Futu Holdings Limited (FUTU) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Welcome to Futu Holdings First Quarter 2020 Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host for today's conference call, Mr. Daniel Yuan, Chief of Staff and Head of IR at Futu. Please go ahead, sir.

Thank you, operator, and thank you for joining us today to discuss our first quarter 2020 results. Joining me on the call today are Mr. Leaf Li, our Chairman and Chief Executive Officer; Arthur Chen, Chief Financial Officer; and Robin Xu, Senior Vice President. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the company's filings with the SEC, including its registration statement. So with that, I will now turn the call over to Leaf Li. Leaf will make his comments in Chinese, and I will translate.

[Foreign Language]

[Interpreted] Hello, everyone. Thank you for joining us today. We are pleased to announce that we generated remarkable growth across our operating matrices in the first quarter of 2020.

[Foreign Language]

[Interpreted] We added 40,154 paying clients on a net basis in the first quarter, which accounts for over 60% of our total net paying client addition in 2019. This brought our total number of paying clients to 239,000, up 60% year-on-year, which marks our highest paying client growth rate since the first quarter of 2019. Notably, our Hong Kong business again maintained a significant growth rate. Total number of Hong Kong paying clients almost doubled from the last March quarter, adding to a streak of over 90% year-on-year growth rate since we launched our Hong Kong business. We believe that the Hong Kong market offers tremendous opportunities, and we are confident to drive further business growth there with our diversified products and excellent user experience.

[Foreign Language]

[Interpreted] Besides total paying clients, our 2 other KPIs, namely client retention and total client assets, also performed well. In the first quarter, we maintained a high-paying client quarterly retention rate of 98.1%. Despite the equities market plunge in March, we were still able to increase our total client assets by 59% year-on-year to HKD 99 billion as of the end of first quarter.

[Foreign Language]

[Interpreted] As our paying client base rapidly expanded and as the huge market swing piqued trading interest, total trading volume reached HKD 595 billion in the first quarter, representing 166% year-on-year increase. In March, we officially launched Hong Kong index futures trading. We will continue to expand our trading product offerings in the quarters to come.

[Foreign Language]

[Interpreted] As for our wealth management business, we onboarded mutual funds from a number of leading fund houses in the first quarter, including BlackRock, PIMCO, PineBridge, Baring (sic) [ Barings ], AllianceBernstein, et cetera, which greatly enriched our equity and fixed income fund offerings. In early April, BlackRock conducted a live streaming event on our platform, discussing the investment opportunity in the health care sector. BlackRock mentioned that this is their first time doing a live broadcast session with an online distributor, which demonstrates the increasing influence of our wealth management business in the region. We will continue to explore ways to deepen our collaboration with leading fund houses to bring high-caliber investor education content to our users.

[Foreign Language]

[Interpreted] Daily average client assets in mutual funds were HKD 6.9 billion in the first quarter of 2020, up 70% sequentially. Total client assets in mutual funds were HKD 6.3 billion as of quarter end, which was flat on a sequential basis. The discrepancy between daily average and quarter end numbers was mainly due to a surge in mutual fund redemption for stock trading during the March stock market plunge. We have witnessed a quick rebound in this segment in the second quarter so far, and we are confident about the growth prospects of our mutual fund distribution business.

[Foreign Language]

[Interpreted] With respect to our enterprise service, as it relies on face-to-face meetings, it was negatively impacted in the first quarter by the social distancing measures due to the COVID-19 pandemic. Nevertheless, we entered into 12 new ESOP service contract, which brought our total number of ESOP clients to 91. In addition, we provided subscription services to 4 U.S. IPOs during the first quarter.

[Foreign Language]

[Interpreted] Moving on to the industry. According to [ SSC ] statistics, the smaller brokerages, whose market shares in terms of stock turnover ranked #65 or lower among the total 648 brokerages, have a combined market share of about 7% in the first quarter of 2020 compared with over 35% in the first quarter of 2000. Since the brokerage business typically demonstrates economies of scale, we are not surprised that the larger players gained market share over the years amid industry consolidation. As a leading online brokerage and wealth management platform, Futu will seize the opportunities brought about by this increasing industry consolidation, especially given the structural trend of users migrating from offline trading platforms to online financial service providers.

[Foreign Language]

[Interpreted] Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

Thanks, Leaf. In the first quarter, we delivered outstanding financial results on top of the remarkable operating metrics. We recorded total revenue of HKD 491 million, up 108% year-over-year and up 58% Q-on-Q. Non-GAAP adjusted net income was HKD 161 million, up 226% year-over-year and the Q-on-Q. Let me walk you through some of our key financial details for the first quarter. Brokerage commission and handling charge income was HKD 299 million, an increase of 161% from the same period in 2019 and up 97% from the last quarter. The growth was primarily due to 166% year-over-year growth in our total trading volume. Our blended commission rate this quarter was 5 basis points, flat year-over-year, but down from 6.7 basis points in the last quarter. This sequential decrease was primarily due to the increase in trading volume per DART for clients that use the flat rate pricing package option we offer for the U.S. stock trading. On an apple-to-apple basis, our commission rate remains quite stable. Brokerage commission and handling charge income account for 61% of our revenue in the quarter. Interest income was HKD 145 million, an increase of 34% year-over-year and 13% Q-on-Q. Margin financing interest income increased on the back of higher daily average margin financing balance. IPO financing interest income surged, thanks to the active Hong Kong IPO market. However, interest income from the bank deposits decreased by 10%, since the Fed Reserve cut the benchmark interest rate to nearly 0. Interest income contribute about 29% of our total revenue. Other income was HKD 47 million. The 238% year-over-year growth was primarily due to higher IPO financing service charge income and higher fund distribution service income. Other income contributed about 10% of our total revenue. On the cost side, total costs was HKD 118 million, an increase of 92% year-over-year and 36% Q-on-Q. Brokerage commission and handling charge expenses grew 140% to HKD 50 million, which was mostly in line with our trading volume growth. Interest expenses increased by 62% to HKD 33 million, primarily due to higher-margin financing interest expenses and also IPO financing interest expenses. Processing and service costs increased by 74% to HKD 35 million. The rise was primarily due to an increase in the market information and the data fee as well as increase in the number of throttling controllers. As trading volume sky rocket in the quarter, we add another 100 throttling controllers so that we can execute a large amount of Hong Kong stock trade simultaneously. Total gross profit increased 113% year-over-year to HKD 373 million. Gross margin was 76% versus 74% in the same period last year. Total operating expenses were HKD 196 million, an increase of 74% year-over-year and 8% Q-on-Q. R&D expenses were HKD 84 million, an increase of 57% from the last year and 13% from last quarter. The year-over-year rise was primarily due to the increase in the R&D headcount in 2019, as we continue to enrich product offerings. Selling and marketing expenses were HKD 65 million, up 105% year-over-year and 27% Q-on-Q. Our higher branding and marketing spending in the quarter result in the highest quarterly paying client addition of over 40,000. G&A expenses was HKD 47 million, an increase of 71% on a yearly basis and a decrease of 15% on a sequential basis. The year-over-year rise was primarily due to the increase in the headcount for the G&A personnel, and the Q-on-Q decrease was mostly due to lower professional service fees. Net income increased by 240% year-over-year to HKD 155 million. The rise was primarily due to exponent-ion of top line growth and a significant operating leverage benefit. The market volatility in the first quarter and increased industry consolidation presents a unique opportunity for us to scale our operation. We will continue to be mindful of the opportunities to grow our business and at the same time remain vigilant on our expenses. Regarding the pandemic, so far, the key effects on our financial include higher trading revenue from increased trading activities, higher net interest margins from the margin financing business and the lower interest income from bank deposits resulting from lower benchmark interest rate. To date, we have not identified any material contingency or impairments as a result of this pandemic. Having said that, while the pandemic in the Mainland China and Hong Kong has shown signs of stabilization, the ongoing impact on the global economy and our future business is harder to predict at this moment. We will continue to closely monitor our business operation. That concludes our prepared remarks, and we are now like to open the call to questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Weicheng Tang.

Yes. First, congratulate on the very robust first quarter results. I've got 2 questions. One is about the turnover. So as you have mentioned, I think the market share of Futu has grown tremendously in the first quarter as we see. It's basically 100 percentage points growth Q-on-Q, outpacing the Hong Kong Exchange overall turnover. So can you share more on the -- like how you dissect the growth of market share. Like on one hand, we see the paying client growth is quite strong at 40,000. And also the client turnover has also peaked. It actually is I think it’s the highest over the past 9 quarters as we have seen. So is there any particular drivers? We know the market volatility is quite high that drive the turnover. But is there any other particulars that will drive the overall volume increase? And also regarding the paying client growth, how much of that is coming from Hong Kong local investors versus the Mainland China? And how do you think in the second quarter or rest of year, how the trend of paying client growth and their turnover will be like? The second question is regarding the cost. So we see in the first quarter, the operating leverage is quite significant, so leading to a much higher bottom line growth. So regarding the -- both the R&D and the marketing expense, is there any budgeting for 2020, particularly for marketing? So we see the per client acquisition cost has come down quite a lot. I'm not sure it's because of the seasonality or the -- it's just a peaking of single quarter paying client growth that led to a decline of per client acquisition costs. And how you see the per client acquisition cost will be like for the rest of the year?

Okay. Thank you, Weicheng. This is Arthur. I will answer your first questions regarding the market shares and also partial of your second questions regarding the cost. I’ll leave the trend of the paying clients in the first quarter and also the remaining years to my colleague, Robin, later on. In terms of market shares, you are right, we have gained market share in Hong Kong, particularly in the first quarter. Compared with last year, last Q4, our estimation is, on average, our market share has increased by 20% in Hong Kong. At the end of last year, our market share in Hong Kong was around 1.03%. And this year, on average, in the first quarter, our market share, the highest is close to 1.4%. And also, I think the spike of the trading volumes is heavily relate to the overall market volatilities, in particularly in February and also in March. Then on the cost side, we have some guidance to the market in the fourth quarter earning call last time. We expect the number of our headcount this year will be roughly in the range of 20% something around. In terms of the marketing expenses, we target for the acquisition cost per each new client will be 10% lower than the average numbers of last year. I think, so far, in the first quarter, our progress was very smooth. So we will not give a fixed absolute amount on the marketing expenses. We'll be more depending on our client acquisition strategies. Given that the -- our this year's economic [ units ] still make valid sense, I think, for us, we will be more aggressively on the marketing spending in order to further enhance our market share and also the number of our paying clients. I will leave more comments to Robin for the number of paying clients trend he observed in the second quarter and also our estimations in the second half of this year.

[Foreign Language]

[Foreign Language]

Okay. [Foreign Language]

[Foreign Language]

[Interpreted] So a large part of our paying client growth can be attributable to the strong growth momentum of our Hong Kong local business. So in the first quarter, as Leaf mentioned in his opening remarks, our number of Hong Kong paying clients grew 97% year-over-year, and that growth rate has consistently topped 90%. So for the rest of the year, in our 4Q 2019 earnings results, we gave a guidance of 90,000 net paying client addition in 2020. And so far, observing from the run rate, we’re pretty confident about succeeding (sic) [ exceeding ] this previous guidance that we gave out, partly because I think we are ramping up our marketing in Hong Kong local market. And also, we have seen very strong growth momentum from word-of-mouth paying client referrals.

Yes. Thank you, Robin and Arthur. It's actually -- I just have a very small follow-up question regarding the tax rate. We see the tax rate in the first quarter is around 10% effective tax rate. So is that like a normalized -- or what we can expect for the rest of the year? Or like first quarter is just like there is still some seasonalities on recognizing the tax?

Sure, Weicheng. We expect that this year's full year effective tax rate will be in the range of 10% to 12%, mainly due to our offshore tax claim benefiting Hong Kong and also our tax treatment -- preferential treatment in the Mainland. And also, I think this effective tax rate will be valid in the next 1 or 2 years as well.

[Operator Instructions] There are no further question at this time. I'd now like to hand the conference back to Mr. Daniel Yuan for the closing remarks.

That concludes our call today. On behalf of the Futu management team, I would like to thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representative. Thank you, and goodbye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]