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

Ladies and gentlemen, thank you for standing by, and welcome to UP Fintech Holding Limited Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, March 26, 2021. I'd now like to hand the conference over to your first speaker today, Mr. Clark S. Soucy. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's fourth quarter 2020 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. Tiger Securities; and [ Mr. Kenny Zhao ], 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. The statements we are about to make contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about factors that could cause actual results to materially differ from those in the forward-looking statements, please refer to our Form 6-K furnished today, March 26, 2021, and our annual report on Form 20-F filed on April 29, 2020. We undertake no obligation to update any forward-looking statements, except as required under applicable law. It is my pleasure to now 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.

[Interpreted] Good day, everyone, and I appreciate your attendance in Tiger Brokers Fourth Quarter 2020 Earnings Conference Call. In the fourth quarter, our operating and financial metrics exhibited solid improvement due to a surge in new clients as well as enhancements to our platform and services. In the fourth quarter, total revenue was USD 47.2 million, 2.4x compared to that of the same period last year and a new all-time high. Tiger's operating efficiency and profitability continue to improve. Non-GAAP net income was $10.3 million in the fourth quarter, nearly 30x the non-GAAP net income in the same quarter last year. In addition, I'm pleased to report that we added 44,000 new funded accounts this quarter, nearly quadruple the number from the same period last year. Total funded accounts reached 259,000 by the end of 2020, more than double that of 2019. Growth in client assets was outstanding. Total account balance reached $16 billion, more than triple that of the fourth quarter of 2019 and 46.2% higher than the third quarter of 2020. Overall for 2020, total revenue was $138 million, more than double versus 2019. We were profitable for the first time on a yearly basis. Non-GAAP net income was $22.3 million in 2020, a big improvement from a non-GAAP loss of $1.8 million in 2019. I would now like to take this opportunity to comment on 3 notable milestones in our development. First and foremost, our internationalization strategy continues to progress nicely. Tiger Brokers now have subsidiaries and offices in the U.S., Australia, Singapore and New Zealand that possess a wide range of licenses that span brokerage, investment banking and asset management, among others. In the fourth quarter, I am pleased to report that our expansion in the aforementioned overseas markets accelerated. International clients represented 40% of newly funded accounts. We expect that in 2021, we will add more than 350,000 funded accounts. International clients will comprise more than 50% of the new funded accounts. Moving on, our investment banking and ESOP services continue to lead the market. We are committed to our growth strategy of leveraging Tiger's core brokerage business to generate synergies among ESOP, investment banking and internationalization. In 2020, in total, we participated in 26 Chinese ADR IPOs in the U.S. And in Q4, we participated in 8 listings, such as 17 Technology, iHuman Inc. and Yatsen Holding Limited. Recently, we also underwrote the secondary listings of Bilibili and Autohome in Hong Kong. I would like to express my appreciation to all of these companies for their trust at such an important time. Reflecting on the development of our investment banking business. In just 2 years, we have become the #1 underwriter globally in terms of deal counts for Chinese ADR issuance. ESOP, our system for managing employee stock options, continues to grow at a rapid pace. In the past year, of the Chinese ADR issuance that listed in the U.S., over half chose to adopt our ESOP system, including popular issuers like Li Auto, Kingsoft Cloud and Yatsen Holding Limited, among others. The growth in adoption of our ESOP system accelerated as we added 35 clients in the fourth quarter for a cumulative total of 124 clients. We expect our ESOP system to maintain its leading position and foresee further increases in market share. Finally, we continue to invest in developing our self-clearing capabilities. In July of 2019, when we acquired Marsco, a U.S. broker-dealer with over 30 years of self-clearing experience, we also acquired their clearing licenses. Our investment to transition to self-clearing remains a key milestone in our firm's developing. We now have the technological and operational prowess to control every aspect of our brokerage system, from the front end to the back end. Self-clearing has also created a competitive barrier for our firm due to its extensive technical, compliance and operational requirements. The percentage of clients having their U.S. cash equity trades self-cleared by Marsco continues to increase and at the end of the fourth quarter, reached over 20%. In addition, Marsco is conducting clearing for all new clients onboarded in the U.S. As I conclude my prepared remarks, I would like to thank the investors who participated in our convertible bond issuance for their support of our firm. In February '21 -- February 2021, we, in total, issued $65 million of convertible bonds. This capital will accelerate our international expansion as well as support further investments in our research and development capabilities. I would now like to invite our CFO, John, to summarize our financial performance.

[Foreign Language] So let me go through our financial performance for the fourth quarter. All numbers are in USD. Total revenue were $47.2 million this quarter, increased 137% from the same quarter of last year. The increase was due to bigger user base as more people entrust us with their assets and more active market backdrop. Within the total revenue, commission increased 245% from last year to reach $25.2 million. Interest-related income, which combines financing service fee and interest income, was $13.3 million, an increase of 53% from last year. Other revenue, mostly revenue from our investment banking business, increased 119% from last year to $8.7 million. Interest expense increased to $4.3 million from $1.5 million last year as we have more consolidated account customers. Net revenue after interest expense was $43 million, an increase of 135% from the same quarter last year. Now on the cost. Execution and clearing expense were $4.2 million, increased 363% year-over-year due to increase in user base and more engaged trading activities. The increase in user base also increased communication and market data expense by 103% to $3.9 million. Employee compensation increased 47% to $15.5 million as we keep adding headcounts, especially in R&D and product to support our global expansion. As a result of headcount increase, our occupancy expense increased 12% to $1.3 million. SG&A also increased 70% to $4.8 million year-over-year. Marketing expense were $6.5 million this quarter, an increase of 277% from same quarter last year. We will keep spending in branding and customer acquisition to accompany our internationalization. Total operating costs were $36.3 million, an increase of 90% from same quarter last year. As a result, our net income was $8.5 million this quarter. Non-GAAP net income, which excludes share-based compensation, was $10.3 million this quarter, 30x the non-GAAP net income in the same quarter of last year. Now I have concluded our presentation. Operator, please open the line for Q&A. Thanks.

[Operator Instructions] Our first question comes from Jacky Zuo from China Renaissance.

I have 2 questions. Number one is about our guidance. I heard we expect 350,000 new paying users for this year. Just want to understand the drivers behind this guidance. What is the trend in the first quarter this year? And we also mentioned 50% of it will come from overseas markets. So can you give us more details in terms of breakdown of, like, Singapore, U.S. and other countries? And second question is about our Singapore business. I saw that [ FTSE ] actually entered Singapore in March. Do we expect some impact from this in terms of our growth? And how do we deal with intensifying competition in Singapore?

[Interpreted] Thanks, Jacky. So let me quickly translate Tianhua's answer for your first question. So let me put it this way, so traditionally Tiger's user mostly are onshore Chinese. So starting from last year, we started to onboard Singapore clients. So far, it's showing good results. So this year, we will expand in the U.S. and Australia. So on a high level, more geographic expansion. And our experience in Singapore give us the confidence to acquire more users this year. So we understand investors are getting nervous recently about the market this year. So the 350,000 guidance is not based on our high-growth in 2020. Instead, we used 2019 data when market activity was much lower as our base case. So in 2019, each quarter, we add about like 42,000 customer accounts. So assuming U.S. and Australia will gradually reach that number this year, combining with Singapore, we feel pretty comfortable each quarter we will have at least 100,000 new customer accounts from offshore investors. And based on our experience, offshore clients have much higher customer account to funded account conversion, typically north of 60%. So this translates to around 60,000 funded accounts each quarter from offshore. And we are confident onshore clients and ESOP to also add another 20,000 to 30,000 funded account each quarter. So combining that, we feel pretty confident we can reach our guidance of 350,000 funded account this year. Okay. So regarding Singapore, so there will be some competition, but we don't think it's a zero-sum game because we feel the TAM in Singapore is still very big for us to grab. So if you look at Singapore's existing market, based on CDP data, there are about 1.3 million accounts than trade Singapore local stocks, and most of them still prefer to place order by phone. And this is a market we haven't really penetrated yet. So currently, Tiger, our focus is on the incremental market, the younger generation, the younger Singaporean, similar to our Chinese users who is more interested in U.S. or Hong Kong stock. And this incremental market is showing good momentum. So we will tap into the existing market by adding more local products on our platform such as [indiscernible] and getting Singapore SGX clearing license so we can provide better service and acquire more users from both market segments.

Our next question comes from Zeyu Yao from CICC.

[Foreign Language] I'm Zeyu Yao from CICC. Firstly, congratulation on the exciting results we have achieved. And I have 2 questions here. The first one is about our growing customers. We see a total of 44,000 funded accounts added in this quarter and the total paying customers has reached nearly 260,000 by 2020, and we also see the volatile market environment [ gratefully ]. I'm wondering if it will be -- if it's the bear market since the second quarter. And what measures will we take on customer acquisition and how to increase the customer activeness? And then the second question is regarding on our corporate business. In this quarter, we see a rapid growth of new ESOP clients with 35 newly added and existing -- most of our major competitors, which is management share more with us. That's why we have grown so rapidly on the ESOP in the recent years and which are our unique advantages.

[Interpreted] Okay. So Zeyu, thanks for your question. To answer your first one. So since our inception 7 years ago, we have experienced quite a few market volatility. So we have experienced on that. So in general, for our business, especially for the online brokerage business, we tend to have higher retention. So quarterly retention rate is around 98% throughout our operating history. Now how do we increase user activities and keep the retention? So for the past year, we actually have been spending quite a resource to optimize our online community operation. So far, we have seen positive results. For example, our content consumer or content creators, in general, their retention rate will be 20% higher than rest of the users. Good content can also help users to make decision and increase trading activities. On average, content users, their trading activity will more than double. If you log on to Tiger community, you can see right now, our offshore clients, they are actually more engaging in our community. We have seen more and more English posts in our community, which is a good progress. And we think they will keep investing. And also for brokers business, volatility in certain extent is good for us. So for example, in first quarter last year, even during big collections, user engagements were still pretty high. We think throughout this year, given the media coverage and also the transparency of the information, we think the market volatility will continue. In the worst-case scenario, say, if it's a bear market, we also have more wealth management products for our users. For example, we added mutual fund automatic investment plan. We also have cash management product and our cash cost. So I think those wealth management product will help our users to manage their investment during bear markets. Okay. So regarding ESOP, we think the moat, actually, it's pretty high. You need a lot of knowhow to be able to be a good ESOP provider. So first of all, given a lot of our ESOP clients, they are international company. Now they have subsidiaries or employees from different countries, different regions. So I think as a service provider, ourself needs to be a global company to have the global platform to service their different region employees. So Tiger, we have licenses in Singapore, U.S., Australia. So we feel we are more capable to be customized and catered to the different needs of our ESOP clients. So that's the first point. The second -- obviously, the second growth driver for our ESOP business is, as you can see from our past reports, so far, we have been generating good synergy between ESOP and our investment banking business. So we not only help company to get invested to raise funds, we also help them from the very beginning to help them manage the plan, to satisfy all the local regulations and also to help them go through the IPO process and to manage their plans when the stock options are vested. So the combination -- or I would say, the bundle of service between our ESOP and IPO has been showing really good results. And we are confident going forward this strategy will keep working and provide the best service for our clients. Lastly is, now, ESOP is a pretty, I would say, complex business, and we are investing heavily in research and development and also acquire -- recruit talents to be the one-stop solution provider combining HR, tax, legal, compliance and our accounting expertise to make the ESOP management more efficient and user-friendly for our corporate users. Thank you.

[Operator Instructions] Next question comes from Hanyang Wang from 86Research.

[Foreign Language] I have 2 questions. The first one is regarding on the Hong Kong license. You mentioned to share the progress of our Hong Kong brokerage license application. Second question is about our international business. So you mentioned the increase of the marketing expense was primarily due to global expansion. Could you share the customization cost per paying client in China, Hong Kong and overseas market and how we should look at the brokerage revenue contribution from the overseas market after 3 to 5 years? And my third question is on the commission rate. So in my calculation, our commission would increase sequentially during the quarter. Any comment on that would be helpful.

[Interpreted] So to answer your question on internationalization. So we are very committed and are optimistic about our global expansion strategy. Because, first of all, is my -- we see the global expansion strategy is a good way for us to increase the funded account, our customer account to funded account conversion. Like we mentioned earlier, a lot of those regions, the commercial rate can be more than 50%, sometimes 60%, 70%. So in this way, this will give us a big tailwind once we generate good customers offshore and build a good momentum. It can help us to reach over 1 million funded account customers in the near future. So our goal is to become a one-stop investment platform for global investors, no matter where they are based. So we are very committed to internationalization. And in addition to the operating data growth by internationalization, we feel by acquiring more investors offshore will also help us to generate better financial results for the company and for the shareholders. So that's your question on internationalization. So on marketing, the customer acquisition. So if you look at our 2020 data, our customer acquisition cost is about, like, USD 100 per person. Okay? So this actually has came down from earlier, and I'd say, 2019 when our customer acquisition cost was about like USD 200 to USD 300. So the reason of the decrease is due to, of course, we are -- we have a better brand now and there are more natural traffic. And also, we are providing more comprehensive services to the users. So there are more users coming to our platform. Going forward, when we expand offshore, we think the customer acquisition costs will go up because, first of all, there might be other players we will be competing for the users. Second thing is if we go to a new market, it will take us some time to build up our brand. So at the very beginning, we will spend more to do more branding to increase our brand awareness. But through our past experience, we think all those marketing expense are well worth it. Because if you look at our customer payback period, it actually came down to just maybe one quarter. So if we go to new market, we will just make the same strategy to keep spending to our acquire users. So in the short term, I think opening data or build a bigger user base is more important for us. So we will keep spending once we get into the new markets. And for your take rates, yes. So the commission rate, if you calculate blended commission rates, go up a little bit versus last quarter on a quarter-over-quarter basis. But eventually, we haven't done any pricing change. Okay? So our pricing stay the same. For U.S., it's about like $0.01 per share, minimum [ 2.99 ]. And for Hong Kong, it's 2.9 bps for Hong Kong securities trading. And to answer your question on the Hong Kong license. So we have resubmitted our application to acquire a Hong Kong stockbroker earlier last month. And so we believe the application contains all the information required by SFC as a result of the discussion we initiated with them to confirm what was required. So the regulator may require further information from us, although, we believe we have given them a very comprehensive material. So, so far, they have not asked for any follow-up information. They may do so in due course, but so far, they haven't done that yet. So typically, the application will take 6 to 12 weeks to process. Obviously, we cannot guarantee the outcome or timing, but we are as confident as we can be that we have filed everything the regulator reasonably needs to consider the application. Thanks.

[Foreign Language] A follow-up question on the tax benefit. What costs are tax benefits during the quarter?

Yes. So Hanyang, we just break even for this year, right? So as every start-up when they break even, they -- before they were breakeven, they have huge losses before. So we have accumulated a lot of tax benefits. So once we started to break even, we'll be able to utilize those tax benefits for this quarter.

We have reached the end of the question-and-answer session. I'll now turn the call back to presenters for closing remarks.

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

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