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Russian Virtual Wallet Company Looks For $100 Million IPO

THE BUZZ In Russia, cash is king. That's what most consumers use to conduct transactions in the country.

The problem is, it's not always convenient, or safe, to carry around large sums of cash.

That's where Qiwi (QIWI) comes in.

Qiwi is a leading provider of next-generation payment services in Russia and the Commonwealth of Independent States. Its applications let consumers use cash, stored value and other electronic payment methods to order and pay for goods and services across physical or online environments.

Its integrated proprietary network enables payment services across physical, online and mobile channels.

The company has deployed more than 11 million virtual wallets and more than 169,000 kiosks and payment terminals. More than 40,000 merchants accept payments from the system.

Consumers can use Qiwi applications for a number of transactions, from buying mobile phone minutes and bus tickets to conducting e-commerce transactions.

Qiwi is expected to make its initial public offering on the Nasdaq this week. Its stock will trade in the form of American depository receipts.

Because of high demand for its services, many IPO experts expect a favorable reaction from investors.

"As the world moves to more cashless transactions, these kinds of systems are becoming much more prominent," said David Menlow, president of IPOfinancial.com. "I think the company will do well with its IPO because it comes to market with profitability.

It also comes to market with plenty of financial might. Billionaire Alisher Usmanov's Mail.ru Group holds 21% of Qiwi shares. Chief Executive Officer Sergey Solonin owns 25%, part of the almost 60% controlled by the company's directors and executives.

Solonin will keep about 25% voting control after the IPO, Qiwi said.

Qiwi also has a high-profile partner in Visa (V), the world's leading credit card processor.

In November, Qiwi and Visa formed an alliance, called Visa Qiwi Wallet, that lets consumers access electronic payment options.

Under terms of the partnership, Qiwi will assist Visa in providing new services to Visa cardholders while enabling Qiwi to extend its kiosk and digital wallet services internationally.

"Visa helps them enter other emerging markets where people don't know what Qiwi is," said Greg Leffert, a research analyst at Renaissance Capital. "In the near term, they are looking at Brazil. Longer term, they might look at Argentina, China and India.

THE COMPANY According to its prospectus, Qiwi was incorporated as a private limited liability company in February 2007 under the name OE Investments Ltd. The company changed its name to Qiwi in August 2010.

Qiwi has two main operating segments: Qiwi Distribution, which gets most of its revenue from payment systems offered through kiosks and terminals; and Visa Qiwi Wallet, which generates revenue from payments processed through virtual electronic accounts and bank prepaid products, including its prepaid card business.

The main source of revenue in both segments is fees Qiwi gets for processing payments made by consumers to merchants, called payment processing fees. These are based on a percentage of the value of the transactions Qiwi processes, referred to as payment volume.

RISKS/CHALLENGES The payment services industry is very competitive, and Qiwi has a number of rivals that are bigger and have more financial resources.

The list of rivals includes Sberbank of Russia, the country's largest retail bank.

"One of the top concerns is the threat from Sberbank," Leffert said. "There's a possibility they will develop their own kiosk network, and they've already purchased virtual wallet competitors.

There is also talk of eBay (EBAY) subsidiary PayPal entering Russia as a direct competitor, he says.

Another risk is that Qiwi gets a big portion of its revenue from a few large merchants, in particular Russia's three biggest mobile network operators.

THE RESULTS Last year, Qiwi reported revenue of $293 million. The vast majority of that — 85% — came from payment processing fees. Most of the rest came from advertising revenue.

Qiwi's cost of revenue for the year totaled $175.6 million. Transaction costs accounted for 83% of the total.

The company recorded shareholder profit of about $30 million.

USE OF PROCEEDS Qiwi expects to raise about $100 million from its initial public offering. According to its prospectus, the selling shareholders will receive all of the net proceeds from the sale of the shares offered.

Shareholders might also decide to use some of their money to finance expansion into other markets.

THE MANAGEMENT Sergey SoloninChief Executive An entrepreneur with more than 14 years of experience in the payment services and banking industries. Co-founded OSMP JSC, a payment terminal operator. Worked there from April 2009 through October 2012, when he took over as CEO of Qiwi.

Alexander KaravaevChief Operating Officer Took over as COO in August 2012. Previously worked as CFO of Mail.ru. Has more than 15 years of experience in finance and accounting, including stints at Arthur Andersen and Ernst & Young.

Evgeny FilimonovChief Financial Officer Has been CFO since October 2010. Previously served as executive director at OSMP from October 2008 to October 2010. From December 1999 until October 2008 he held numerous positions with e-port, including commercial director.

Qiwi PLC Cyprus (357) 22-653390 qiwi.ru/payment/main.action Lead underwriters: JPMorgan Chase and Credit Suisse Offering price: $16-$18 per ADS Expected date: week of April 29-May 3 Ticker: QIWI