the current guidance may not longer be relevant.

It is also important to stress that our 2014 guidance includes effects of our ongoing investments in our key verticals, which include but are not limited to acquisition of consumers, marketing campaigns, promotion activities with our key merchants and launch of new products.

We anticipate that these investments will flow through both our top line by virtue of introduction of better than market takes, and different types of discounts in certain verticals, as well as through marketing and advertising expenses.

We also are now running our models to estimate the volumes in revenues in 2015 in order to prepare the 2015 budget timely. We will come to you with our 2015 guidance as soon as we have our 2015 budget finished and we have reasonable estimation for our volumes and revenue in 2015.

With that, I pass it back to Sergey for a closing remark.

Thank you, Alexander. Though the macro situation may affect some of our verticals in the short term, we really see a great potential in current environment to increase our market share as well as to attack new market segments that otherwise were not in focus.

We believe that we have a unique opportunity to build a great basis for the future growth, and we have to invest in that basis here and now. We are currently more than ever committed to expand our operations and build a platform for our growth in the future using our advantages in the current environment.

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

(Operator Instructions). Georgios Mihalos, Credit Suisse.

Hi guys. This is [Ryan, standing] in for Georgios. Congratulations on the quarter. My first question stems around the long term guidance. Is there any change to your thoughts around the long term 20%, 25% revenue net earnings growth?

Look, it's as we said we just need to see how the market slowdown would affect our volumes and revenues within the next couple of years. So generally speaking we remain positive on the market. And we believe we can gain share, though we really face that 2015 can be a tough year. And let us do our homework and we will come to you as soon as we have a real estimation of the (inaudible) revenues.

Okay. And I guess third quarter today maybe from -- or fourth quarter today maybe from what you can say, has there been a material slowdown in third quarter?

We see a certain slowdown in financial services obviously. Other than that not yet really.

Okay, perfect. And then my second question, can you help us frame what the eBay deal means for e-commerce volume growth in net revenue yield? And are you guys pursuing more physical online partnerships?

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

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

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

Okay guys. Once again congrats on the quarter. Thanks for taking my questions.

Thank you very much, Ryan.

Bob Napoli, William Blair.

Good morning, good afternoon depending on where you're at. It was great seeing you last week Sergey at Money20/20. Nice quarter, a question on the growth of -- the acceleration growth of e-commerce and the pickup in the e-commerce revenue yield. What were the drivers to the acceleration in that vertical?

Actually, we are still gaining market share in that vertical and especially if you remember the majority of that volume still comprise (inaudible) e-commerce, let's say it's the social network gaming and so on. We see a great traction in classic e-commerce meaning online sale of physical goods. That is one of the reasons, especially of those large players like Alibaba with whom we were partners in Russia. And we are still gaining the market share we believe over the last few months in the (inaudible) so that's on the (inaudible).

On the net revenue yield it's all structural shift, it's a product mix. So basically as soon as we gain a long tail let's say those guys would usually be paying higher commissions than the large players. And that's what is driving the net revenue yields up.

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

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

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

Well, mostly it's the physical goods products, so it's about small physical goods below I think $100 (inaudible) that are being sent to Russia from China.

Okay. And the eBay relationship would probably be smaller than the Alipay relationship. Are there any differences? It's -- the eBay is announced as the Visa Qiwi wallet whereas Alipay is not. Is eBay -- is that relationship a different type of relationship?

It's very similar because you can pay with Visa Qiwi wallet on the website of Alipay, so on the website where you order it because you will be prompted to check out with Qiwi. And technically speaking it is very similar. Well, in eBay we expect to have the average check which will be larger than from Alibaba. That's the only difference I think.

Okay and just on remittances, the remittance business, is, do you think that that, the growth is very good, 77%, slowing off of very high numbers, but do you think that the remittance business, how much potential does that business have?

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

Right. Thank you very much, appreciate it.

Alexander Vengranovich, Otkritie.

Yes, good morning, a couple of questions. First on the cost side, so I've noticed there is the decrease of SG&A expenses year-over-year of around 10%. Can you please like comment how much of this was really a one-off effect? And second, I've noticed that you've substantially increased your advertising campaign on TV in the fourth quarter in Russia, so should we expect a major increase in SG&A expenses in the fourth quarter, quarter over quarter? And what should be the normalized level for SG&A going forward in the absence of the major partnerships, in case you announcement.

And the second question here on the cost side, so I've noticed there was also a reduction of the effective tax rate, so could you please also comment on that.

Okay. Now on the cost side there are a few effects, actually as soon as we felt that we are facing a macroeconomic slowdown we obviously are keeping the costs under control, and that has been always the policy of the company. So that is probably the major effect.

Now a part of that we really put in place additional procedures in the processes on how we grant the credit limits, the credit support limits to our agents and that results in the fact that we had much less bad debt expense than we usually would have. And that is the second large factor.

In terms of what's going to be happening in Q4 and going forward, yes, obviously we see a great momentum now to actually invest in advertising and marketing campaigns because they, at least, always have proved effective, so we may expect certain amounts of advertising to flow through P&L in Q4. Those, at least based on our estimations, there will be not be much different from what we had in Q3 so I wouldn't really expect a hike in expense in Q4.

And again, what's going to be happening in 2015 there, let us first run our models on the revenue side on the numbers of consumers, but again our policy remains to stay under -- I mean the costs to stay under control.

On the effective tax rate, yes, it's generated to a certain extent the scale effects, obviously we are structured in the intergroup structure in a way that we achieve the savings on taxes. Again, generally speaking we, as we've always told, we really believe that kind of a normalized tax rate that -- should be around 25% and that is probably something that you have to incorporate in your models going forward.

Okay, good. And just a second question on the partnerships and potential M&As. So a quarter ago you were talking that you were considering some M&As, so can you please give us an update what's happening here.

And also on the partnership with one of the mobile operators, should we really expect that you would launch some visible product by the end of the year?

Yes, well, hopefully we will be announcing something to the end of the year with a mobile operator. And on the other partnerships and M&As, we're still looking at the deals so we're not in a hurry, we're trying to find the best deals possible so we have a few of them on the table. So we have to be sure that it is a strategic business for the company and fully accretive to our share price. So we want to use some more time to think about that and then maybe do something.

Okay, good, thank you. And just a final question in connection to that. So I've noticed there is still a huge amount of the cash sitting on your balance sheet since the IPO and as far as I understand you reserve it for the future potential M&As. But in fact, for example, in case you see that probably it's not a good moment to do any M&As would you in any situation consider the usage of this cash either to increase the dividend or maybe to do some buybacks? And was this anyhow discussed by the Board yet or not?

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

Thank you.

Thanks.

(Operator Instructions). Meghna Ladha, Susquehanna.

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

Actually, the spend per wallet was growing over the past several quarters, so it is still growing and the primary reason was actually the growth in the money remittance and financial services, where you obviously would see much larger average checks than, for example, in ecommerce.

So, and what's going to happening with average checks generally, they obviously will be affected by the inflation but that would very much depend on the product mix. So still we would see money remittance to be one of the growth drivers and that obviously will drive the spend per wallet up.

Again, if you're talking about each of those verticals then I would say that the spend per wallet in each specific vertical is more or less stable just now and we expect that to continue.

Okay. And then with respect to advertising and marketing, last quarter you talked about spending about RUB130m in the second half. How much of that was spent in Q3?

We do not disclose the exact amount but we really think that it's, it's RUB130m that we mentioned at the Q2 call, that was actually the amount that we underspent in H1 and that one we believe will go on top of what was planned for second half anyway.

Again, compared to our revenue those amounts are not that significant so generally speaking you will not see any kind of substantial increase being spent in Q4.

Okay. And then, I know you were asked about the tax rate and you're seeing some benefits this quarter. How should we think about the tax rate as we exit the year? I know the normalized tax rate you said about 25% going forward, which I would assume is 2015, but how should the 2014 tax rate look like?

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

Okay. And then just lastly, you talked about announcing a potential partnership with a mobile operator at the end of the year, but can you help us understand the revenue opportunity for Qiwi if a partnership is announced? Thank you.

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

Thank you.

Anna Lepetukhina, Sberbank.

Yes, hello. I have several questions. My first question is on money remittances, I'm just trying to understand whether you think that there is a lag between campaigns that you launched in August with some payment services, and the growth in payment volumes. So I do understand that there is kind of macroeconomic effect but is this the growth that you expected given all the campaigns that were launched?

My second question is on personnel expenses. Can you please provide some color on what growth you see, whether it is growing in line with revenues and whether going forward you need to expand employee numbers? Thank you.

So okay, on money remittances, yes, we obviously saw actually the good efficiency of the campaigns that were launched. So, and then here we see that in volumes and we still believe that -- that specific vertical is very price sensitive so we're likely to continue with good tariffs and we'll continue to gain market share in that, so that is our estimation.

On the personnel expenses, yes, we historically had those under control, especially now where we face some slowdown. We will not be expecting that, I mean historically the growth was something like 15% on average so we were gaining like 5% in terms of new headcount and around 10% of average inflation of salaries.

For 2015 that can be a bit more conservative and that would be our kind of deliberate policy to work on the cost side, although generally in the market I think what we've been doing so far will be the trend for the next few years.

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

So I don't have that number to hand but it was lower than last year, so we still, that market, especially now, is declining so everyone is feeling that and we are developing, let's say, a new strategy on how we're going to be attacking this market from a standpoint of small and medium enterprises. So as soon as we have any visible estimates on how that is going to evolve next year we'll come to you and explain.

Thank you.

Thank you.

Thank you.

Ulyana Lenvalskaya, UBS.

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

Yes, we're still gaining newcomers, so we still see that our campaigns are efficient to date.

Thank you. And maybe quickly on the quite visible growth in number of terminals, what are the drivers behind and what should we expect by the end of the year?

Well, we have signed quite important agreements with a few big retailers --

Yes, yes.

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

Got it, thanks.

Thank you.

Dmitry Trembovolsky, Goldman Sachs.

Also my questions have been answered, maybe I would just come back to the advertising revenues which I said Sasha said that there is no clear estimate in his head. Would you guys, would you mind just giving us the number maybe later on the call or maybe after this call, because we would use it in the model, if it's possible.

Thank you for your question. We obviously will disclose all the numbers as soon as we have filed 20-F, the annual report so you'll see everything there.

When is that roughly?

Well, we don't have yet any estimation but usually it would take us 60 days after the yearend to prepare the report and publish that.

All right, so you will no longer disclose quarterly advertising revenues as you did in that past, just for us to be clear about that.

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

All right, understood. Okay, that's it, thank you.

Thank you.

Lea Chaftari, Janus Capital.

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

Thanks for your question. Well, we believe that we are compliant to the maximum level possible given the deficiencies of the gateways that are provided to us by governmental authorities as of today. And our level of procedures is the same as other electronic wallet systems and we do not expect any problem with regulators with whom we work closely on these issues. Thank you.

Thank you.

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

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

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