Earnings Call Transcript - FUTU Q1 2022

Operator, Operator

Hello, ladies and gentlemen. Welcome to Futu Holdings First Quarter 2022 Earnings 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'd 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.

Daniel Yuan, Chief of Staff and Head of IR

Thanks, operator, and thank you for joining us today to discuss our first quarter 2022 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 containing 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. 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 us today. As of quarter end, we had 1.3 million paying clients, representing a 68% growth year-over-year. In the first quarter, we added approximately 82,000 paying clients, and we are well on track to deliver on our prior guidance of adding 200,000 paying clients in 2022. This was also the ninth consecutive quarter to which organic growth contributed over 50% of new paying clients. In Hong Kong, client acquisition picked up as we leveraged our strong brand positioning, leading product offering, and sound financial standing to attract clients and assets from smaller-sized brokers suffering from plummeting client engagement amid a weak equities and IPO market. Our quarterly paying client retention rate returned to the pre-headline news level of over 98%. Client retention in Singapore improved for every quarter since we launched the business as we optimized client acquisition channels and incentives through rapid iteration. Despite dampened market sentiment, users continue to engage actively with a growing portfolio of content, products, and services in our ecosystem. Average Daily Active Users exceeded 1 million, and average user time spent was around 30 minutes for all trading days in March. Our Daily Active Users also exceeded 1.2 million for the first time. Total client assets declined 16% year-over-year and 5% quarter-over-quarter. The sequential decline can be attributed to sharp market depreciation, partially offset by robust net asset inflow across markets. Notably, total client assets in Singapore increased by 15% sequentially despite challenging mark-to-market impact. We continue to see an inflow of high-quality clients in Singapore. For clients that we acquired in January, for example, their average asset balance almost doubled by March. While we observed a meaningful uptake in securities lending balance, margin financing balance slipped sequentially as our clients deleveraged some of their margin positions amid market turmoil. Total trading volume was HKD1.3 trillion, up 8% quarter-over-quarter, of which U.S. trading constituted 64%. Higher trading turnover in China tech names as well as leveraged and inverse ETFs contributed to the 9% and 11% sequential growth in U.S. and Hong Kong stock trading volume. Meanwhile, our market share in Hong Kong futures and options trading climbed to over 6% and 12%, respectively, for the first time, driving a further increase in blended commission rate. In the first quarter, we continued to broaden our trading product offerings by launching VIX futures in Hong Kong, two new types of algo order for accredited investors in Singapore as well as U.S. and Australian stocks and ETPs in Australia. Total client assets in Wealth Management were HKD21 billion, up 59% year-over-year and 11% quarter-over-quarter. As of quarter end, over 13% of our paying clients held wealth management positions. We continue to expand fund offerings for Singapore clients, including money market funds and dividend funds. We collaborated with BNY Mellon Investment Management and E Fund Hong Kong to provide diversified asset allocation strategies for clients with Futu Securities International Hong Kong. As of quarter end, we had 258 IPO and IR clients as well as 459 ESOP clients, up 70% and up 130% year-over-year. During the first quarter, we added 59 ESOP solutions clients, including MetLife Technology and 4Paradigm. We also expanded our enterprise service to print in Singapore by participating in several high-profile ETF IPOs.

Arthur Chen, Chief Financial Officer

Thanks, Leaf and Daniel. Please allow me to walk you through our financial performance in the first quarter. All the numbers are in Hong Kong dollar unless otherwise noted. Our total revenue was HKD1.6 billion, down 26% from HKD2.2 billion in the first quarter of 2021. Brokerage commission and handling charge income was HKD968 million, a decrease of 27% year-over-year and an increase of 13% quarter-over-quarter. The year-over-year decrease was mainly attributable to lower trading volume from a very high base in the first quarter of 2021, partially offset by a higher blended commission rate of 7.3 basis points. The quarter-over-quarter increase was largely driven by sequential growth in trading volume. Interest income was HKD575 million, a decrease of 13% year-over-year and 7% quarter-over-quarter. The year-over-year decrease was mainly due to lower interest income from the securities lending business and lower IPO financing interest income amid a very inactive IPO market. The quarter-over-quarter decrease was mostly attributable to lower margin financing income as clients deleveraged. Other income was HKD98 million, down 56% year-over-year and 23% quarter-over-quarter. The year-over-year and quarter-over-quarter decrease was primarily due to lower IPO financing service charge income, currency exchange service income, and underwriting fee income. Our total costs were HKD228 million, a decrease of 49% from HKD443 million in the first quarter of 2021. Brokerage commission and handling charge expenses were HKD96 million, down 55% year-over-year and up 9% quarter-over-quarter. Brokerage commission expenses did not move in tandem with brokerage commission income due to an upgraded service package and the lower IPO financing interest expenses associated with our store lending business. Interest expenses recorded a steep decline in the interest income due to lower blended funding costs as we further diversify our funding sources. Processing and servicing costs were HKD93 million, up 50% year-over-year and 26% quarter-over-quarter. The increase was primarily driven by higher product service fees to support overseas market expansion and to process a higher number of concurrent trades. As a result, total gross profit was HKD1.4 billion, a decrease of 20% from HKD1.76 billion in the first quarter of 2021. Gross margin was 86% compared to 80% in the first quarter of 2021. Operating expenses were up 53% year-over-year and down 9% quarter-over-quarter to HKD748 million. R&D expenses were HKD282 million, up 160% year-over-year and 4% quarter-over-quarter. The increase was mainly due to a higher R&D headcount as we continue to invest in U.S. sales clearance and to support our new product offerings in existing and new markets. Selling and marketing expenses were HKD288 million, an increase of 5% year-over-year and a decrease of 15% quarter-over-quarter. The year-over-year increase was primarily due to increased selling and marketing personnel to support international market expansion, though largely offset by lower marketing spending. G&A expenses were HKD178 million, up 128% year-over-year and down 18% quarter-over-quarter. The rise was primarily due to an increase in headcount for G&A personnel as we opened more international offices. As a result, our net income decreased by 51% year-over-year and increased by 15% quarter-over-quarter to HKD572 million. Our effective tax rate for the quarter was 11%, and net margin was close to 35%. That concludes our prepared remarks. We would now like to open the call to questions. Operator, please go ahead.

Operator, Operator

Your first question comes from Emma Xu from Bank of America Securities. Please ask your question.

Emma Xu, Analyst

Thank you for giving me the opportunity to ask the first question. Congratulations on your very strong results in the first quarter. I have a question for your second quarter operations. Could you please run us through the major operating metrics in quarter to date? We see you gain market share in the Hong Kong market in the first quarter. If the trend continues in the second quarter, do you expect it to continue to gain market share for the rest of the year? Also, how about the performance in your other new international markets?

Arthur Chen, Chief Financial Officer

Thank you, Emma. Since this is our first quarter earnings call, our focus is primarily on the first quarter's performance. I believe Leaf can provide further qualitative insights regarding the quarter-to-date situation. To address your second question first, we expect the trend of market consolidation, particularly in the Hong Kong markets, to accelerate in the second quarter. So far this quarter, we are noticing an increasing number of small players exiting the market. We have observed that some smaller brokers, as well as larger ones, have closed their offices in Hong Kong during the first quarter. Additionally, we are seeing more client assets migrating from these smaller brokers to leading firms like Futu.

Leaf Li, Chairman and Chief Executive Officer

I think the client acquisition pace is, to some extent, affected by market performance, and we have seen client acquisitions slow down a bit across various regions. In the Greater China region, client acquisition remains largely stable, with Hong Kong outperforming, as I mentioned, on the back of market consolidation. In Singapore, we continue to see clients entrust us with more of their assets. Despite the robust momentum of net asset inflows, total client assets still experienced a single-digit quarter-on-quarter decline so far, largely due to mark-to-market. Generally, we saw both improving quality and quantity of clients in Singapore, which aligns with our overall expectations when we launched in Singapore. Then regarding our U.S. business, despite the rapid growth of clients in the U.S. in the first quarter, average assets per client still suffered a decline. For the rest of the year, we will put more emphasis on improving client quality. We will also continue to adjust our client incentives for different client acquisition channels to test the acquisition efficiency for clients with different profiles.

Operator, Operator

Our next question comes from Leon Qi from Daiwa. Please go ahead.

Leon Qi, Analyst

This is Leon Qi from Daiwa. I have two questions today. Firstly, on the trading side, I appreciate that management mentioned in your opening remarks that the blended commission rate actually saw a sizable uplift. This is mainly because of a number of new noncash equity products such as inverse ETFs, futures and other products in Singapore. Just wondering if management has dealt with a split in trading volume between cash equity and derivative products over a longer time horizon? Also, if possible, I would appreciate management sharing some commentary on our upcoming pipeline and the development of products in our major markets? The second question is just wondering if management could give any updates on the progress of your R&D expenses, noting that you are investing heavily on the R&D side. Just wondering if we have any updates compared with the guidance given a quarter ago on the timing when we could see the results of these investments.

Arthur Chen, Chief Financial Officer

Thank you, Leon. This is Arthur. I will take these two questions. To give you a little sense about derivative trading contributions to our total trading commission, derivatives accounted for roughly 30% this quarter. I think the contribution from the derivatives in the first quarter was particularly high due to market conditions, as many investors were looking for instruments to hedge amid market volatility in both the U.S. and Hong Kong markets in the first quarter. Looking at our long-term strategy, we do not encourage people to trade derivatives. Our guiding principle is to help investors understand the associated risks with these complicated instruments. However, after providing sufficient investment education, we do want investors to use these instruments to achieve a better risk-reward return compared to other online brokers such as Robinhood or other U.S. players, where derivative revenues contribute around 45% to 50% of their total revenues. Therefore, we think our current 30% contribution is healthy. At the same time, there is a huge potential for the Hong Kong derivatives market, given that more Chinese ADRs continue to return to Hong Kong, leading to enhanced market trading liquidity, which will positively impact our derivative business in Hong Kong in the future. Regarding your second question about R&D expenses, as we provided certain guidance in terms of staff headcount increase this year, at the beginning of the year we projected a roughly 20% headcount year-over-year increase, and we have maintained this budget so far. In the first quarter, our headcount increased by about 5% quarter-over-quarter. Therefore, everything is on track. The majority of our R&D expenses consist of salaries and bonuses for our R&D personnel, who are working hard to move projects forward, especially for key projects such as U.S. sales clearing and new products aimed to be launched in the second half of this year.

Operator, Operator

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

Zoey Zong, Analyst

My first question is on customer acquisition costs. We have seen a quarter-on-quarter decline in customer acquisition costs in Q1. How should we think about the trend in Q2 and beyond? My second question is since we've launched our business in Australia on March 8; could you please provide some insights on user traffic, brand assets per paying client, and customer acquisition costs in Australia?

Arthur Chen, Chief Financial Officer

Thank you, Zoey. I will leave the second question to Leaf, and I will address your first question regarding the CAC. You are right. The overall CAC costs in the first quarter were around HKD3,500, surpassing our budget of HKD2,500 to HKD3,000 at the beginning of the year. The reason is that in the first quarter, we had some advertising campaign commitments made in the last Q4, which carried over to the first quarter. In the remaining three quarters, we expect a sequential decrease in terms of absolute CAC amount, hopefully returning to the range of HKD2,500 to HKD3,000. At the same time, as Robin previously mentioned, this year our focus will be on the quality of new paying clients, alongside the number of new paying clients, which means that besides customer acquisition costs, we will also take asset acquisition costs into consideration.

Leaf Li, Chairman and Chief Executive Officer

As we mentioned, we officially launched in Australia on March 8, which was about three months ago. Since then, we have primarily focused on building the local team and exploring marketing strategies. We see large growth prospects in Australia and will wait to see more data.

Operator, Operator

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

Zeyu Yao, Analyst

As we observed, Futu has acquired many clients from other brokers in the last few months and accelerated its market share gains as the leading platform. We believe Futu will be a potential winner in the upcoming sector consolidation among the mark-to-market. Could you give us some more insights on the reasons why so many clients from our competitors choose to transfer their accounts to Futu? What is Futu's target market share in stock and derivatives in the Hong Kong market or retail market?

Arthur Chen, Chief Financial Officer

I will take these two questions. You are correct. We made very encouraging progress in the Hong Kong market in the first quarter. In fact, if we look at net asset inflows in the first quarter, it was actually the second-best quarter in terms of net asset inflows in Hong Kong. We believe Hong Kong will face significant industry consolidation, which will benefit leading players like Futu. Besides the new clients we acquired, we are also focusing on existing clients' asset inflows. In particular, in the first quarter, we conducted numerous proactive marketing campaigns to encourage our existing clients to migrate more assets to Futu from other brokers or banks, which has led to higher inflows from our existing clients. Additionally, we believe the industry dynamics in Hong Kong will become more favorable, as some of our peers begin to strategically exit the Hong Kong market. In terms of product offerings, there will definitely be many exciting new product pipelines in the second half of this year. From a trading perspective, we are looking forward to more FX trading starting in the second half of this year and will cater more to the demands of institutional investors in both the Hong Kong and U.S. trading markets. Regarding your second question about long-term market share, we currently hold a market share of around 2% to 3% in cash equity in Hong Kong. Compared to our peers in Asia and other regions, we see ample opportunities for consolidation. For reference, in recent months, our market share in Hong Kong futures has ranged from 5% to 8%. We are very confident of gaining more market share in this niche market.

Operator, Operator

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

Daniel Yuan, Chief of Staff 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. That does conclude our conference for today. Thank you for participating. You may all disconnect.