Qiwi PLC (QIWI) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to the QIWI fourth-quarter and full-year 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.

Thank you, operator, and good morning, everyone. Welcome to the QIWI fourth-quarter and full-year earnings call. I am 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, March 29, 2017. Access information for the replay is listed in today's earnings press release, which is readable on our investor relations website at investors. QIWI.com. For those listening to the replay this call is held and recorded on March 22, 2017.

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. The 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 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 consist of 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 will 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 fourth-quarter results were in line with our expectations, despite the challenging environment in our core markets, and we managed to increase both our adjusted net revenue and our adjusted net profit.

Though in 2016 our total payment volume decreased by 2%, we saw positive trends in e-commerce and money remittance verticals, which grew in 2016 21% and 14%, respectively, over 2015. Growth in this vertical, along with moderate growth in financial services vertical, was offset by declines in telecom and other verticals by 25% and 22%, respectively.

We are especially pleased with the dynamics in the money remittance vertical, which was under substantial macroeconomic and competitive pressure for the past several months, as its growth has accelerated in fourth quarter 2016 to 28% over the fourth quarter 2015. The decrease in telecom and other market verticals was largely driven by the decline in our kiosk network, while growth in e-commerce, financial services, and money remittances was largely due to shift of consumer preferences towards digital payment channels, where we believe we have one of the best product offerings in the market.

As of December 31, we had 17.2 million QIWI Wallet accounts, an increase of 1.1 million as compared to the prior year, resulting from our continuous efforts to grow and leverage our infrastructure. Positive volume dynamics in our key market verticals converted into slight net revenue growth in 2016 despite the challenging environment as full-year 2016 adjusted net revenue grew 4% over 2015, which together with our cost control program resulted in growth of the adjusted net profit by 14% year over year.

Alexander will walk you through the fourth-quarter numbers in more details just in a moment, while I would like to walk you through some important recent developments.

As we have announced during our third-quarter earnings call, we have launched our new pay by installment card project SOVEST. The marketing campaign and the rollout of the project started in January 2017 in Moscow and currently we see positive dynamics in terms of consumer interest in the product.

We are constantly fine-tuning our IT infrastructure, developing the product and expect to start the roll on a federal scale in the second half of 2017. We will start providing key operating metrics for SOVEST project starting first quarter 2017.

SOVEST is an important step in implementing our fintech strategy and disrupting the consumer finance market with innovative, affordable, convenient, interest-bearing technological solutions. We believe that by providing more diverse and convenient service to our customers we will be able to leverage our existing base and infrastructure as well as attract new users and penetrate new areas of the market.

In the meantime, we continue to see our payment business as core to our future growth and are committed to providing our merchant customers with the most advanced and convenient technological solutions, broadening the scope and increasing the quality of our services that we offer.

I am also happy to announce that we have completed the acquisition of Flocktory, a Software-as-a-Service platform for customer lifecycle management. With this transaction, we are adding a new angle to both our merchant and consumer relationships, especially in the e-commerce market. Flocktory currently offers its clients a variety of instruments aimed at increasing the efficiency of consumer targeting and driving sales.

The key products offered by Flocktory include personalized [targeting gear], web push notifications and email, customer journey personalization, predictive algorithms for consumer segmentation and targeting, and post-checkout referral marketing instruments. We expect to enrich Flocktory data analysis instruments with our consumer data, which we believe will help us to improve lifetime value and consumer loyalty in our core products over the long term as well as further enhance the solutions that Flocktory offers to its clients.

I would like to highlight that besides advanced technology and demanded product offering, an exceptional management team will be joining QIWI to further develop and enhance the solutions that Flocktory offers. In terms of the numbers, we expect 2017 revenue in the range between RUB220 million and RUB240 million and net profit margin of at least 20%.

With this, I will turn the call over to Alexander, who will take you through our financial results in more detail.

Thank you, Sergey, and good morning, everyone. As Sergey just noted, our financial results this quarter were in line with our expectations.

Total adjusted net revenue increased by 6% to reach RUB2.8 billion, up from RUB2.7 billion in the fourth quarter of 2015. Total adjusted net revenue, excluding revenue from fees for inactive accounts and unclaimed payments, increased 15% compared to the same period in the prior year, primarily as a result of growth in payment-adjusted net revenue.

Payment-adjusted net revenue increased 21% to RUB2.4 billion, up from RUB2 billion in the prior year, as a result of the net revenue growth in our money remittance, e-commerce, and financial services verticals which grew 55%, 22%, and 14%, respectively, offset by a continuous decline in the net revenue in telecom and other verticals by 16% and 12%, respectively.

Our financial results are driven both by increase in volumes, as Sergey just described, and the improvement of the net revenue yields across our key market verticals, resulting from shifts in product mix towards higher-yielding [category submersion] as well as new commission introduced in certain types of peer-to-peer money transfers that contributed to the increase in our money remittance revenues, partially offset by declining volumes in telecom and other market verticals.

Our payment net revenue yield has increased year over year by 19 basis points, as we have seen an improvement in our yields across all market verticals. Other adjusted net revenue decreased 37% to RUB432 million, down from RUB688 million in the prior year, mainly because of the decrease in revenue from fees for inactive accounts and unclaimed payments due to the effect of change in the Company's policy for recognition of revenue from unclaimed payments as well as declines in revenue from cash and settlement services, advertising revenue, and revenue from sale of kiosks, slightly offset by increase in interest revenue.

Moving on to expenses. This quarter we managed to tightly monitor our costs in our core business, although we have incurred additional expenses connected to our SOVEST projects.

Adjusted EBITDA increased 4% to RUB1.3 billion, up from RUB1.2 billion in the prior year. Adjusted EBITDA margin was 45% compared to 46% in the prior year. Adjusted EBITDA margin contraction primarily resulted from the increase in personnel and office maintenance expense incurred due to launch of SOVEST project, offset by lower bad debt expenses as compared to the same period of 2015.

Adjusted net profit increased 9% to RUB940 million, up from RUB860 million the prior year. Adjusted net profit was largely affected by the same factors as adjusted EBITDA. Finally, as you saw in our earnings release, following the determination of fourth-quarter 2016 financial results, our Board of Directors approved a dividend of $0.19 per share.

Although we continue to pursue certain M&A targets and our dividend distributions are subject to our future cash flow needs, including our cash requirements in connection with the new projects, we remain committed to returning the cash back to our shareholders.

Now on to our guidance. We expect adjusted net revenue to increase by 2% to 5% over 2016 with the expectation that there will be no material contribution from SOVEST project. Adjusted net profit, excluding SOVEST expenses, to increase as well by 2% to 5% over 2016 while adjusted net profit including SOVEST expenses is expected to decline by 25% to 35% over 2016.

As we already stressed, given the difficult environment we might see further impact on our key market verticals this year. With that and certain other factors beyond our control, we reserve the right to revise our guidance.

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

(Operator Instructions) Bob Napoli, William Blair.

Thank you, appreciate it. First question on the announced partnership between Sberbank and Alibaba. I know that you have had -- that QIWI has worked with Alipay and I just wondered if this partnership is going to have an effect on your business as it relates to Alibaba or otherwise.

Thank you, Bob, for your question. This is Sergey. First of all, I would say that as far as I know there is nothing signed between Alibaba and Sberbank so I cannot comment on this. From the prospective point of view, what is already definite is that there will be no restrictions with this partnership on the payment partners, so still this partnership will work with all the players on the market. That is definite for me; at least it was discussed in some aspect publicly.

Okay. So you don't feel like that will have any effect on your business?

No, we don't feel that it will decrease our volumes or partnership with Ali.

Okay. The acquisition of Flocktory, what is the revenue from that business that is in your -- that you will get in 2017?

Bob, it's Alexander. We expect the revenue to be in the region of slightly more than RUB200 million so it is not, let's say, material to the whole revenue of the group.

Okay, and is it --? How are you working that into your business? How are you going to use that technology?

Well, if you look at the rationale, strategic rationale of this move, first of all, we see that in general the competition creates an environment where finally, maybe long-term finally, you will not be able to get any revenues or commissions on payments. So I believe that in the long term, long run we will not be able to benefit on high commission. I think that commissions will be lower; peer to payments finally will be for free.

And we were looking on the board on the subject for monetization for the revenue stream and we understood clearly that one of the big -- on the commission being paid is not settlement, not just payments to the merchant, but (inaudible) with more in-depth work with merchants together with client attraction, cross sales, and some other aspects. This was the initial strategy of QIWI from the beginning, but we really didn't manage to go deep on that. So now we are buying one of the best solutions in the market and best players who do that, who can optimize finally our streams of clients together with additional revenues from a site.

But we are just in the beginning of this work so I think that we already have some cases that we did with Flocktory internally so we see that these cases are successful and our management goal will be to scale this experience to our merchants and to our clients.

Thank you.

Vladimir Bespalov, VTB Capital.

I have a couple of questions. First is on your guidance. If we look at the 2016 numbers, the growth trend for your payment-adjusted net revenues looks quite good, but for 2017 you expect a major slowdown. Could you decipher a little bit your guidance, what is behind it? Do you expect some pressure on yields and things like this?

My second question is on SOVEST. Again, when I look at your 2017 guidance, it looks like the negative effect on the net profit from SOVEST currently estimated roughly at the same level you provided last time or even a little bit higher. What is behind this? Do you see any headwinds to this product or maybe an increase in spending and things like this? Thank you.

Thanks. As for the guidance, in general, if you look in general this reflects our approach or our intention to be much more aggressive in 2017 in terms of volumes. So in terms of attacking the market, attacking some segments and somewhere decreasing some yields internally. As soon as we -- we want to be more aggressive. This is -- this will cause some revenue yields.

And also I would say for now that's this guidance is quite conservative, so I think we will be regarding maybe after first quarter towards up. And the second question?

On the SOVEST guidance, actually we were estimating the SOVEST expenses basically (inaudible) and we have slightly amended our initial estimation, but that change is not really material. So we do not really expect the SOVEST expenses to differ materially from what we told you last time.

In terms of the dynamics, so far we have seen a fairly good client dynamics. Clients like the products we have a [content in floor] of requests to receive the card, although it's really premature yet to comment on its results. As we said in the press release, we will start providing a set of data and a set of service starting from Q1 of this year.

Thank you very much.

(Operator Instructions) Alexandra Melnikova, Alfa Bank.

Good afternoon. Thanks a lot for hosting my question. I have a question on your new acquisition, Flocktory. Can you maybe give us an indication in terms of this new acquisition contribution, either in the top line or in EBITDA line, so we can understand how sizable is that for the QIWI business? Thank you.

Thank you. The estimation of the top line [subsequent] yield is slightly above RUB200 million, while we expect the net income margin to be around 20%. So that's the number.

This is great, thank you very much.

Bob Napoli, William Blair.

Thank you. Just on SOVEST, I think -- so you are about RUB1.2 billion of expenses in 2017? I think that's around what you had suggested last quarter.

Yes, Bob, that's exactly right. We have not really -- we have revisions of the budget because we are doing that on an [ongoing] (inaudible) each quarter. But based on our data, we have not changed our estimation materially so it's fairly close to what we reported last time.

Then revenue from SOVEST? You've started making loans, right? So you're getting some revenue. What type of revenue do expect? What is the net loss from SOVEST?

It's actually immaterial in the group. So the calc here could be quite complicated because a part of the interest income was going to be having a certain period expense that will reduce net revenues. But the overall effect for 2017 should not be material. That's our estimation as of now. (multiple speakers)

I'm sorry. So the interest income will be offset by amortization of origination costs or something like that, so you have net --?

Yes, but by some other (inaudible) expense and some other.

Then how are you --? As you sit here today I know it's very, very early, but you're taking credit risk on this product. What are your thoughts? What are you seeing?

How comfortable are you on the credit risk side and at what point would you pull back the investment? At what point would you accelerate the investment? And what are your thoughts still over the next several years for what SOVEST could deliver to QIWI?

Look, quite honestly it's really premature to discuss that so we -- and generally we have seen actual decline dynamics meaning the average check, average payment size per month slightly above what we have in our models. We have encountered certain problems in our kind of technical systems that process the issuance of the capital, but those kind of are (inaudible). So generally we do not have really anything yet that would change our view towards a global sales pattern for that project.

All in all, we would say that it's more or less in line with our expectations that we delivered to you last time.

Bob, from my perspective this year we will do a lot of experiments as well. As soon as this -- the model, how we want to approach this is really different from the original bank model. We will do a lot of different kind of experiments, transactional scoring models and some other things that will definitely lead to some answers that we will be able to give to the end of the year. So we will be more sure, more certain about how this business will go on I think only hopefully at the end of 2017.

Okay. It looked like your inactivity fees fell a fair amount in the fourth quarter. Is that right or is that not correct? And what are your thoughts on inactivity fees in 2017?

It's actually -- I think the peak of the activity fees were in Q2, Q3 of last year so we do not really expect that amount to be growing. It is -- according to our estimation, it should be slightly decreasing in 2017.

Again, you have probably seen that we have increased essentially the number of digital wallets, so we just need to see the dynamics: which of those new newcomers are going to be churned out and which will stay. But generally, in our guidance and our budget, we don't expect substantial kind of change on the demand in 2017.

Then just last question. As you look at growth by sector next year, payment volume, essentially a continuation of the same trend of e-commerce being the strongest growth and you've got some pretty good pickup in money transfer growth in the fourth quarter. What caused that? Are you looking at those two sectors being the leading growth drivers in 2017?

Yes, that's right. We really expect -- you just correctly know that we had a substantial increase, especially in Q4, so we saw the acceleration of money remittance. It looks like we see a trend that the users are moving towards digital channels and really expect that trend to continue.

We are feeling slightly better on the financial services side, so again we probably would not be expecting a substantial increase but certainly will be a stabilization. Again, our telecom segments we would not be actually expecting any kind of potential change, so it probably should be continued to slightly decrease.

And e-commerce, yes; e-commerce has decelerated, but we would really expect growth in 2017 as well. Not to that extent as money remittance, for example, but we are still adding new merchants and gaining some market share in that vertical as well.

Is e-commerce --? What percentage of e-commerce is virtual goods versus physical goods today?

It's still that majority. It's like 80%-plus is virtual.

80%-plus is virtual. Then last question. On revenue yield, e-commerce was awful high. I know you said you're going to bring revenue yields in some areas down. Which sectors are you -- is it e-commerce? What should we expect from revenue yield and decline?

Primarily money remittance, so we really saw kind of inflow of new consumers and a good dynamic for our products, so we probably are in a position to affect this market heavily. We are going to be dumping the prices in certain (inaudible) in certain products. Otherwise, we will probably see certainly stabilization of the net revenue yield, so probably we may have just a slight decline in e-commerce but not really crucial so far. So except for money remittance, 2017 should be probably more or less in line with the net revenue yields that we achieved last year.

Sorry, one last one. On the regulatory front, is -- are we at a point where the regulatory environment is stable or are there other potential effects on your business? What are you watching on the regulatory side that could affect your business?

As for now, I don't see anything that is already being discussed, but in general, the regulatory field is quite unstable in Russia I think.

Okay. Continues to be unstable is --?

Yes, it continues to be unstable. There are a lot of things that are being discussed about Internet, about some other things, but -- they are big.

But as it directly affects your business at this point, what are you most concerned about?

I don't know exactly. At least for now I don't see anything material. I mean I don't see an increase; I just see that the Duma is new and the Duma is said to be active, more active this time so there will be more initiatives that will come to Duma within next few years. So that in general gives you a little unpredictable market on the regulatory side.

This is how I see it. A lot more laws and initiatives that will be on the table, but generally we feel quite involved in that. As you know, I became the general manager for the bank association for fintech. This is also the structure that is very close to and aligns the direction with Central Bank and with other government institutions. And at least we will definitely be very involved in those discussions if they exist.

Great, thank you.

(Operator Instructions) Sveta Sukhanova, Sberbank.

Good afternoon, everyone. Would you please elaborate what is impairment of intangible assets in your P&L (inaudible)?

That relates to our creation of contract (inaudible), so basically it's the adjustment that we have to book in IFRS because we really believe (inaudible). Besides it's pretty technical; you might actually read in our 20-F form in our reporting, so we have quite expensive paragraph describing all the inputs in the model that we have to run in accordance with IFRS and the outcomes. So that's more of which we show the decaying amount of those intangible assets is less than the realizable value, so that's where the impairment is coming from.

Okay, clear. And, yes, I will have a look for more details in 20-F as you advised.

My second question would be about your e-wallet. As you mentioned in the press release and as Sergey highlighted, your e-wallets increased in Q4. Congratulations with this, and two questions here.

First, why? Were you making active campaign or --? Who are these new incremental additions to your e-wallets? Where do they come from?

My second question would be when do you and if you overall expect to report your e-wallet on three-month cost base, not 12-month cost base?

So the increase in e-wallet is basically -- it is probably, to a certain extent, the reflection of certain macro stabilizations to really see that people are moving kind of back into the (inaudible) channels as well as general kind of shift to digital channels in the payment space. If you think about the exact verticals, look, we run really a lot of different types of campaigns in each of the verticals so we are not really providing the breakdown of where the origination of those new wallets is coming from. But generally the key verticals would be money remittance in the commercial business, so the verticals are obviously the most potentials out of all.

Okay, very clear. And about three months' definition for e- wallets do you plan to move to a more conservative definition?

Look, we are still debating this internally. We don't yet have any decision on that. It obviously depends on how we're going to be looking at our business in few quarters from now and how SOVEST will affect the client dynamic. So let's see; we don't know yet.

Okay, clear enough. My last question would be on the blockchain, which already was also mentioned. But we (inaudible) that you split out blockchain into separate entities. Should we read anything special into it or it's just a technical reorganization inside the group?

No, it's more technical reorganization so I wanted to as soon as there are a lot of -- too many discussions that are going on blockchain and also we have some contracts from third parties on blockchain solutions and something. So we decided technically to move it out of the scope of the core business so that no one is involved in that except the team that is dominantly working on blockchain solutions. So it's more technical in terms of the management and execution.

Clear, and thank you very much for your answer.

Olga Naydenova, BCS Capital.

Thank you very much for taking my questions. I have a couple more details I would like to learn about SOVEST. Well, of course, you don't have too much on the operating data that you can share right now.

Could you please tell us who are mostly the SOVEST clients potentially? Are you looking more for regional expansion or you will still focus on capital as you do for now? And what are the profiles of the clients that you are looking for?

My second question about it would be are you expanding the merchant base for the service project or it is where it was when you first announced it?

Okay, thank you for your question. If I correctly understood you, you're interested in client profiles that we are targeting. I mean, look, we actually -- in the first place we were starting with our existing consumer base, which is actually huge, and were just applying different types of filters to figure out the consumer base that we believe is most acceptable to such type of products.

On top of that we are using kind of classical where we have taken the financial banking instruments to identify those consumers. And so from that point of view it's not probably much different from what retail banking are doing, so we probably have a few more (inaudible) on the scoring side, but we have (inaudible) a bit later.

Geographically we have just started in Moscow and --

Second half of the year we will reach it. So this program is federal; it's not the program from Moscow and we are launching other regions in the second half of the year.

On the merchant side, yes, sure we are kind of adding new merchants basically every week. You may monitor this on our sites.

Again, this is probably not let's say the core kind of activities. We do believe that we do have a substantial merchant base for the start of this project, but it's obviously one of the key pipelines for the project team.

Also, do I understand it correctly that you will be regulated in a similar way as other bank credit card products are? Or there is any specifics to the regulation that you have? I don't know; how would your total cost of credit, for example, limit, will you have any? Or because it's an installment card it's not applicable? How does that things work?

No, there's no special regulation for the installment cost so we are under the same regulatory environment as other cards.

Okay. And just how your total cost of credit calculates. Or is it zero because it's an installment and wealthy customers and --?

Technically 0.001, something like that, but the base is created by the commission of merchant. It's not based on client paying interest.

Okay, thank you.

Thank you. At this time I would like to turn the floor over to management for any additional or closing comments.

Thank you very much, all, and looking forward to good results in the first quarter.

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