Qiwi PLC (QIWI) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to QIWI's Fourth Quarter and Full Year 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the call over to Mrs. Varvara Kiseleva, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the QIWI fourth and full year 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, April 4, 2018. 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 March 28, 2018.

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 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 this call, management will provide certain information that will constitute non-IFRS financial measures, such as adjusted net revenues, 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. We're glad to share our fourth quarter and full year results, demonstrating strong performance of our core Payment Services business. Our Payment Services segment demonstrated 19% segment net revenue and 34% segment net profit growth in 2017, driven by the development of our payment ecosystem as well as secular trends towards digitalization of payments in our focus markets. This quarter, we continued to develop our key products in order to offer our clients convenient solutions in different market verticals, especially in Money Remittances and E-commerce. I would also like to note that the growth in Payment Services segment net revenue accelerated in Q4, which gives us solid growth prospect into 2018. At the same time, during 2017, we have been investing heavily in our consumer Financial Services segment, namely our SOVEST project as well as the development of our Tochka project. Currently, we plan to continue further with our investments in SOVEST and other projects and partnerships.

During all of big buzz, we believe that our performance sets a solid foundation for our future growth. We achieved strong financial results in our Payment Services business this year and thus we are able to continue investing in our new business lines and projects. We believe, we'll be able to grow our Payment Services segment by focusing on building a wider digital infrastructure and enriching our product offering, expanding and penetrating further our core markets and generate substantial operating cash flows. At the same time, we see 2018 as a year of investments in our new projects and will continue to focus on executing our strategy and developing our new initiatives. In 2017, our Payment Services segment volume increased by 8% to reach RUB 911 billion, driven by significant growth in Money Remittance and E-commerce verticals, which grew 51% and 7% -- 17% respectively, over 2016.

Growth in these verticals was partially offset by decline in Financial Services and Telecom verticals. We're especially pleased with the dynamics in Money Remittance vertical, which was under substantial macroeconomic and competitive pressure in 2016. In the fourth quarter and throughout the year, we continued to see substantial growth in this vertical that was triggered by secular trends towards digitalization of payments as well as development of our peer-to-peer ecosystem. As of December 31, we had 20.1 million Qiwi Wallet accounts, an increase of 2.9 million as compared to the prior year, resulting from our continued effort to grow and leverage our infrastructure. For the third quarter of 2017, our consumer Financial Services segment demonstrated positive net revenue for the first time since the launch of the project, which we're pleased with. We have seen positive dynamics across few key metrics of the project and continue to believe that we have entered an interesting niche with a significant potential. Total consumer Financial Services payment volume reached RUB 3.3 billion in 2017. As of December 31, the amount of total loans issued under SOVEST project was RUB 1.7 billion. Moreover, we have connected to more than 40,000 retail locations in both off-line and online including some of the most well-known Russian retail chains and providers. We've also noted that the competition continues to intensify in this market and seeing increasing interest towards installment card projects from other players in the banking segment. Positive volume dynamics in our key market verticals converted into consumer payment services segment net revenue growth and overall robust performance in our core business. Alexander will walk you through the fourth quarter and full year numbers in more details just in a moment, while I would like to walk you through some recent developments.

Now I would like to provide some details on our recent transactions with Otkritie Bank. In August 2017, we have executed a series of transactions to acquire brand software and hardware of Tochka and Rocketbank from Otkritie.

We have also entered into a number for operational agreements with Otkritie in connections with these transactions. Currently, we continue our negotiations with the new administration of Otkritie Bank regarding our future corporation and development of both businesses. We believe that our negotiations in respect to Tochka are currently in advanced phase, and we will be in position to frame a mutually beneficial resolution that would establish the basis for our future joint activities. Moreover, we have launched Tochka project on QIWI infrastructure and started offering Tochka services in QIWI Bank in August 2017 as well as providing services to Tochka clients, who have their accounts in the Otkritie Bank. Since then the project is operated as a multibank service providing these customers with an opportunity to open accounts with either Qiwi Bank or Otkritie. As of December 31, we had approximately RUB 1 billion of customer balances and serviced more than 14,000 Tochka clients in QIWI Bank. We have also concluded the development of Rocketbank project. However, Rocketbank operations have not been launched so far, and we presume that given the early stages of our negotiations in respect of this project, we may not launch Rocketbank operations in the nearest future. As far as we are in the process of negotiations with Otkritie Bank regarding the future structure and development of Tochka and Rocketbank project, we are not in a position to provide any estimates or potential midterm contribution of these businesses.

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

Thank you, Sergey, and good morning, everyone. First, I would like to walk you through the new segment representation of our business. This quarter, we revised our organizational structure to better reflect our operational and management strategy as well as the expansion of our business operations including the broadening of our products and services distinguishing 2 key operating segments as well as Corporate and Other category. Payment Services segment, which includes our core payment services business, historically has been and continues to be a major part of our operations. It currently generates most of our revenues as well as significant free cash flows that we can invest in developing new businesses and projects. Consumer Financial Services segment is represented by our payment by installment card project service while Corporate and Other category includes expenses associated with the corporate operations of Qiwi Group as well as some for research and development initiatives and revenues, cost and expense associated with a number of new and significant projects and emerging businesses that we are currently testing. Q4 total adjusted net revenue increased by 46% to reach RUB 4.1 billion, up from RUB 2.8 billion in the fourth quarter of 2016. The increase was mainly driven by Payment Services segment and Corporate and Other category net revenue growth. Payment Services segment net revenue, which includes payment services payment adjusted net revenue and payment services other adjusted net revenue increased 24% to reach RUB 3.5 billion compared to RUB 2.8 billion in the fourth quarter of 2016. Payment services payment adjusted net savings increased 26% to RUB 3 billion, up from RUB 2.4 billion from the prior year, as a result of the net revenue growth in our E-commerce and Money Remittance verticals, which grew 42% and 51%, respectively offset by a continued decline in net revenue Telecom and Financial Services verticals by 15% and 8%, respectively. Our financial results in this segment driven both by increasing volumes, as Sergey just described, and the improvement of the Payment Services net revenue yield by 17 basis points year-over-year. Payments Services other adjusted net revenue increased 16% to RUB 495 million, as compared to RUB 427 million in the prior year, mainly because of the increase in revenue from fees from inactive accounts and unclaimed payments due to the effect of change in the company's policy for recognitions of such revenues in the prior year.

Payment Services segment net revenue excluding revenue from fees for inactive accounts and unclaimed payments increased 23%, compared with the same period in the prior year, primarily as a result of growth in Payment Services payment adjusted net revenue as discussed earlier.

Consumer Financial Services segment net revenue was RUB 35 million for the fourth quarter of '17, as compared with the net revenue loss of RUB 3 million in the fourth quarter of the prior year, showing the development of our SOVEST project.

Net saving of the Corporate and Other category was RUB 581 million for the fourth quarter of 2017, compared with RUB 8 million in the prior year. Such increase resulted mostly from the launch of the Tochka project and recognition of corresponding revenues from information and technology service agreement with Otkritie Bank for providing services to Tochka clients that have their accounts with Otkritie Bank in the amount of RUB 578 million for the period from August 2017 to December 2017 in the fourth quarter.

Moving on to expense. This quarter, we managed to tightly monitor cost in our Payments Services segment, increasing the operating leverage and generating substantial cash flows. Strong operating performance for our Payment Services business supported our investments in the development of our new projects, most notably, SOVEST. This being said, adjusted EBITDA decreased 23% to RUB 965 million, from RUB 1.3 billion in the prior year. Adjusted EBITDA margin 23%, compared to 45% in the prior year. Adjusted EBITDA margin contraction primarily resulted from the increase in client acquisitions and advertising expenses by RUB 266 million due to investments in the development for our SOVEST project as well as personnel expenses incurred in connection with SOVEST and Tochka projects. Adjusted EBITDA was also affected by the increase in other administrative expenses by RUB 502 million as compared to the same period in the prior year, primarily due to the expenses incurred in connection with acquisition of assets of Tochka and Rocketbank from Otkritie. This was partially offset by lower bad debt expenses as compared to the same period of 2016.

Group adjusted net profit decreased 32%, RUB 642 million, down from RUB 940 million in the prior year. Adjusted net profit was largely affected by the same factors of adjusted EBITDA as well as recognition of an income tax expense as opposed to the income tax credit for the same period in the prior year. Payment Services segment net profit increased 47% to reach RUB 2 billion compared to the RUB 1.4 billion in the prior year, driven by Payment Services segment net revenue growth as well as increasing operating leverage in the Payment Services business. Consumer Financial Services segment net loss was RUB 647 million in the fourth quarter 2017, as compared to a net loss of RUB 131 million in the same period of the prior year, resulting from the expansion of the operations of SOVEST project and associated cost mostly related to the consumer acquisition. Corporate and Other category net loss was RUB 723 million, an increase of 145% compared with the net loss of RUB 295 million in the prior year. The net loss was primarily driven by expenses incurred in connection with acquisition of assets of Rocketbank and Tochka from Otkritie Bank and launch of Tochka project. Finally, as you saw in our earnings release, the Board of Directors decided to refrain from distributing the dividend, while they're incurring significant investments, in connection with the launch and allow us to have new projects. We expect that throughout the next 12 months and starting first quarter of '17, we will concentrate on investing into our future growth. While long term, we remain committed to distributing all excess cash to our shareholders.

Now on to our guidance. Given substantial uncertainty in respect to the future arrangements regarding the development of the Tochka and Rocketbank projects and outcome of our negotiations in respect thereon with Otkritie, we believe that we are not in position to provide any reliable estimates of revenues or expenses associated with Tochka and Rocketbank projects for 2018. We therefore, only include in our guidance for 2018 actual expenses associated with the Tochka and Rocketbank projects for the first quarter of '18. Actual results of these projects for 2018 may differ substantially from the data that we used in our guidance. Given that, we expect group adjusted net revenue to increase by 12% to 16% over 2017, Payment Services segment net revenue to increase by 12% to 16% over 2017. Group adjusted net profit to decrease by 10% to 0% over 2017, while Payment Services segment net profit is expected to increase by 10% to 15% over the prior year. Although, we see our 2017 results as a solid foundation for future growth, certain other factors remain beyond our control and hence, we will be authorized to revise guidance in the course of the year.

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

(Operator Instructions) Our first question is from Vladimir Bespalov with VTB Capital.

First of all, I would like to ask you about SOVEST. So my impression is that you're moving a bit slower with this project that you initially anticipated when you launched it in 2016, and probably it looks like you have to financing it with your own cash. Do you expect any acceleration of this project in 2018? How are you going to finance it? Whether you'll need to borrow this year for this project? And also on this project, what is the progress on making it a multi-banking product and what is the status of your talks with other banks on this issue?

Vladimir, it's Sergey here. Yes, well, SOVEST really is going a little bit slower than we expected. Mostly, it is due to our revisiting the business model and trying to work with a lot of experiments that we did in 2017. So now we are much more sure about the business model. So we understand how it works. More or less we did all the experiments, so we're on track now. Last, I think, fourth quarter and first quarter are very good in terms of number of new customers. So we are back on track with some lagging of a few quarters where we did some of the experiments and some of the channels that we used. Second, we really talked with -- we are still committed to a multi-bank model. So we think that this is what we are generally doing this project for. And we are talking with 2 banks. So we think that at least 2 banks to the end of the year, we will be in at least testing and contracting. This summer, our first bank will already be partnering with us. So generally, we think that this is still a very attractive model for us to go on. So we continue to contract a lot of merchants. We still -- we think that it is much efficient to have one operator for many banks to do this work with merchants, because it's a lot of documents, a lot of things that we do professionally on this side. So we think that this model should work with a lot of banks and, with that, we still think that this project will be financed from the bank side, and we will not have a burden on financing -- the launch to consumer. That's it.

Okay. So if you work with other banks just here, it will be a commission-based business for you, right?

Yes, it will be commission-based business. Yes, we will not create from our balance consumer launch.

Okay. And the second question is on Tochka. I would like to clarify one thing, which you have in your statement. You mentioned that the revenues, which you showed in 2017, from Tochka, from those clients, who decided to choose Otkritie Bank to be serviced at, but there are some clients who are choosing QIWI Bank as well as far as I understand, so where the revenue from those clients goes in your accounts? And what is the amount of that revenue, if you could disclose?

Yes. This is Alexander. For the revenue, yes, obviously, we have already quite a few clients that on-boarded the Qiwi Bank balance, but comparative to the even massive balance that Otkritie have, it's not as large, but generally that revenue will go through the same line, but it's not as much yield and we are not really discouraging those efforts.

Yes, and also if you look at Tochka from our angle, we also aim to have a multi-bank distribution model. So Otkritie and Qiwi is just the technical -- more technical case to have experiment and to test the technology that will allow clients to choose a bank, finally. And for us, we see it also finally a multi-bank model and commission-based model.

Okay. And just the last clarification. This revenue, mostly a noncash, right? Before you settle all the issues with Otkritie, all you are getting like cash revenues from Otkritie at the moment?

From Otkritie, it's non-cash, yes.

Our next question is from Ulyana Lenvalskaya from UBS.

This is Ulyana from UBS. The follow-up question on SOVEST, please. Is it possible for you to disclose a number of issued cards or the number of active users, either for 2017, '18 or some sort of a target we can use in the model?

Ulyana, unfortunately, it's no. We do not disclose those numbers. I think, we disclosed only volumes right now. We're -- and the total loan amount that we issued. I think that each year we -- yes, I think, this year we can come to the numbers if we agree to do it, yes, in kind of association where everyone in this year will disclose their numbers. So then -- we're trying to move there. We're trying to agree on that, so that this market in that sense will be transferable. So if we agree then this year you will see those numbers as well.

Okay. So maybe just as a comment since you started to show this as a separate segment, in my view, the number of cards should be helpful and should also be reported. The clarification on the guidance, please. So this 12% to 16%, both for the total business and for the payments. Is it basically implying 0 from SOVEST on that basis in 2018?

Yes, it implies the revenue of service as well, yes.

Not 0.

Not 0. Yes.

No, no, like, Alexander, the total for -- the total revenue growth guidance is 12% to 16% and then payments segment growth guidance is also 12% to 16%. So basically the same, which means that the other...

Yes, yes, fair point, Ulyana. These were the following. So in 2017, we booked revenue, that contract that we have with Otkritie on Tochka. That is kind of still subject to final negotiation, while the likelihood is quite high that we eventually will get the demand for 2017. For 2018, we have not included that in guidance, because we are already in quite an advanced phase in negotiations with Otkritie and set up that we may have in respect of Tochka can be somewhat different. So we -- it may not -- so the revenues of the business might not be flowing directly through our P&L. So that's why, to be conservative, we have not included it. So in 2018, in our guidance, we consider the revenue of Tochka as 0. So that's why you have exactly the same percentage for our core business and total.

And the revenue for services is at 0 as well?

No, no, services is not 0.

Fine, fine. Another question, if I may. There was quite nice addition of a number of active wallet accounts in the fourth quarter over 1 million users, and you said this is because of the expansion of consumer and merchants user cases -- use cases. Can you maybe provide a few examples of those new use cases, which expands the user base?

Well, yes, we are working with merchants on, for example, different kind of events. So we did an event with Alibaba, AliExpress. So a lot of clients coming from the merchant side. Also we did several new products that also brought some of our clients to (inaudible), for example, it was a project with Uber drivers, project with now Airbnb and Qiwi Bonus and also we have a lot of clients on the betting side, the project with TSUPIS. So it's kind of a B2B2C component that is quite high in Qiwi where we have a business, through which we acquire the clients of this business onto the Qiwi platform, because we do financial services for this business. That was the large take of the clients in the fourth quarter. And it will continue.

(Operator Instructions) Our next question is from Alexandria Melnikova, from Alfa-Bank.

Can you please, maybe, guide us, when to expect service to be breakeven? Is it like 2019 as they previously talked or given you have the better understanding of the situation now as you said?

Yes, it really depends on how advanced we're going to be in terms of multi-bank model and how well those experiments of the plan to start with and be able to go, but generally, yes, if everything going to be more or less successful with a multi-bank model, we may expect the product to breakeven sometime in 2019.

And I have one more like broad statistical question. I mean, given like a strong marketing of the B2 banks in terms of their online payment services and basically access to online services available from the B2 bank, what do you think is your key competitive advantage now because really, results of the fourth quarter is tremendous, that's really signaling your (inaudible), which no one else can do in the market. What do you think is the main thing here?

Yes, again, as I said, we are -- what we are doing in 2017 and 2018, we are doing different tailored solutions for big clients and this is something that usually big banks cannot do, because big clients like -- like Uber or others, they require some specific components in the protocol. So it's -- usually it's not a standard thing. So all the other players in the market, they do standard thing that we did before. And we do a tailored thing as we usually did on the payment side, so gateways -- we have direct gateways to merchants and these gateways can be -- can drive and have different functions instead of like to compare with cards, maybe credit and debit cards, where you have access to the merchants and you can pay, but the flexibility and functionality of those payments are very, very limited. So we will move forward with that strategy through 2018, and we think that protects us a lot from other players in the market.

Our next question is from Bob Napoli with William Blair.

Just on SOVEST, the, I mean, what is your confidence level in success? I know, you're saying, Alexander and you, still, if things go well this year, you should breakeven in 2019. With the additional competition that you're seeing, is there a point where you decide that SOVEST is not a great idea and you would terminate your investment in SOVEST?

Bob, this is Sergey. Well, in -- generally, we think that still SOVEST is a very good idea and the situation that we have that we have some of the banks and some of the other players coming to this market actually supports the idea that the product is needed on the market. So we were first who came out with that product and now we have Alfa-Bank and Home Credit Bank, who are trying to do similar things, and also SOVKOMBANK, who are doing similar things. So of course, it depends. There are some larger banks that are still not there and we don't know exactly how the competition will evolve from that point. But generally, we now understand the model much better than it was before, than it was in the beginning of 2017. So we have our own experience on playing with the customers, acquiring customers -- and we are -- I think, we're -- still have disparity on 2 other competition on the channels, on work with merchant, et cetera. So I think that the model should work at the multi-bank finally. So I don't see efficiency when every bank goes directly to the merchant -- for merchant and for -- and customer and bank as well. So I think that there should be a player like us who consolidate all this work and then distribute it to other bank. So I still believe that this is an efficient model how we'll finally come to, so -- to this model, because it should be efficient. You have one point to work with merchant and then you have many distribution points as banks and others. But the specifics of our market and usually we have, like a path, like learning path to the market and most of the big banks like want to try themselves and I am -- I think that most of these trials will be failed, so I don't see any efficiency for the banks to do that. They don't have this personnel, who should work with merchants on this specific issue, and also they don't have systems to support this work. So I believe that it is still a good model, but we can go through sometimes of rough competition and that's normal. So I -- we see the numbers, we see that the model works and we believe that if we will prove to the market that multi-bank model should be there and is much more efficient than doing it in every bank in-house. So if we will be able to prove that, then it will be very -- very, very good project. If not, then there are other options that we will think of.

And just to be very clear, right now, you are holding the loans and taking the credit risk, but the model -- the bank model, as you sign bank partners, you will not hold the loans on your balance sheet at all. You'll take a commission. You will not have any of the asset risk or credit risk. Is that correct?

.

Yes, absolutely, yes, absolutely. That's -- the problem when we'd launched the project was that we couldn't agree with banks on the product and because there was no brand, so like -- and technically everyone wanted to white-label and we didn't see any sense in doing that. Now -- and that's why we decided to start in our own balance to push the brand to make sense in terms of the business negotiations for the bank and we showed how it works, then some banks followed to try themselves. We still think that it is not efficient. So we still think that other banks with whom we are talking right now agree that it is not efficient for every bank to do those models, because they are very branch-specific and they are heavy on marketing. So I don't believe that there will be a lot of cards and maybe just a few Tochka cards in the market. And I think that we will finally come to this model. But right now, yes -- right now, we started to make launch from our balance sheet, because we couldn't find initial partners and -- but we want to finish that as soon as we find enough partners -- bank partners and we'll transfer all those loans to their balance sheets.

Okay and you will announce whenever you sign up those partners, you'll probably do a press release or something so we're aware?

Yes, yes, we will announce first launch.

And then on your core business, you had nice acceleration in the E-commerce and the money transfer business, and I think, the same transfinancial services and Telecom continue to be soft. That trend, the acceleration in E-com is due to the partnerships as you mentioned or projects with Alibaba and Airbnb and Uber and like that, and those trends in those segments, do you expect that those trends to continue, as you look into 2018 and '19?

Yes, yes. We will increase the number of partners in '18. We just started some programs in the fourth quarter, so they will continue, of course, throughout the year. And also they will expand, because the projects are not at full right now. So we will expand the client base, we will expand also all the numbers within our current clients. So yes, I think, that this is a strategic choice for Qiwi right now.

Can you give us an update on the first quarter since we're through the first quarter pretty much?

Issue is, Bob, what seems to be the growth in the first quarter?.

Right, yes, the payment volume growth in the first quarter.

Okay. Well, we are not guiding about that, but it should more or less toward the growth that you've noted in Q4.

Okay. No acceleration or deceleration that you're seeing?

Exactly. Yes, that's what we see.

(Operator Instructions) We have a follow-up question from Ulyana Lenvalskaya.

Just a quick traditional follow-up. What is the company's current net cash position on the balance sheet at the end of the year?

So it's -- well, it's slightly below (inaudible) with a portion of it for SOVEST with other projects, but it has not changed dramatically from Q3.

Okay. And I'm also curious what is the current share of cash top-up in a wallet, if you can comment on this?

Ulyana, this information is disclosed in press here. You can just take a look there.

We have a follow-up question from Vladimir Bespalov with VTB Capital.

Just a quick one. Some time ago, you mentioned that you're working on new strategy, I believe. So when are you going to disclose that? Could you give us some color on this work?

We are going to have a roadshow in the near future and we will be disclosing strategy at the same time. It's in the end of April, yes, end of April.

(Operator Instructions) We have a follow-up question from Bob Napoli with William Blair.

I guess, I mean, I'm not clear on your strategy with the Tochka project and how that relates to the core business or new strategies at Qiwi?

Yes. well, we're still unclear on the deal with Tochka, finally. So we will -- I think, we will be able to finalize soon. And small and medium business is one of the target audiences in our strategy. So we do work with self-employed and small and medium, so we think that this is our -- one of our target audience to work with for the future. But we cannot say much about Tochka right now because we are now agreeing with Otkritie on the final setup of Tochka, and we think, well, within months or few months, we will be able to draw up what kind of corporation we agreed on. Generally, we -- both sides are doing a lot of work towards building this project and towards building strategy around it. So we will be able to answer that as soon as we complete the contract with Otkritie Group.

We have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

So thank you very much for this meeting. We are as management very happy for the results. And I hope to hear you on the next earning call. Thank you very much. Bye-bye.

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