Qiwi PLC (QIWI) 2016 Q1 法說會逐字稿

Good day everyone and welcome to the Qiwi First Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Varvara Kiseleva, Head of Investor Relations. Please go ahead.

Thank you operator and good morning, everyone. Welcome to the Qiwi first quarter earnings call. I'm Varvara Kiseleva, 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 Wednesday, May 25, 2016. Access information for the replay is listed in today's earnings press release, which is available in our Investor Relations website at investor.qiwi.com. For those listening to the replay, this call was held and recorded on May 18, 2016.

Before we begin, I'd 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 statements 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, Varvara, and good morning everyone. Thanks for joining us today. Our first quarter results were in line with our expectations despite the challenging environment in our core markets. In the first quarter, our total payment volume increased by 25% to reach RUB198 billion, driven by acquisition of Contact and Rapida in the second quarter of 2015, while payment volume in Money Remittance and E-commerce market verticals grew even faster by 76% and 62% to reach RUB33 billion and RUB34 billion respectively. As of March 31, we had 16.1 million Visa QIWI Wallet accounts, a decline of 1.2 million as compared to the prior year, resulting from lower marketing spend, decrease in the QIWI's network in Russia in the second half of 2015 and the overall economic downturn affecting consumer activity. Our physical distribution network was negatively affected by stricter regulations of agents business as well as adverse market conditions and as of March 31, 2016, we had around 167,000 kiosks and terminals including Rapida physical distribution points.

Turning to our financial results, in the first quarter, total adjusted net revenue was flat year-over-year, reaching RUB2.5 billion largely due to a decline in our other adjusted net revenue. Payment adjusted net revenue was up 9%, driven by strong payment volume in turn offset by decrease in net revenue used across our major market verticals. We continue to see pressure on our volumes in the Financial Services vertical, which is affected by weak consumer loan market and bankruptcy of several large consumer-oriented banks, as well as our Money Remittance vertical, where shift in migration trends contributed to decrease in the demand for remittance services.

Telecom vertical demonstrated volume decline primarily resulting from the contraction of our physical distribution network. Although the consumer spending in Russia is still under pressure, we see strong trends in our E-commerce market vertical. I believe that we will continue to successfully execute on our strategy and penetrate this diverse and technological market by offering demanded solutions to our customers and merchants.

Adjusted EBITDA declined 8% in the quarter, primarily affected by bad debt expense that Alexander will tell you more about shortly. Adjusted net profit grew by 10%, primarily as a result of the foreign exchange gains.

Now, I'd like to walk you through some important recent developments. Starting September 2015, we have experienced a significant pressure in our business, resulting from enhanced legislative controls over agents, consequent market instability and exit of non-compliant players. Although our physical distribution network in Russia has stabilized and our market share has increased, we continue to see after effects of these regulatory changes to pressure on our volumes in both historical and acquired business and then our other revenue in the first quarter of 2016. We believe that currently the market has stabilized and adjusted to the new circumstances opening opportunities for future growth.

Further, several initiatives regarding e-wallet regulation in Russia are currently being discussed between the regulator and the market players, including introduction of new remote identification procedures and stricter regulation of unidentified wallets. In the end of April, Central Bank representatives stated that regulator is planning to propose some changes by the end of 2016. Given our continued work in this area and the fact that Qiwi Bank operates under full banking license, we don't see any significant risks in relation to the development of e-money regulation.

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 described, we delivered stable financial results this quarter. Total adjusted net revenue was flat year-over-year, amounting to RUB2.5 billion. Total adjusted net revenue, excluding revenue from fees for inactive accounts, decreased 7% compared to the prior year.

Payment adjusted net revenue increased 9% to RUB2 billion, up from RUB1.8 billion in the prior year, a result of the net revenue growth in our Money Remittance and E-commerce verticals, which grew 50% and 13% respectively, offset by continued decrease in net revenue in Financial Services and Telecom verticals, by 7% and 12% respectively. While we see great potential in our key verticals, we believe 2016 will continue to be challenging.

Our financial results were driven predominantly by payment volume growth resulting from consolidation of Contact and Rapida, offset by decrease in net revenue yields across almost all our verticals as a result of the consolidation of Contact and Rapida, which have driven significantly lower net revenue yields than QIWI historical businesses. Although our net revenue yields have decreased year-over-year, we have seen a substantial improvement in our yields in the last two quarters as a result of our efforts to increase the yields in the businesses that we acquired.

Other adjusted net revenue decreased 25% to RUB505 million, down from RUB675 million in the prior year, mainly because of the decrease in cash and settlement services, interest revenue and overdrafts provided to agents, revenue from sales of kiosks and rent of space for kiosks triggered by the contraction of our physical distribution network, partially offset by the increase in inactivity fees.

Moving to expenses. This quarter, we managed to tightly monitor our costs. Adjusted EBITDA decreased 8%, to RUB1.5 billion, down from RUB1.6 billion in the prior year. Adjusted EBITDA margin was 58% compared to 64% in the prior year. Adjusted EBITDA margin contraction is primarily resulted from budget expense that amounted to RUB12 million in the first quarter of 2016 as opposed to RUB67 million of bad debt recovery in the first quarter of 2015.

Adjusted net profit increased 10% to RUB1.2 billion, up from RUB1.1 billion in the prior year. Adjusted net profit was affected by the same factors as adjusted EBITDA, offset by foreign exchange gain, excluding the effect of foreign exchange loss in June 2014 offering proceeds, generated in the first quarter of 2016 as compared to foreign exchange loss in the first quarter of 2015.

Finally, as you saw in our earnings release, following the determination of first quarter 2016 financial results, our Board of Directors approved a dividend of $0.22 per share. Although we continue to pursue certain M&A targets, we remain committed to return the cash back to shareholders.

Now, onto our guidance. Despite difficult macroeconomic situation and lower visibility over the potential market environment changes, reiterate our guidance for 2016. Adjusted net revenue to increase by 5% to 8% and adjusted net profit to increase by 7% to 12% over 2015. As was already noted, given the difficult environment, we might see further impact in our key market verticals throughout the year. With that and certain other factors beyond our control, we therefore arrived to revise the guidance in the course of the year.

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

(Operator Instructions). Bob Napoli, William Blair.

First question on the other revenue, the level of the current quarter is that the loss of revenue from -- the vast majority of it is coming from inactivity fees. Do you expect that to continue going forward? And on the inactivity fees, how do you collect those inactivity fees and is that sustainable? Is that revenue line at a level that's sustainable?

Thank you, Bob, it's Alexander. We expect that other net revenue generally is hitting the bottom in this quarter in Q1. So, based on what we talked in our guidance, so really can expect that the other net revenue will be growing slightly starting from Q2 throughout the year as well. So, we (inaudible) providing the guidance for the separate line items and this I can tell you. On the inactivity fees, generally, it's worse in a way that that based on the public offer that we published in our site, (inaudible) fees. Usually, the people after that period expires will never claim back those balances when they count.

As for the sustainability, generally yes, we have stressed the best concept over the last few years. Looks like that really became a sustainable part of our net revenue. We are still not ready to guide on the exact amount going forward. So, we may see slowdown in the inactivity fees, but generally, we really believe that that is the stable source of revenue for us now.

And then just a follow-up question, if I could, here, the improvements in revenue yield and I think you did call out last quarter and when you bought Contact and Rapida that you are going to raise prices. It looks like you were able to improve revenue yields in several of the product lines. How good has been the response to the price increases? Do you feel like you've maintained market share and do you expect further price? Are these levels of revenue yield levels that you would expect through the year?

I think, yes. Generally, look, what happened is that we managed to increase the net revenue yield in the majority of the categories that Rapida and Contact operate except for the Money Remittance itself. So, this is something -- in Money Remittance, we believe that that should take some more time for the market to consolidate and for the prices to go up. Generally speaking, we have not seen the shift on the market share, (inaudible) basically, all the activities that we took last year and the activities of Central Bank, that regulatory pressure on the agent market basically left to the extent that our market share in the self-service kiosk market increased. Based on the very recent report that we're seeing, we saw our share in the self-service kiosk market increasing to slightly below 60% of total market, up from around 50% of the market and this is something that we see in majority of for key verticals, probably except for Telecom, which is no longer looked as a core segment -- core vertical to be the -- so far, we have not seen negative effect of the pricing increase on the market share and our strategy is basically to keep all the activities in a way either to keep or to increase the market share. If having all of that, we are in a position to increase net revenue (inaudible).

And just finally, have you seen any stabilization as we're halfway through the second quarter in the Money Remittance sector or generally in the Financial Services sector, is there any sign of stability where the level of decline would cease in the market?

Hi, Bob, yes, we do see some recovery. So, we see that Financial Services segment is really, in the late first quarter, it started to recover. We think that we have some delay from the market. So, we will see how it goes in the second quarter and it will be much more visible. For Money Remittances, I would say that we hit the bottom in the beginning of the year. So, it was really uncertain where the market will grow further, but again through the end of the first quarter, we see some recovery and now the volumes are growing.

(Operator Instructions). Brady Martin, Citi.

Yes, good afternoon. Just hoping to get some more color on your guidance of the year. There are lots of moving parts in Q1 and we see volumes are up, but a lot of that seems to be still linked to integration of Contact, Rapida (inaudible) your adjusted net profit was up, but there was some FX component there. Just wondering what gives confidence that you'll see adjusted net income growth at all this year? Is this just a combination of weaker base for you in the second half and maybe your expectations of a recovery in the economy or is there -- are there very specific issues that you could share with us that are you think will help drive the net income growth? That's first question.

Thank you, Martin. This is Sergey again. Well, I guess, as you said, there are many moving parts inside of our model. So, generally what we do, we have more than several hundreds of projects that we evaluate. And we see in -- we make kind of a forecast to the end of the year in each project, and then what you see at our guidance is the combined effect of all those forecast.

For this forecast, we actually still -- we're still quite not too optimistic in terms of our economic recovery. So, we still think that we are planning in line with the drop in the GDP in this year around 1.5%. So, we are generally looking at the situation as it is today and we have all the forecast as a combined effect of a lot of projects. So, I don't think that it will be easy to explain all of that but there are hundreds of those projects that are taken into account. Thank you.

Okay. Maybe just another question on a different topic. Just a few weeks ago, there's some Russian press speculation I think about changes in the Money Remittance and maybe getting rid of anonymous transfers. Can you comment on this, is there any expectation that we'll see some change in -- kind of eminent change in Money Remittance regulation that you are aware of? Thanks.

Well, we will be meeting with Central Bank soon on this topic. We generally don't see real legislative act or preparation for this act in Duma. If you look at today's press release -- not press release, maybe interview with RBK, they actually say that they have even more problem with banking crisis -- on the banking side than with payment system like us. They also mentioned QIWI as the payment system that is quite good, in that sense. So, really it is more the -- this is more around investigations and trying to understand how the market works. So, we're really in talks. So, I don't think that we will see anything like that soon, but even if we see something, that will be definitely discussed and will not hit our base as soon as we are operating here under the banking license. So, maybe for some small players, it will be little bit more difficult.

Svetlana Sukhanova, Sberbank.

Good afternoon, gentlemen. If I may start with Money Remittances, I think Sergey answered in one of the previous question and mentioned that you managed to increase yields across all the segments except with Money Remittances as of Contact, but when I look straightforward on your segments, I see that Money Remittance yields went up. Was it mainly because of FX effect, because FX was quite volatile? So, how should I understand that two contradicted numbers?

Thank you for the question, it's Alexander. So, the net revenue yields that are increased in Money Remittance that you see in the reporting is primarily due to the product mix, because we report under Money Remittance everything that we can call Money Remittance, it's all the cash to card, card to card and (inaudible) money remittance and this is basically due to the fact that higher yielding categories within Money Remittance are gaining share from, let's say, classical Money Remittance of Contact. So, this is purely (inaudible). So, we have not, as I told, let's say change the price of dispatch in that segment. So, we still think we might have certain improvement in net revenue surely in that category.

I understand. So, it's pretty much mix shift into QIWI classical, the QIWI kind of Money Remittances. Okay. And follow-up question here, this 1.45% yield which were seen in Money Remittances in Q1, can we extrapolate it to the following quarter or not yet because it's too many more impact?

We are not really guiding on the net revenue yields in each of the verticals and those things. What we might say that we really expect that this level of net revenue yields in Money Remittance is sustainable . We see certain potential to improve those, but we are not yet clear about the timing and how many basis points we might be gaining in addition on top of what we have now.

But is there any downside [risk to 145%] that was I see upside but actually I was trying to understand downside?

Well, not really. We do not see any downside. In terms of net revenue, basically we do not see that there is any downside risk.

Okay, clear enough, thank you very much. My next question if I may would be about other payment revenues. Can you -- because you have already answered the question about other revenues, but can you please kindly remind that what do you put on the other payment volumes and what was the main driver in the decline of this other payment volumes?

Essentially, other payment volumes are basically everything what is not included in the other category so that category generally is represented by governmental -- I mean payments for governmental services like taxes, traffic fines, utilities and many other categories. None of those is having a total net share in that category. The decline of that in the category was primarily due to the contraction of the distribution network in the second half of 2015.

Understand. So, we might -- the way you see, you might see recovery once you restore the distribution network in the following quarter, do I understand you right?

That's what our assumption is. That's correct.

Okay, clear enough. Thank you very much. And my another question would be, if you can kindly disclose your cash on the balance sheet at the end of the Q1?

Well, the total cash is disclosed in the (inaudible). It's basically -- currently, the cash that is available for the investments and/or M&A is slightly [above $70 million].

Okay. That excluding cash which you reviewed for the dividend payments. Do I understand correct?

Correct. That's correct.

(Operator Instructions) Anna Kazaryan, VTB Capital.

Yes, hello. Thank you for taking my question. My question is about regulation. I think you have already mentioned the discussions of banning unidentified electronic wallets, but could you explain why you don't see any serious risk for QIWI? Could you clarify this question, please?

Yes, no problem. So, maybe you know that we have a lot of payments already that are under the identification procedure. So, we have a lot of experience already on converting all users into identified and we do have electronic means to identification procedures already. So, we don't see that was too hurtful for those people. So, it was quite clear procedure and quite an easy one. Also, as we are already discussed, there will be levels of identification. So, there will be not -- it will not be the situation when you will need to go somewhere and show your passport like that. So, it will not be that kind of difficult identification procedure anyway.

So, the talk that is going on for a while, so it's like for few years and we are kind of in support for that. It runs different types of services and different types of identification for these services. So, what was said actually is that those kinds of services, those kind of identified wallets should be linked to a banking account. So, in terms of report into the Central Bank, today, we report them as one math, it's one account, and under this one account, there are lot of wallets and a lot of accounts of different users. So, what will happen, as I understand, is that we will have to divide all those wallets that are in one bulk in the counting, in the bank and we will have to divide them into standard like accounting procedures in the bank, and that will be supported by our IT. And I think that technically, we are completely prepared to do that. It will take a little bit more IT resource in terms of like to process these transactions, but definitely it's not the material one.

Okay. Thank you, it's clear. And one more question, just a clarification. So, we still see a decline in number of kiosks and terminals and could you give us an update on the station, when exactly do you expect recovery of this number, maybe next quarter, third quarter, so on?

Well, this number will be recovered during over the year. So, we see that some of the regions do need some additional terminals right now and we think that it will be more or less done during the year. So, we see that it is already happening a little bit in the end of first quarter. So, we think that as soon as our monthly base of the wallet goes up, the quantity of terminals should go up as well. So, it should be -- in some sense, it will be aligned during this year. It's not so aggressive.

Thank you. Mr. Solonin, we have no further questions. I'd like to turn the floor back to you for any final remarks.

Thanks, operator. Our first quarter results have demonstrated the resilience of our business model in a very challenging environment. While the macro situation may continue to negatively affect our volumes and revenues throughout 2016, we continue to see many opportunities in this environment to increase our market share in our key verticals, as well as to attract the new market segments and aim to position us for future growth. With that operator -- thank you very much, everyone, and goodbye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.