Earnings Call Transcript - FUTU Q4 2023

Operator, Operator

Hello, ladies and gentlemen. Welcome to Futu Holdings Fourth Quarter and Full Year 2023 Earnings 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, Daniel Yuan, Chief of Staff to CEO and Head of IR at Futu. Please go ahead, sir.

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

Thanks, operator, and thank you all for joining us today to discuss our fourth-quarter and full-year 2023 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 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 statement. 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 Hua Li, Chairman and CEO

Thank you all for joining our earnings call today. In the fourth quarter, we added over 59,000 paying clients. Our total paying clients as of year-end reached over 1.7 million, representing 15% growth year over year and exceeding our guidance. This was due to level four for tissue valves increasing by volume versus the total volume of business. Client acquisition in Singapore has sustained high growth into the fourth quarter. Money market funds continue to garner significant client interest amid high interest rates and market volatility. In December, we became the first and only distributor of Fullerton Fund Management Singapore-dollar-denominated money market funds, the only T+0 Singapore dollar money market funds for retail investors in Singapore. We continue to gain user mindshare in Japan with our rich market information, comprehensive market data, and interactive social community. In the fourth quarter, the average daily downloads of the moomoo app in Japan ranked top three among all brokers and surpassed those of Nomura and Matsui Securities according to data.ai. With remarkable gains and hitting new highs, client acquisition in Japan also showed a notable sequential increase in the first quarter. We continue to streamline the account opening process to reduce leakage in the conversion funnel and focus on R&D for key investment products. We launched a growth account in December that will soon roll out Japan equities trading. Our clients in Hong Kong and Singapore will also have access to Japan stock trading in the second quarter. Client acquisition in Hong Kong slowed down due to sluggish market sentiments. However, we have rebounded in the first quarter along with the recovery of the Hong Kong stock market. In the US, we continue to prioritize client quality over quantity, with the average asset balance of new paying clients in their first quarter of onboarding increasing by over 30% compared to the last quarter. In Australia, we focused on cultivating brand equity and adding new products, including cash management. On February 26, we launched the brokerage business in Malaysia and gained significant traction. Over 30,000 clients flocked to our platform within one week of the official launch, representing the fastest growth in any of our international markets. We managed to generate high brand awareness in Malaysia from the outset, thanks to our rapid share gain in Singapore over the past three years. We observed robust paying client growth across all markets this year. In fact, we attracted more paying clients and net asset inflows in the first two months this year than in the entire fourth quarter. Given the strong momentum year to date, we are guiding for a net new paying client total of 350,000 in 2024. Total client assets increased by 16% year over year and 4% quarter over quarter to HKD486 billion. The sequential increase was largely due to robust net asset inflow across all regions and the market appreciation of our clients' US stock holdings. In Singapore, total client assets and average client assets posted sequential increases of 25% and 17%, respectively. Average client assets exceeded SGD17,000 due to strong inflows across cohorts. As we continue to build brand equity, moomoo gained traction among high-net-worth clients in Singapore. As of quarter end, margin financing and securities lending balances increased marginally by 2% quarter over quarter. While we saw an uptick in security funding balance for US stocks, the margin financing balance declined as clients unwound their positions. Total trading volume was HKD957 billion, down 12% year over year and quarter over quarter. In the fourth quarter, Hong Kong and US stock trading volumes were down 13% and 12% sequentially. Weak sentiments around Hong Kong equities and lower turnover in US tech stocks dragged total trading volume. Our share gains in the derivatives market and Hong Kong was a bright spot. Hong Kong futures and options trading had 8.5% and 14.7% market share in the fourth quarter respectively. Total client assets in wealth management increased by 82% year over year and 11% quarter over quarter to HKD58 billion, accounting for 12% of total client assets. Clients increased their allocation in money market funds and US Treasury bills to harvest high yields. Total bond holdings consequently increased by over 60% quarter over quarter. We continue to enrich our structured products by onboarding the accumulator nodes, a product that allows clients to sell their stock positions out of premium. Our enterprise business had 414 IPO distribution and IR clients, up 24% year over year. In the fourth quarter, we acted as joint book runners for several high-profile Hong Kong IPOs, including those of J&T Express and UBTech. We underwrote 37 Hong Kong IPOs in 2023 and ranked first among all brokers according to Wind. Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.

Arthur Chen, CFO

Thank you, Leaf and Daniel. Before going through our financial performance, I'd like to give you an update on our latest share repurchase program announced on March 11, 2022. As of December 31, 2023, the expiration date of the program, we have repurchased an aggregate of $11 billion ADS with approximately USD365 million total repurchase amount in open market transactions. We have put in place a new share repurchase program, which approved and authorized us to repurchase up to USD500 million of ADS before December 31, 2025. Now please allow me to walk you through our financial performance. All numbers are in Hong Kong dollars unless otherwise noted. Total revenue was $2.4 billion, up 4% from $2.3 billion in the fourth quarter of 2022. We ended 2023 with full-year revenue growing 31% to $10 billion. Brokerage commission and handling charge income were $904 million, a decrease of 14% year over year and 10% quarter over quarter. The decrease was mainly driven by lower trading volumes. Interest income was $1.3 billion, up 17% year over year and down 11% quarter over quarter. The year-over-year increase was mainly driven by higher interest income from client cash deposits due to a higher benchmark interest rate and higher margin financing income due to an increase in daily average margin balance. The quarter-over-quarter decrease was mostly due to the lower interest income from clients' cash deposits due to a decrease in daily average client cash balance. Other income was $137 million, up 46% year over year and largely flat quarter over quarter. The year-over-year increase was primarily attributed to higher fund distribution income, partially offset by lower enterprise public relation service income and underwriting fee income. Our total cost was $433 million, an increase of 27% from $342 million in the fourth quarter of 2022. Brokerage commission and handling charge expenses were $59 million, down 8% year over year and 6% quarter over quarter. The decrease was roughly in line with our decrease in brokerage commission and handling charge income, partially offset by the cost of migrating our SGX equities to our self-clearing system. Interest expenses were $271 million, up 49% year-over-year and down 6% quarter over quarter. The year-over-year increase was driven by higher interest expenses associated with our securities borrowing and lending business and the higher margin financing interest expenses. The quarter-over-quarter decrease was mostly due to lower interest expenses associated with our securities borrowing and lending business, partially offset by higher margin financing interest expenses. Processing and servicing costs were $104 million, up 7% year over year and 21% quarter over quarter. The increase was largely due to higher product service fees for new markets and higher system usage fees. As a result, our total gross profit was $1.9 billion, largely flat year over year. Gross margin was 81.7% as compared to 85% in the fourth quarter of 2022. Operating expenses were up 12% year over year and 3% quarter over quarter to $916 million. R&D expenses were $363 million, up 9% year over year and 1% quarter over quarter. The year-over-year increase was mainly due to increasing R&D headcount as we continue to support new product offerings in international markets. Selling and marketing expenses were $182 million, up 19% year over year and down 14% quarter over quarter. The year-over-year increase was due to a 41% year-over-year increase in net new paying clients, partially offset by lower customer acquisition costs. The quarter-over-quarter decrease was due to fewer net new clients and lower customer acquisition costs. General and administrative expenses were $370 million, up 12% year over year and 15% quarter over quarter. The increase was primarily due to an increase in headcount for general and administrative personnel, partially offset by lower professional service fees. As a result, income from operations decreased 9% year over year and 22% quarter over quarter to $1 billion. Operating margin declined to 43.1% from 49.1% in the fourth quarter of 2022, mostly due to operating deleverage. Our net income decreased by 9% year over year and 20% quarter over quarter to $876 million. Net income margin shrank to 36.9% in the fourth quarter as compared to 42% in the same quarter last year. Among our international business, Singapore was the first to achieve breakeven on a quarterly basis even with apportioned costs from the headquarters. As client assets continued to grow, we believe the unit economics in Singapore will maintain an upward trajectory. That concludes our prepared remarks. We'd now like to open the call to questions. Operator, please go ahead. Thank you.

Operator, Operator

First question today is from Cindy Wang from China Renaissance.

Cindy Wang, Analyst

Thanks for taking my call. And I have two questions. The first one is about the progress of improving the accounts opening process in Japan. And could you provide more color on new paying client acquisition in the fourth quarter last year versus the first quarter of this year so far in Japan? And when would you expect to launch Japan stock trading? And the second question is regarding the new paying client. So we see the new paying client target of 350,000 in 2024. It's very impressive. Could you break down by key markets, including Hong Kong, Singapore, US, Japan, etc.? Thank you.

Arthur Chen, CFO

Thank you, Cindy. I will take your second question first and will leave the first question to my colleague, Daniel. In terms of our new targets for 2024, the contributions from Singapore, Hong Kong, and the Australian markets should remain similar in absolute terms to last year. So the incremental growth drivers mainly come from new markets we entered this year and recently in the fourth quarter last year, such as Japan, Canada, and Malaysia. Thank you.

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

Hi, Cindy. This is Daniel, and I'll take your question on Japan. So in the fourth quarter, we continued to optimize the account opening process by integrating redundant processes and pages, and iterating on the key friction points. As a result, we have seen a meaningful increase in the conversion rate from users to registered clients to paying clients. However, in comparison to other international markets, there is still a lot of room for improvement in that conversion number, and optimizing that account opening process will be a key priority for us this year. Regarding Japan equities trading, we are planning to roll out the Japan equities trading to our Japan clients by the end of March. In April or May, we plan to roll out Japan equities trading for our clients in Hong Kong and Singapore. Thank you.

Operator, Operator

Thank you. Next question today is from Chiyao Huang from Morgan Stanley.

Chiyao Huang, Analyst

My question is on Singapore. So what was roughly the client number and client asset contribution on an overall firm basis? And also, I wonder what's the strategy in Singapore for 2024, and how has the competitive landscape changed in Singapore? Additionally, what's the risk appetite evolving for Singapore clients in 2024, given the US market still performing quite well? Are we trading more stocks? Thank you.

Robin Xu, Senior Vice President

In the fourth quarter, Singapore recorded very steady client growth and contributed about 30% of our total net new clients for the entire quarter. Thanks to the continued net asset inflow of our existing clients and the higher quality new clients, the total client assets and average client assets in Singapore reported sequential growth of 25% and 17%, respectively. The total client assets reported sequential increases in every single quarter since we launched the business. Average client assets have been on an upward trajectory for six consecutive quarters. As of the end of last year, average client assets in Singapore was over SGD17,000. We believe that as we continue to enhance our brand awareness, diversify and enrich our product offerings, and improve our client services, moomoo will continue to attract more high-net-worth individuals. We have also seen the unit economics in Singapore improve over the past two years. Taking into account the costs from the headquarters to support Singapore, the Singapore subsidiary achieved breakeven for the first time during the fourth quarter, and we have seen very good growth year to date. In terms of clients' risk appetite, during the past rate hike cycle, we started to promote our Cash Plus product, which is a money market fund product. We continue to cross-sell different investment products based on our clients' risk appetite. This year, we have seen very strong traction in US equities among our Singapore clients. Thank you.

Operator, Operator

Next question today is from Yu Fan from CICC.

Yu Fan, Analyst

My first question is regarding the blended commission rate. We noticed that your commission rate increased this quarter. What is the reason behind this? My second question is about the customer acquisition cost. We see the customer acquisition cost decrease along with the quarter. What is the reason behind this, and how do you view the future trend of the customer acquisition cost?

Arthur Chen, CFO

Thank you. I will take these two questions. For the commission rate, the combined take rate is slightly up on a quarter-over-quarter basis due to the product mix and more contributions from our virtual products. Regarding the customer acquisition cost, we optimized our different marketing campaigns and channels to control and even decrease our customer acquisition cost, which resulted in good performance in the fourth quarter. Looking forward, based on the year-to-date situation, we expect the customer acquisition cost to decrease compared to last year, hopefully by 10% to 20% on a year-over-year basis. Thank you.

Operator, Operator

Thank you. Next question today is from Emma Xu from Bank of America Securities.

Emma Xu, Analyst

I have two questions. The first one is about client quality in other international markets. You mentioned earlier about the positive progress in Singapore client quality, but how about other international markets? Do you also see improvement in the average client asset? For your Hong Kong market, as you penetrate into the mass market, how will the client profile and average client assets change? My second question is about your trading velocity and trading volume. The trading velocity declined to a record low in the fourth quarter, and while it's understandable that Hong Kong trading velocity declined due to the weak market, the US market actually performed quite well in the fourth quarter, yet your US trading volume also declined. How should we think about the connection between market performance and your trading velocity? Do we see a notable rebound of your trading velocity in the first quarter?

Arthur Chen, CFO

Thank you. I will take your second question first and leave the first question to my colleagues. In terms of trading velocity, you're right. The trading velocity declined in Hong Kong and the US in the fourth quarter. Despite the US stock performance being strong in the fourth quarter, it remains a very strong continuous uptrend for the whole quarter. Most of our clients use a buy-and-hold strategy to enjoy the rallies. The implied volatility in the US markets in the fourth quarter actually decreased compared with the third quarter. Therefore, the trading velocities decreased, which is in line with many other US discount brokers' operating metrics as well. In the first quarter this year so far, we have seen a healthy pickup, not only in the US but also in Hong Kong regarding the trading volume and trading velocity. Thank you.

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

Thank you, Emma. This is Daniel, and I will take your question on client quality in international markets. We have actually seen an improvement in average AUM, not only in Singapore but also in our other international markets, including the US, Australia, and Japan, mostly because, unlike some of our peers, Futu really cares about quality growth. Net inflows of AUM is a key KPI for all of our marketing teams across different international regions. In the fourth quarter, we observed robust AUM inflows despite weak market sentiments. As Leaf mentioned in his opening remarks, we saw higher net asset inflows in the first two months of this year compared to the entire fourth quarter combined, and over one-third of that net asset inflow comes from international markets. We expect a continuing upward trajectory in our client assets across international markets. In Hong Kong, we are attracting older clients, especially with our offline store, and we have seen that these clients typically have higher average assets. However, due to the large base effect, these new clients haven't changed the overall client profile much in Hong Kong. Thank you.

Operator, Operator

Thank you. Next question today is from Leon Qi from Daiwa.

Leon Qi, Analyst

Thanks for taking my questions. This is Leon Qi. I want to ask two questions today. Firstly, about our Hong Kong marketing and client acquisition strategy. Management has shared a lot of details on Singapore, but I'm interested in Hong Kong now. Given our increasing paying client base, with management's view that going forward it will be increasingly difficult to acquire new customers, are we considering gradually shifting our focus from the number of customers to average AUM or the quality of our customers? We appreciate the new customer guidance that management talked about just now — that Hong Kong new customer guidance for 2024 would be similar to 2023. My second question is about self-clearing in US stocks. Can I confirm that all of our trades in the US have already been self-cleared? In addition to the positive impact on our net interest income, do we see any improvements in trading execution efficiencies by using self-clearing? Can we make any comparisons with our competitors in the US, such as Interactive Brokers, etc.? Thank you very much.

Arthur Chen, CFO

Thank you, Leon. I'll let Leaf take the first question, and I will answer the second one.

Leaf Hua Li, Chairman and CEO

The Hong Kong market is our home base, and in 2023, we continued to maintain very high penetration among younger clients. We steadily improved our penetration into clients from other age groups. As of the end of Q4, our paying client penetration among adults aged 35 to 55 in Hong Kong was over 10%. In Hong Kong, our goal is to achieve high-quality growth, focusing on acquiring high-quality clients and also attracting net asset inflow from existing clients. That's why during Q4, even with weak market sentiments, we continued to see robust net asset inflow from Hong Kong. Going forward, we will leverage our comprehensive product offerings, employing different operational strategies for clients with varying asset analysis and investment needs. We will closely track the net asset inflow trend in Hong Kong. Thank you.

Arthur Chen, CFO

For the second question, yes, we have already largely completed self-clearing for US stocks. The positive contributions from this migration will continue, thanks to the increased client access cohort and contributions from new markets, such as Japan and Malaysia. In terms of operating efficiency, self-clearing implementation has significantly reduced our service downtimes compared to before, and trading execution, in terms of reporting, has become smoother. Thank you.

Operator, Operator

Thank you. Next question today is from Peter Zhang from JPMorgan.

Peter Zhang, Analyst

My first question is about interest income. We noticed that your interest income decreased sequentially in the first quarter. We wish to understand the fourth quarter trend for clients' idle cash and Futu's deposit rates. Additionally, I would like to understand the trend regarding clients' idle cash balance in the first quarter. My second question is about operating expenses. I wish to know Futu's plan for headcount increase in 2024 and what's management's guidance for Futu's operating expense increase, particularly regarding cost-to-income ratio trends. Thank you.

Arthur Chen, CFO

Thank you, Peter. I will take these two questions. For idle cash, roughly 10% to 15% of our total client assets in the past quarter reflected idle cash, a similar situation occurring in the first quarter thus far. The decrease in interest revenue in the fourth quarter, as I noted in my opening remarks, is mainly due to the average balance decrease for securities borrowing and lending. Regarding your second question about headcount, we expect mid to high single-digit headcount growth, primarily to support international market expansion and enhance our R&D capabilities. Unfortunately, we do not have a guidance for the cost-to-income ratio. Given the nature of our business, our revenue is very volatile, making it difficult to predict due to market fluctuations. Thus, our main focus is on headcount, given that this is one of the largest cost components in our overall cost structure. Thank you.

Operator, Operator

Thank you. This does conclude the question-and-answer session. I would now like to hand the conference back to Daniel Yuan for closing remarks. Thank you.

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

That concludes our call today. On behalf of the Futu management team, I would like to thank you for joining us. 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

Thank you, and this does conclude today's conference call. Thank you for participating, and you may now disconnect.