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QIWI Plc (QIWI 9.88%)
Q3Â 2019 Earnings Call
Nov 20, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day everyone and welcome to QIWI Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the call over to Ms. Varvara Kiseleva, Interim Chief Financial Officer of QIWI. Please go ahead.
Varvara Kiseleva -- Interim Chief Financial Officer
Thank you, operator, and good morning, everyone. Welcome to the QIWI third quarter earnings call. I am Varvara Kiseleva, Interim Chief Financial Officer; and with me today are Sergey Solonin, our Chief Executive Officer; and Andrey Protopopov, Chief Executive Officer of the Payment Services segment. A replay of this call will be available until Wednesday, December 4, 2019. 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 November 20, 2019.
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 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 our 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 over the call to Sergey Solonin, our Chief Executive Officer.
Sergey Solonin -- Chief Executive Officer
Thank you, Varvara, and good morning, everyone. Thanks for joining us today. I'm glad to share our third quarter results with you today. This quarter, we have demonstrated robust performance. Our Payment Services business delivered 29% segment net revenue and 31% segment net profit growth securing strong results for nine months of 2019. Our growth was driven by solid performance of our key streams, Payment Services for digital entertainment merchants, digital money remittances and projects we developed for self-employed and sharing economy partners.
Growth was also influenced by overall expansion of our payment ecosystem, driven by the scaling of our operations and enhancement of the product proposition we offer to our users, merchants and partners. This quarter, we also continued to invest in the development of our Financial Services projects, primarily SOVEST, while Tochka project has booked some positive net profit this quarter. I believe that our performance clearly demonstrates the value of our ecosystem to our customers and serves as a solid foundation for the future growth. It's an important contribution toward the achievement of the mid-term goals we have provided last year.
Moreover, significant cash flows that are generated by our Payment Services business allow us to invest in the new products and projects in financial and payments spaces, in order to secure the long-term growth prospects of our Company.
Now onto some operating highlights. Third quarter of 2019 total adjusted net revenue increased by 15% to reach RUB6 billion, up from RUB5.2 billion in the third quarter of 2018. The increase was mainly driven by Payment Services and Consumer Financial Services segments' net revenue growth. The growth was slightly offset by the technical decrease of the SME segment net revenue and negative net revenue contribution of Rocketbank segment.
Andrey will discuss the performance of our Payment Services segment in a minute, while I will walk you through the results of all other segments. Consumer Financial Services segment payment volume reached RUB7.2 billion for the third quarter of 2019, increasing by 54% as compared to the same period of the prior year.
Segment's net revenue was RUB369 million as compared to RUB125 million in the third quarter of the prior year, demonstrating the development of the SOVEST project. Relative to 2019, we have enhanced the product offering and improved the monetization of the project. At the same time, we continue to explore potential opportunities to support and reinforce the scaling of the project primarily focusing on transforming SOVEST into a platform that can efficiently partner with other banks to offer them new solutions focused on consumer acquisition while leveraging their balances to scale the product.
Moving on to SME segment. While Tochka platform that we developed together with Otkritie Bank continued to demonstrate robust operating financial performance in the third quarter of 2019, our SME segment net revenue decreased to RUB200 million for the third quarter of 2019, as a result of the transfer of Tochka operations to JSC Tochka that happened on February 1, 2019.
Certainly, I would like to give you a brief update on the latest developments in relation of the Rocketbank project. Following the decision of our Board of Directors in August, we have explored currently available market opportunities of partial or complete sale of the project. The Board has further concluded that it will be in the best interest of the Company and its shareholders to seek a complete sale of Rocketbank. We have hence hired a financial advisor and are currently preparing for conducting a formal sales process. At the same time, we continue to invest in the development of new products and maintenance of our customer base to secure that we are able to achieve the best possible deal.
Last but not least, I'm glad to announce that following the determination of the third quarter 2019 financial results, our Board of Directors has approved a dividend of $0.28 per share, keeping the nominal per share payout constant as compared to the previous quarter, in accordance with the decision of the Board being to distribute between 65% to 85% of our adjusted net profit for 2019.
With this, I will turn the call over to Andrey for an update on the Payment Services business. Andrey?
Andrey Protopopov -- Chief Executive Officer of Payment Services
Thank you, Sergey, and good morning, everyone. It's my pleasure to be here with you today. Now on the results of our Payment Services segment. For the third quarter of 2019, our Payment Services segment volume increased by 32% to reach RUB391 billion driven by significant growth in the E-commerce, Financial Services, and Money Remittance vertical which grew 56%, 37% and 33% respectively.
The growth in the E-commerce and Money Remittance vertical were largely driven by the development of our key streams, mainly the digital entertainment, self-employed and sharing economy partners, where we were able to expand our partner and merchant network, build up our relations with our existing partners and expand our product offering. This growth was reinforced by secular market trends toward the digitalization of payment in our key regions.
The growth in Financial Services category was driven primarily by the new distribution contracts. Payment Services segment net revenue increased 29% to reach RUB5.5 billion compared to RUB4.3 billion in the prior year. Payment Services payment adjusted net revenue increased 28% to RUB4.7 billion, up from RUB3.7 billion in the prior year, primarily as a result of the net revenue growth in our Money Remittance, E-commerce and Financial Service vertical, which grew 33%, 30% and 19% respectively.
Our financial results in this segment were predominantly driven by the increase in volumes. Our Payment average adjusted net revenue yield was down by 3 basis points year-over-year to 1.2% driven by the yield decline in our E-commerce and Financial Services market vertical. Such decline was driven mainly by our focus on increasing the scale of our business through offering our merchants and partners new services, such as online acquiring which may have lower commissions on our key role [Phonetic] solutions.
The growth of this new product streams may dilute our Payment average adjusted net revenue yield primarily in the E-commerce category while the commissions we charge from our core solutions remained stable. Payment Services other adjusted net revenue increased 37% to RUB808 million as compared to RUB589 million in the prior year, as a result of growth of revenue from fees from inactive accounts and unclaimed payments, and this is in line with our overall growth and scaling of our consistent and interest revenue.
As Sergey mentioned earlier, our growth was driven by the robust performance we have achieved in our key strategic streams and through the expansion and enhancement of the product proposition we offer to our users, merchants and partners. We believe that we have a position to continue growing our business by enriching our suite of services in this area, while we aim to further improve our key solutions and use cases and develop new strategic niches to support our long-term growth.
With this, I will pass over to Varvara for more details on the financial performance of the Group. Varvara?
Varvara Kiseleva -- Interim Chief Financial Officer
Thank you, Andrey. Moving on to expenses. Strong operating performance of our Payment Services business that continued to generate substantial cash flows, supported our investments in the development of the new project. Our net revenue growth outpaced the growth of the expenses supported by the improving operating leverage. This being said, adjusted EBITDA increased 54% to RUB2.5 billion from RUB1.6 billion in the prior year.
Adjusted EBITDA margin was 42% compared with 31% in the prior year. Adjusted EBITDA margin expansion primarily resulted from adjusted net revenue growth enforced by a decline in payroll and related taxes related to the quarter revenue and advertising client acquisition and related expenses, partially offset by the increase in compensation to employees and related taxes, related to the SG&A expenses, as well as the increase in other expenses related mostly to the transfer of operations of Tochka platform.
Group adjusted net profit increased 62% to RUB1.9 billion from RUB1.2 billion in the third quarter of the prior year. Adjusted net profit was largely affected by the same factors as adjusted EBITDA as well as by a net foreign exchange gain as compared to the net foreign exchange loss for the same period in the prior year. Payment Services segment net profit increased 31% to RUB3.3 billion compared with RUB2.5 billion in the prior year, driven primarily by the Payment Services segment net revenue growth, slightly offset by growth of payroll compensation to employees and related taxes, excluding the effect of share-based payment.
Consumer Financial Services segment net loss was RUB424 million in the third quarter 2019 as compared to net loss of RUB699 million in the same period of the prior year, resulting from the expansion of the operations of SOVEST project and improvement of user economics as Sergey previously mentioned.
SME segment's net profit was RUB156 million as compared to net loss of RUB80 million in the third quarter of 2018. Net profit growth in the SME segment resulted primarily from the growth and development of the Tochka business.
Rocketbank segment net loss was RUB632 million for the third quarter 2019 as compared to the net loss of RUB305 million for the same period in 2018. The substantial increase in net loss was primarily driven by the expenses incurred in connection with transfer and development of Rocketbank operations in QIWI including primarily personnel expenses, as well as client acquisition and marketing costs.
Now onto our guidance. Firstly, I would like to remind you of certain accounting changes that are embedded in our 2019 guidance. We have ceased starting from February 1, 2019, to recognize part of the Tochka revenues associated with information and technology service agreements with Otkritie Bank for providing services to Tochka clients that have their accounts with Otkritie Bank, as Tochka business was transferred to separate legal entity, JCS Tochka. Such revenues were recognized in full for the full-year 2018. However, they are only being recognized for one month in 2019.
For the avoidance of doubt, only revenues related to Tochka clients that have their accounts with Qiwi Bank are recognized as Qiwi Group revenues starting from February 1, 2019. We correspondingly account JCS Tochka as an equity associate.
This being said, we upgrade our 2019 guidance to reflect primarily strong performance on our Payment Services business and underlying trends that we currently observe. We expect Group adjusted net revenue to increase by 15% to 19% over 2018. Payment Services segment net revenue to increase by 25% to 29% over 2018, while adjusted net profit is expected to increase 45% to 55% over 2018. We reiterate Payment Services segment net profit guidance to reflect our current expectations in regards to certain one-off expenses we are likely to incur in the fourth quarter this year, that Payment Services segment net profit is to increase by 25% to 29% over 2018. Although we see our nine months results as a solid foundation for future growth, certain other factors remain beyond our control and hence we reserve the right to revise guidance in the course of the year.
With that, operator, please open the call for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question is from Cris Kennedy with William Blair. Please proceed.
Chris Kennedy -- William Blair -- Analyst
Thanks for taking the questions. I just wanted to get an update on your thoughts on SOVEST reaching break-even in 2020.
Sergey Solonin -- Chief Executive Officer
Hi Cris, this is Sergey. On SOVEST, we're planning to be break-even in the next year. So everything goes there. I don't know if Varvara wants to add anything.
Varvara Kiseleva -- Interim Chief Financial Officer
Yeah. We are -- the project is developing in accordance with the current budget and we believe we will reach break-even in the second half of 2020.
Chris Kennedy -- William Blair -- Analyst
Thank you. Can you just give a little bit more details on kind of the roadmap to reaching that break-even point?
Sergey Solonin -- Chief Executive Officer
Right now, the project reaches, at this point, with its current settlement and organic current growth, so nothing specific in that.
Varvara Kiseleva -- Interim Chief Financial Officer
So this year, we basically improved consumer monetization and we see good results of the project developments that we have done, and adding some value-added options for the customers -- so the revenue of the project is growing. We are optimizing certain functions such as delivery etc. And through that, we are kind of increasing the scope of business growing and improving the business unit economics.
Chris Kennedy -- William Blair -- Analyst
Okay, great. And then just any updated thoughts on your kind of 2021 targets, I think of like 45% net profit margins? Thanks a lot.
Varvara Kiseleva -- Interim Chief Financial Officer
So currently we still confirm -- we did -- we reiterate our mid-term guidance which is provided in 2018. We don't see at the moment any significant changes to other plans and forecasts that we have provided. And if we have anything that we are on to change to the mid-term guidance, we will update the market accordingly.
Chris Kennedy -- William Blair -- Analyst
Thank you.
Sergey Solonin -- Chief Executive Officer
Thank you.
Operator
[Operator Instructions] Our next question is from Vladimir Bespalov with VTB Capital. Please proceed.
Vladimir Bespalov -- VTB Capital -- Analyst
Hello. Congratulations on good numbers and thank you for taking my question. My first question will be on the guidance. If we take the revenue growth guidance and the lower bound of this -- this, if my calculations are correct, this implies that your growth -- revenue growth in the fourth quarter could be somewhere close to zero. So we are more than in the middle of the quarter right now, could you may be provide some color of what could lead to this out-turn, if this is the case, or are you just trying to be very conservative? Then maybe Varvara could elaborate a little bit on the one-off item which would push the margins for the Payment Services down in the fourth quarter.
Varvara Kiseleva -- Interim Chief Financial Officer
So yes. Vladimir, thank you for your questions. For the guidance for the year and for the fourth quarter, as you know, the accounting for Tochka has changed and the largest effect from the Tochka shift from QIWI to JV [Phonetic] will be in the fourth quarter because naturally the largest revenues generated by Tochka were in the fourth quarter 2018. So this will significantly impact the Group net revenue growth and the Group -- and this through does affect the guidance provided overall.
Of course, we are trying to be slightly conservative, but this guidance is in line with our -- viewing current expectations.
As for the one-off item, which was -- which has a chance to affect the Payment Services net profit in the fourth quarter, this one-off is connected to the reserves we are likely to make in connection with the operations of our business in Kazakhstan, where our partner bank went through a bankruptcy procedure. These reserves are likely to be recuperated at some point, but to be again on the conservative side and in accordance with IFRS, we're likely to reserve some sum of money for that case.
Vladimir Bespalov -- VTB Capital -- Analyst
Okay, thank you very much. And my second question is to Sergey, you mentioned in your recent interview that you are trying to get a loan for your personal project and then alternative for this is a sale of a small stake. So maybe you could update, how this is proceeding. Have you been capable of getting a loan or what are your plans? Thank you.
Sergey Solonin -- Chief Executive Officer
Hi, Vladimir. Thank you for your question. I'm currently considering different options, either a loan or a small sale of the stake for this project. And, but it's still -- is still not decided.
Vladimir Bespalov -- VTB Capital -- Analyst
Thank you very much.
Operator
Our next question is from Maria Sukhanova with BCS Global Markets. Please proceed.
Maria Sukhanova -- BCS Global Markets -- Analyst
Hi. Congratulations from me too. So I have several questions again related to the guidance. If you look at the components, first of Rocketbank, you guided that for the second half you're going to book around RUB2 billion net loss. So it seems like you are going far below than that. So the first question is, what kind of loss do you expect for the fourth quarter? Is it going to be less than you initially guided?
And second question, you were expecting the impact on staff costs from the shift to different accounting method. So have you already seen it in the third quarter or is this something that you are going to see in the fourth quarter?
And third technical question, you booked an impairment on assets around RUB500 million this quarter. Is it related to this Kazakhstan one-off or like it is something totally different? Thank you.
Varvara Kiseleva -- Interim Chief Financial Officer
Maria, hi. Thank you for your questions. First of all, as for Rocketbank, we're currently going better than the budget and the investments associated with Rocketbank in Q3 were slightly below what we have initially planned. So for the second half of the year, we are likely to be again slightly below the RUB2 billion we have initially planned as for Rocketbank.
On the PS expense, the Payment Services expenses question, yes, the additional expenses which came not from different accounting but from shift of our long-term compensation -- as part of our long-term compensation programs from share-based payments to cash is already embedded into the third quarter numbers, so we've already started launch those programs.
And as to impairment, no impairment was not connected to the potential reserves for the capital business. Impairment is connected with impairment of Rocketbank and impairment of Qiwi books.
Maria Sukhanova -- BCS Global Markets -- Analyst
Okay, thank you.
Operator
[Operator Instructions] We do have follow-up question from Vladimir. Please proceed.
Vladimir Bespalov -- VTB Capital -- Analyst
Thank you for taking my follow-up question. So I have two actually. One question is on your dividend policy. Probably you haven't approved it yet for the next year, but in your internal thinking, what do you expect in this respect in 2020? And I have also a question on SOVEST. Where do you stand now in terms of developing your new strategy for SOVEST and in particular for the things that you mentioned earlier, such as the development of multi-banking model, adding more banks to the platform and selling a part of the loan portfolio to your partner banks? Thank you.
Sergey Solonin -- Chief Executive Officer
Hi, Vladimir. On the second question, we are currently in the process with SOVEST on both projects. So first, we are doing a project with some other bank on the multibank so and if we succeed on the integration side and everything, so next year, we will be in the process of selling down the credit portfolio and staying as an operator of the business.
On the first question with dividends, so we are in line with what we are doing today for the next year. As a shareholder, I would love to have dividend policy in place for the next year. But it will be under the decision of the Board.
Vladimir Bespalov -- VTB Capital -- Analyst
Thank you.
Operator
Our next question is from Svetlana Sukhanova with Sberbank. Please proceed.
Svetlana Sukhanova -- Sberbank -- Analyst
Good afternoon, and congratulations with very good results. My question would be about betting and on performance of E-commerce and Money Remittance business lines. So if we compare -- if you compare second quarter versus third quarter performance, you saw some acceleration of E-commerce line, and we understand that betting revenues are recorded on this kind of E-commerce line. While we know that third quarter was much higher base for you, given the World Cup last year, so how -- so two questions here. First, how -- what was the performance of betting-related revenues in Q3? And the second question would be, why has E-commerce revenues accelerated in the third quarter while Money Remittance's revenue decelerated in the third quarter? Thank you.
Sergey Solonin -- Chief Executive Officer
Hi, Svetlana. Thank you for your question. On the betting revenues, we are not growing at the same pace of course as the previous year. So now betting revenues are more or less in line with the budget, but not growing as fast anymore as it was previous year. That's what I can say. And the part of the question was on the --
Andrey Protopopov -- Chief Executive Officer of Payment Services
For the Money Remittance, so Svetlana, it's Andrey -- for the Money Remittance, the question was why Money Remittance growth de-accelerated in the third quarter, right?
Svetlana Sukhanova -- Sberbank -- Analyst
Yes. Money Remittance growth decelerated and E-commerce growth -- revenues growth accelerated. So I wanted to understand the kind of dynamics in that two lines.
Andrey Protopopov -- Chief Executive Officer of Payment Services
Overall, we don't see it like significant changes in trends, so it's -- the effect of the base of the last year and -- so it is the base effect basically.
Svetlana Sukhanova -- Sberbank -- Analyst
So, OK, I understand. That's -- base effect from Money Remittance is, I also understand -- understood answer regarding betting, that's in line with budget but not growing that fast. But in that kind of light, can you please elaborate why E-commerce revenues growth accelerated in second -- in third quarter?
Varvara Kiseleva -- Interim Chief Financial Officer
So, Svetlana, it depends on, as you know, the growth of the revenues mainly depends on manufacturers, both on the product mix, on the commissions that we charge and our E-commerce category includes also another categories apart from betting, for example, such things as online games, tourism and ticketing and things like these. There are a lot of different development that form the dynamic for the entire category as well as our new additions -- new product additions. So in this respect, it's effect of the multiple streams combined together.
Sergey Solonin -- Chief Executive Officer
And talking about the products, the key contributor was the launch of online acquiring. So it's continued to develop and this is one of the growth driver for the [Indecipherable] as well.
Svetlana Sukhanova -- Sberbank -- Analyst
Very clear. Thank you very much.
Sergey Solonin -- Chief Executive Officer
Thank you.
Operator
[Operator Closing Remarks]
Duration: 28 minutes
Call participants:
Varvara Kiseleva -- Interim Chief Financial Officer
Sergey Solonin -- Chief Executive Officer
Andrey Protopopov -- Chief Executive Officer of Payment Services
Chris Kennedy -- William Blair -- Analyst
Vladimir Bespalov -- VTB Capital -- Analyst
Maria Sukhanova -- BCS Global Markets -- Analyst
Svetlana Sukhanova -- Sberbank -- Analyst
