Futu Holdings Ltd Q4 FY2021 Earnings Call

Hello, ladies and gentlemen, welcome to Futu Holdings Fourth Quarter and Full Year 2021 Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. 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, Daniel Yuan, Chief of Staff and Head of IR at Futu. Please go ahead, sir.

Thanks, operator, and thank you for joining us today to discuss our fourth quarter and full year 2021 earnings results. Joining me on the call today are Mr. Leaf Li, 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 risk and uncertainty. 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. Leaf will make his comments in Chinese and I will translate.

Thank you all for joining our earnings call today. 2021 marks another year of rapid client base expansion as we experienced our full-year paying client guidance by adding approximately 728,000 paying clients. This brings our total paying clients to over HK$1.2 million, translating into 141% growth year-over-year. We added 77,000 paying clients in the fourth quarter, with about 90% of net paying clients coming from Hong Kong and other overseas markets. Paying client retention remains around 97% despite the negative impact from a series of headline news. Looking into 2022, we are guiding for 200,000 net new paying clients, representing 16% year-over-year growth in total paying clients. We will dynamically adjust our growth target subject to market conditions. Among the net additions, we expect roughly one-third to come from the Greater China region, one-third from Singapore, and one-third from the U.S. and Australia. Our client assets were HK$408 billion, up 43% year-over-year and down 4% quarter-over-quarter, while a tumbled equities market and some headline news weighed on the total asset balance. Asset inflows remained positive in each market, totaling more than HK$10 billion. In Singapore, strong asset inflows pushed every client asset up by 26% quarter-over-quarter, despite a negative mark-to-market impact on their holdings. Total trading volume was HK$1.2 trillion, flat year-over-year. Due to fewer trading dates in the fourth quarter, total trading volumes were down 9% sequentially, despite a higher turnover of 3.1 times. Trading volume for U.S. stocks was HK$777 billion, up 14% quarter-over-quarter, driven by surging trading volume in some U.S. tech names, higher U.S. options trading volume, and increased trading volume from Singapore clients. Trading volume for Hong Kong stocks was HK$403 billion, down 33% quarter-over-quarter due to dampened market sentiments, especially around Chinese tech stocks. Our wealth management business maintains resilient growth, with total client assets reaching around HK$19 billion, up 84% year-over-year and 6% quarter-over-quarter. In Singapore, we have established partnerships with 20 fund houses and we will continue to expand our mutual fund product offerings and services in the coming quarters. In Hong Kong, we established new partnerships with four prominent asset managers, including Fidelity and AXA. As of quarter-end, approximately 140,000 or 11% of our paying clients held wealth management positions. In the fourth quarter, we launched an auto-rebalancing function for our mutual fund portfolio product and distributed a flagship multi-asset hedge fund managed by a leading global alternative manager. Private fund asset balance grew substantially by 120% quarter-over-quarter. We believe alternative assets are an integral source of diversification for our high-net-worth clients during market turmoil. We intend to onboard more private funds in the coming quarters. As of year-end, Futu I&E had 236 IPO and IR clients and 400 ESOP clients, up 125% and 152% year-over-year, respectively. We acted as joint book managers for several high-profile Hong Kong IPOs, including SenseTime, for which we contributed over 20% of the retail subscribers and retail subscriptions. As of quarter-end, over 800 companies, including more than 200 listed companies with market capitalization above HK$10 billion, held enterprise accounts in our social community to interact with retail investors. I'd like to invite our CFO Arthur to discuss our financial performance.

Thanks, Leaf and Daniel. Please allow me to walk you through our financial performance in the fourth quarter. All the numbers are in Hong Kong dollars, unless otherwise noted. Our total revenue was HK$1.6 billion, up 35% from HK$1.18 billion in the fourth quarter of 2020. Ending a strong year, as full year 2021 revenue grew 115% to over HK$7 billion. Brokerage commission and handling charge income was HK$857 million, an increase of 19% year-over-year and a decrease of 8% quarter-over-quarter. The increase was driven by a higher blended commission rate of 7 basis points; the blended commission rate expanded as the commission rate for U.S. equity rose year-over-year and the developed trading contributed a higher proportion of brokerage commissions. The quarter-over-quarter decrease was mainly due to lower trading volume for Hong Kong stocks. Interest income was HK$618 million, an increase of 83% year-over-year and a decrease of 2% quarter-over-quarter. The year-over-year increase was driven by higher margin financing income, as a result of a higher daily average margin financing balance. Other income was HK$128 million, down 2% year-over-year and 23% quarter-over-quarter. The year-over-year and quarter-over-quarter decrease was both primarily due to lower IPO financing service charge income. Our total cost was HK$217 million, a decrease of 10% from HK$242 million in the fourth quarter of 2020. Brokerage commission and handling charge expenses were HK$88 million, down 34% year-over-year and 30% quarter-over-quarter. The expenses didn't move in line with our brokerage commission and handling charge income due to our upgraded service package with our U.S. clearing house and the lower IPO subscription fees. Interest expenses were HK$56 million, down 14% year-over-year and 25% quarter-over-quarter. The year-over-year decrease was due to lower IPO financing interest expenses, partially offset by higher interest expenses associated with our securities borrowing and lending business. Interest expenses declined quarter-over-quarter primarily due to lower lender funding costs. Processing and servicing costs were HK$74 million, up 65% year-over-year and 9% quarter-over-quarter. The increase was primarily due to higher cloud service fees to support overseas market expansion and to process a larger number of concurrent trades. As a result, total gross profit was HK$1.39 billion, an increase of 47% from HK$944 million in the fourth quarter of 2020. Gross margin was 87% as compared to 80% in the fourth quarter of 2020. Operating expenses were up 127% year-over-year and 8% quarter-over-quarter to HK$826 million. To break it down, R&D expenses were HK$271 million, up 64% year-over-year and 21% quarter-over-quarter. The increase was mainly due to an increase in R&D headcounts, as we continue to support new product offerings, invest in U.S. sales clearing capabilities, and develop customized products for international markets. Selling and marketing expenses were HK$337 million, an increase of 270% year-over-year and a decrease of 16% quarter-over-quarter. The year-over-year increase was due to higher marketing and branding spending, especially in international markets. The expenses declined quarter-over-quarter as performance marketing spending came down amid dampened market sentiments. G&A expenses were HK$218 million, up 145% year-over-year and up 59% quarter-over-quarter. The rise was primarily due to an increase in headcount for G&A personnel, with the opening of more international offices. As a result, our net income decreased by 6% year-over-year and 19% quarter-over-quarter to HK$499 million. Our effective tax rate for the quarter was 12.9% and the net income margin was 31%. In addition to the US$300 million share repurchase program previously announced on November 3, 2021, which we have completed in open market transactions, our board has authorized a new share repurchase program, enabling us to purchase up to US$500 million worth of our ADS until December 31, 2023. We plan to fund this repurchase from our current working capital. That concludes our prepared remarks. We would now like to open the call to questions. Operator, please go ahead.

Thank you. Our first question comes from Katherine Liu from Morgan Stanley. Please ask your question.

Hi management. Thank you for the opportunity to ask my question. I'm Katherine Liu from Morgan Stanley. I have two questions. First, can management provide guidance on year-to-date operational results, including details on new client additions, geographical breakdown, client assets, and turnover rates? Second, regarding overseas markets, could management outline their plans and targets for the Australian market and how it compares to the Singapore market? Additionally, is there any update on the U.S. Self-Clearing progress and expectations for revenue in terms of profitability? Thank you.

Thank you, Katherine. This is Arthur. Maybe I can answer your last question first. Then I will leave the first two questions to Leaf. In terms of Self-Clearing, so far, we have already migrated dollar value around 40% of our U.S. stock holdings from our U.S. stream business partners to our own clearinghouse in Dallas. And our target is we try to complete this migration toward the end of the third quarter, because we want to ensure the stability and the system's scalability during this transition. So, yesterday, we have already seen positive impacts from the Self-Clearing, which have generated revenues alongside a lot of zero or essentially zero cost fundings to our operations outside of the U.S. And as we mentioned in our previous earnings calls, we do have some very rough calculations after the Self-Clearing completions. For 2022, we expect there will be around HK$160 million operating revenues incrementally from the Self-Clearing migration, and the majority part will be translated into the pre-tax profit. Thank you.

In terms of business update, our addition of clients has slowed down a bit this year due to the poor performance of the equities market and a less active IPO market. However, the positive aspect is that we are not seeing any lasting effects from the recent news on client attrition and retention. Breaking it down by different markets, our client acquisition in the Greater China region remained stable. Even though new competitors have entered the market, we maintain a strong market position. In times of market performance and regulatory uncertainties, we will adopt a more cautious growth strategy. In Singapore, we have experienced healthy net asset inflows, which help counterbalance the negative impacts from market downturns. However, client acquisition in Singapore also slowed due to poor market performance. Trading turnover remained stable, and net asset inflow has rebounded from the previous quarter’s numbers. Overall, client assets saw a slight decline due to negative impacts from market valuations. Regarding our product offerings, in Australia, we've introduced U.S. stock trading, Australian stock trading, and ETF trading, and we plan to continue enhancing our offerings. As mentioned earlier, for our self-clearing business, we have moved about 40% to 50% of our U.S. stock holdings to this segment, resulting in zero-cost funding from our clearing operations. I would also like to discuss the competitive landscape in Australia. On one side are traditional players like CommSec and ANZ, whose trading accounts are seamlessly integrated with their bank accounts, allowing for smooth transfers. However, they usually charge relatively high commission rates and fees for idle accounts. On the other side are online brokers like SelfWealth and Stake, known for their low commission rates and straightforward trading interfaces, but they have a smaller client base, typically only a few hundred thousand. We believe we have advantages in our product offerings and technology capabilities. However, as we are new to the market, it's challenging to assess the market potential, and we will provide further updates on our Australian operations next quarter.

Thank you very much.

Thank you. Our next question comes from Leon Qi from Daiwa Capital. Please ask your question.

Hi. Thanks for allowing me to ask a few questions. This is Leon Qi from Daiwa. I have two questions today. First, one is about your user mix day, you haven’t mixed geographically, appreciate that management just mentioned a very clear guidance on our user acquisition targeting 2022 and the specific regional breakdowns on it. But if we just take a longer time horizon strategically for the next three years, would you expand the overseas markets? I'm referring in particular to the markets except for Mainland China. Do they expect that the overseas markets to contribute to a much larger proportion of the users and AUM? Appreciate it for management to give us a very high-level overview of that over a longer timeframe. The second question is about your user acquisition costs. Understand your user acquisition has been very successful over the past few years. But given the dramatic change in the market conditions over the past few months, well, naturally, a lot of customers and potential customers are becoming more cautious. Would you keep spending your user acquisition dollars in a way that has been similar over the past few years, or will you consider some changes in the tactics that you are doing in a market that is less exciting, at least for the moment.

Thank you for the question. Maybe I take the second question first. I will also leave the first question to Leaf. In terms of the marketing expenses, you're right, it is highly correlated to market conditions as everybody can understand. For 2022, we expect our cash for each new paying client will be in the range of around HK$2,500 subset. And in total, we will have different parameters to evaluate the effectiveness of the client positions, not only just the CAC numbers for each new paying client, but also we will be focusing more on the payback period for this CAC, i.e., the client's effective ARPU versus cap ratios. Depending on different markets for these more mature markets such as Greater China, this payback period will be controlled in the ratio of six months to nine months, as always. But for some new markets such as Singapore, Australia, and the U.S., etc., we are more generous in this ratio because we think in the early stage, user engagement is the most important thing we need to consider. Besides this ratio, we will also look at another ratio that is the new client asset acquisition costs, i.e., how much money we need to pay to migrate incremental new assets into our platform. On an apple-to-apple basis we – if we do not consider the market fluctuations year-to-date or which may continue in the next couple of quarters, we do expect our new client acquisition amount – this client net asset new inflow will be increased by 20% to 25% versus the number at the end of last year. Thank you.

In three years, we expect the ratio of our paying clients from Mainland China, Hong Kong, and other overseas markets to be roughly 1:3:6. From a client asset perspective, this ratio will be closer to 2:3:5.

Thank you.

Thank you very much.

All right. Thank you. Our next question comes from Zoey Zong from Jefferies. Please ask your question.

Thank you to management for addressing my question. I have two inquiries. First, when will we begin offering our digital currency trading services? Secondly, how many of our paying clients were acquired through the ESOP? Thank you.

Sure. I will take these two questions. For the second question, actually the new paying clients contributed by the ESOP channel just account for low single digits for the fourth quarter. Of course, you can understand, the IPO situation, the market was not very strong in the fourth quarter and also year-to-date as well. For the crypto business, we are still doing the feasibility studies and also certain license applications; therefore, we have not confirmed the time schedule yet.

Thank you.

Thank you. Our next question comes from Zeyu Yao from CICC. Please ask your question.

Hi, management. Thanks for taking my question. This is Zeyu Yao from CICC. Congratulations on our solid results in this financial crisis market. I'd like to ask two questions. The first one is about our customer acquisition strategy in the U.S. market. What’s new in that area, and what are our plans for business growth in the mid to long term? Secondly, during our business expansion in 2022, should we expect to see a rapid increase in employment-related expenses similar to what we experienced last year? Thank you.

Thanks Zeyu. Maybe I can share some color or our initial thoughts for the headcount increase for 2022. Then my colleague, Robin Xu, can give you some more colors on our U.S. operations and the U.S. marketing strategy going forward. For the overall headcount in 2022, we do look for another 20% year-over-year growth. This growth will primarily be deployed into our R&D functions and also the international market development. The reasons behind putting more staff into the R&D is we want to do a very significant system migration, i.e., from our current infrastructure, building on language C++ to another result and also we will adopt a more proud native technology in our infrastructure. We are dedicated to assigning a special task force to develop these two areas. And we expect this migration will be complete towards the end of this year. After this completion, we do expect our R&D efficiency will be enhanced by 20% to 30% down the road, and the search migration will ensure our system stability and scalability in the next three to five years. At the same time, it will significantly enhance system flexibility and lower IT spending in the IDC and also the server. These annual IT spending savings will exceed HK$100 million starting from 2024. Thank you. As our client acquisition picked up in the fourth quarter, I think on one hand, that's because we continue to invest to improve our product experience. And we want to improve the conversion rates from the app downloads to registration, from registration to account opening, and then from account opening to asset deposits. Another reason is that as our advertising spending in the U.S. market increases, our brand recognition has also risen in the past couple of quarters as a result. I think we need more time to continue to improve our client acquisition efficiency in the U.S. Thank you.

Thank you.

Thank you. Our next question comes from Emma Xu from Bank of America Securities. Please go ahead with your question.

I have questions regarding the newly announced $500 million repurchase program. Does it represent approximately 85% of the cash outstanding by the fourth quarter of 2021? Is this due to a lack of need for cash or working capital for future investments, or do you believe you can continue to generate enough cash to fund future investments?

Sure. Thank you for your question. This is Arthur. I would like to answer this question. Since our IPO, we have conducted three rounds of equity financings, alongside this funding from the share placements, together with our user returns generated every year. At the end of last year, you can see our total net assets reached over $2.7 billion. And we do think, our capability to continue to generate profit and free cash flow will remain robust in the next one or two years. So, considering our current market conditions and the funding needs for organic growth, we do think now we have some idle cash which can be deployed and utilized to reward our long-term shareholders. Having said that, we will continue to closely monitor any potential merger and acquisition situations, if they appear and also the valuations to be attractive. So, this share repurchase program will cover the next almost 18 months. It will be very dependent on the market conditions and also any opportunities we may encounter. Thank you.

Right. Thank you. We have reached the end of the question-and-answer session. I'll turn the call back to Daniel for closing remarks.

Thank you, operator. 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.

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