Futu Holdings Ltd Q1 FY2020 Earnings Call

Hello, Ladies and gentlemen. Welcome to Futu Holdings First Quarter 2020 Conference Call. 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 would now turn the call over to Leaf Li. Leaf will make his comments in Chinese and I will translate.

[Foreign Language] Hello, everyone. Thank you for joining us today. We are pleased to announce that we generated remarkable growth across our operating metrics in the first quarter of 2020. [Foreign Language] 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. The total number of Hong Kong paying clients almost doubled from last March quarter, adding to its 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 in driving further business growth there with our diversified products and excellent user experience. [Foreign Language] Besides total paying clients, our two 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 HKD99 billion as at the end of first quarter. [Foreign Language] As our paying client base rapidly expanded and as the huge market swing peaked trading interest, total trading volume reached HKD595 billion in the first quarter, representing a 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] As for our wealth management business, we on-boarded mutual funds from a number of leading fund houses in the first quarter, including BlackRock, PIMCO, PineBridge, Barings, AllianceBernstein, etc., which greatly enriched our equity and fixed income fund offering. In early April, BlackRock conducted a live streaming event on our platform, discussing the investment opportunities in the healthcare 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] Daily average client assets in mutual funds were HKD6.9 billion in the first quarter of 2020, up 70% sequentially. Total client assets in mutual funds were HKD6.3 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 [Foreign Language]. 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 contracts, which brought our total number of ESOP clients to 91. In addition, we provided subscription services to four U.S. IPOs during the first quarter. [Foreign Language] Moving on to the industry, according to SEC statistics, the smaller brokerages with market shares in terms of stock turnover ranking number 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] 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 HKD491 million, up 108% year-over-year and up 58% quarter-on-quarter. Non-GAAP adjusted net income was HKD161 million, up 226% year-over-year and quarter-on-quarter. Let me walk you through some of our key financial details for the first quarter. Brokerage commission and handling charge income was HKD299 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 products for clients that use the flat-rate pricing package option we offer for U.S. stock trading. On an apples-to-apples basis, our commission rates remain quite stable. Brokerage commission and handling charge income accounts for 61% of our revenue in the quarter. Interest income was HKD145 million, an increase of 34% year-over-year and 13% quarter-on-quarter. 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 bank deposits decreased by 10% since the Federal Reserve cut the benchmark interest rate to nearly zero. Interest income contributes about 29% of our total revenue. Other income was HKD47 million, the 238% year-over-year growth was primarily due to higher IPO financing service charge income and a higher fund distribution service income. Other income contributed about 10% of our total revenue. On the cost side, total cost was HKD118 million, an increase of 92% year-over-year and 36% quarter-on-quarter. Brokerage commission and handling charge expenses grew 140% to HKD50 million, which was mostly in line with our trading volume growth. Interest expenses increased by 62% to HKD33 million, primarily due to higher margin financing interest expenses and also IPO financing interest expenses. Processing and service costs increased by 74% to HKD35 million. The rise was primarily due to an increase in market information and data fees as well as an increase in the number of throttling controllers. Our trading volume skyrocketed in the quarter. We added another 100 throttling controllers to execute large amounts on the Hong Kong Stock trade simultaneously. Total gross profit increased 113% year-over-year to HKD373 million. Gross margin was 76% versus 74% in the same period last year. Total operating expenses were HKD196 million, an increase of 74% year-over-year and 8% quarter-on-quarter. R&D expenses were HKD84 million, an increase of 57% from last year and 13% from last quarter. The year-over-year rise was primarily due to the increase in R&D headcount in 2019, as we continue to enrich product offerings. Selling and marketing expenses were HKD65 million, up 105% year-over-year and 27% quarter-on-quarter. Our higher branding and marketing spending in the quarter resulted in the highest quarterly paying client addition of over 40,000. G&A expenses were HKD47 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 G&A personnel and the quarter-on-quarter decrease was mostly due to lower professional service fees. Net income increased by 240% year-over-year to HKD155 million. The rise was primarily due to the exponential top line growth and significant operating leverage benefits. The market volatility in the first quarter and increasing 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 while remaining vigilant about our expenses. Regarding the pandemic, so far the key effects on our financials include higher trading revenue from increased trading activities, higher net interest margins from the margin financing business, and lower interest income from bank deposits resulting from the lower benchmark interest rate. To date we have not identified any material contingencies or impairments as a result of this pandemic. Having said that, while the pandemic in Mainland China and Hong Kong has shown signs of stabilization, the ongoing impacts on the global economy and our future business are harder to predict at this moment. We will continue to closely monitor our business operations. That concludes our prepared remarks and we would now like to open the call to questions. Operator, please go ahead.

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

Hi. Hi Leaf, Arthur, and Daniel. Yes, first congratulations on the very robust first quarter results. I got two questions. One is about the turnover. So as you had mentioned, I think that the market share of Futu has grown tremendously in the first quarter as we see. It's basically a 100 percentage point growth quarter-on-quarter outpacing the Hong Kong Exchange turnover. So can you share more on 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. Actually, I think it's the highest over the past nine quarters as we had seen. So is there any particular drivers? We know that market volatility is quite high to 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 Mainland China? And how do you think in the second quarter or rest of the year, how the trends 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 both the R&D and 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 if it's because of the seasonality or if it's just the 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 costs will be like for the rest of the year. Thank you.

Okay, thank you, Weicheng. This is Arthur. I will answer your first question regarding the market shares and also part of your second question regarding the costs. I 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're right; we have gained market share in Hong Kong, particularly in the first quarter. Compared with last year's Q4, our estimation is that, 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%. This year, on average in the first quarter, our market share, the highest, is close to 1.4%. Also, I think the spike in trading volumes is heavily related to the overall market volatility, particularly in February and also in March. Then on the cost side, we have some guidance to the market in the fourth quarter -- in the fourth quarter earnings call last time. We expect the number of our headcounts this year will be roughly in the range of 20%. In terms of the marketing expenses, we target for the acquisition cost per each new client to 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 dependent on our client acquisition strategies. Given that our economic units this year still make valid sense, I think for us we will be more aggressive in our marketing spending 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 trends she observed in the second quarter and also all estimations in the second half of this year. Thank you. [Foreign Language]

So a large part of our paying client growth can be attributed to the strong growth momentum of our Hong Kong local business. So in the first quarter, as Li 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 Q4 2019 earnings results, we gave guidance of 90,000 net paying client addition in 2020, and so far observing from the run rate, we are pretty confident about succeeding this previous guidance that we gave out, partly because I think we are ramping up our marketing in the 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%, the effective tax rate. So is that like a normalized rate or what can we expect for the rest of the year, or is the first quarter just a seasonal and 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 benefit in Hong Kong and also our tax obligations in Mainland China. I think this effective tax rate will be valid in the next one or two years as well. Thank you.

Yes. Got it. Thanks, Arthur.

[Operator Instructions] There are no further questions at this time. I would 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 representatives. Thank you and goodbye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.