QIWI's (QIWI) CEO Sergey Solonin on Q3 2016 Results - Earnings Call Transcript

| About: QIWI plc (QIWI)

QIWI plc (NASDAQ:QIWI)

Q3 2016 Earnings Conference Call

November 22, 2016 8:30 AM ET

Executives

Varvara Kiseleva - Head, Investor Relations

Sergey Solonin - Chief Executive Officer

Oleg Ryazhenov-Sims - Project Chief Executive Officer

Alexander Karavaev - Chief Financial Officer

Analysts

Bob Napoli - William Blair

Brady Martin - Citi

Operator

Greetings, and welcome to the QIWI Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now pleasure to introduce your host Ms. Varvara Kiseleva, Head of Investor Relations. Thank you. You may begin.

Varvara Kiseleva

Thank you, operator, and good morning, everyone. Welcome to QIWI third quarter earnings call. I am Varvara Kiseleva, Head of Investor Relations. And with me today are Sergey Solonin, our Chief Executive Officer; Alexander Karavaev, our Chief Financial Officer; and Oleg Ryazhenov-Sims - Project CEO.

A replay of this call will be available until Tuesday, November 29, 2016. Access information for the replay is listed in today's earnings press release, which is available at our Investor Relations website at investor.qiwi.com. For those listening to the replay, this call was held and recorded on November 22, 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 third quarter financial results were in line with our expectations despite the challenging environment in our core markets.

In the third quarter, our total payment volume decreased by 19% as compared with the same periods in prior year and was equal to RUB215 billion, driven by mix trends across market verticals with growth in E-commerce offset by decline in volumes in Financial Services, Money Remittances, Telecom, and Other market verticals. These decreases were largely driven by the decline in our kiosk network and significant shrinkage of contact center side network due to microeconomic practice and some regulatory pressure.

As of September 30, we had 16.5 million Visa Qiwi Wallet accounts, a decline of 0.2 million as compared to the prior year is resulting mainly from the decrease in the kiosk network in Russia in the second half of 2016, as well as overall economic downturn affecting consumer activity.

Our physical distribution network continues to be negatively affected by strict regulations of agents business as well as adverse market conditions. And as of September 30, 2016, we had around 163,000 kiosks and terminals, including Rapida physical distribution points. We anticipate that the number of kiosks and terminals will continue to fluctuate around this level with our market share slightly increasing.

Turning to our financial results. In the third quarter, total adjusted net revenue increased 5% year-over-year, reaching RUB2.7 billion driven by payment volume growth in E-commerce market vertical as well as increase in net revenue yields across all key market verticals offset by decline in volumes in Financial Service, Money Remittances, Telecom and Other market verticals.

We continue to see pressure on our volumes in Money Remittance vertical where shift in migration trends contributed to the decrease in demand for Remittance Services and regulatory changes negatively impacted the reach of contact acceptance network. Our volumes in financial services, telecom and other verticals were affected preliminarily by the contraction of our physical distribution network.

Although, the consumer spending industry is still under pressure, we continue to see strong trends in our E-commerce market vertical. I believe that we will continue to successfully execute on our strategy in this category and penetrate this diverse and technological market by offering new demanded solutions to our customers and merchants.

Now, I’d like to walk you through some important recent developments. Following our mid-term strategy update, I’m glad to announce and share with you our new project that I’m very excited about, SOVEST.

With this, I will turn the call over to Oleg, the Head of the Project, who will provide more details about this. Oleg?

Oleg Ryazhenov-Sims

Thank you, Sergey, and hello, everybody. My name is Oleg Ryazhenov and I’m CEO of SOVEST project. As Sergey just said, we are proud to announce today our new product, it’s called SOVEST. SOVEST is a first large-scale payment-by installment credit card system in Russia, developed in-house by our team using proprietary technology and QIWI extensive infrastructure. SOVEST enables a broad range of customers to get easy access to funds and purchase numerous number of goods and services they need and when they need them.

Our business model differs significantly from those currently exist in the Russian market, including quasi credit cards, point-of-sale for loans and merchant installment program. It presumes that the bank earns money from the retail partners sharing their sales profits and not from the customers paying interest. Such model forms an attractive proposition for customers while limiting our risks. There are many advantages for our current and potential uses including easy-to-understand installment usages, no interest on customer side, no overpayment, revolving credit limit and single-time credit limit setup with multiple usage in our street and online partner network.

SOVEST card will target all credible population. We estimate reachable target is over 40 million people. Project partner/merchants will highly benefit from attracting new customers, increasing basket size and purchase frequency, not to mention additional marketing through the project development and communication.

As of now, we have contracted more than 40 top retailers with over 1,000 shops in total and we will be adding new partners every week. While SOVEST is unique in Russian market, there is a number of successful payment-by installment products around the world and in the markets similar to Russia, including Belarus, Azerbaijan, Serbia, Turkey, Brazil, Australia, et cetera.

SOVEST card has great potential in Russia now. The market shows pessimistic macroeconomic trend such as stagnating GDP and shrinking consumer disposable income combined with limited trust in bank. Customers are in search for local funding and convenient credit options to maintain their consumption level, while retailers strive to maintain turnover and attract new customers.

Today, we launched SOVEST card. Our plan is to invest heavily in 2016 and 2017 with costs close to RUB200 million in 2016 and approximately RUB1.4 billion negative net profit effect in 2017. We believe that by 2020, we will reach 2 million active accounts with total credit portfolio of close to RUB40 billion with net revenue of close to RUB20 billion and target EBITDA margin of 30% to 35%. Sergey?

Sergey Solonin

Thank you, Oleg. The launch of SOVEST is an important step in implementing our Fintech strategy and disrupting the consumer finance market with innovative, affordable, convenient and transparent technological solution. We believe that might provide you more diverse and convenient services to our customers, who will be able to leverage our existing base and infrastructure as well as attract new users and then penetrate new areas of the market.

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 noticed, our financial results this quarter were in line with our expectation. Total adjusted net revenue increased 5% year-over-year, amounting to RUB2.7 billion. Total adjusted net revenue, excluding revenue from fees for inactive accounts also increased by 5% compared to the prior year.

Payment adjusted net revenue increased 15% to reach RUB2.1 billion, up from RUB1.8 billion in the prior year. As a result of the net revenue growth in our Financial Services, E-commerce and Money Remittance verticals, which grew 53% and 27% and 7% respectively, offset by continued decrease in net revenue in our Telecom and Other verticals by 23% and 18%, respectively.

While we see great potential in our key verticals, we believe 2016 will continue to be challenging. Our financial results were driven predominantly by net revenue yield improvement across our key market verticals resulting from pricing optimization and shift in product mix, offset by declining volumes in Money Remittance, Financial Services, Telecom and Other market verticals.

Our payment net revenue yield has increased year-over-year by 29 basis points as we’ve seen a substantial improvement in our yields across all key verticals. Other adjusted net revenue decreased 20% to RUB567 million, down from RUB693 million in the prior year, primarily due to the decrease in cash and settlement services triggered primarily by the construction of our physical distribution network.

Moving to expenses. This quarter we continue to tightly monitor our cost. Adjusted EBITDA increased 25% to reach RUB1.7 billion, from RUB1.3 billion in the prior year. Adjusted EBITDA margin was 63% compared to 53% in the prior year. Adjusted EBITDA margin expansion primarily resulted from growth of net revenue accompanied by decrease in personnel costs and bad debt expenses.

Adjusted net profit increased 12% to RUB1.3 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 lower foreign exchange gain generated in the third quarter 2016 as compared to the third quarter of 2015.

Finally, as you saw in our earnings release, following the determination of third quarter 2016 financial results, our Board of Directors approved a dividend of US$0.22 per share.

And now moving to our guidance. Despite difficult macroeconomic and regulatory situation, prolonged lack of rebalancing in the agent market and significant cost that we anticipate in connection to our new project, we regenerate our guidance for 2016. Adjusted net revenue to increase by 2% to 5% and adjusted net profit to increase by 5% to 10% over 2015.

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

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Bob Napoli of William Blair. Please proceed with your question.

Bob Napoli

Hi. Two questions. One first on the core business before the new product, just – the trends – are we seeing – as we think about 2017 for the core business, do you expect to be able to get revenue growth? Or are the trends we’ve seen from the second quarter to the third quarter? Or are the trends stabilizing? Or do you expect to see further deceleration in some of the non-E-commerce products? And the E-commerce growth rate is that – so is that sustainable or could it accelerate?

Alexander Karavaev

Hi, Bob. It’s Alexander. Thank you for your question. So, look, we are not yet in a position to guide 2017 because we’re generally running through the budgeting as I said. But generally our understanding wise and what we see on the market is that, we should not be expecting any further deterioration of the distribution network and the volumes though the – we also do not expect growth in our core business, we expect it should be flat in 2017, but again we will come out with the proper guidance as soon as we finish our 2017 budget.

Bob Napoli

Okay. And then on the new product, QIWI will be taking the credit risk, is that clear and – on the new product? And then the investment of RUB1.4 billion in 2017, do you expect that to be ratable over the year or do we expect to ramp to a peak in the fourth quarter? How do you expect the investment? And is QIWI taking the credit risk?

Oleg Ryazhenov-Sims

Hi, Bob. This is Oleg Ryazhenov, the project leader of SOVEST.

Bob Napoli

Hi.

Oleg Ryazhenov-Sims

We expect that the peak of investment will come on the third and fourth quarter of 2017.

Bob Napoli

Okay. And the credit risk?

Sergey Solonin

Yeah, and the credit risk will be on QIWI.

Oleg Ryazhenov-Sims

It is on QIWI side.

Sergey Solonin

At least for this next few years.

Bob Napoli

Great. Thank you very much.

Sergey Solonin

Thank you.

Operator

[Operator Instructions] Our next question is coming from Brady Martin of Citi. Please proceed with your question. Mr. Martin, your line is live; please make sure your mute feature is not on.

Brady Martin

Yes, can you hear me?

Operator

Yes, sir. Please go ahead.

Brady Martin

Okay. Sorry. Just wanted to get more color on the timing of the RUB200 million investment in 2016 or is it primarily in Q4? Or is part of that reflected in Q3 or even in the first half of the year? And second question, just more idea of what the guidance implies for the full year? I mean it looks like adjusted net profit growth was around 15% for the first nine months, but you are still guiding 5% to 10% for the year. I’m just trying figure out is it just conservative outlook? Or is this the expectation that you will have kind of net profit decline in Q4 perhaps linked to this? Thanks.

Alexander Karavaev

Hi, Brady. It’s Alexander. Thank you for your questions. So this RUB200 million of investment in 2016 will primarily be spend in Q4, so we should spend through the month, you will see, but this is actually a really small one. And you are exactly right. The guidance really implies that investment that will flow through P&L in Q4 but that’s why we may expect that Q4 will not be as profitable as Q3, for example, simply because we have to invest in that new project.

Brady Martin

Okay. That’s clear. Thank you.

Operator

[Operator Instructions] I’m showing no questions in queue at this time. I would like to turn the floor back over to management for any additional or closing comments.

Sergey Solonin

So, thank you very much operator. Thank you, all. Bye-bye.

Alexander Karavaev

Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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