Joint Stock Co Kaspi.kz Q1 FY2024 Earnings Call

Hello, everyone, and welcome to Kaspi's First Quarter 2024 Financial Results. My name is Harry, and I'll be your operator today. It is now my pleasure to turn the call over to David Ferguson from Kaspi to begin. David, please go ahead when you're ready.

Hi. Thank you, Harry. Hi, everybody. Welcome to our first quarter 2024 financial results conference call. Joining me on the call today, we've got Mikheil Lomtadze, our Co-Founder and CEO; Pavel Mironov, our Chief Operating Officer and Deputy CEO; Tengiz Mosidze, Chief Financial Officer and Deputy CEO; and Yuri Didenko, Head of Capital Markets and Deputy CEO. As usual, Mikheil will take you through the strategic updates. I'll take you through to the financials section and then we'll open the call up for the regular Q&A. So on that note, Mikheil, over to you, please.

Thank you, David. So let's go straight to our strategic updates for the first quarter. The quarter has been strong, and we're off to a good start in 2024. The Payments total payment volume (TPV) has grown nicely by 35%, tracked by revenue growth of 25% and net income growth of 25%. Marketplace gross merchandise volume (GMV) is up 62%. Revenue is up 108% on the Marketplace, driven by the solid growth of a 36% bottom line. The revenue in the Marketplace is also driven by some of the new business lines we've launched, including everything around cars and groceries showing nice growth as well. I'll talk more about it later. The Fintech total financial volume (TFV) is growing nicely at 48%, leading to a revenue growth of 26% year-over-year and net income growth of 3%. As interest rates decrease, there is significant profitability cushion in the fintech business. The volumes are nice and high quality, which is reflected in the revenue growth. We continue to be extremely relevant for our consumers, reaching 71 monthly transactions per active consumer, which meets world-class standards. We've started the year with a very strong quarter. As you see, we've been on this journey of building our Payments, Marketplace, and Fintech platforms. With Payments and Marketplace being the fastest-growing, we are happy they contribute roughly the same share to our bottom line. If investors have followed us since we went public on the stock exchange in 2020, this mix has dramatically changed. Before, Fintech was the dominant sector. Currently, we have 68% of our bottom line coming from the rapidly growing Payments and Marketplace platforms. We've been working on value-added services that deliver additional value to our merchants, specifically through our Marketplace. Our added value services have now grown to contribute 1.6% out of 9.5% of the total take rate on total Marketplace GMV. The classifieds business, which we entered and acquired last year, contribute significantly to the value-added services around cars and real estate. Our advertising segment is scaling rapidly and is also contributing meaningfully as we launch a suite of services throughout the year. Delivery, which we started to monetize last year, has grown dramatically and also contributes significantly to our take rate. In general, we've seen over four times growth compared to last year's first quarter in value-added services, and each segment is growing nicely and quickly. Remember, when we refer to them as value-added services, they genuinely add value to our merchants and consumers. For instance, if we launch an advertising service, your sales increase, and that is compelling. We are excited about launching additional services this year. The e-Grocery sector is an exciting business that we began scaling last year and has now grown by 125% year-over-year. There are nearly 600 consumers shopping for groceries through our mobile app, and over 2 million purchases were completed during the first quarter, which is double the number of purchases from last year. We've seen larger weekly average purchases grow to KZT14,000 quarter-over-quarter. We're launching another major city in Kazakhstan this year, focusing on the three largest cities: Almaty, Astana, and Shymkent, as our main priority. Another innovation from last year is our Tours business, which focuses on family vacations, growing by 350% in GMV. It's now a meaningful portion of 7% of our Kaspi Travel GMV and has an impressive take rate of around 8.7%. Our consumers love this business, which is fundamentally important to us as it reflects in the feedback and excitement they share with us. We are excited about continuing to scale this business throughout the year. We entered the car business last year with the acquisition of Kolesa, the leading car classified platform. It’s vital as car purchasing is the second biggest household decision, including ownership and service aspects. We are happy to present our strategy around cars, which we are scaling throughout the year. In 2023, the registered cars in the country are around 5 million, with 1.9 million changing ownership during the year. Approximately 2.4 million cars are listed on the Kolesa car marketplace, which shows Kolesa is the reliable platform for car purchases with listed cars valued at around $37 billion and an average price of $15,000 per car. Hence, we believe this is a vast market, and we are at the early stages of revolutionizing the car purchasing experience and everything around ownership. We are investing in providing a complete consumer experience, which includes financing, ownership registration, service-related aspects, and transfers, maximizing the lifecycle of car ownership. Leveraging our data and technology can enhance this experience significantly. We believe there is a huge market here, and we are working on multiple touchpoints surrounding car ownership. Many of the services have already been established over the past years. Our e-Cars platform connects buyers and sellers, and we've implemented fully online car finance that enhances our offerings. Our auto parts business already has a wide assortment of spare parts available. We also just launched this quarter, facilitating a sale of around 1,200 cars, which we've started buying and selling, creating an incredible online experience. With meaningful integrations in our GovTech platform, consumers now can register cars online, with around 2 million car tax payments made in the first quarter and approximately 70,000 driving licenses issued. With these technology advancements, we aim to create seamless consumer experiences while making lives easier.

Thank you, Mikheil. I'll run you through the three respective platforms and the consolidated financial numbers. Starting with the Payments platform, the message on this slide is very simple and clear: user and financial trends remain very strong and predictable. User consumers have grown to 13 million, which is an 11% year-on-year increase. Transaction volumes are up 42% year-on-year, translating into TPV growth of 35% year-on-year. It's important to keep in mind that inflation has moderated significantly in the past year; it was above 20% a year ago and is now around 9%. This affects growth trends, which is also a theme in the Marketplace. All products contribute positively, but B2B Payments is the fastest-growing component at 78% year-on-year, now accounting for 4% of overall volumes. Robust consumer and merchant trends, combined with stable take rates, translate into strong financial results. Revenue growth is up 25% year-on-year, lower than TPV growth, reflecting slower growth in interest revenue on wallet balances. The bottom line grows at the same rate, reflecting consistent operational efficiency. As usual, our payment platform has tight cost controls and operational gearing in place. We are reiterating the guidance for the Payments platform with an expected revenue increase of around 20% year-on-year, reflecting strong consumer and merchant trends, though slightly offset by moderating inflation. Payment take rate dynamics should also positively impact revenue growth, but it must be balanced against moderating interest revenue on current account balances. Considering the Payments platform's operational gearing, we still expect bottom line growth of 25% year-on-year. Moving on to the Marketplace. It's our fastest-growing platform, showing strong trends across the board. Consumer growth is up 15% year-on-year to 7.4 million, with a rapid increase in transactions, up 33% year-on-year, translating into a GMV increase of 62%. This GMV momentum is significantly accelerating compared to 2023. All platforms contribute, but e-commerce stands out as the best performer. The take rate is now at 9.5%, reflecting the growing value-added services mentioned earlier. E-commerce is particularly impressive, as we've seen accelerating momentum with purchases up 101% and GMV up 114% year-on-year. All platforms are contributing, with a focus on e-Cars yielding higher ticket sizes, which is beneficial for GMV growth. Our take rate has increased to 11.1% due to continued strength in advertising and delivery revenue. Regarding Kaspi Travel, there is very strong top line growth with no signs of slowing down. The take rate is increasing due to package holiday sales, leading to revenue growth outpacing GMV growth. In m-Commerce, we witnessed strong GMV growth of 34%, surpassing transaction growth at 10%, aided by promotional events in the first quarter. Previously, there were concerns from investors regarding slower growth in m-Commerce during the fourth quarter, showcasing the potential issues of overreacting to a single quarter's results. It's evident that m-Commerce is generally aligning with long-term trends, with successful promotional events boosting the take rate from 8% to 8.9% year-on-year. To conclude on Marketplace financials, we have experienced strong GMV growth with faster revenue growth due to higher take rates and contributions from first-party sales, resulting in a revenue increase of 108% year-on-year compared to GMV growth of 62%. Net income increased by 76% year-on-year, which is slightly below revenue growth due to contributions from 1P e-Grocery and 1P e-Cars. For the full year, we expect Marketplace revenue to grow 70% year-on-year with particularly strong performance in e-Commerce, especially from e-Grocery and e-Cars. Net income for the year is projected to be up 40% year-on-year, which is impacted by 1P revenue growth but reflects a positive bottom line outlook. Now moving to the Fintech platform. Over the past two years, we have focused on growing the consumer deposit base, which continues to show positive results, albeit at a slower rate. Consumer growth is up 24% year-on-year to 5 million. As a reminder, when we began this interest rate hike cycle, the deposit consumer base was about 3 million, showcasing substantial growth over the last two years. Fintech consumer growth is up 10% year-on-year to 6.3 million; this growth rate is consistent with prior years. TFV origination remains healthy, up 48% year-on-year in the first quarter, aligned with trends from 2023, indicating a robust consumer and merchant overlap. While all platforms contribute positively, particularly merchant finance is expanding rapidly and now comprises 17% of origination, which greatly contributes to overall TFV growth. Cross-platform integrations, such as merchant micro-financing, car financing, and Buy Now Pay Later services, will continue to grow this year and increase total origination share over the medium term. In regards to the loan and savings portfolios, it's worth noting that the loan portfolio grew at a faster rate, up 37% year-on-year, than the savings portfolio at up 32%. Consequently, the loan-to-deposit ratio has moved up to 86% from 79% year-on-year, which, assuming interest rates continue to decline, should lead to improved profitability for the Fintech business by year-end and into 2025. Consumer trends across multiple areas are robust and consistent with observations over an extended period. As for credit risk metrics, they remain low and stable, in line with expectations across the entire business, whether for payments, savings, or loan repayment trends. We are experiencing a very healthy environment among end-customers, and this is reflected in a stable cost of risk year-on-year at 0.5%. The non-performing loans (NPL) ratio is also stable or slightly improving. I want to address the concern raised by several investors regarding the flooding situation in Kazakhstan; currently, there is no notable impact on our financials. In summary, Fintech revenue and profitability are strong, with healthy origination and stable year-on-year yield trends driving considerable revenue growth. However, net income is growing at a lower rate than revenue, which is attributable to an enlarged deposit base and increasing funding costs, up 36% year-on-year. This remains consistent with our guidance, and we anticipate improved bottom line growth as the loan-to-deposit ratio increases and funding costs decrease. Reiterating guidance, we expect top line growth to remain at 20%, while bottom line growth is predicted at 15%, with an expectation of stronger growth in the later part of the year flowing into 2025. Reviewing the consolidated numbers, I've outlined the key dynamics, and I want to conclude by highlighting that we declared a dividend of KZT850 per ADS for the first quarter. Moving on to guidance at a consolidated level, I've spoken about the platform-level guidance already. Just to wrap up, the second quarter of 2024 has started off strong. We are very much on track to deliver another year of robust top and bottom line growth, with a projected 25% year-on-year increase in Kaspi.kz net income unchanged from our expectations at the end of February when we last communicated with the market.

Thank you, David. Addressing the National Payment System concerns raised by some investors in recent weeks, we feel the project is misunderstood; hence, I’d like to clarify its core aspects. To take a simpler approach, I will address three frequently asked questions. Firstly, the primary concept behind the National Payment System is to process transactions within the country, enabling consumers to transfer funds seamlessly between different bank accounts. Discussions on the project have been ongoing for a decade, with practical talks evolving over the last five years. The technical tests have been postponed to next year for evaluation. It's essential as it's a technically demanding project that requires significant input from numerous parties. Secondly, one essential principle under discussion is that the payment system will not replace existing successful networks. It aims to add functionality to facilitate more transactions while allowing market pricing decisions to remain in the hands of the players involved. Finally, regarding Kaspi's stance, we're fully supportive of any free market initiative. Facilitating seamless money transfers aligns perfectly with our operational ethos. Our entire business model is built around convenient digital services for our consumers. Ultimately, this project has the potential to enhance market dynamics, creating greater service quality across the board. We look forward to supporting this initiative and offering our expertise to ensure its success.

Thank you, Mikheil. With that, let's move into the Q&A session. Harry, can you please manage this?

Our first question comes from Darrin Peller of Wolfe Research. Darrin, your line is open. Please go ahead.

Guys, thanks. Great execution and results. If we could just start with a bit on guidance. You're obviously showing some really good traction in the first-party car marketplaces, which you talked about as a potential source of upside for the year. We are seeing some other trends outperforming. Despite that, we saw guidance reiterated. Just a little more color on your philosophy around the guidance framework would be great, and maybe some conservatism embedded in or how you're thinking about the potential upsides.

Okay. So maybe I'll take the guidance question, Darrin. The guidance is what we've stated: 25% growth for the year bottom line. What I would emphasize is that we're only one quarter into the year. Yes, it started strong, but with volatility across the year, there's a long way to go since the first quarter is the smallest among the four quarters. Expectations and visibility will improve significantly as we approach the summer period.

Darrin, can I add? I just wanted to add a brief commentary about the first quarter. We made two significant observations. On the marketplace and e-Commerce and m-Commerce side, we are transitioning from two major promotional events a year to a minimum of three. This is due to strong requests from merchants and consumers for seasonal promotions, which is something we've now accepted to increase the value for them. The first quarter was marked by our Kaspi Juma event, and our goal is to become more seasonal in these campaigns. Therefore, it’s essential to analyze yearly dynamics. Secondly, we maintain a long-term perspective on new services we launch, aiming for quality over paying attention to rapid traction. Regarding cars and other value-added services, these are initial stages of our strategy where quality takes precedence. As the year progresses, we remain optimistic about improvements.

That's helpful. Just a quick strategic follow-up, if you don't mind, regarding capital allocation priorities and potential international ventures. Any updates on your international initiatives worth noting?

We have an open-minded approach towards international expansion. We believe the business model we established in Kazakhstan is extraordinary and have received requests from consumers about going beyond Kazakhstan. However, our considerations will involve ensuring that the chosen country and associated target are of high quality. Nothing immediate to report yet, but we will communicate significant updates through our reports as they emerge.

Yes. Hi. Thank you. A few questions from me. First on the National Payments System: what do you think about the economics of how payments would compare between this system and your existing one? Understanding this helps us gauge the disruptive potential for the Kaspi Payments platform. Second, regarding the e-Cars platform, would you provide comparables on the recent performance metrics for the past couple of quarters? Lastly, regarding the Marketplace take rate, any insights into the potential for monetizing value-added services further?

Thank you, Gabor. I will address these. Regarding payments, the National Bank has confirmed that fees will not be regulated, ensuring that our payments section remains competitive. From my perspective, lower fees might stifle innovation as larger players might gain more significant advantages, thereby reducing competition. Kaspi's fees are already one of the lowest in the market at 0.95%. In reference to cars, our car parts GMV is incorporated into our e-Commerce numbers, and everything else is relatively new since the Kolesa acquisition, with substantial growth planned for the future. Lastly, on Marketplace take rates, I do not anticipate significant increases; we prioritize delivering value over excessive monetization for merchants.

Hi. Good afternoon. I wanted to ask about your balance sheet as the company delves deeper into areas like e-Grocery and cars. Historically, you've been transaction-focused. Should we anticipate a more considerable commitment to the balance sheet with these additional areas?

Thank you, James. While we're expanding our businesses, it's essential to remember that we already maintain a significant balance sheet. We manage diverse lending products and are effectively the largest consumer bank in Kazakhstan. These fintech products play a vital role in our operations. For example, once we buy and sell cars, that involves financing, so we maintain good control of our balance sheet risk while offering comprehensive services to our consumers. We're not looking to scale our balance sheet considerably, but rather recruit more value through technology-driven processes.

James, it's a valid question. When we say the second quarter started positively, could you elaborate on what that means? Any particular indicators about the second quarter would be helpful.

I understand the challenges analysts face in forecasting due to our rapid ongoing innovations. Each quarter brings new product lines; thus, tracking changes can be complex. We recognize this as part of our ongoing evolution, and while I acknowledge the inquiries, our focus remains on continuous growth and improvements throughout the year.

Good morning. Thank you for sharing significant insights regarding the auto business. It would be valuable for U.S. investors to grasp the typical car buying process in Kazakhstan. Who are your competitors, and how does your service enhance this car purchasing experience?

Hi, Reggie. The car buying process in Kazakhstan largely involves consumer-to-consumer transactions. The car marketplace is predominantly classified, providing excellent consumer experiences and liquidity. The penetration of dealerships is relatively low, which offers ample opportunity for our services targeting consumers wishing to buy or sell cars among themselves. Notably, a significant number of cars in use are older models, providing us an opportunity to streamline processes and facilitate access to newer vehicles. Competing with technology remains central to our mission. In terms of comparable business models, think of CarMax or Carvana, providing an online purchasing experience without expensive physical locations, because efficiency is key.

Are most cars owned and registered in larger cities or rural areas? Do sales tend to stay local?

Car transactions are predominantly local and mainly found within larger cities. Our strategy has always embraced focusing on larger markets, evident in our e-Grocery growth from Almaty to Astana and Shymkent. As we expand, we prioritize establishing profitable businesses to ensure a sustainable growth trajectory.

Could you share your product development approach? Any examples of products that you opted not to pursue, as it would help us understand your vetting process?

For example, while we explored a food delivery business, we eventually decided against it due to market saturation and many existing players. The current market landscape shows limited potential for innovation from us. Instead, we are committed to our core values and look for projects that create value rather than remove it. We focus on creating blue ocean opportunities conducive to valuable growth and high-quality service.

That makes sense. Rideshare seems crowded as well, so you’re not pursuing it?

Ridesharing also faces significant competition. Nonetheless, our brand holds consumer interest, as they've expressed a desire for a Kaspi Taxi service. However, we remain cautious and prioritize the right market opportunities. Thank you for your questions.

We're nearing the end of our Q&A, so I would like to thank everyone for their participation. If you have any further inquiries, don't hesitate to reach out. Thank you, and we look forward to speaking with all of you soon.

Thank you and have a great week, everyone.

This concludes today's webinar. You may now disconnect from the call.