QIWI's (QIWI) CEO Sergey Solonin on Q1 2016 Results - Earnings Call Transcript

| About: QIWI plc (QIWI)


Q1 2016 Earnings Conference Call

May 18, 2016, 08:30 AM ET


Varvara Kiseleva - Head, Investor Relations

Sergey Solonin - Chief Executive Officer

Alexander Karavaev - Chief Financial Officer


Rob Napoli - William Blair

Brady Martin - Citi

Sveta Sukhanova - Sberbank

Anna Kazaryan - VTB Capital


Good day, everyone, and welcome to the QIWI first quarter 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. Please go ahead.

Varvara Kiseleva

Thank you, operator, and good morning, everyone. Welcome to the QIWI first quarter 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, May 25, 2016. 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 18, 2016.

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 undertake 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 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.

Sergey Solonin

Thank you, Varvara, and good morning, everyone. Thanks for joining us today. Our first quarter results were in line with our expectations, despite the challenging environment in our core markets.

In the first quarter, our total payment volume increased by 25% to reach RUB198 billion, driven by acquisition of Contact and Rapida in the second quarter of 2015. While payment volume in money remittance and e-commerce market vertical grew even faster about 76% and 62% to reach RUB33 billion and RUB34 billion, respectively.

As of March 31, we had 16.1 million Visa Qiwi Wallet accounts, a decline of 1.2 million as compared to the prior year, resulting from lower marketing spend, the decrease in the kiosk network in Russia in the second half of 2015 and the overall economic downturn affecting consumer activity.

Our physical distribution network was negatively affected by strict regulations of agents business as well as adverse market conditions. And as of March 31, 2016, we had around 167,000 kiosks and terminals, including Rapida physical distribution points.

Turning to our financial results. In the first quarter, total adjusted net revenue was flat year-over-year, reaching RUB2.5 billion, largely due to a decline in our other adjusted net revenue. Payment adjusted net revenue was up 9%, driven by strong payment volume, in turn offset by decrease in net revenue yields across our major market verticals.

We'll continue to see pressure on our volumes in the financial services vertical, which is affected by weak consumer loan market and bankruptcy of several large consumer-oriented banks. As well as our money remittance vertical, where shift in migration trends contributed to decrease in demand for remittance services.

Telecom vertical demonstrated volume decline, primarily resulting from the contraction of our physical distribution network. Although, the consumer spending in Russia is still under pressure, we see strong trends in our e-commerce market vertical. I believe that we will continue to successfully execute on our strategy and penetrate this diverse and technological market by offering demanded solutions to our customers and merchants.

Adjusted EBITDA declined 8% in the quarter, primarily affected by bad debt expense that Alexander will tell you more about shortly. Adjusted net profit grew by 10%, primarily as a result of the foreign exchange gain.

Now, I would like to walk you through some important recent developments. Starting September 2015, we have experienced a significant pressure in our business, resulting from enhanced legislative controls over agents, consequent market instability and exit of non-compliant players.

Although, our physical distribution network in Russia have stabilized and our market share has increased, we continue to see aftereffect of these regulatory changes through pressure on our volumes in both historical and acquired business and in our other revenue in the first quarter of 2016. We believe that currently the market has stabilized and adjusted to the new circumstances, opening opportunities for future growth.

Further, several initiatives regarding new wallet regulation in Russia are currently being discussed between the regulator and the market players, including introduction of new remote identification procedures and strict regulation of unidentifying wallets.

In the end of April, a Central Bank representative stated that the regulator is planning to propose some changes by the end of 2016. Given our continued work in this area and the fact that QIWI Bank operates under full banking license, we don't see any significant risk in relation to the development of e-money regulation.

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

Alexander Karavaev

Thank you, Sergey, and good morning, everyone. As Sergey just described, we delivered stable financial results this quarter. Total adjusted net revenue was flat year-over-year, amounting to RUB2.5 billion. Total adjusted net revenue, excluding revenue from fees for inactive account, decreased 7% compared to the prior year.

Payment adjusted net revenue increased 9% to RUB2 billion, up from RUB1.8 billion in the prior year as a result of the net revenue growth in our money remittance and e-commerce verticals, which grew 50% and 13%, respectively, offset by continued decrease in net revenue in financial services and telecom verticals by 7% and 12%, respectively. While we see great potential in our key verticals, we believe 2016 will continue to be challenging.

Our financial results were driven primarily by payment volume growth resulting from consolidation of Contact and Rapida, offset by decreasing net revenue yields across almost all our vertical as a result of the consolidation of Contract and Rapida, which operate on significantly lower net revenue yields than key historical businesses.

Although our net revenue yields have decreased year-over-year, we have seen a substantial improvement in our yields in the last quarter, as a result of our efforts to increase the yields in the businesses that we acquire.

Other adjusted net revenue decreased 25% to RUB505 million, down from RUB675 million in the prior year, mainly because of the decrease in cash and settlement services, interest revenue and overdraft provided to agents, revenue from sales of kiosks and rent of space of kiosks, triggered by the contraction of our physical distribution network, partially offset by the increase in inactivity fees.

Moving to expense. This quarter we managed to tightly monitor our cost. Adjusted EBITDA decreased 8% to RUB1.5 billion, down from RUB1.6 billion in the prior year. Adjusted EBITDA margin was 58% compared with 64% in the prior year. Adjusted EBITDA margin contraction primarily resulted from budget expense that amounted to RUB12 million in the first quarter of 2016, as opposed to RUB67 million of bad debt recovery in the first quarter of 2015.

Adjusted net profit increased 10% to RUB1.2 billion, up from RUB1.1 billion in the prior year. Adjusted net profit was affected by the same factors as adjusted EBITDA, offset by a foreign exchange gain excluding the effect of foreign exchange loss on June 2014 offering proceeds generated in the first quarter 2016 as compared to foreign exchange loss in the first quarter of 2015.

Finally, as you saw in our earnings release, following the determination of first quarter 2016 financial results, our Board of Directors approved a dividend of US$0.22 per share. Although we continue to pursue certain M&A targets, we remain committed to return the cash back to shareholders.

Now on to our guidance. Despite difficult macroeconomic situation and lower visibility over the potential market environment changes, we reiterate our guidance for 2016. Adjusted net revenue to increase by 5% to 8% and adjusted net profit to increase by 7% to 12% over 2015.

As was already noted, given the difficult environment, we might see further impact on our key market verticals throughout the year. With debt and certain other factors beyond our control, it's easier for I to revise the guidance in the course of the year.

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

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Rob Napoli with William Blair.

Rob Napoli

First question on the other revenue. The level of the current quarter is that the loss of revenue from the vast majority is coming from inactivity fees. Do you expect that to continue going forward? And on the inactivity fees, how do you collect those inactivity fees? And is that sustainable? Is that revenue line at a level that's sustainable?

Alexander Karavaev

We expect that other net revenue generally is hitting bottom in this quarter in Q1. So based upon the top of our guidance, so really can expect that the other net revenue will be growing slightly, starting from Q2 and throughout the year as well. But we were hoping to, providing with the guidance for the separate line items of this business I can tell you.

On the inactivity fees, I mean, generally it works in a way that based on the public offer that we published on our site, I mean [indiscernible] established players and the account of absolutely an inactive player [indiscernible]. Usually the people after that period expires will never claim back those balances on the account.

As for the sustainability, generally, yes, we have stressed that concept over the last few years, and it looks like that really became a sustainable part of our net revenue. We are still not ready to guide on the exact amount going forward, so we may see certain slowdown in the inactivity fees, but generally, we really believe that there is a stable source of revenue for ourselves.

Rob Napoli

And then just a follow-up question, if I could. Here the improvements in revenue yield and I think you did call out last quarter and when you bought Contact and Rapida that you were going to raise prices. It looks like you were able to improve revenue yields in several of the product lines. How good has been the response to the price increases? Do you feel like you've maintained market share and do we expect further price? Are these levels of revenue yield levels that you'd expect through the year?

Alexander Karavaev

I think, yes. Generally, look, what happens is that we manage to increase the net revenue yields in the majority of the categories that Rapida and Contact operate, except for the money remittance itself. So this is something -- I mean in money remittance is we believe that that should take some more time for the market to consolidate and for the price to go up.

Generally speaking, we have not seen the shift on the market share, so it's quite opposite. So basically, all the activities that we took last year and the activities of Central Bank, I mean that regulatory pressure on the agent market basically led to the extent that our market share in the self-service kiosk market increased.

Based on the very recent report that we've seen, we saw our share in the self-service kiosk market increasing to slightly below of 60% of total market, up from around 50% of the market. And this is some thing that we see in majority of our key verticals, probably except for telecom, which is no longer, let's say, the core segment, core vertical for to be a result.

So far we have not seen negative effect of the pricing increase on the market share, and our strategy is basically to keep all the activities in a way that to be able to keep or and increase the market share. If having all that, we are in a position to increase net revenue than we were hoping before.

Rob Napoli

And just finally, have you seen any stabilization, as we're half way through the second quarter in the money remittance sector or generally in the financial services sector. Is there any sign of stability where the level of decline would seize in the market?

Sergey Solonin

Yes, we do see some recoveries. We see that financial services segment is really in the late first quarter it started to recover. We think that we have some delay from the market, so we will see how it goes in the second quarter. And it will be much more visible. For money remittances, I would say that we hit the bottom in the beginning of the year, so it was really uncertain, where the market will grow further. But again, to the end of the first quarter, we see some recovery and now the volumes are growing.


Our next question comes from the line of Brady Martin with Citi.

Brady Martin

Just hoping to get some more color on your guidance for the year. There are lots of moving parts in Q1 and we see volumes were up, but a lot of that seems to be still linked to integration of Contact Rapida, [indiscernible] another two months. I mean, your best guess, net profit was up, but there was some FX component there.

Just wondering, and it gives confidence that you'll see adjusted net income growth at all this year? Is this the combination of weaker base for you in the second half and maybe your expectations are recovery in the economy or are there very specific issues that you could share with us that will help drive the net income growth? That's first question.

Sergey Solonin

Well, yes, as you said, there are many moving parts inside of our model. So generally what we do, we have more than several hundreds of projects that we rally, and we make kind of a forecast through the end of the year in each project, and then what you see as our guidance is the combined effect of all those forecasts.

As for the basis for this forecast, we actually feel we're still quite not too optimistic in terms of our economic recovery, but we still think that we are planning in line with the drop in the GDP in this year around 1.5%. So we are generally looking at the situation as it is today, and we have all the forecast as a combined effect of a lot of projects. So I don't think that it will be easy to explain all of that. But there are hundreds of those projects that are taken into account.

Brady Martin

Maybe just another question on a different topic. A few weeks ago there was some Russian press speculation I think about changes in the money remittance and maybe getting rid of anonymous transfers. I mean, can you comment on this? Is there any expectation that we'll see some imminent change in money remittance regulation that you're aware of?

Sergey Solonin

Well, we will be meeting with Central Bank soon on this topic. We generally don't see real legislative act or preparation for this act in Duma. If you look at today's press release, not press release, maybe interview with RBK, they actually say that they have even more problem with banking cards, on the banking side than with the payments systems like us. They also mentioned QIWI as a payment system that is quite good in that sense.

So really it is more around investigations and trying to understand how the market works. So we're really in talks. So I don't think that we will see anything like that soon. But even if we see something that will be definitely discussed and will not hit our base as soon as we are operating here under the banking license. So maybe for some small players it will be a little bit more difficult.


Our next question comes from the line of Sveta Sukhanova with Sberbank.

Sveta Sukhanova

If I may start with money remittance, I think Sergey answering one of the previous question and mentioned that you managed to increase yield across all the segments except with money remittance as of Contact. But when I looked straightforward on your segments, I see that money rem yields went up. Was it mainly because of FX effect, because FX was slight volatile, so how should I understand that two contradictory numbers?

Alexander Karavaev

That increase in money remittance that you've seen report is primarily due to the product mix, because we report under money remittance everything that we can call money remittance. It's called, I think, cash to card, card to card and classical money remittance.

And this is basically due to the fact that higher yielding categories within money remittance are gaining share from, let's say, classical money remittance of Contact. So this is purely, let's say, [indiscernible] exercise. So we have not, as I told, let's say, changed the price of dispatch in that segment. So we still think we made a certain improvement in net revenue surely in that category.

Sveta Sukhanova

And follow-up question here, this 1.45%, which we're seeing in money remittance in Q1, can we extrapolate into the following quarter or not yet because it's too many more to go?

Alexander Karavaev

Well, we are not really guiding on the net revenue yield in each of the verticals and those things for you. What we might say that we expect that these level of net revenue yield in money remittance is sustainable. We see some potential to improve those, but we are not yet clear about the timing and how many basis points we might be gaining in additional -- on top of what we have now.

Sveta Sukhanova

But is there any downside to 1.45%, as that was -- I see upside, but actually I was trying to understand downside?

Alexander Karavaev

Not, really. We do not see any downside. I mean in terms of net revenue basically we do not feel that there is any downside risk.

Sveta Sukhanova

My next question, if I may, would be about other payment revenues. Can you -- because you have already answered the question about other revenues. But can you please kindly remind us that what do you put on the other payment volume and what was the main driver in the decline of this other payment volume?

Alexander Karavaev

Essentially under others payment volumes is basically everything what is not included in the other category, so that category generally is represented by governmental -- again, payment for governmental services like taxes, traffic fines, utilities, and many other categories, but none of those is having a total net share in that category. And the decline in that category was primarily due to the contraction of the distribution method in the second half of 2015.

Sveta Sukhanova

Understand. So we might see recovery once you restore the distribution network in the following quarter. Do I understand you right?

Alexander Karavaev

That's one of our assumptions. That's correct.

Sveta Sukhanova

And another question would be, if you can kindly disclose your cash on the balance sheet at the end of the Q1?

Alexander Karavaev

So the total cash is disclosed in the number that was in the press release, the balance sheet. I think you mean the available cash flow. It's basically currently the cash that is available for the investment and or M&A is slightly above the $70 million.

Sveta Sukhanova

That excluding cash, which you reviewed for the dividend payment, do I understand correct?

Alexander Karavaev



We do have another question from the line of Anna Kazaryan with VTB Capital.

Anna Kazaryan

My question is about regulation. I think you have already mentioned the discussions of banning unidentified electronic wallets, but could you explain why you don't see any serious risk for QIWI? Could you clarify this question, please?

Sergey Solonin

Maybe you know that we have a lot of payments already that are under the identification procedure, so we have a lot of experience already on converting all users into identified. And we do have electronic means to identification procedures already. So we don't see that that was too hurtful for those people. So it was quite clear procedure and quite an easy one.

Also, as we already discussed, there will be levels of identification, so it will not be the situation when you will need to go somewhere and show your passport like that, so it will not be that kind of difficult identification procedure anyway, so the talk that is going on for a while, so it's like for few years, and we are kind of in support for that. It runs different types of services and different types of identification for these services.

So what was said actually is that those kinds of services or those kind of identified wallet should be linked to a banking account, so in terms of reporting to the Central Bank, today we report them as the one math, as one account. And in this one account there are lot of wallets and a lot of accounts of different users.

So what will happen, as I understand, is that we will have to divide all those wallets that are in one bulk in the counting, in the bank, and we will have to divide them into standard, like accounting procedures in the bank and that will be supported by our IT. And I think that technically we are completely prepared to do that. It will take a little bit more IT resource in terms of like to process these transactions, but definitely not the material one.

Anna Kazaryan

So one just clarification. So we still see a decline in the number of kiosk and terminals, and could you give us an update of the stations. When exactly do you expect recovery of this number, maybe next quarter, third quarter and so on?

Sergey Solonin

Well, this number will be recovered during over the year, so we see that some of the regions do need some additional terminals right now, and we think that it will be more or less done during the year, so we see that it is already happening a little bit in the end of first quarter, so we think that as soon as our monthly base of the wallet goes up, the quantity of terminals should go up as well, so it should be, in some sense, it will be aligned during this year. And it's not so aggressive as well.


Mr. Solonin, we have no further questions. I'd like to turn the floor back to you for any final remarks.

End of Q&A

Sergey Solonin

Thanks operator. So our first quarter results have demonstrated the resilience of our business model in very challenging environment. While the macro situation may continue to negatively affect our volumes and revenues throughout 2016, we continue to see many opportunities in this environment to increase our market share in our key verticals, as well as to attract a new market segment aimed to position us for future growth.

With that operator, thank you very much, everyone, and good bye.


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

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