UP Fintech Holding Limited (TIGR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the UP Fintech Holding Limited Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 25th, 2020. I would now like to hand the conference over to your first speaker today, Mr. Clark Soucy. Thank you. Please go ahead.

Thank you, Rachel. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's fourth quarter 2019 earnings release was distributed earlier today and is available on our IR website at ir.itiger.com as well as GlobeNewswire services. On the call today from UP Fintech are Mr. Wu Tianhua, Chairman and Chief Executive Officer; Mr. John Zeng, Chief Financial Officer; Mr. Huang, Lei, CEO of U.S. Cyber Securities; and Mr. [ Kenny Xiao ], our Financial Controller. Mr. Wu will give an overview of our business operations and discuss corporate highlights. Mr. Zeng, will then discuss our financial results. They will both be available to answer your questions during the Q&A session that follows their remarks. Now let me cover the safe harbor. Today's discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, but we do not take any obligation to update these statements, except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Wu. Mr. Wu will make remarks in Chinese, which will be followed by an English translation. Mr. Wu, please go ahead with your remarks.

[Foreign Language]

[Interpreted] Good evening, everyone, and thank you very much for attending the Tiger Brokers 2019 Fourth Quarter and Full Year Earnings Conference Call. Before I elaborate on our business results, I would like to make a brief comment on the virus pandemic. Since we operate an online platform, there has not been a substantial impact on our business. However, the health and safety of our employees is paramount, and our firm has taken extra precautions. At our global offices, employees are working in shifts or from home. I will now continue with my prepared remarks. In the fourth quarter, Tiger delivered impressive financial results. Total revenue was $20 million, a new all-time high and nearly 110% increase over the same period last year. In the fourth quarter of 2019, we achieved the fastest year-over-year revenue growth of any quarter last year. In addition, I would like to highlight that we continue to optimize our revenue mix. Interest related income, which is interest income plus financing service fees exceeded commission income and accounted for 38% of total revenue. 2B revenue which includes our corporate services like IPO distribution and ESOP administration services increased to 26% of total revenue. This is compared to 2018 when 74% of our income was derived from commissions. In the fourth quarter, we recorded our first ever non-GAAP operating income of USD 0.3 million. A significant improvement from a non-GAAP operating loss of USD 2.8 million in the same period of 2018 and a $1.3 million loss in the third quarter of 2019, demonstrating the improvement in Tiger's operating efficiency and earnings quality.

[Foreign Language]

[Interpreted] We are also pleased to report that our innovative platform and differentiated services continue to drive ever more investors to choose Tiger to manage their assets. In the fourth quarter, we added approximately 11,300 new accounts with deposits, an increase of 86% from the same quarter in 2018. In addition, total client assets increased to $5.1 billion, a nearly 114% increase from the same period in 2018 and an increase of $1.3 billion in the third quarter of 2019.

[Foreign Language]

[Interpreted] In aggregate, our 2019 financial results evidenced a solid improvement over 2018. Total revenues in 2019 were $58.7 million, a 75% increase over 2018. We also achieved consecutive non-GAAP profit for the third and fourth quarter of 2019.

[Foreign Language]

[Interpreted] 2019, was a monumental year in the history of our company. In March, we successfully listed on the NASDAQ and embarked on a new journey in our company's history. 2019 was full of challenges but we remain focused and continue to emphasize transparency and made positive progress on our business. I would now like to highlight 4 key components of our corporate strategy that we successfully implemented over the last year.

[Foreign Language]

[Interpreted] First and foremost, we are following our strategy of shifting from relying on clearing counterparties to developing our self-clearing capabilities. Self-clearance will not only reduce our expenses and drive increased interest income, it will also limit the impact to revenue from commission volatility. This was our reason for acquiring Marsco in July. System integration is on track. We expect to gradually self-clear U.S. cash equities for the end of the second quarter of 2020.

[Foreign Language]

[Interpreted] Second, our strategy to increase our international reach progressed nicely in 2019. Besides our New Zealand office, we now have a presence in the United States and Singapore. We are confident that our international expansion will increase our customer base and give us access to more business development opportunities.

[Foreign Language]

[Interpreted] Third, our ESOP business and IPO underwriting delivered strong growth in 2019. In 2019, we participated in 18 U.S. IPOs, in 12 of which we served as underwriter. We were the #1 IPO underwriter in terms of deal number for Chinese issuers in 2019 by a wide margin and the scale of our IPO business greatly exceeded that of any other Chinese broker. Beside the contribution to our revenues, we view the development of our investment banking services as beneficial to our reputation and accretive to user stickiness. Our ESOP business also grew rapidly in 2019. We developed a large client base in just 1 years' time, and it started to yield results. I am pleased to report that in the fourth quarter, over 20% of newly funded accounts came from our ESOP customers.

[Foreign Language]

[Interpreted] In addition, we are investing in our asset management business. Tiger has actively managed Cash Plus product, has delivered good investment returns for our users since launch. We also recently launched our Fund Mall, where users may choose for over 30 investment funds. We view brokerage and asset management as complementary as our growing range of services increases user stickiness. Over the long term, this strategy will comprehensively develop commission, interest income and asset management fees, diversifying our revenue and increasing customer lifetime value.

[Foreign Language]

[Interpreted] Finally, after discussion and agreement by the Board of Directors, we have decided to implement a share buyback program. Over the next 12 months, we will allocate a maximum of USD 20 million to ADS buybacks. In conclusion, we look forward to continuing to implement the 4 aforementioned points of our corporate strategy in growing our business.

[Foreign Language]

[Interpreted] I would now like to invite our CFO, John Zeng, to discuss our key financial results.

[Foreign Language] Hello, everyone. Overall, very strong fourth quarter for Tiger. Total revenue was USD 20 million, grew more than 100% year-over-year and 30% quarter-over-quarter. Commission income was $7.3 million, increased 4% from last year and 17% from previous quarter. Cash equity blended commission was 8 bps this quarter versus 5 bps the same quarter last year. Financing service fee increased 18% year-over-year to $2 million this quarter. Interest income grew more than 100x year-over-year to $5.5 million as we have more consolidated account customers versus last year. The growth for financing service fee and the interest income also both benefited from increased margin and securities lending activity this quarter. Other revenue primarily consists revenue from corporate services such as IPO underwriting, grew close to 700% year-over-year to $5.1 million. We were very active on IPO underwriting last year. In terms of deal counts, far exceeded any of our competitors, it's also an effective customer acquisition tool to develop the retail and the institutional business. Comparing revenue composition with fourth quarter last year, we are happy to see revenue mix is getting more healthy. Interest related income this quarter accounted for 38% of total revenue. Corporate services accounted for 26%. While in the fourth quarter last year, commission accounted for 74% of the total revenue. Interest expense grew to $1.5 million this quarter due to more consolidated account customers. After interest expense, net revenue was $18.5 million, a 90% -- 94% increase from same quarter last year. Now switching to expense. Clearing expense increased from $0.1 million in the fourth quarter last year to $0.9 million this quarter, in line with our growth of consolidated accounts. Salary expense increased to 61% to $10.6 million, primarily due to a 49% head count increase year-over-year. In 2020, we will keep adding key positions but our head count growth rate will moderate. Occupance expense increased 72% to $1.1 million as we opened offices in New York and Singapore. Communication and market data expense also grew 100% year-over-year to $1.9 million as more users are using our services. Marketing expense decreased 25% year-over-year to $1.7 million this quarter as we optimized our marketing strategies which related to higher efficiency. General and administrative expense increased 14% to $2.8 million, primarily due to business expansion and professional services. Total expense for fourth quarter was $19.1 million, an increase of 46% year-over-year. Operating loss was $0.7 million this quarter, an improvement of 80% year-over-year. Non-GAAP operating income turned positive for the first time at $0.3 million compared to a non-GAAP operating loss of $2.8 million last year. Net loss for UP Fintech was $0.6 million in the fourth quarter of 2019 compared to a net loss of $2 million in the fourth quarter of 2018. Our net loss of $0.6 million this quarter was primarily due to a $1.9 million foreign currency exchange loss we laid it out as other expenses. Let me elaborate a little bit more on this FX loss. As of now, we book majority of our revenue and acquire assets in New Zealand entity. Under New Zealand regulation, financial reporting needs to be in local currency, which is New Zealand dollar, while most of our revenue and asset inflows are settled in USD or Hong Kong dollar on a daily basis. So when our New Zealand entity prepares local financial reporting on a monthly or quarterly basis, there will be difference due to different exchange rate when revenue and related asset are booked and when reporting is done. So in the fourth quarter, New Zealand dollar has been gradually rising against the U.S. dollar and Hong Kong dollar. So we booked this difference as a FX loss. There was low FX transaction took place and low cash loss. It's just a pure accounting treatment to reconcile the difference between our consolidated book and local book. And our non-GAAP net income was $0.3 million this quarter as compared to a USD 1.2 million non-GAAP net loss in the fourth quarter of 2018. So to summarize, we are satisfied with our progress in the fourth quarter. Revenue mix is more balanced, new accounts with deposit showed accelerated growth quarter-over-quarter and year-over-year, and the total client assets also grew at a fast pace. We are confident as -- now as we execute the strategies laid out in Tianhua's earlier remarks, we can deliver good growth for 2020. This concludes our prepared remarks. Now we can open for questions.

[Operator Instructions] Your first question comes from the line of Lesley Liu from HSBC.

I have 3 questions today. First one is that, why is our trading volume down Q-on-Q but our commission income up Q-on-Q? And second question is about the liquidity and risk management. Could management share with us the liquidity situations and also the margin cost situations recently, especially during this month? And the third question is about the competitive advantage. So what's the competition strategy for us as we have seen that a lot of similar internet brokers for overseas securities tradings recently have sprung up in China and also invested by some Internet companies, quite a lot of apps are -- joined this competition. So what do you think is our competitive advantage compared to all these competitors?

Thanks, Lesley. I will answer your question number 1 and the number 2. Then Tianhua will answer your question number 3, okay? So let me answer your second question first, what's the liquidity issue or how we manage the risk. So at Tiger, we have really, I would say, very prudent margin policies. So we do have a team of risk managers to monitor clients' positions, especially during this volatile time. So to answer your question, there was no margin call or no -- any principal losses we have experienced so far. We will keep exercising our prudent strategies going forward to make sure, with the volatile market backdrop, we're not going to suffer any losses in those spaces. And to answer your first question, the trading volume difference and commission, the blended commission. So at Tiger, we do have a lot of people trading futures and also a lot of people trading equities. So if you just lose the -- use the overall trading volume to calculate a blended commission, I think sometimes, it's getting more volatile. It's not really a good indicative commission of how we operate our business. So we give you the clear cash equity conditions, which means it's more stable. So the rates increased from 5 bps in fourth quarter 2018 to 8 bps in fourth quarter 2019. It's because in the U.S., we charge by shares. And in fourth quarter 2019, there are people trading more low-dollar amount shares, which means even though the total value looks low, but actually, there are more shares to be traded. So that's why our cash equity commission has gone up from 2018 fourth quarter. Tianhua?

[Foreign Language]

[Interpreted] Okay. Let me just quickly translate. So the landscape of brokers -- actually brokerage business has been around for a long time. Same as the reason we started our business 6 years ago, is we think there are a lot of areas we can improve, and there are a lot of optimization we can do. So compared to other Internet brokers, especially those new start-ups, first of all, Tiger has a lot of licenses, for example, in the U.S., in Australia, Singapore and New Zealand. And it took a while -- will take a while for those -- the newcomers to get all relevant licensing and there's knowledge and know-how how to run those new broker-dealer business. So that's one differentiator we have. The second differentiator is most of those online brokers, especially China online brokers. They don't have U.S. self-clearing license, and they cannot clearly trades by themselves. That's the reason we acquired Marsco. We hope we can be able to self-clear in the U.S. Once we become self-clear, it can create a huge barrier of entry because we are really building the infrastructure of brokers from bottom up. And this will take a long time and -- for the newcomers to catch up. The third thing is on the product offering is, what we want to do is now to enhance user experience with a different type of product offering. So Tiger pioneered an IPO subscription for Chinese ADRs. And typically, retail investors, they most likely will get most allocation from Tiger. During the past years, we participate in those high IPOs like PDD and [ Zoom ] and also give us a competitive edge in terms of how we offer differentiated product to retail investors. And also, we have those Fund Malls and Cash Plus, those wealth management products. It's also another way for us to try to have a comprehensive product offering to enhance user experience. So combine those 3 points together, I think there is -- there will always be competition, but I think these differentiating factors can set us apart.

Your next question comes from the line of Daphne Poon of Citi.

So also 3 questions from my side. The first one is regarding the other revenue. So there is a big jump in the fourth quarter. I understand the part of that is because of the IPO subscription. But can you just help us break down how much is from different category, like how much is from the IPO underwriting related? And also how much is from the interest income on the bank deposits? And whether you see that strong other revenue would be sustainable going forward? And the second question is regarding the current rate cut cycles. Have you done any specific analysis on what would be the impact on your earnings, and whether that will affect the pricing on your margin loans as well? And the last question is about -- regarding the recent coronavirus situation. I'm actually wondering whether that has benefits, really, in terms of your new kind of growth and also your turnover. Because we understand that from some of your peers and also from the onshore Chinese investors, that the trading activity in the stock market actually picked up quite a bit during this virus outbreak. So I just want to get a sense of the trend you see in Q1.

Thanks, Daphne. So let me answer your question 2 first. Then Tianhua will answer question 3. And for number 1, Tianhua and I will split. Because I think that's 2 questions actually in question number 1. So in terms of the rate cuts, and I think your question is, how is that going to affect our business, right? So the rate cut, on liability side, because we don't have much debt or loan, so it doesn't help us to reduce any funding cost. But going forward, we were looking at opportunities to put on debt there because right now, if the liquidity is cheap, as much as we can, generate decent return and spread on that, that's something we will consider. On the asset side, for the first quarter, I think it's still, okay, interest income. For the third -- starting from second quarter, we will wait and see. Because right now, a lot of banks, they lowered their interest rate to 0. And also our partners -- our clearing brokers partners, they also lowered their interest rate to 0. So if you just look at the second quarter, it could have an impact on our interest generating income. But how big is that impact is yet to see because we just started the 0 interest rate cycle. But still, we still have some bank partners who offer interest rates above 0. So we will efficiently allocate our cash or our client assets to make sure we can generate returns out of the idle cash. To your first question, in the other revenue section, I would say IPO related is more than 80%, I would say, 85% of the composition. The rest of it, 10% to 15% is from interest income of the bank deposits. And then I will let Tianhua answer your question, how sustainable is the other revenue. And also, your third question about the coronavirus, how does that impact our trading volumes.

[Foreign Language]

[Interpreted] Let me translate the other revenue, whether it's sustainable, first. So what Tianhua mentioned is, still, right now, the pipeline is very strong. Even some of those potential issuers delays or timetabled due to the virus. But their intention to get listed still very strong, and we are working with a lot of them to help them with preparation. Because we are a fintech company, so we do -- right now we do a lot of online NDR and roadshow for those guys to help them to manage their IPO timetable. So we think the pipeline is very strong, and we still think the business, going forward, can generate decent returns.

[Foreign Language]

[Interpreted] Okay. So just briefly recap. What Tianhua mentioned is the -- right now the coronavirus caused a lot of volatility in the market, especially in the U.S. market. So the volatility, first of all, give us -- give people -- got more people interested and got their attention to investing in the U.S. market and give people the 2-way opportunities we can insure as they come on. So given Tiger's reputation in this -- in the U.S. market, it actually does help us to generate more accounts with deposits. That also help us to generate more customer trading volume. So in short, it does help our trading patterns and with our brokerage business.

Your next question comes from the line of Han Pu of CICC.

First congratulations on the strong quarter. I have 2 questions. First is about the Fund Mall. Could you introduce more on the new business and what kind of rates do we plan to charge the investors as well as the fund companies, maybe depositable fee rates compared to the peers? And the second one is about the customer acquisition. We have 11,000 new customers with deposits on the -- in the fourth quarter. And how many of them were from the Mainland China and the other from oversea regions? Do we have any guidance on the customer acquisition in the coming year as well as the regional location as we try to do more international business?

[Foreign Language]

[Interpreted] Okay. So to answer your first question, Pu, Han, regarding the Fund Mall. So the rationale we are doing Fund mall is, now additionally, Tiger has a lot of customers. They like to trade by themselves, but we also have a lot of customers who don't really know what to buy. So we want to have Fund Mall those like mutual fund products on our platform to give people more choice. And we also diversify our product offering from active trading to passive trading, so we can capture all the needs of our customers. So how we're going to make money is we're going to make that -- work with our partners on selling and also on funding administration fees. In terms of customer acquisition, so going forward, once we -- our operation is fully underground in Singapore, U.S., Australia, we target to have, on a quarterly -- over a year, by end of this year, at least 10% of our new accounts come from international, new clients. And also one thing I -- to mention is we hope our ESOP also can account for about like 20% of the new clients on a yearly basis.

And may I have a follow-on question on the AUM of our Cash Plus product currently?

Right. Okay. So our Cash Plus AUM right now is still relatively small. It's about like USD 25 million at this moment, where recently, it has been growing pretty decent because the 7 days return, given the volatility, has been pretty attractive, really. That's not a -- that's like one product managed by our in-house asset management team.

Your next question comes from Lesley Liu from HSBC.

Just a follow-up question on the Cash Plus product because it's now the extremely low rate environment. Are we seeing any margin pressure for this product? And also, just wondering the latest update of the Hong Kong license. What's the obstacles that we are facing for -- apply for that?

So to answer your first question on the Cash Plus, we don't have any margin pressure because we -- first of all, it's not levered. And also, like we invest in very liquid products like TPOs and other fixed income, so, so far, we don't have any margin pressure. And then your question regarding the license, we don't really come under license, but I think you can follow our release once we have something to publish.

There are no more further question at this time. I would now like to hand the conference back to today's presenters. Please continue.

Hello. This is Clark. I would like to thank everyone for joining our call today. I am now closing the call on behalf of the management team here at UP Fintech. We do appreciate you your participation in today's call. If you have any further questions or concerns, please reach out to our Investor Relations team. This concludes the call, and thank you very much for your time.

Ladies and gentlemen, this concludes 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.]