Qiwi PLC (QIWI) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Qiwi Second Quarter 2017 Earnings Conference Call. Today's call 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 2017 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 Tuesday, August 22, 2017. 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 15, 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. 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 take 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 statement.

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 will begin by turning the call over to Sergey Solonin, our Chief Executive Officer.

Thank you, Varvara, and good morning, everyone. We are glad to share our second quarter results, demonstrating solid net revenue growth as well as (inaudible) good performance in our core business. This quarter, we continue to see the signs of improvement in the overall economic situation in some of our core markets that we've noticed earlier this year. Moreover, we are happy to see that we're able to take advantage of the secular trends towards digitalization of payments by offering our clients convenient solutions in different market verticals, and especially in Money Remittances and E-commerce. At the same time throughout the first half of 2017, we have been investing in the rollout of our new project SOVEST, and plan to continue further with our investment in SOVEST and potentially other projects and partnerships. Given all of the above, we see our first half performance as a solid foundation for the future growth. We see many opportunities ahead, and we'll continue to focus on executing our strategy and developing our new projects. In the second quarter, our total payments volume increased by 6% to reach RUB 217 billion, driven by growth in Money Remittance and E-commerce verticals, which grew 58% and 13%, respectively, over second quarter of 2016. Growth in these verticals was partially offset by decline in Telecom and Financial Services verticals. We are especially pleased with the dynamics in Money Remittance vertical, which was under substantial microeconomic and competitive pressure throughout the year. In the second quarter, we continue to see substantial growth in this vertical that was triggered by secular trends towards digitalization of payments. The decrease in Telecom market vertical was largely driven by the decline in our kiosk network as well as high accessibility of alternative commission prepayment channels, while our Financial Services market vertical was mostly affected by a lack of underlying market growth, as well as the ongoing license withdrawal campaign of the Central Bank of Russia. At the same time, growth in E-commerce and Money Remittances, as I mentioned earlier, was largely due to the shift of consumer preferences towards digital payment channels where we believe we have one of the best product offerings in the market. As of June 30, we had 18.5 million Visa QIWI Wallet accounts, an increase of 2.3 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 solid net revenue growth. Alexander will walk you through the second quarter numbers in more details just in a moment, while I would like to walk you through some recent developments. For the second quarter 2017, total SOVEST payment volume reached RUB 314 million. The marketing campaign and the rollout of the project started in January 2017 in Moscow, and currently we're in the process of a federal rollout and the aim to establish federal coverage by the end of the year. As of the second quarter 2017, we have connected more than 11,000 retail locations in both off-line and online, including some of the most well-known Russian retail chains and providers. We have also noted that there is a substantial interest towards installment card projects from other players in the banking sector, which means that the value of the solution is recognized by the banking sector, and from our point of view, can provide support in terms of consumer and market education. Currently, our plans are focused on fine-tuning of our IT infrastructure, risk management practices and mid business model of the project, broadening our network of partners and developing the product in order to provide our customers with the most attractive product proposition.

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. Although investing heavily in our new projects have demonstrated strong growth this quarter, primarily due to (inaudible) performance of our core business. Total adjusted net revenue increased by 12% to reach RUB 2.9 billion, up from RUB 2.6 billion in the second quarter of 2016. Total adjusted net revenue, excluding revenue from fees for inactive accounts and unclaimed payments increased by 17% 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 23% to RUB 2.5 billion, up from RUB 2 billion from the prior year as a result of the net revenue growth in our Money Remittance and E-commerce verticals, which grew 58% and 31%, respectively, partially offset by a decline in net revenue in Financial Services and Telecom verticals by 12% and 15%, respectively. Our financial results was driven both by increase in volumes, as Sergey just described, and improvement of the payment average net revenue yield by 16 basis points year-over-year. Other adjusted net revenue decreased 24% to RUB 463 million from RUB 607 million in the prior year, mainly because of the RUB 68 million net loss of the SOVEST project, as well as a decline in revenue from fees for inactive accounts and unclaimed payments, partially offset by an increase in interest revenue.

Moving on to expenses. This quarter, we continue to tightly monitor our cost in our core business, although we have incurred substantial expenses connected to our SOVEST project. Adjusted EBITDA decreased 16% while adjusted EBITDA margin was 47% compared with 63% in the prior year. The adjusted EBITDA margin contraction primarily resulted from the increase in advertising and personnel expenses as well as bad debt expenses incurred due to the rollout of SOVEST project. Adjusted net profit decreased 15% to RUB 1 billion, a RUB 1.3 billion in the prior year, while adjusted net profit excluding net expenses associated with the SOVEST project was up by 31% as compared to the previous 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 the second quarter 2017 financial results, our Board of Directors approved a dividend of $0.21 per share. In the second half of 2017, we have incurred certain significant investments in connection with the launch and rollout of our new project. Facing into account our current investments, as well as our future funding requirements for the new project, capital expenditures or potential M&A, written or right to review, modify or suspend our dividend distribution and determination to pay dividends in the third quarter and going forward is subject to the capital needs of the company, including the [execution] for the company's strategic plan and growth initiatives. Now on to our guidance. Based on our current performance and the trends that we see, we reiterate our guidance for 2017. We expect adjusted net revenue to increase by 10% to 15% over 2016, with the expectation that there will be no material contribution from SOVEST project. Adjusted net profit excluding SOVEST expenses increased by 12% to 17% over 2016, while adjusted net profit including SOVEST expenses is expected to decline by 15% to 30% over 2016. Although we see our second quarter results as a solid foundation for future growth, certain other factors remain beyond our control. And hence, 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) Our first question comes from the line of Bob Napoli with William Blair.

Just the SOVEST, Sergey is, I mean, obviously, taking a lot of investment. You're getting some momentum and you're getting acceptance. But how confident are you at this point in the business model for SOVEST and the likelihood of success? And what is your outlook for continued investment in that business as we move through '17 and to 2018?

Hi Bob, thank you for your question. Well, in general, we are happy with the dynamics of the project. So we see good trends on total volumes and so we think that on average, every quarter, we will be more or less doubling the volumes with some acceleration. On the business model side, we're still working hard on optimizing the model and on doing a lot of work on the experiments. So I think that we will still be in the experimental phase throughout 2017, so we will do some experiments with the clients, with the commissions, limits et cetera. We are also developing still in evolution of our distribution channels. So we've just opened [soreznoy], we are opening El Dorado now in the EU and other retail partners. We are working on risk management models, so we are improving our risk management side. And -- well, it is still, I think, a little premature to make conclusions as we don't have enough real statistics from the project. But we will continue to develop the project and we will provide an update as soon as it is possible. In general, I'm quite happy with the project and we are moving it forward.

And just a follow-up question on the segment trends, the payment volume by segment. Obviously, E-commerce and Money Remittance posting some good trends with nice revenue yields at E-commerce. The -- as we think about next year, we really -- is that going to be -- those 2 segments are going to be the growth drivers, and Financial Services and Telecom are going to continue to become less important? And is there any change in the mix of E-commerce between physical goods and digital -- virtual?

Bob, it's Alexander. Thank you for your questions. I mean, that's right, we would believe that E-commerce and Money Remittance will be growth drivers in '17 and in '18 as well. On Telecom, yes, as well, we do not really expect any substantial change to the trend so we may stabilize the flows, but we would not be expecting growth. On Financial Services, it's still kind of in the dark so we feel that, that segment generally I mean, from a [microeconomic] point of view, has stabilized. We feel that there's a trend that the consumers, they are migrating from small private banks to large banks and governmental banks. If and when that will result in an increase in the segment, we don't know. We, again, we quarter-on-quarter previously, we feel like it's stabilized. In Q2, we have not seen any further degradation although we only just compared to Q1, but again, let's see what happens in Q3. On the mix, no, we do not yet see any substantial change in the mix in E-commerce. Still in our portfolio, the majority of volumes is represented by the (inaudible) goods, but we see have a lot of, kind of thinking, I mean, from Alibaba and other players that are the classical E-commerce players, how they love to act on the Russian market base. You've probably seen in the press, there is a kind of a joint venture between Alibaba and Zurich Bank, but we don't know, I mean when, how that will play out. Then Zurich Bank kind of issued a press release, that they are going to be making a joint venture (inaudible) a lot of things is happening around this E-commerce segment. Generally, we would expect that portion to increase, but we are not really in a position to make any statements of when that's going to be happening.

Our next question comes from the line of Ulyana Lenvalskaya with UBS.

My first question will be on SOVEST, a follow-up. Could you please comment on the financing of the project, I mean, the balance sheet for the loans issued, how should we think about this for 2017 and more importantly, for the future?

Yes, well, look for '17, you've seen we published the amount of total outstanding loans, the amount is not as different for it. We like to -- we're going to continue to finance that by our own cash this year. Next year, we are having several options. We discussed them with you, it can be a cumulative bond or kind of a syndicated loans from the banks. So we have like several options. We have not yet decided, which one would be the best one.

Well, one of the initial options is still also on the table when we distribute the product throughout other banks. So this is still in discussions and we think that next year, we will show up some projects on that as well.

So the partnership with the banks is the key priority, right?

Well, it's -- right now, it's one of the options so we don't think that we are ready still on this year because to do that, we need to have a very sounding business model for the banks. So I think next year, we will be able to show up something and we have preliminary agreements with some of the banks to do that.

And if I may, just to follow-up again on the volumes in Financial Services. Now we have like 4 consecutive quarters of decline in volumes in this segment. Well, the market has stabilized. The Central Bank data suggest like 0 growth. Should we think about like this segment as more structural decline for you rather than cyclical and kind of being the next Telecom segment?

Well, I wouldn't say so. Right now, we see a very -- some of the banks in our portfolio who are growing. And some of the banks who are falling and the difference that we see today is mostly generated by those banks which are closing. So in -- I definitely think that in those medium-sized banks, we have a market share bigger than in a large governmental bank. So if you look at it from this perspective, it will be completely structural. And those banks who are growing in loans, we see them growing in our portfolio as well.

And sorry, another one, if I may. There was announcement about the corporation with Tochka. How should we think about potential volumes for you or what are the synergies between the two?

Well, I think, it's a little bit too early to say. We're talking about this for a little bit more than a year. And right now, we are just launching these services and doing some work on that side. So for us, it is an interesting segment, so we're -- we want to service this and provide broader services for our clients, for merchants and for partners. And also, we think that Tochka is a perfect example of a digital banking service that also fits very well into our portfolio. So I think it's a little bit too early to say how big volumes will be there and so we have to start first.

(Operator Instructions) Our next question comes from the line of Vladimir Bespalov with VTB.

I have a couple of quite technical questions. First, on E-commerce. Your yield in E-commerce is quite high and it has been increasing for 4 consecutive quarters. So should we see the current level as sustainable going forward? Or it's just was driven by one-offs? This is the first question. The other question is on your kiosks and terminals. The network is continuing to shrink. Is this due to that your strategic focus is probably shifting into some other areas and you're paying less attention on this trend, this network is less important for your business? Or there are some other reasons behind this? And the third one is, if I may on SOVEST also, a brief one. There is a negative contribution to net adjusted revenue from SOVEST, but when do you expect this to change and this contribution to net-adjusted revenues to become positive? Or is it going to be this year or later?

Okay, so on SOVEST. Yes, we expect that next year, we will be on the positive side of net revenue. Today, we're negative because we invest a lot of money into product call centers and (inaudible). So we'll see next year, positive net revenue from SOVEST, I believe. Then about number of kiosks, what we see what is happening is that more and more clients -- our clients, sorry, are going for the wallet solution, so more and more terminal turnover is connected to with the top up of the wallet through terminals. Also we see very intensive growth in cards, so when our clients top up for their wallets by cards. So in general, what it brings for our agents is diminishing commissions. So when you have on the agent side, the commissions that are falling, what happens is that they optimize the network so they decrease a little bit, decrease the quantity of terminals and have more or less the same revenues from those terminals that stay. So from our perspective, we believe that terminal network and this was one of the reasons why we changed our accounting segments. So for us, it is more and more service zone for our wallet customers. So it's becoming kind of a service for our customers, for our wallet customers that they have throughout Russia. And with that, we also have in mind some optimized figures on a number of kiosks, but we -- I wouldn't say that I'm sure about where it will go the next quarter or 2. And your first question was?

On E-commerce and yields.

Yes, look, I mean, this general trend is that we are still gaining the return yields due to the structural shift so we are gaining more kind of first of all, subsegments in that. So whether or not it is sustainable, look, it really depends on how much we will develop so in the short and medium-term, we believe these yields are more or less sustainable. They can kind of drop just a little bit. In the longer term, we just need to see, I mean, generally, we are believers that the -- I mean, payments will become modified, and hence, the yields will go down over the long-term. But I mean, when and to what extent that will happen is still unclear.

(Operator Instructions) Our next question is a follow-up from the line of Bob Napoli with William Blair.

A follow-up on Bank Otkritie, the investment in QIWI. They attempted to do, they were going to buy stock at 28, and then I think just bought -- decided it made more sense to buy it in the open market, but they become a much bigger shareholder. How are you -- what is the -- what are your thoughts on the, a partnership with them? Or their ownership in QIWI and what that means over the medium-term?

Well in generally, I look at the Otkritie partnership very positively. So I think that we signed a partnership in 2015, and we have been discussing many different ideas and projects that can generate synergies for both QIWI and Otkritie. So some of these ideas, as you know, Tochka, for example, are being discussed lately, and we see many potential synergies between digital businesses for Otkritie group and QIWI. So we are still in discussions of several projects, however, it's still too early to go into any details. In general, I feel that Otkritie is a good partner. I am -- I was sorry that their offer didn't go through. But well, we'll see what will be happening further on.

What types of thing are you working on together? I mean, how is that partnership -- how would that work? I mean, what value do they bring to the table?

Well, we have for Otkritie, a value of our distribution network. So we plan to use terminals with some of the SMBs. Well, from Otkritie's side, they have some digital products that they can pour into the QIWI platform and QIWI can bring to the table a lot of experience in IT and in managing the projects. So in general this is both ways a road. So we're still in a lot of talks around different projects. So I think, we'll see where it will go.

Okay. And last question. Just on SOVEST. Has the product -- how are you tweaking the product? What has surprised you? What is working? What have you had to adjust? and what is SOVEST -- at the end of the day, what is SOVEST going to be?

Well generally, in the very general terms, in terms of product positioning et cetera, we're still at the same -- more or less at the same place. So we think that it's a very good competing project -- product for clients to have these installments for free and very good exploiting our abilities, capabilities to work with a lot of merchants. So we're taking, as you know, commissions from the merchants so we're not -- we're not really transferring these commissions to our clients. So generally, it is a competing special segment, competing mostly with, I think, credit cards offerings with other banks. But in general, credit cards are focusing mostly on getting money from clients through interest. And our product is focused on bringing clients to merchants so that merchants can give additional commissions to us, so we compensate the costs of funding by that. So when we see also that throughout our launch, we see already 2 payers, 1 -- 2 banks who are trying to start playing in the same field. So generally, we think that this also shows you that our model is quite interesting and it is being through examination of other banks. So I think it is a positive thing because in general, we are trying to push a new category on the market. So and this new category is accepted by several banks already. So our perception that it goes very well. On the business model side, the product is quite complex in terms of the -- a lot of levers that change in numbers so we are playing with different so it's quite difficult to predict that a certain model will work long term. So we're doing a lot of experiments, as I said, with tariffs, with the merchants, with limits, with approvals so, so many factors that influence final results. So we really -- we're on track. So I'm sure that we will get there, but we're still trying to find a solution and we're on track with that, so we're moving forward.

Mr. Solonin, there are no further questions at this time. I'll turn the floor back to you for final comments.

So thank you very much for joining us today. See you next quarter. Thanks, and bye-bye.

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