Earnings Call Transcript - FUTU Q1 2025

Operator, Operator

Hello, ladies and gentlemen. Welcome to Futu Holdings First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management 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 to CEO, Head of Strategy and IR at Futu. Please go ahead.

Daniel Yuan, Chief of Staff to CEO, Head of Strategy and IR

Thanks operator, and thank you for joining us today to discuss our first quarter 2025 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 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 annual report. With that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese, and I will translate.

Leaf Li, Chairman and Chief Executive Officer

Thank you all for joining our earnings call today. We kicked off 2025 with strong momentum, adding approximately 262,000 new funded accounts in the first quarter, which is up 48% year-over-year and 22% quarter-over-quarter. By the end of the quarter, total funded accounts stood at 2.7 million, reflecting a 42% increase from a year ago and an 11% rise sequentially. With a third of our annual target already achieved, we're tracking well against our guidance of 800,000 net new funded accounts in 2025. For the second consecutive quarter, the Hong Kong market led in new funded accounts amid a positive sentiment for China equities. An active IPO calendar also helped us acquire new clients while reactivating previously dormant ones. We believe that brokers with strong brand equity, seamless user experience, and superior execution capabilities are best positioned to capitalize on market opportunities for sustained growth. Funded account growth in the U.S. accelerated as we enhanced the platform experience for active traders. Our trading campaign in New York City also increased brand visibility and deepened engagement with retail investors. Malaysia delivered the fastest sequential growth in new funded accounts among all seven markets, driven by effective marketing campaigns and our seamless Malaysian IPO subscription experience. Looking ahead, we see significant potential for market share expansion and remain committed to product localization and brand investment. In Japan, new funded accounts experienced strong sequential growth, reaching a historic high, reaffirming our status as the preferred platform for U.S. equity trading among Japanese retail investors. Among the products we launched in the first quarter, the standout was Futubull AI, a smart investment assistant using Futu’s proprietary financial data and insights from the investor community. This integrated solution combines AI-powered search, Q&A, and customer support, providing context to tailored responses for retail investors. Since its launch, it has received overwhelmingly positive feedback with a satisfaction rate of around 90% and has shown significantly higher accuracy and professionalism in addressing investment-related questions compared to general-purpose models. We plan to introduce similar AI offerings to other international markets in the second quarter to empower investors globally. In the first quarter, we also launched a brand new desktop version of Futubull built on a new framework compatible with Windows, Mac OS, and Linux. This next-generation version features intuitive drag-and-drop tools for building quantitative strategies and outlines multi-leg option strategies that align with clients' views on securities, delivering institutional-grade functionalities in a user-friendly manner. In Japan, we rolled out U.S. fractional shares trading in February to enhance accessibility, followed by the April launch of U.S. options trading to help clients better capture market movements. Total client assets reached HKD 830 billion, a 60% increase year-over-year and a 12% increase quarter-over-quarter, primarily driven by record net asset inflow. The rally in Hong Kong equities led by large-cap tech names contributed to substantial asset inflow. Total client assets in Singapore grew by 11% sequentially, marking the 11th consecutive quarter of double-digit growth, thanks to strong inflow into U.S. equities and wealth management products. In Canada and Australia, average client assets rose for the fifth consecutive quarter, indicating improved client quality and growing brand trust. Margin financing and securities lending balance closed the quarter at HKD 50.3 billion, remaining largely stable from the prior quarter as clients engaged in March amid a market pullback. Total trading volume hit HKD 3.22 trillion in the first quarter, a 140% increase year-over-year and an 11% increase quarter-over-quarter. U.S. equity trading rose 8% sequentially to HKD 2.25 trillion, supported by buying interest in semiconductor and technology stocks. Trading volume in Hong Kong equities advanced 21% quarter-over-quarter to HKD 916 billion, buoyed by an upswing in investor sentiment during the recent rally. In the U.S., we observed double-digit sequential growth in both the number of options traders and options contracts traded, with the latter reaching a new historic high. Wealth management plan assets reached HKD 139.2 billion by the end of the quarter, representing a 118% increase year-over-year and a 26% increase quarter-over-quarter; 29% of funded accounts now hold wealth management products, reflecting a further sequential increase. A significant share of the inflow was attributed to money market funds as clients sought safe haven assets amid market volatility. Concurrently, we experienced rising allocations into bond funds and strong demand for structured notes, particularly in Singapore. In Hong Kong and Singapore, we expanded our structured product offerings with FX-linked notes. In Malaysia, we onboarded equity funds, and in Japan, we introduced U.S. dollar-denominated money market funds to better meet clients' cash management needs. As of the end of the quarter, we have 498 IPO distribution and investor relations clients, an increase of 16% year-over-year. In the first quarter, we participated in several landmark Hong Kong listings as a joint manager, including those of Bloks Group and Guming Holdings, acting as the exclusive online broker for IPO distribution. Notably, in the much-anticipated Misha Group IPO, 70,000 clients contributed to over HKD 1 trillion in subscription amount, ranking us first among all brokers in both total subscription amount and number of subscribers. We observed that these high-profile IPOs generally lead to increased client engagement, higher stock trading volume, and asset inflow. Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

Arthur Chen, Chief Financial Officer

Thank you Li and Daniel. Please allow me to walk you through our financial performance in the first quarter. All the numbers are in Hong Kong dollars unless otherwise noted. Total revenue was 4.7 billion, up 81% from 2.6 billion in the first quarter of 2024. Brokerage commission and handling charge income was 2.3 billion, an increase of 113% year-over-year and 12% quarter-over-quarter. The year-over-year increase was mainly driven by higher trading volume, partially offset by the decline in blended commission rate. The year-over-year decline in blended commission rate was mainly driven by changes in product mix and a higher average order size for Hong Kong stock trading. The quarter-over-quarter increase was mainly driven by the sequential growth in trading volume. Interest income was 2.1 billion, up 53% year-over-year and 2% quarter-over-quarter. The year-over-year increase was driven by high interest income from security borrowing and the lending business, margin financing, and bank deposits. The quarter-over-quarter increase was driven by higher margin financing income as well as higher interest income from security borrowing and the lending business, partially offset by lower interest income from bank deposits due to lower interest rates on clients' cash deposits. Other income was 314 million, up 101% year-over-year and down 11% quarter-over-quarter. The year-over-year increase was primarily attributable to higher fund distribution service income and currency exchange income. Our total cost was 749 million, an increase of 59% from 417 million in the first quarter of 2024. Brokerage commissions and handling charge expenses were 144 million, up 138% year-over-year and 28% quarter-over-quarter. Both the year-over-year and quarter-over-quarter increases were roughly in line with the movement of our brokerage commission and handling charge income. Interest expenses were 469 million, up 50% year-over-year and down 9% quarter-over-quarter. The year-over-year increase was driven by higher interest expenses associated with our security borrowing and lending business and higher margin financing interest expenses. The quarter-over-quarter decrease was mainly due to lower margin financing interest expenses and lower interest expenses associated with our security borrowing and lending business. Processing and servicing costs were 136 million, up 44% year-over-year and down 10% quarter-over-quarter. The year-over-year increase was largely due to higher market information and data fees for enhanced market data coverage, while the quarter-over-quarter decline was mainly driven by lower system usage fees, as well as lower marketing information and data fees. As a result, our total gross profit was 3.9 billion, an increase of 86% from 2.1 billion in the first quarter of 2024. Gross margin was 84% compared to 81.9% in the first quarter of 2024. Operating expenses were up 36% year-over-year and down 12% quarter-over-quarter to 1.3 billion. R&D expenses were 386 million, up 15% year-over-year and down 3% quarter-over-quarter. The year-over-year increase was primarily driven by investing in AI capabilities and related technology initiatives. The quarter-over-quarter decline was mainly due to the sequential decrease in R&D spending. Selling and marketing expenses were 459 million, up 57% year-over-year and down 1% quarter-over-quarter. The year-over-year increase was roughly in line with the growth of our new funded accounts. The quarter-over-quarter decrease was mainly due to lower client acquisition costs, partially offset by the sequential increase in new funded accounts. G&A expenses were 415 million, up 38% year-over-year and down 28% quarter-over-quarter. The year-over-year increase was primarily due to increases in general administrative expenses to support overseas market development, while the quarter-over-quarter decrease was mainly due to bonus accrual for general administrative personnel in the previous quarter. As a result, income from operations increased by 125% year-over-year and 21% quarter-over-quarter to 2.7 billion. Operating margin increased to 57.2% from 46% in the first quarter of 2024, mostly due to strong top-line growth and operating leverage. Our net income increased by 107% year-over-year and 15% quarter-over-quarter to 2.1 billion. Net income margin expanded to 45.6% in the first quarter as compared to 39.9% in the same quarter last year. Our effective tax rate for the quarter was 18.6%. That concludes our prepared remarks. We would now like to open the call to questions. Operator, please go ahead.

Operator, Operator

First question comes from Cindy Wang of China Renaissance. Please go ahead.

Cindy Wang, Analyst

Thank you for taking my call. I have two questions. First, the overall Hong Kong and U.S. stock markets experienced significant fluctuations in April and May. Could you provide some insights on the trading velocity, trading volume, and the margin financing security lending balance on your platform for the second quarter? My second question is regarding the recent launch of membership programs by Futubull and moomoo. Can you explain the business model for these programs and share how many paying clients have subscribed so far? Looking ahead, what benefits do you anticipate for Futu from these programs?

Arthur Chen, Chief Financial Officer

The new funded accounts in the second quarter are likely to experience a significant sequential decrease, primarily due to a high baseline from the first quarter. However, we are maintaining strong momentum in client acquisition for the second quarter and are confident in reaching our target of 800,000 new paying clients by 2025. Despite market volatility, clients are actively trading, and based on our current activity, we anticipate an increase in total trading volume. Clients are also depositing substantial assets into our platform, and our data suggests that net asset inflows will remain high, similar to what we experienced in the first quarter. Additionally, since the market rebound in mid-April, we expect an increase in our total client assets. Regarding the membership programs we have recently launched, they are primarily aimed at clients utilizing our wealth management products, particularly those with significant assets, high trading frequency, or specific risk preferences for alternative investment products. We plan to tailor our offerings based on clients’ risk appetites, asset levels, and product requirements. Since these programs are new, the number of members relative to our total client base is still quite limited.

Operator, Operator

Thank you for the questions. Our next question comes from Charles Zhou from UBS. Please go ahead.

Charles Zhou, Analyst

First of all, congratulations to the management. I believe it’s a very strong set of results that surpasses both the consensus and our estimates. I have two questions. The first is, could you provide more details about the timeline for your crypto trading business and the implications of the recent passage of the Hong Kong stablecoin bill for your company? The second question pertains to customer retention and client assets under management in light of recent concerns regarding taxation on overseas investment income for mainland China clients.

Arthur Chen, Chief Financial Officer

The crypto prices have pulled back since the first quarter, impacting investor enthusiasm on our platform. However, the monthly trading volume and the number of crypto traders remained high. Since May, crypto prices have rebounded, leading to renewed interest in crypto trading and an increase in daily trading volume. We will continue to develop our crypto-related product capabilities. Recently, we introduced crypto deposit functionalities in Hong Kong, making it easier for clients to deposit crypto into Futu’s platform and switch between different asset classes. Following this launch, we received positive feedback from the Web3 community and clients. We plan to launch crypto withdrawal functions soon. Additionally, we launched a crypto paper trading function in Hong Kong, becoming the first regulated crypto platform to offer this, which helps new investors learn trading rules and procedures, especially during volatile market conditions. A few days ago, we began offering crypto trading on a grayscale basis across most states in the U.S., now supporting over 30 mainstream cryptocurrencies. We will closely monitor our clients' trading behaviors to improve our product and aim to increase the number of cryptocurrencies offered in the near future. From a long-term perspective, we are optimistic about virtual assets as an asset class. For Futu, the take rate for crypto trading is higher than that for cash equities. We believe that as regulatory clarity increases, there will be more cryptocurrencies and functions permitted, providing Futu with additional monetization opportunities from this asset class. We see significant potential in crypto from both an AUM and revenue perspective, and we are still in the early stages of this journey. Regarding stablecoins, we are aware of recent regulatory developments. Airstar Bank, which Futu invested in, is participating in the stablecoin sandbox and exploring stablecoin custody options. Many countries worldwide now participate in the common reporting system, applying CRS rules to all licensed financial institutions, including banks, insurance companies, and brokers. These rules are consistently enforced across various financial intermediaries. Although the U.S. is not part of the CRS, it has its own FATCA system for tax information exchange with many major countries. Like other licensed brokers in Hong Kong, Futu Securities will not disclose client information or trading data to third parties without explicit requests from the Hong Kong SFC or if we are not in compliance with relevant laws. We have seen rumors online regarding Futu disclosing client data and trading information to third parties, and we want to clarify that these claims are unfounded. We always comply with regulatory requirements and aim for our clients to understand these laws and regulations accurately. So far, we have not observed meaningful client attrition or asset outflow as a result.

Operator, Operator

Thank you for the question. One moment for the next question. Our next question comes from Emma Xu of Bank of America Securities. Please go ahead.

Emma Xu, Analyst

Congratulations on another quarter of outstanding performance. I have a question regarding HIBOR. Recently, HIBOR dropped sharply. How will this impact your net interest income? Meanwhile, with HIBOR falling, are we seeing changes in client behavior such as increased fund deposits, more allocations to money market funds, or more active trading?

Arthur Chen, Chief Financial Officer

In our last earnings call, we conducted a sensitivity analysis. If there is a 25 basis point rate cut, our pre-tax monthly profit would decrease by approximately HKD 8 million to HKD 10 million. However, after the Fed cut rates by 50 basis points last year, we have observed a consistent growth in overall interest income revenues in the first quarter on a quarter-over-quarter basis. This growth is primarily due to the average size of our idle cash balance, which has largely offset the effects of the rate cut. Additionally, the recent decrease in HIBOR is likely to encourage more trading activity from clients, which would lead to higher trading commissions. However, the causes behind the significant drop in HIBOR could be temporary, partly due to certain major IPOs in Hong Kong, and it remains uncertain whether it will stay at such a low level.

Operator, Operator

Thank you for the questions. One moment for the next question. Our next question comes from Chiyao Huang from Morgan Stanley. Please go ahead.

Chiyao Huang, Analyst

My first question is about the record high client asset inflows this quarter. I'm curious about the mix of inflows from different regions, particularly from China, and what the outlook is for the entire year. The second question is whether there are any quantitative metrics available to assess engagement and satisfaction with the AI tools we have introduced, and what further actions can be taken in this area.

Arthur Chen, Chief Financial Officer

In terms of first quarter asset inflows, we are experiencing strong momentum across our seven different markets. Overall asset inflow for the group rose by over 50% compared to the previous quarter, marking a record high for us in a single quarter. Geographically, Hong Kong and Singapore continue to be the primary contributors to these asset inflows, and we are optimistic about the asset inflow situation for the entire year. We have been offering the Futubull AI functions for roughly two months and are currently analyzing the data. Preliminary numbers indicate positive feedback from our users regarding the Futubull AI function, resulting in increased engagement and activity on our platform. We have integrated our AI functions into our membership programs, providing a limited number of free questions to the AI based on the membership tier determined by client assets and trading behavior. This integration has contributed to net asset inflows and heightened trading velocity. We plan to expand the AI functions to more international markets based on the initial interest shown by our clients in Hong Kong.

Operator, Operator

Thank you for the question. One moment for the next question. Our next question comes from You Fan of CICC. Please go ahead.

You Fan, Analyst

This is You Fan from CICC, and I have two questions. The first is about the customer acquisition cost, which has seen a significant decline this quarter. What is the reason for this, and do you have any new guidance for future CAC? The second question pertains to your announcement about entering the New Zealand market. Could you provide more details about this market?

Arthur Chen, Chief Financial Officer

In the first quarter, the average customer acquisition cost (CAC) was about HKD 1,800, which is lower than our targets set at the start of the year. This is partly due to strong market conditions in China, a robust IPO market in Hong Kong, and fluctuations in the U.S. Our marketing team leveraged these opportunities, and our brand strength contributed to excellent outcomes. Moving forward, we plan to keep focusing on client growth while enhancing our brand-building initiatives related to funding. Over the long term, we believe that boosting brand equity will increase our resilience across different investment cycles. Consequently, we will keep our full-year guidance on CAC the same, but we will reassess this in the upcoming quarters. Futubull has become the second-largest broker in Australia, and we have built significant brand equity, making our expansion into New Zealand a logical step. We have recognized that Australian and U.S. stocks are among the top asset classes for Kiwi investors, and we already possess strong capabilities in these areas. Thus, entering the New Zealand market will not require substantial investment in licensing, personnel, or research and development, as we can effectively use our existing IT infrastructure and marketing resources from Australia. Therefore, the additional costs will be manageable, and we expect favorable returns on investment from the New Zealand business.

Operator, Operator

Thank you for the question. One moment for the next question. Our next question comes from Peter Zhang from JP Morgan. Please go ahead.

Peter Zhang, Analyst

Thanks for giving me the opportunity to ask questions. This is Peter Zhang from JP Morgan. I have two questions. First, about the effective tax rate. We noticed that the effective tax rate picked up in the first quarter to 18%. What is the reason behind this, and what do you expect the medium to long-term effective tax rate for Futu going forward? Second question is about the blended commission rate. We observed that in the first quarter, the blended commission rate stabilized and picked up slightly. We wish to understand the reason behind this and what the trend looks like going forward.

Arthur Chen, Chief Financial Officer

In the first quarter, our effective tax rate is approximately 18.6%. This increase can be attributed to two factors. First, as more international markets begin to report profits, we have fully tapped into our historically accumulated tax credits, which improves our overall effective tax rate. Second, the implementation of Pillar Two by the OECD in various markets will have a minor effect on our overall effective tax rate. Therefore, I anticipate that our effective tax rate will stabilize between 17% and 18% in the upcoming quarters. Regarding the blended commission rates, we observed a slight increase quarter-over-quarter. This is primarily due to shifts in our product mix, with more clients engaging in certain derivatives, such as U.S. options. As we introduce additional new products, including crypto trading, I expect our blended commission rate to remain stable.

Operator, Operator

Thank you for the questions. One moment for the next question. Our next question comes from Alan Chan from Citi. Please go ahead.

Alan Chan, Analyst

Thank you, management, for the opportunity to ask a question. This is Alan from Citibank. My first question is about the Hong Kong markets. Futu previously aimed for a market share of about 40% in Hong Kong, which would mean around 1 million paying customers there. Based on our Q1 numbers, we are nearing that target. Given the rapid growth in new customer acquisitions in Hong Kong, I believe that reaching our long-term goal of 40% may be possible in the next few quarters. With that in mind, could management provide an updated perspective on the Hong Kong market, particularly in light of recent changes in the competition? Additionally, beyond the 40% market share target, how much room do we have for further increasing our market share in Hong Kong? My second question relates to interest income. We have noticed a significant increase in our idle cash balance in the first quarter. Could management clarify the sources of our interest income? Specifically, how much comes from idle cash compared to margin financing and other lending activities?

Arthur Chen, Chief Financial Officer

Regarding idle cash, approximately 35% to 40% of our total interest income for this quarter comes from idle cash-related income. The significant increase in revenue from idle cash results from two main factors. Firstly, we have seen strong net asset inflows from existing clients, along with acquiring many new clients in the first quarter. Secondly, this quarter, a number of clients chose to increase their cash positions while reducing stock positions due to market volatility, benefiting our revenue. Concerning our market share in Hong Kong, the number of funded accounts you mentioned relates to our greater China business, while the market share target is specific to our local Hong Kong business, making those figures not directly comparable. Over the last two quarters, the Hong Kong market has contributed the highest number of paying clients compared to our other markets, reinforcing our confidence that as a leading broker in Hong Kong, we will reap considerable advantages from favorable market conditions. We believe our Hong Kong business has significant growth potential regarding client numbers and assets. The Hong Kong market has always been competitive, especially with the entry of notable peers in recent years. However, regardless of external market changes, we continue to innovate our products and features, and we believe our capabilities create a strong barrier to entry. In every market we enter, we prioritize delivering customized product experiences, innovative features, superior user experiences, and competitive pricing. This collective approach allows us to gain user mindshare in Hong Kong and bolster our market share. Additionally, brand recognition is crucial in financial services, and building a strong brand takes time. Futu has developed a significant level of trust with clients, resulting in client retention consistently above 98-99% quarterly. We believe newcomers who cannot provide differentiated products and services will struggle to change client preferences. Our emphasis on cultivating brand identity, along with the growing presence of high-net-worth clients in Hong Kong, has led to a considerable increase in net assets quarter-over-quarter.

Operator, Operator

Thank you for the questions. Our last question comes from Zoey Zong from Jefferies. Please go ahead.

Zoey Zong, Analyst

Thank you to the management team for addressing my questions, and congratulations on your strong results. I have two questions. First, I'd like to follow up on Futubull AI. The management mentioned that more AI products will be launched in international markets in Q2. What are your strategies and investment plans regarding these AI products? My second question relates to VATP. Can you provide an update on the development of your VATP license?

Arthur Chen, Chief Financial Officer

For the VATP license, there hasn't been any update in the first quarter. Although we have been shortlisted by the Hong Kong SFC for the VATP license along with a few other applicants, we are still in the second phase of the process. There is still a considerable amount of validation and testing work that independent consultants need to complete before final approval can be granted by the SFC. We will keep you informed about any progress. Regarding our AI strategy, Futu has formed its own AI team. We closely track industry developments and stay updated with innovations. AI is utilized in two main ways at Futu: internally to boost operational efficiency, and externally to create new products and features for our clients. For operational efficiency, we have already implemented AI in various situations, such as customer service and verifying account opening documentation, and we've observed noticeable improvements in efficiency. For client-facing features, we think AI can greatly reduce the investment threshold for active traders and help them efficiently gather information to make informed investment decisions. For instance, we will soon introduce algorithmic trading capabilities that will allow retail clients to specify their stock of interest, monitoring parameters, and trigger conditions, enabling our AI to create algotrading functions tailored to their needs, which we believe will considerably lower barriers for users.

Operator, Operator

Thank you for the questions. With that, I'd like to hand the call back to Mr. Daniel Yuan for closing.

Daniel Yuan, Chief of Staff to CEO, Head of Strategy and IR

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.

Operator, Operator

That concludes today’s conference call. Thank you for your participation. You may now disconnect.