Earnings Call Transcript - TIGR Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the UP Fintech Holding Limited First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference is being recorded today, May 30, 2023. I would now like to hand the conference over to your first speaker today, Mr. Aaron Lee, the Head of IR. Thank you. Please go ahead.

Aaron Lee, Head of IR

Thank you, operator. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's first quarter 2023 earnings release was distributed earlier today and is available on our IR website at ir.itigerup.com, as well as GlobeNewswire services. On the call today from UP Fintech are Mr. Wu Tianhua, Chairman and Chief Executive Officer; Mr. John Zeng, Chief Financial Officer; Mr. Huang Lei, CEO of U.S. Tiger Securities; and Mr. Kenny Zhao, our Financial Controller. Mr. Wu will give an overview of our business operations and discuss corporate highlights. Mr. Zeng will then discuss our financial results. Then they both will be available to answer your questions during the Q&A session that follows their remarks. Now let me cover the Safe Harbor. The statements we are about to make contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about factors that could cause actual results to materially differ from those in the forward-looking statements, please refer to our Form 6-K furnished today, May 30, 2023, and our annual report on Form 20-F filed on April 26, 2023. We undertake no obligation to update any forward-looking statements, except as required under applicable law. It is my pleasure to now introduce our Chairman and Chief Executive Officer, Mr. Wu. Mr. Wu will make remarks in Chinese, which will be followed by an English translation. Mr. Wu, please go ahead with your remarks.

Wu Tianhua, Chairman and CEO

Hello, everyone. Thank you for joining the Tiger Brokers' first quarter 2023 earnings conference call. In the first quarter, we saw a moderate rebound in market conditions. However, high inflation expectations in the U.S. and ongoing threats have hindered investor confidence and market activities. Despite this backdrop, we are committed to our internationalization strategy by optimizing our revenue mix and managing expenses. In the first quarter, commission income and interest rate income improved sequentially, with total revenue increasing by 3.9% quarter-over-quarter and 26% year-over-year, reaching $66.3 million. GAAP and non-GAAP net profit attributable to UP Fintech were $8 million and $10.3 million, respectively, marking increases of 541% and 129% from the previous quarter, and a significant turnaround from the net loss reported in the same quarter last year. The non-GAAP bottom line for the first quarter was the highest in the past two years, demonstrating that our execution strategy can withstand challenging market conditions and regulatory news. In the first quarter, we added 30,392 new funded accounts, an 11.2% increase quarter-over-quarter. We are confident in our ability to meet our annual goal of acquiring at least 100,000 new funded accounts in 2023. The total number of funded accounts at the end of the first quarter reached 810,000, reflecting a growth of 15.4% compared to the same quarter last year. In terms of total current assets, the asset inflow trend remained strong, with net inflows of nearly $1.2 billion in the first quarter, primarily from Singapore and Mainland China. With market recovery leading to mark-to-market gains, total client assets in the first quarter increased by 15.2% compared to the last quarter, reaching $16.1 billion. Additionally, we are pleased to continue acquiring high-quality users while optimizing our customer acquisition costs. The average net asset inflows of newly acquired retail clients exceeded $17,000 for the first quarter, and average fees in the first quarter were $175, reflecting a 37% drop quarter-over-quarter. This demonstrates that our ongoing international expansion efforts are being recognized by local investors in various regions, and our return on investment remains at an industry-leading level, allowing us to adjust our customer acquisition strategy dynamically while maintaining reasonable unit economics. We continue to invest in research and development to enhance operational efficiency and user experience, benefiting from our self-clearing capability in the U.S. Our self-clearing efficiency has consistently been at a leading level in the industry. In the first quarter, execution and clearing expenses as a percentage of commissions decreased from 16.1% in the previous quarter to 9.6% as we began to self-clear more Hong Kong equities since February. Furthermore, we launched a beta test of TigerGPT. This feature, based on the underlying model of ChatGPT, integrates financial figures, information, and market data accumulated by Tiger Brokers over the years. It enables experienced users to quickly extract and analyze investment-related data to assist with their re-investment research, significantly reducing the learning curve for new users. In our wealth management sector, following the Singapore market, we introduced Tiger Vault, our wealth management products in Hong Kong in April, to help users diversify their portfolios and enhance returns by combining cash management with other investment products. Our Tubi business continues to perform well. In investment banking, we underwrote eight U.S. and Hong Kong IPOs in the first quarter, including content and other transactions. In our ESOP segment, we added 29 new clients in the first quarter, bringing the total number of ESOP clients served to 448 by the end of the first quarter of 2023, which is a 33% increase year-over-year. Now, I would like to invite our CFO, John, to discuss our financials.

John Zeng, CFO

Great. Thanks, Tianhua and Aaron. Let me go through our financial performance for the first quarter. All numbers are in U.S. dollars. Total revenues were US$66.3 million, an increase of 26% year-over-year and 3.9% quarter-over-quarter, primarily due to a 13% jump in interest-related income versus last quarter. Cash equity take rate was 6.3 basis this quarter, slightly decreased from 6.9 basis from last quarter, with roughly 60% of commission revenue coming from cash equities, 30% from options, and the rest from futures and other products. Now on to cost. Interest expense was $8.4 million, increased by 130% from the same quarter of last year as both interest and securities lending expenses increased in line with the rate hike. Execution and recurring expenses were $2.4 million, decreasing 46% from the same period of last year, primarily due to more efficiency in clearing for U.S. and Hong Kong securities. Since we only started to move Hong Kong equities to Tiger Vault this February, we expect cash equity clearing expenses as a percentage of commission to decrease. Employee compensation and benefits were $24.4 million, a decrease of 11.2% year-over-year as we adjusted our headcount in response to challenging market conditions. Occupancy, depreciation, and amortization expenses increased 19% to $2.4 million due to an increase in overseas office space and relevant leasehold improvements. Communication and market data expenses were $7 million, an increase of 9.2% year-over-year due to the growth in our user base. Marketing expenses were $5.2 million this quarter, a decrease of 48% year-over-year. Average CAC dropped 37% quarter-over-quarter from US$271 to US$171. We focus on the quality of new users and do not see the current market conditions as suitable for a major marketing campaign; hence, we scaled back on marketing spending. That being said, we will look to adjust our marketing strategy based on market sentiment in different regions. We see payback from newly acquired users is still attractive. General and administrative expenses were $4.5 million, flat year-over-year. Total operating costs were $46 million, decreased by 16% from the same quarter of last year. As a result, the bottom line increased on both GAAP and non-GAAP bases. GAAP net income turned positive at $8 million versus a GAAP loss of $5.9 million in the same quarter of last year, and non-GAAP net income also turned positive at $10.3 million from a non-GAAP net loss of $1.9 million in the same quarter of last year. Now I have concluded our presentation. Operator, please open the line for Q&A. Thanks.

Operator, Operator

We are now going to proceed with our next question. The questions come from the line of Hua Fan from CICC. Please ask your question.

Hua Fan, Analyst

Okay, I will translate. Thanks to management and congratulations on the results achieved this quarter. This is Hua Fan from CICC. I have three questions. The first is about the regional breakdown of the newly added funded accounts this quarter. The second concerns the clients in Singapore. We know that Tiger has held a leading position since entering the market. So what are the current net asset inflows and the average asset balance of clients in Singapore? After over three years of growth, how does the asset balance of the clients we acquired early compare to when we first entered the market? The third question is about the progress in the Hong Kong retail market. Could management provide more details on this? Those are my questions. Thanks.

Wu Tianhua, Chairman and CEO

In the fourth quarter, approximately 60% of newly funded accounts originated from Singapore, around 15% from Australia and New Zealand, over 20% from the United States, and nearly 5% from Hong Kong. Regarding Singapore, where we have the highest number of existing and new users, we find user experience to be vital for strengthening our market position. Out of the $1.2 billion net asset inflow in the first quarter, about two-thirds was from Singapore. By the end of the fourth quarter, the average plan asset for all funded accounts in this region was roughly $15,000. We officially entered the Singapore retail market in the first quarter of 2020, and the average plan assets in the first quarter of this year reached nearly $25,000, representing a three to four times increase compared to the first quarter of 2020. In the first quarter, user equities in Hong Kong only made up a small percentage of new funding accounts for a couple of reasons. First, we refrained from spending excessively since the market conditions are still weak; it was important for us to maintain an attractive user experience. Secondly, we are still refining our customer acquisition strategies based on feedback. In the second quarter, we will launch more client campaigns to commemorate Tiger's anniversary next year, which may temporarily boost customer acquisition costs, and we will monitor payback closely. Furthermore, in the second quarter, we began transferring some functions to Tiger. A higher number of Hong Kong equity trades were cleared by Tiger Vault, leading to a decrease in total clearing expenses as a percentage of commission from 16% in the fourth quarter to 9.1% in the first quarter. We anticipate additional reductions in the clearing expenses for Hong Kong cash equities. Additionally, we launched Tiger Role, our wealth management platform in April, and we intend to introduce more wealth management products to Tiger Vault to enhance user retention and provide value-added services. Thank you.

Hua Fan, Analyst

Thanks a lot.

Operator, Operator

We are now going to proceed with our next question. The next questions come from Cindy Wang at China Renaissance.

Cindy Wang, Analyst

Thank you management for taking my call and congratulations on the excellent first quarter results. I have two questions. First, what functions does Tiger ChatGPT offer? When will it officially launch, and what are the R&D costs associated with it? My second question pertains to customer acquisition costs and self-clearing efficiency. We noticed a further decline in customer acquisition costs in the first quarter, yet there was an increase in new customers with deposits quarter-over-quarter. Could management elaborate on how these results were achieved, and will customer acquisition costs remain stable for the next few quarters in 2023? Regarding self-clearing efficiency, it saw a significant increase in the first quarter. What can we expect for clearing expenses in the second quarter for the Vault? Is there potential for further reductions? Thank you.

Wu Tianhua, Chairman and CEO

Regarding the first question about TigerGPT, we believe that AI technology can greatly enhance productivity in various areas of our lives and work, including programming, copywriting, design, and more. Our goal is to improve investment through technology, and we have always emphasized the connection between technology and finance. We are optimistic about TigerGPT's ability to enhance user experience with its language interaction features. Although we provide excellent market data and information, many users may struggle to locate them. TigerGPT can assist users in boosting their efficiency in this regard. We are excited to be the first technology-focused broker to introduce GPT functionality. TigerGPT's products are designed to address inquiries related to financial investment. It can serve as a link between user questions and Tiger’s vast investment content and paid market data. This product can significantly enhance users' information gathering efficiency, including market data, industry insights, third-party market data, and knowledge about individual stocks and finances. It can also greatly lower the learning curve for new users navigating our app's various functions. We believe that TigerGPT will be a unique feature that enhances the user experience, ultimately aiding in user acquisition and retention. Currently, this product is still undergoing internal testing, and we anticipate launching it to a wider audience by the end of the second quarter this year. Regarding costs, since TigerGPT is specifically designed for the financial sector rather than a general-purpose model, the expenses are manageable and will not significantly affect our profit and loss statement. We're pleased to observe that the number of new funding per account has increased, while the average customer acquisition cost has decreased potentially quarter-over-quarter after our updates on December 30. This can be attributed to a couple of factors: first, our brand has gained better acceptance among local users in the Singapore market, attracting more organic traffic from abroad and reducing customer acquisition costs. Second, we have reassessed our advertising and branding partnerships and have ended those that do not provide a reasonable return on investment. Looking ahead, we will continue to adjust our customer acquisition costs based on market conditions and returns. Overall, our current low customer acquisition costs give us the flexibility to enter new markets, such as our recent launch in Hong Kong, which helps us sustain healthy unit economics. Thanks to our self-clearing capabilities in the U.S. stock market, the clearing cost as a percentage of total commission for U.S. cash equities was approximately 3% to 12%, keeping our overall self-clearing efficiency at an industry-leading standard. Since mid-February, we have begun to self-clear more Hong Kong stocks following our entry into the local retail market, with the clearing cost relative to commission income falling to below 10% in the first quarter. Future clearing costs will be influenced by market volatility and user trading patterns, but we expect our overall clearing efficiency to improve with the complete self-clearing of Hong Kong stocks. Thank you.

Operator, Operator

We are now going to proceed with our next question. And the questions come from the line of Judy Zhang from Citi. Please ask your question.

Judy Zhang, Analyst

Let me translate. I have two questions. The first question is about the take rate. We observed a rebound in the U.S. stock market, yet the take rate decreased. Can you explain the main reasons for this? Additionally, we have seen continuous growth in interest income during the rehike cycle. What is the breakdown of that interest income? My second question is about regulation. We noticed that the Tiger app has been removed from the App Store. How should we interpret the current situation, and what impact will it have on existing customers? Did regulators give us any further information on the criteria that onshore investors need to fulfill to open overseas brokerage accounts? Thank you.

Wu Tianhua, Chairman and CEO

The commission rate remained unchanged in the first quarter. Since we charge commission per share for U.S. stock trading, the increase in trading volume during the market recovery has led to a decrease in cash equity take rates. Regarding the breakdown of interest income, approximately 30% originated from customer idle cash, while the remainder came from margin financing, securities lending, and other business activities. We prioritize compliance with global regulatory requirements and maintain direct communication with regulators. Recently, regulators clarified several guidelines. Firstly, they are allowing onshore users living or working overseas to open new accounts with us. Secondly, for onshore users who can show they have already opened brokerage accounts offshore, they will be recognized as existing clients of the industry. As a result, we can accept these users to open new accounts or transfer their existing securities to us. The third guideline permits us to continue supporting teams, R&D facilities, and systems within Mainland China to serve our current onshore investors. Lastly, the recent request to remove our app from the onshore application market aims to ensure that we do not have onshore clients outside of the scenarios mentioned. These guidelines bring clarity to industry regulations and foster long-term, orderly development while avoiding disruptions. Following the regulators' announcement on December 30 of last year, we promptly stopped accepting new offshore clients from Mainland China to comply with these requirements. The recent directive to remove our app from the Chinese application market is essentially a follow-up to the announcement made on May 18, 2023. We have successfully removed our app from the onshore application market and provided existing users with clear instructions on how to download and update the app. This change does not impact our existing clients, and we will continue to deliver core services and ensure the safety of our clients' funds. We have also noticed that compared to the end of last year, the total client assets of onshore clients increased by about 10%, with a trend of net asset inflows in the first quarter of this year. Furthermore, the trading volume and commission income contributed by onshore clients has also slightly increased sequentially. These numbers indicate that our existing clients have a rational understanding of recent events since December 30 of last year, and their trading velocity and trust in Tiger Brokers have not changed. Thank you.

Operator, Operator

We have no further questions at this time. I will now hand back the call to Aaron Lee for closing remarks.

Aaron Lee, Head of IR

Thank you, operator. I would like to thank everyone for joining our call today. I am now closing the call on behalf of the management team at Tiger. We do appreciate your participation in today's call. If you have any further questions, please reach out to our Investor Relations team. This concludes the call, and thank you very much for your time.

Wu Tianhua, Chairman and CEO

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.