Qiwi PLC (QIWI) 2018 Q1 法說會逐字稿

Good day. Welcome to the QIWI First Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I will 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 first quarter earnings call. I'm Varvara Kiseleva, Head of Investor Relations, and with me today are Sergey Solonin, our Chief Executive Officer; and Alexander Karavaev, our Chief Financial Officer.

A replay of this call will be available until Wednesday, May 30, 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 May 23, 2018.

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. Those 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. We're excited to share our first quarter results and a strong start to the year with our Corporate and Service business demonstrated solid performance with 26% segment net revenue and 27% segment net profit growth. Our growth this quarter was mainly driven by the development of our payment ecosystem as well as secular trends towards digitalization of payments in our major markets. On top of that, we continue to develop our key products and use cases in order to offer our clients convenient solutions in our focus market verticals and niches.

Moreover, strong growth in the first quarter was underpinned by the low base effect in the first quarter of 2017 as several projects, which now contribute to our Payment Service business were launched and started to get traction throughout the year.

At the same time, we continue to invest and scale up our Consumer Financial Services segment, which includes SOVEST project as well as in building up our new segments for the Tochka project. Given all of the above, we believe that our Performance Services has a solid foundation for our future growth. We keep strong financial results in our Payment Services business in the first quarter, creating a firm foundation for further growth in 2018, as well as investing in our new business lines and projects.

We believe we are well positioned to grow our Payment Services segment product. In order to achieve this goal and generate substantial operating cash flows to support our investment in the new project, we will focus on executing our strategy through building a wider digital infrastructure, creating new and enriched and existing client use cases and expanding our product offering.

Now to some operating highlights. Payment Services segment volume increased by 20% to reach RUB 249 billion, driven by significant growth in Money Remittances and E-commerce verticals, which grew 53% and 58%, respectively, over first quarter 2017. We are pleased with the dynamics of both verticals and believe that such growth was largely driven by the development of our peer-to-peer existence as well as the rollout of the projects we deployed together with our partners, such as a Visa for taxi companies as part of our P2P strategic focus. As of March 31, we've had RUB 20.3 million Qiwi Wallet account, an increase of RUB 2.3 million as compared to the prior year, resulting from our continuous efforts to grow and leverage our existence. Our total Consumer Financial Services segment payment volume increased up to RUB 2.3 billion for the first quarter of 2018. We also see positive dynamics across key operating metrics of the project. We continue to develop our products and enhance our business model with the aim to set the multi-banking model for SOVEST by the end of 2018 as we see substantial interest towards installment card projects from other players on the market. We believe that we have entered an interesting niche with a significant potential and have built a robust infrastructure, including best-in-class distribution partner networks.

Our SME segment, which we'll develop through Tochka, also demonstrated robust operating performance in the first quarter of 2018. We currently upgrade Tochka to a multibank service that provides customers the ability to open accounts with either Qiwi Bank or Otkritie. We offer Tochka services in Qiwi Bank as well as provide services to Tochka clients with their accounts in Otkritie. As of March 31, we had approximately RUB 1.6 billion of Tochka customer balances and served more than 17,000 Tochka clients in QIWI. Most of the volume dynamics in our key market verticals convert into strong Payment Services segment net revenue growth and overall robust performance of our business.

Alexander will walk you through the first quarter numbers in more detail just in a moment, while I would like to walk you through some recent developments.

Currently, we continue our negotiations with the management of Otkritie regarding our future cooperation and development of both Tochka and Rocketbank project. We believe that our negotiations in respect of Tochka are currently in advanced phase and we might be in a position to frame a mutually beneficial resolution that will establish the basis of our future joint activities in the near future.

We have also recently started negotiations with Otkritie in respect of the Rocketbank project, as we are now in the early stages of negotiations and we will provide an update once we reach agreement and develop further strategy.

As far as we are in the process of negotiations with Otkritie regarding the future structure and development of Tochka and Rocketbank project, we're not in a position to provide any estimates of the potential midterm contribution of this businesses.

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. First, I would like to update you on the segment presentation of our business. Last year, we have revised our investment structure to better reflect our operational and management strategy as well as the expansion of our business operations. As of December 31, 2017, we have distinguished 2 key operating segments as well as Corporate and other categories. As of March 31, 2018, we have also separated our Small and Medium Enterprises business that is represented by Tochka as a separate segment. Now onto the results.

First quarter 2018 total adjusted net revenue increased by 41% to reach RUB 4.1 billion, up from RUB 2.9 billion in the first quarter of 2017. The increase was mainly driven by Payment Services and Small and Medium segment net revenue growth. Payment Services segment net revenue, which includes Payment Services payment adjusted net revenue and Payment Services as adjusted net revenue, increased 26% to reach RUB 3.7 billion as compared to RUB 2.9 billion in the first quarter of 2017. Payment Services payment adjusted net revenue increased 36% to RUB 3.2 billion, up from RUB 2.4 billion in the prior year.

And as a result of the net revenue growth in our E-commerce and Money Remittances verticals, which grew 58% and 43%, respectively, offset by a slight decline in net revenue in Financial Services and Telecom verticals by 5% and 3%, respectively.

Our financial results in this segment were driven both by increased volumes as Sergey just described and the improvement of the payment average net revenue yield by 15 basis points year-over-year as a result of changing category and product mix.

Payment Services other adjusted net revenue decreased 17% to RUB 455 million, as compared to RUB 536 million in the prior year, mainly because of the decrease in interest revenue, revenue from advertising, as well as revenue from overdrafts provided to agents.

Payment Services segment net revenues, excluding revenue from fees for inactive accounts and unclaimed payments, increased 30% compared to 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 3 million for the first quarter 2018 as compared with the net revenue loss of RUB 10 million in the first quarter of the prior year, showing the development of our SOVEST project was -- which has, however, shows weaker results as compared to the fourth quarter 2017 due to seasonal factors as well as substantial focus on clearing up our profit distribution.

Net revenue of the Small and Medium Enterprises segment was RUB 420 million for the first quarter 2018, compared with 0 in the prior year. This segment net revenue includes mostly Tochka revenues recognized from the information and technology service agreements with Otkritie Bank for providing services to Tochka clients that had their accounts with Otkritie Bank.

Net revenue of the Corporate and Other category were RUB 8 million for the first quarter 2018 compared with RUB 7 million in the prior year. Moving on to expenses.

Strong operating performance of our Payment Services business that continues to generate substantial cash flows supports our investments in the development of our new projects, most notably, SOVEST. These new sales adjusted EBITDA decreased 5% to RUB 1.5 billion from RUB 1.52 billion in the prior year. Adjusted EBITDA margin was 35% compared to 52% in the prior year. Adjusted EBITDA margin contraction primarily resulted from the increase in client acquisitions and advertising expenses by RUB 242 million incurred due to investments in the development of our SOVEST project as well as higher personnel expenses incurred in connection with SOVEST and Tochka projects. Adjusted EBITDA was also affected by the increase in credit loss expenses associated with SOVEST and other administrative expenses.

Group adjusted net profit decreased 15% to RUB 1.1 billion, down from RUB 1.3 billion this quarter over the prior year. Adjusted net profit was largely affected by the same factors of adjusted EBITDA, as well as increase in income tax expenses and decrease of foreign exchange gain generated as compared to the same period in the prior year. Payment Services segment net profit increased 27% to RUB 2.2 billion compared with RUB 1.7 billion in the prior year, driven by Payment Services segment net revenue growth.

Consumer Financial Services segment net loss was RUB 679 million in the first quarter 2018, as compared to a net loss of RUB 316 million in the same period of the prior year, resulting from the expansion of operations of the SOVEST project and associated costs mostly related to the consumer acquisition.

Small and Medium Enterprises segment net loss was RUB 153 million, resulting mostly from client acquisitions and marketing costs. Corporate and Other category net loss was RUB 296 million, an increase of 90% compared with a net loss of RUB 155 million in the prior year. The net loss was primarily driven by expenses incurred in connection with the acquisition of assets of Rocketbank from Otkritie Bank as well as several individual and significant projects and items.

Finally, as you saw in our earnings release, our Board of Directors decided to refrain from distributing the dividend, while they're incurring significant investments in connection with the launch, and will allow us to fund new projects. We expect that throughout the 12 months starting from the third quarter of 2017, we will concentrate on investing into our future growth. While long term we remain committed to distributing all cash excess to our shareholders.

Now onto our guidance. Given substantial uncertainty in respect of the future arrangements regarding the development of the Tochka and Rocketbank projects and the outcome of our negotiations in respect thereon with Otkritie, we believe that we are not in a 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 revenues and expenses associated with Tochka and Rocketbank projects for the first half of 2018. Actual results of these projects for 2018 may differ substantially from the data that we used in our guidance.

Given that, we increased our total adjusted net revenue guidance to incur price necessary being recognized in connection to our Tochka project in the first quarter 2018 and expect our total adjusted net revenue to increase by 15% to 20% over 2017. This should reiterate our Payment Services segment net revenue, adjusted net profit and Payment Services segment net profit guidance.

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 2017. Although we see our first quarter 2018 results as a solid foundation for future growth, certain other factors remain beyond our control and, hence, we should arrive 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 Ulyana Lenvalskaya with UBS.

The guidance on the underlying Payment Services revenue was unchanged 12% to 16%. Looks like very conservative against the first quarter delivered. Why is it that? Do you see any deceleration trends now? Or what are -- what is the logic behind?

Ulyana, it's Alexander. So it's -- so we were -- we don't really assume deceleration as such, but we -- in Q1, there had been an excess of low base because we, throughout last year, we started to launch several projects in our Payment Services vertical starting from Q2, Q3 and Q4, and then gave traction. So that's why in Q1, the growth was a little bit also subject to a low base in Q1 of last year. So that's why we kind of upgraded the guidance in such a way. But anyway, we feel the guidance is conservative, but just we need some time to see further trends outright. So...

Okay. Then second thing on the wallets. We do see some deceleration in the pace of growth to 13% now versus like 17% in the fourth quarter. What is the driver behind, you think? And what shall we expect going further?

Well, so the -- generally, what we see is -- so we like close to the saturation point in a way. So we initially, when we prepared our model as IPO, so we were thinking that when I reach 20 million wallet, we'll certainly be somewhere close to the saturation point. For now, I think we generally believe we can grow like a few millions more by the pace of gaining new wallets is not the trouble (inaudible). And what's important here is that the number was not only the important part, so also what's important is the volume per wallet, generally speaking, and the quality of wallet, so to say. Because we are now focusing on specific segments where we believe the majority of growth will come from. For example, the shares economy, the self-employed and a few others. So that's why we -- this trouble, we'll feel a certain situation of the number of the wallets. But we are not in a position just now to guide what will be the growth rate of the wallets going forward.

Okay. That's very useful. And another question, if I may. Another one, which too slow in terms of the quarterly growth pace was volumes in SOVEST, the payment volume in SOVEST. Do you see some sort of normalization there as well? So this 20% quarter-on-quarter is sort of less impressive than before. Are we coming to some sort of a saturation at all?

Not really. If you -- the seasonality, effectively, Q1 is the weakest quarter, so to say, generally for such type of product. At least based on the data that we collect. So generally, we believe we are still far, far away from normalization of the wallet. So we'll have to expect substantial growth for it.

It's like a seasonal effect?

Exactly, yes.

Our next question comes from the line of Cris Kennedy with William Blair.

I appreciate the additional segment disclosure. One question on E-commerce. You alluded to new projects that's been driving the growth. I mean, volume has accelerated, I think, for 4 consecutive quarters. Can you talk about those new projects? And then any update on improving the mix to physical goods with your E-commerce business?

Chris, thanks for the question. While there are several projects with quite big companies, one of which is SOVEST, it's a platform for sports betting companies to make bets. This is one. Another one is a large project with Uber, with the taxi drivers, not only with Uber actually, to major Russian taxi companies. And another one, I think it has recently started with Alipay. So all 3 are still in a growth position, so they will be increasing more and generally, QIWI is focusing on that kind of clients and services who cannot only increase the volumes, but also who is helping us to find new clients.

Okay. And then an update on the physical, the mix towards physical goods?

Well, it's more or less unchanged, so it's still so the majority of the wallets through E-commerce, that we are showing in E-commerce are mostly virtual. So the physical E-commerce is not more than 1/5 of total volumes. So it hasn't been differential.

Okay, great. And then, just 2 questions on SOVEST. Any update on kind of working with more bank partners? And then, I guess, still looking for the project to be breakeven exiting 2019?

I think, this year, we'll be announcing only one bank who is testing the product now and we will wait in a few months, I think. So this year, it will be one bank, and we have another 2 banks for the next year. It seems that the integration part on SOVEST on more sophisticated product than just payments is a little bit more difficult and it takes more time than we expected, but we're still in line with our strategy to do multibank model on SOVEST.

And yes, we feel kind of in a position to say that, yes, we're likely to achieve breakeven towards the end of next year.

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

First, I would like to clarify a little bit about dividends. You changed the statement compared to what you had in your previous reviews, in particular, currently it looks like you are ready to pay, potentially, in 6 months from now, while in the previous release it was like 12 months from that point. So do you see any changes in your new projects like maybe moving to profitability or just the core business generating more cash that you feel like more prepared to pay dividends earlier rather than later?

Thank you. So actually, we did not really change our position in respect of that. But we -- so we always thought that suspension of dividend is kind of a temporary decision. We generally are in a position to (inaudible) shareholders based on the plans that we have as of now. We may restart paying the dividends between probably 9 to 12 months from now, if everything goes according to plan.

My second question, I would like to clarify a little bit to your guidance. What has activated from the changes that you included to your actual revenues from Tochka in the first quarter of 2018? But you also mentioned that you would reflect, sounds like, actual numbers for the first half in the guidance. But I don't see like any additional revenue contribution from Tochka in the guidance or no changes on the expense side. Could you provide a little bit more clarity on what is in the guidance and the new guidance and what is not?

Okay. So in the -- so we have included in the new guidance, I mean, the phrase that actual revenues of Tochka that we have (inaudible) for you. Actually, we have seen in Q1 report, the actual number is RUB 420 million of revenue in Q1. And then we also extrapolated slightly the numbers that we believe we're going to be getting for the second quarter as well. And that would be, given that we are still in negotiation with Otkritie. So again, we're in the final stage but not yet concluded. So we -- I'm not sure which amounts would flow through our P&L in the second half of the year, so that's why those are not included. So that's the only reason why we increased the guidance.

But you didn't include anything for the second quarter, right? Is that correct?

We have included a certain amount for the second quarter as well, but not for the second part of the year, not for Q3 and Q4.

Okay. And one more question, if I may. On Rocketbank. There are some expenses associated with the Rocketbank and some losses, but could you maybe update -- you are not going to get any revenues, it looks like, from this asset. So could you update how these assets is being negotiated with Otkritie and whether you're going to recover some losses? Or how are negotiations are -- going around this asset?

Yes. I mean, so yes, we have a certain amount of expense that we are taking [as bucket of] Rocketbank, but those are not material. So we have not effectively launched the Rocketbank operations entirely yet. So it still resembles basically a small amount in general. And in terms of the plans, we have just started eventually the negotiation with Otkritie. This is a good sign itself because we were not really talking to them on Rocket so that Tochka was the main subject. So that's fine. So let's see how we proceed. So we may be having the final evaluation in respect to profits over the next (inaudible).

With that, we do have some of the programmers, for example, and some staff that is dedicated to Rocket project with some staffs to connect and integrate Rocket into QIWI ecosystem. So for today, we are, I think, ready to do that depending on the situation with Otkritie.

(Operator Instructions) Thank you. We have a follow-up question from the line of Vladimir Bespalov with VTB Capital.

So one more question on SOVEST. We saw a pretty big volatility in yield, so you explained it by some seasonal factors. But if you -- where do you think the yields will stabilize for -- once these projects are going to be like more mature? What would be a normal yield for this kind of business?

Yes. Well, we're not guiding on the yield, but I mean, as soon as the project would mature, it should be around the same yield as we have in our core business, so that's what we mentioned.

And with that, this concludes our question-and-answer session and, thus, our conference this morning. We thank you for your participation, and have a wonderful day.