Qiwi PLC (QIWI) 2016 Q2 法說會逐字稿

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

Thank you operator and good morning, everyone. Welcome to the QIWI second 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 Thursday August 18, 2016. 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 11, 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. In the second quarter, our total payments volume decreased by 0.3% and was equal to RUB202 billion, driven by mix trends across market verticals with growth in E-commerce, Financial Services and Money Remittance, offset by decline in volumes in telecom and other market verticals.

As of June 30, we had 16.2 million Visa QIWI Wallet accounts, a decline of 0.8 million as compared to the prior year, resulting from lower marketing spend, the decrease in the kiosk network in Russia in the second half of 2015, and overall economic downturn affecting consumer activity. Our physical distribution network continues to be negatively affected by strict regulations of agents business, as well as adverse market conditions. And as of June 30, 2016, we had around [165,000] kiosks and terminals, including Rapida physical distribution points.

Turning to our financial results. In the second quarter, total adjusted net revenue increased 4% year-over-year, reaching RUB2.6 billion. Payment adjusted net revenue was up 7%, driven by payment volume growth in our major market verticals, offset by declining volumes in telecom and other market verticals, as well as decrease in net revenue yields in financial services market vertical.

We continued to see pressure on our volumes in money remittance vertical, while shift in migration trends contributed to the decrease in demand for remittance services, and extensive banking license reallocations by the Central Bank of Russia negatively impacted the reach of Contact acceptance network, as well as in telecom and other verticals, 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 our strategy and penetrate this diverse and technological market by offering demanded solutions to our customers and merchants.

Adjusted EBITDA increased 11% in the quarter, primarily due to increase in adjusted net revenue and bad debt affect that Alexander will tell you more about shortly, and efficient cost controls that we have implemented. Adjusted net profit grew by 23%.

Further, I would like to provide a brief update on our mid-term strategy. Although we see our payment business with its unique infrastructure as a core of our future growth and are committed to providing our merchants and customers with the most advanced and convenient technological solutions, we believe that any company engaged in fintech market should constantly evolve and innovate. Lately, we've been evaluating different fields' adjustment to our core business in order to envision new products and services, where we can leverage our existing infrastructure and competence to the largest extent.

Our strategic focus for the next three to five years will be in disrupting the consumer finance market with technological solutions, by focusing on our existing as well as new users, providing unique, affordable, convenient and transparent solutions, fueled by cutting edge technology and rolling out successful international models in our core markets. We believe that our market currently likes easy-to-use customer-friendly solutions on both sides, investing money and obtaining money. We believe that we will be able to offer a diversified range of products that will satisfy the needs of our clients and give them access to services and opportunities that they previously lacked. We will follow up with product updates in the second half of 2016.

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 mentioned, we delivered stable financial result this quarter. Total adjusted net revenue increased 4% year over year, amounting to RUB2.6 billion. Total adjusted net revenue, excluding revenue from fees for inactive accounts decreased 3% compared to the prior year. Payment adjusted net revenue increased 7% to reach RUB2 billion, up from RUB1.9 billion in the prior year, as a result of the net revenue growth in our Money Remittance and E-commerce verticals, which grew 28% and 23% respectively, offset by a continued decrease in net revenue in Financial Services and Telecom verticals, by 9% and 25% respectively.

While we see great potential in our key verticals, we believe 2016 will continue to be challenging. Our financial results are driven predominantly by payment volume growth, resulting from consolidation of Contact and Rapida, offset by decreasing net revenue yields in financial services market vertical and declining volumes in telecom and other market verticals.

Our payment net revenue yield had increased year-over-year and we have seen a substantial improvement in our yields in the last three quarters, resulting from our efforts to increase the yields of the businesses that we acquired and shift in product mix.

Other adjusted net revenue decreased 6% to RUB607 million, down from RUB649 million in the prior year, mainly because of the decrease in cash and settlement services, interest revenue on overdrafts provided to agents, revenue from sales of space of kiosks triggered by the construction 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 increased 11% to RUB1.6 billion from RUB1.5 billion in the prior year. Adjusted EBITDA margin was 63% compared to 59% in the prior year. Adjusted EBITDA margin expansion primarily resulted from the net effect of bad debt recovery in the amount of RUB 1 million in the second quarter of 2016, as opposed to bad debt expense of RUB 50 million in the second quarter of 2015, as well as lower advertising expenses.

Adjusted net profit increased 23% to RUB1.3 billion, up from RUB1 billion in the prior year. Adjusted net profit was affected by the same factors as adjusted EBITDA.

Finally, as you saw in our earnings release, following the determination of second 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 on to our guidance. Given difficult macroeconomic and regulatory situation and lower visibility over the potential market environment changes, we downgrade our guidance for 2016. Adjusted net revenue to increase by 2% to 5% and adjusted net profit to increase by 5% to 10% over 2015. As already noted, given the difficult environment, we may feel the impact on our key market verticals throughout the year. With this and certain other factors beyond our control, we reserve the right to revise guidance in the course of the year.

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

(Operator Instructions) Bob Napoli, William Blair.

Sergey, talking about going into the consumer finance market, I was wondering if you could give some thoughts around the timing of entering that market and what types of products you're considering.

On timing, we believe that to the end of the year we will show up with several new products that we plan to launch to the end of the year. In terms of what particular areas, so we are now working with our client data a lot and looking at the competitive market on a global scale. So, we believe that we will be able to shop with some financial services for our consumers that are based on our knowledge of the consumer and that will be kind of small loans to consumer or merchants.

Is it your thought that you would originate and sell those loans to investors or keep those loans on your balance sheet? And if you keep the loans on the balance sheet, what are your thoughts on funding, the funding you need to go into that business?

Well, in the beginning we think that it's a small amount, so we will do it from our balance sheet. In the future, we look at the opportunities -- different kind of opportunities within which also transferring into the other banks' balances.

And then just last question on your core business, are all of the regulatory changes implemented in your business? I'm understanding the economic challenges, but from a regulatory perspective are there any more pressures to your business yet to come that you are aware of, either currently implemented or there could be new regulations?

Well I believe that fintech in general is an area where we will always be watching for different kinds of regulatory changes. So I think that in general, in fintech there will be new challenges in either identification fields or some other fields. But I don't see anything that could hurt the Company.

(Operator Instructions) Vladimir Bespalov, VTB Capital.

First I have a question on your guidance. It actually implies that you are going to accelerate your organic growth in the second half of the year, given that Contact and Rapida will no longer affect your numbers so long. What do you think will drive this acceleration? And on your profitability guidance, so it looks like your margins are going to go down in the second half of the year. Are you going to increase marketing spend or what is going to be the reason behind this?

It's Alexander. On the net revenue guidance, yes, we believe that in the second half of the year we will have a certain increase in organic growth, primarily driven by our understanding of what's going to be hitting from a macro point of view. We actually have expected that we will hit the bottom in second quarter this year, which unfortunately haven't yet happened, but we believe that that will happen in Q3 or Q4.

On the net profit guidance, again, here is actually why we believe our margins will go down, and the primary reason for that is our ongoing investments, especially in R&D, so in those products that we plan to launch in the second half of the year that Sergey just described in different fields, especially, in providing the different financing options for our consumers.

One more question, just maybe you could provide some color on your physical distribution. The network of kiosks and terminals keeps shrinking even compared to the previous quarter. What is the reason first? Maybe it's not that profitable or economically viable for your agents to install new terminals, and this hurts the expansion of the network. And you also mentioned that your market share is increasing, maybe you could give us some color on the market and where your market share stands now, where the competitors are and so on?

Yes. We actually -- the recent report that we saw on the self-service kiosks network in Russia show that our market -- again, those reports are not yet have a quality that we would love to have, but generally we believe our market share went from somewhere around 45% last year to something around 55% this year, based on the second quarter results, though the market itself decreased, obviously due to the regulatory changes.

In terms of the number of self-service kiosks, the number decreased just a little bit as of the end of Q2 as compared to Q1. So, that number was not so much. It's more due to the mix -- [present mix] of the agents. So some of the agents actually quit the market, while we had few new ones. So this is not something that dramatically changes the whole landscape. In terms of our plans, again, we still believe we have a capability to increase slightly the numbers of kiosks by the end of the year, though we obviously depend very much on the macro in this market. So, again, let us see how it's going to behave in Q3. And as soon as we will feel that the trend is reversed, then we'll discuss with you on our next call.

(Operator Instructions) Svetlana Sukhanova, Sberbank.

It's Svetlana Sukhanova from Sberbank. Maybe I may have missed from your previous answer, but why your terminal network was down quarter-on-quarter, because looks like you lost around 3,000 terminals and kiosks on quarter-on-quarter basis?

Yes, we just lost a little bit. So, it's slightly less than that. So it's 2,000-point something. But again, this number is not that dramatical. As I explained to you, the fact that some agents have quit the market, but we also had the inflow of new agents. So I mean, we consider that the network of self-service kiosk is stable now. So, the fluctuation of couple of thousand points of sales quarter-on-quarter is not something that we care much about. So it's not really huge numbers. Again, going forward, we need to assess what's going to be happening macro-wise. So we unfortunately are not really able to guide you exactly how many more kiosks we may be installing within the next several months, we just need to assess the data that we are getting from our agents.

Okay. So do I understand you right, when you was talking at the last conference call that you see that number of kiosks is growing in some of the regions, it was primarily offset by the decline of the number of agents in other regions. Is it the right way to think about it?

Yes, there is always some dynamics in agents. So some of them are going out or reviewing their rental agreements still. So, we think that it's a temporary effect for few large agents who will return in some other form again in the market very soon.

And my second question would be regarding [your new] fintech strategy. What kind of volumes, revenues, profitability should we expect from this fintech strategy say for the next year, and do you expect it to be profitable in 2017, or you expect to be a loss-making? And approximately, in terms of revenue how should significant do you think might the contribution be?

Well, in -- judging to some of the comparables we see, the business itself can be quite scalable. So it in 2020, say, it can be around half of our total net revenue. But in terms of the year it is very difficult to say. Since it is a new business, we do not foresee sizable profits or revenues.

You do not see next year profit or you do not see profit by 2020? Apologies.

No, in 2020, as I said, we believe that it may constitute to half of our earnings. In 2017, it's (multiple speakers)

That was about revenues. And what about profitability? What kind of profitability of this fintech business should we assume compared to your profitability of your core business?

Actually we're looking at the project that will provide approximately same level of profitability that we have from our core business. At least -- if you talk about the products that are in the pipeline, then we would be shooting on something that should be very similar to QIWI core business, as soon as those products get mature. But again, at the earlier stage, you will obviously see, first of all, the investment to develop and launch those [products], and that's actually why we are decreasing the profitability for the second half of this year, simply because of the different types of investment that we need to spend just for the launch of those products. So that's a general view.

And my last question, if I may, would be about your existing business. What kind of trends do you see across all the lines in Q3? I'm especially interested in financial services and money remittances. Do you see kind of acceleration in the financial services market recovery? Do you see in the money rem -- in Q3, do we see again acceleration or [it's very much] same level?

I would say no, in general, because some of the volumes to migrate to, for example, wallet-to-wallet transfers, where we don't have any commission. So, we believe that this trend may continue. But still on the overall volumes on money remittances it will not be seen very much. But we don't think that due to the falling macroeconomic conditions we will be able to increase yield as well. So we think that it will be kind of stable to the end of the year.

Kind of stable in terms of absolute volumes or in terms of volumes growth?

In terms of volumes growth, yes.

In terms of volume growth? So we can extrapolate a trend? Very clear. Thank you very much.

Bob Napoli, William Blair.

Just wanted to see what your feelings are in your partnership with Visa and how that relationship is today versus what it was when you went public, with the changes in the payment systems in Russia with the National Payment system and if there is any -- what types of things -- so maybe just comment on your relationship with Visa and any thoughts on how changes in the Russian payment market could affect your business?

Look, as for Visa, we are planning to do new products together. So we will be -- we are now in discussions on these products and we hope to be launching them together. In terms of the international strategy, right now is postponed, so that we are focusing mostly on our core markets for a while. So we will do projects mostly internally. In terms of new things, we are waiting for (inaudible) and waiting for new opportunities there.

As far as new products or services, are you at all looking at the merchant acquiring space? Is that something that is interesting to you and it's related enough to your core business?

Everything that is related to small and medium merchants is definitely in the area of our interest.

Vladimir Bespalov, VTB Capital.

I have a couple of follow-up questions. First is, could you update us on your M&A activities? Are you considering (inaudible) at what stage they are, advanced or not advanced, whether it's going to be big acquisitions or small? And maybe with your new products you're going to launch in the second half, are these like internally developed products or you're going to make some acquisitions to boost your exposure to these new areas of business?

Yes, mostly, we are right now considering our internal resources for new products. So the first launches will definitely be on our internal resources and we are right now spending quite a lot of to the end of the year and planning to spend for this new products. In terms of the M&A activity, yes, we do still are looking at different opportunities and mostly we look at big ones, not small ones.

But are there any news at a pretty advanced stage or it's just pretty early stages at the moment?

I would say it's somewhere in the middle. I would say that there are major discussions, but not contracted.

Maybe one more question, if you could provide some color on the E-commerce growth, whether it's like tangible goods or intangibles and what is your strategy, how you're going to develop this business in the future?

So, the growth that we are experiencing is still primarily intangibles (inaudible) goods. So, we have reported during the last few quarters that the share of classical -- I mean physical goods lying in our portfolio is growing. But now it's kind of stabilized. And as we have said, the majority of growth is still coming from our core markets. I mean gaming and the line and then in the virtual space. Although we believe that the classical E-commerce has a huge potential in the future, it's not yet gained a substantial market share in total Russia. I mean the percentage of E-commerce in total rubles spent it still will be low. So, we would really expect a change in the situation within the next three to five years, but not now.

Thank you. Ladies and gentlemen, we have come to the end of our time for questions. I'd like to turn the floor back to management for any final remarks.

Thank you, operator. Thank you very much for being on this call. And we're looking forward to show you new products in the next quarter. Thank you, bye-bye.

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