Qiwi PLC (QIWI) 2016 Q3 法說會逐字稿

Greetings and welcome to the QIWI Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Varvara Kiseleva, Head of Investor Relations. Thank you. You may begin.

Thank you operator and good morning, everyone. Welcome to the QIWI third quarter earnings call. I'm Varvara Kiseleva, Head of Investor Relations. And with me today are Sergey Solonin, our Chief Executive Officer; Alexander Karavaev, our Chief Financial Officer; and Oleg Ryazhenov-Sims, our Project CEO. A replay of this call will be available until Tuesday, November 29, 2016. Access information for the replay is listed in today's earnings press release, which is available at our Investor Relations website at investor.qiwi.com. For those listening to the replay, this call was held and recorded on November 22, 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 third quarter financial results were in line with our expectations, despite the challenging environment in our core markets.

In the third quarter, our total payment volume decreased by 19% as compared with the same period in the prior year and was equal to RUB215 billion, driven by mix trends across market verticals, with growth in e-commerce offset by decline in volumes in financial services, money remittance, telecom and other market verticals. This decrease was largely driven by the decline in our kiosk network and significant shrinkage of Contact center [side] network, due to macroeconomic factors and some regulatory pressure.

As of September 30, we had 16.5 million Visa Qiwi Wallet accounts, a decline of 0.2 million as compared to the prior year, resulting mainly from the decrease in the kiosk network in Russia in the second half of 2015, as well as overall economic downturn affecting consumer activity.

Our physical distribution network continues to be negatively affected by stricter regulations of agents business, as well as adverse market conditions. And as of September 30, 2016, we had around 163,000 kiosks and terminals, including Rapida physical distribution points. We anticipate that the number of kiosks and terminals will continue to fluctuate around this level with our market share slightly increasing.

Turning to our financial results. In the third quarter, total adjusted net revenue increased 5% year-over-year, reaching RUB2.7 billion, driven by payment volume growth in e-commerce market vertical, as well as increase in net driven yields across all key market verticals, offset by decline in volumes in financial service, money remittance, telecom and other market verticals. We continue to see pressure in our volumes in money remittance vertical, where shift in migration trends contribute to the decrease in demand for remittances services and regulatory changes negatively impacted the reach of Contact acceptance network.

Our volumes in financial services, telecom and other verticals were affected preliminarily by the contraction of our physical distribution network. Although the consumer spending in Russia is still under pressure, we continued to see strong trends in our e-commerce market verticals. I believe that we will continue to successfully execute on our strategy in this category and penetrate this diverse and technological market by offering new [demanded] solutions to our customers and merchants.

Now, I would like to walk you through some important recent developments. Following our mid-term strategy update, I'm glad to announce and share with you our new project that I'm very excited about, SOVEST.

With this, I will turn the call over to Oleg, the Head of the Project who will provide more details about this. Oleg?

Thank you, thank you Sergey and hello everybody. My name is Oleg Ryazhenov and I'm CEO of this project. As Sergey just said, we are proud to announce today our new product; it's called SOVEST. SOVEST is a first large-scale payment by installment credit card system in Russia, developed in-house by our team, using proprietary technology and QIWI extensive infrastructure. SOVEST enables a broad range of customers to get easy access to funds and purchase numbers and diverse goods and services they need and when they need them. Our business model differs significantly from those currently exist in the Russian market, including [quasi] credit cards, point of sale for loans and merchant installment programs. It presumes that the Bank owns money from the retail partner's share in their sales profit, not from the customers paying interest. Such model forms an attractive proposition for customers, while limiting our risks.

There are many advantages for our current and potential users, including easy to understand installments usage, no interest on customer side, no over-payment, revolving credit limit and single time credit limits set up with multiple usage in our streets and online partner network.

SOVEST card will target all credible population. We estimate reachable target as over 40 million people. Project partner merchants will highly benefit from attracting new customers, increasing basket size and purchase frequency, not to mention additional marketing through the project development and communications. As of now, we have contracted more than 40 top retailers with over 1,000 shops in total and we will be adding new partners every week.

While SOVEST is unique in Russian market, there are a number of successful payment by installment products around the world and in the market similar to Russian, including Belarus, Azerbaijan, Serbia, Turkey, Brazil, Australia etcetera. SOVEST card has great potential in Russia now. The market shows pessimistic macroeconomic trends, such as stagnating GDP and shrink in consumer disposable income, combined with limited trust in banks. Customers are in search for low cost funding and convenient credit options to maintain their consumption level, while retailers strive to maintain turnover and attract new customers.

Today, we launched SOVEST card. Our plan is to invest heavily in 2016 and 2017, with cost close to RUB200 million in 2016 and approximately RUB1.4 billion negative net profit effect in 2017. We believe that by 2020 we will reach 2 million active accounts with total credit portfolio of close to RUB40 billion, with net revenue of close to RUB20 billion and target EBITDA margin of 30%, 35%. Sergey?

Thank you Oleg. The launch of SOVEST is an important step in implementing our FinTech strategy and disrupting the consumer finance market with innovative, affordable, convenient and transparent technological solution. We believe that by providing more diverse and convenient services to our customers, we will be able to leverage our existing base and infrastructure, as well as attract new users and then penetrate new areas of the market.

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 noted, our financial results of this quarter were in line with our expectations. Total adjusted net revenue increased 5% year-over-year, amounting to RUB2.7 billion. Total adjusted net revenue, excluding revenue from fees for inactive accounts also increased by 5% compared to the prior year. Payment adjusted net revenue increased 15% to reach RUB2.1 billion, up from RUB1.8 billion in the prior year, as a result of the net revenue growth in our financial services, e-commerce and money remittance verticals, which grew 53%, 27% and 7% respectively, offset by a continued decrease in net revenue in our telecom and other verticals by 23% and 18%, 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 net revenue yield improvement across our key market verticals, resulting from pricing optimization and shift in product mix, offset by declining volumes in money remittance, financial services, telecom and other market verticals.

Our payment net revenue yield has increased year-over-year by 29 basis points, as we have seen a substantial improvement in our yields across all key verticals. Other adjusted net revenue decreased 20% to RUB557 million, down from RUB693 million in the prior year, primarily due to the decrease in cash and settlement services, triggered primarily by the construction of our physical distribution network.

Moving to expenses, this quarter, we continued to tightly monitor our costs. Adjusted EBITDA increased [25%] to reach RUB1.7 billion from RUB1.3 billion in the prior year. Adjusted EBITDA margin was 63% compared with 53% in the prior year. Adjusted EBITDA margin expansion primarily resulted from growth of net revenue, compromised by decrease in personnel costs and further expenses.

Adjusted net profit increased 12% to RUB1.3 billion, up from RUB1.1 billion in the prior year. Adjusted net profit was affected by the same factors as adjusted EBITDA, offset by a lower foreign exchange gains generated in the third quarter of 2016, as compared to the third quarter of 2015.

Finally, as you saw in our earnings release, following the determination of third quarter 2016 financial results, our Board of Directors approved a dividend of $0.22 per share.

And now on to our guidance. Despite difficult macroeconomic and regulatory situation, prolonged lack of rebalancing in the agent market and significant costs with the anticipation and connection with our new project, we reiterate 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.

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

(Operator Instructions) Bob Napoli, William Blair.

Two questions. One, first on the core business, before the new product. Just the trends, are we seeing -- as we think about 2017 for the core business, do you expect to be able to get revenue growth or the trends we've seen from the second quarter to the third quarter, are trends stabilizing, or do you expect to see further deceleration in some of the non-e-commerce products and the e-commerce growth rate is that -- so, is that sustainable or could it accelerate?

Hi, Bob, this is Alexander. Thank you for your question. We are not in yet in a position now to guide on 2017, because we are generally running through the budgeting exercise. But generally, our understanding, based on what we see on the market is that we should not be expecting any further deterioration of the distribution network and the volumes. We also do not expect growth in our core business. So, generally we expect the [sales] to be flat in 2017, but again, we will come out with the proper guidance as soon as we finished our 2017 budget.

And then on the new product, so it is -- QIWI will be taking the credit risk. Is that clear, on the new product? And then the investment of RUB1.4 billion in 2017, do you expect that to be ratable over the year, or do we expect to ramp up to a peak in the fourth quarter, how do you expect the investment? And, is QIWI taking the credit risk?

Hi, Bob, this is Oleg, the project leader of SOVEST. We expect that the peak of investment will come on the third and fourth quarter of 2017.

Okay. And the credit risk?

And the credit risk will be on QIWI's side.

It is on QIWI's side, because we --

At least for the next few years.

Brady Martin, Citi.

Just wanted to get more color on the timing of this RUB200 million investment in SOVEST in 2016, whether is this primarily in Q4, or is part of that reflected in Q3, or even in the first half of the year? And second question, just more idea of what the guidance implies for the full year. I mean, it looks like that net adjusted profit growth was around 15% for the first nine months, but you're still guiding for 5% to 10% for the year. So I'm just trying to figure out, is this just conservative outlook or is this the expectation that you'll have kind of net profit decline in Q4, perhaps, related to this SOVEST investment? Thanks.

So this RUB200 million of investment in 2016 will primarily be spent in Q4. So we should expend certain amount in Q3, but this is actually -- really a small one. And you are exactly right, the guidance really implies that investment that it will flow through P&L in Q4. So that's why we may expect the Q4 will not be as profitable as Q3, for example, simply because we have to invest in that new project.

(Operator Instructions) I'm showing no questions in queue at this time. I would like to turn the floor back over to management for any additional or closing comments.

Yes. So thank you very much operator. Thank you all. Bye, bye.

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