Earnings Call Transcript - TIGR Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the UP Fintech Holding Limited Fourth Quarter 2022 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, March 29, 2023. I would now like to turn the conference over to your first speaker today, Mr. Aaron Lee, the Head of IR. Thank you. Please go ahead.

Aaron Lee, Head of Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited’s fourth quarter and full-year 2022 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 March 29, 2023 and our annual report on Form 20-F filed on April 28, 2022. 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’ fourth quarter and full-year 2022 earnings conference call. 2022 was a year with challenges. Geopolitical issues along with high inflation and the meltdown in the crypto sector hampered investor confidence and slowed down market activity. Under this macro backdrop, we remain committed to international growth with an emphasis on cost and efficiency. In 2022, we further solidified our market-leading position in Singapore and entered the Australia and New Zealand markets to expand our footprint. We officially launched retail brokerage in Hong Kong and improved our trading efficiency with upgraded self-clearing infrastructure. Total revenue for 2022 was US$225 million. Non-GAAP net profit was US$12.7 million for the full year. In the fourth quarter, interest-related income and IPO underwriting income both increased compared to the previous quarter. Total revenue was US$63.9 million, an increase of 15.2% quarter-over-quarter and 2.7% year-over-year. GAAP and non-GAAP net profit attributable to UP Fintech was US$1.2 million and US$4.5 million, both improved from the same quarter of last year, demonstrating the resilience of our business model in volatile market conditions. In the fourth quarter, we added 27,300 new funded accounts, and the total number of funded accounts for the year reached 108,100, exceeding our annual guidance of 100,000 funded accounts. The total number of funded accounts at the end of 2022 exceeded 780,000, representing a growth of 16.1% compared to the end of the last year. Among the new funded accounts this quarter, over 90% came from markets outside Mainland China. In terms of total client assets, the share of asset inflow remains strong. This net inflow equated to US$1.4 billion in the fourth quarter. After neutralizing the impact from mark-to-market loss, total planned assets in this quarter increased by 8.1% compared to the third quarter, reaching US$14 billion. We are very pleased to see the quality of our newly acquired customers further improved in the fourth quarter. Taking Singapore as an example, the average net asset inflows of newly acquired clients in Singapore were around US$12,000 in the fourth quarter, further increased from over US$11,000 in the first quarter and US$9,000 in the second quarter, demonstrating our growth presence in this key market and unwavering commitment to providing our clients with exceptional services. Additionally, the overall average CAC was US$271 in the fourth quarter, a decrease of 17% quarter-over-quarter, showing that we continue to acquire high-quality clients while being prudent with marketing and branding expenses. We continue to invest in research and development to improve operational efficiencies and enhance user experience. Benefiting from self-clearing capability in the U.S., the percentage of growth commissions significantly decreased from 21% in 2021 to 14% in 2022. We expect further reduction in clearing expenses as we progress in offsetting clearing Hong Kong equity in 2023. We also launched the recurring investment function for U.S. stocks and ETFs in the fourth quarter, making it more convenient for long-term investors to invest periodically. Since our official launch in Hong Kong last December, we have introduced products to serve local investors with the most competitive package in the industry. Currently, we offer Hong Kong and U.S. equities, warrants, options, and margins. We will add Tiger Vault, our wealth management product, in April. Our Tubi business continues to perform well. In the investment banking sector, with the IPO market rebound, we underwrote 17 U.S. and Hong Kong IPOs in the fourth quarter, bringing the total number of U.S. and Hong Kong IPOs underwritten for the year to 48. According to Wind data, Tiger Brokers ranked third globally and fourth in terms of deal counts and value for U.S. IPOs underwriting in 2022. Additionally, in our ESOP business, we added 26 new clients in the fourth quarter, bringing the total number of ESOP clients served to 419 at the end of 2022, representing a growth of 34% year-over-year. Now, I would like to invite our CFO, John, to go over our financials.

John Zeng, CFO

Great. Thanks, Tianhua and Aaron. Let me go through our financial performance for the fourth quarter. All numbers are in U.S. dollars. Total revenue was US$63.9 million this quarter, an increase of 2.7% year-over-year. For the whole year, total revenue was US$225.4 million, a decrease of 14.8% from last year, due to a slowdown in market activities, which dragged down commission and IPO underwriting. On a quarter-over-quarter basis, total revenue increased by 15.2%, primarily due to a 23% jump in interest-related income and a 46% increase in other revenue versus the prior quarter. Cash equities take rate was about 6.9 basis points this quarter, slightly better than 6.7 basis points of last quarter. Within commission revenue, about 60% comes from cash equities, close to 30% from options, and the rest from futures and other products. Now onto costs. Interest expense was $7.2 million, increased 80% from the same quarter last year as interest expense and securities lending expense both increased in line with the rate hike. Execution and clearing expenses were $4 million, decreased 42% from the same period of last year. We expect further reduction in clearing expenses as we are in progress of self-clearing Hong Kong equities. Employee compensation decreased 14% year-over-year to $24.5 million this quarter as we adjusted headcounts in response to challenges arising from the market backdrop. In line with employee compensation, G&A expense, which was $6 million, decreased 31% from the same quarter of last year due to one-off professional service fees incurred last year. Occupancy, depreciation, and amortization expenses increased 12% to $2 million due to an increase in overseas office space and rental and leasehold improvements. Marketing expenses were $7.4 million this quarter, decreased 36% year-over-year. We focused on the quality of new users, do not see current market conditions as suitable for major marketing as we keep a close eye on CAC and payback. Overall, CAC dropped 17% quarter-over-quarter to US$271. We will adjust our marketing strategy based on the market environment. Communication and market data expenses were US$7.1 million, a decrease of 9% from a year ago. Total operating costs were US$51 million, decreased 22% from the same quarter of last year. As a result, bottom-line increased on both GAAP and non-GAAP basis year-over-year. GAAP net income turned positive to $1.2 million versus a GAAP net loss of $5.4 million last year. Non-GAAP net income further increased to $4.5 million from a non-GAAP breakeven in the same quarter of last year. Total non-GAAP net income for the whole year of 2022 was $12.7 million. Now, I have concluded our presentation. Operator, please open the line for Q&A. Thanks.

Operator, Operator

Thank you. Our first question comes from Cindy Wang from China Renaissance. Please go ahead. Your line is open.

Cindy Wang, Analyst

Thank you, management, for taking my question. This is Cindy from China Renaissance. I have two questions. First, regarding the new funded accounts, Tiger Brokers added 27,000 new funded accounts in the fourth quarter, and this number increased sequentially. Could you provide the original breakdown of new funding accounts in the fourth quarter? My second question is about the Hong Kong retail market. Since your entry into this market has been a quarter ago, could you share the current business progress and customer acquisition strategies in Hong Kong? Thank you.

Wu Tianhua, Chairman and CEO

In the fourth quarter, about 90% of our newly funded accounts were from outside of Mainland China, with approximately 55% from Singapore, nearly 20% from Australia and New Zealand, and 15% from the United States. We have ceased attracting new onshore clients following the CSRC notice on December 30th and are currently serving only 15 onshore clients, adhering to regulatory guidance until more detailed policies are implemented. Regarding our progress in Hong Kong, as a new market for us, we experimented with various marketing strategies in the fourth quarter. For offline marketing, we utilized branding advertisements in traditional newspapers, and during the Chinese New Year, we will conduct customer panels for feedback. In online marketing, we introduced several promotional packages for new users. Our Hong Kong marketing strategy is in line with our global approach, balancing customer acquisition costs with return on investment. We intend to continue this strategy to achieve our goals. On the product front, in addition to cash equity options and warrants, we plan to launch Tiger Vault, our wealth management product, in the second quarter. Our objective is to offer users a variety of products at competitive prices with a user-friendly experience. We currently have no commission or platform fees for trading Hong Kong equities and warrants. Even though we launched only a quarter ago, local investors have recognized our efforts, and we received the best equity trading platform award from a local newspaper. We anticipate a gradual increase in the number of funded accounts in Hong Kong this year. Thank you.

Operator, Operator

Thank you. We'll now move on to our next question. Please standby. Our next question comes from the line of Han Pu from CICC. Please go ahead. Your line is open.

Han Pu, Analyst

This is Han Pu from CICC. Thank you for taking my question. I have two inquiries. First, is there any current impact on Tiger due to the recent issue, and what precautions are we taking for the future? Second, can you provide updates on the regulatory environment and our business operations since the CSRC announcement at the end of last year? Thank you.

Wu Tianhua, Chairman and CEO

Okay. In light of the recent high-profile incident with Silicon Valley Bank, I want to assure you that Tiger Brokers has no accounts or funds with SVB. Consequently, this event does not affect our operations. We function as a licensed broker internationally and work with respected custodians and settlement banks like ICBC Asia, DBS, and Citibank. We have been closely monitoring this incident in our operational data. From March 5 to March 24, our operations remained stable, with a slight increase. Overall, we continue to observe a trend of net asset inflows. We take our responsibilities as a broker seriously and will assess the risks associated with our current partnerships in light of recent events. Regarding your second question, Tiger Brokers has always prioritized compliance with global regulations. Recently, on December 30 of last year, the CSRC issued an announcement clarifying regulations for domestic investors in China to engage in cross-border securities activities. Although this announcement led to a temporary drop in stock prices, we see it as a significant step in the development of cross-border securities regulations and aim to facilitate industry growth while preventing capital outflows. In response, Tiger Brokers has promptly stopped accepting new clients from Mainland China since midnight on December 30. In 2022, approximately 90% of our new funded clients came from overseas, so this policy change will not significantly impact our business. Additionally, we have completed inspections with the Beijing Securities Regulatory Bureau and are awaiting positive guidance from the regulator. On February 15, during a press conference, the CSRC indicated that relevant brokers have fully understood and complied with the regulatory requirements. The main requirement is to prevent the inflow of funds, while domestic investors can continue trading through their existing overseas accounts. We will maintain this policy until we receive further guidance from the regulator. Thank you.

Operator, Operator

Thank you. We'll now move on to our next question. Please standby. Our next question comes from the line of Brandy Wang from Citi. Please go ahead. Your line is open.

Brandy Wang, Analyst

Thank you management for taking my questions. I have two questions here. First, we saw that income tax in the fourth quarter increased a lot by around 38% quarter-over-quarter, which is driving the effective tax rate to over 65%. Any reason behind this? And my second question is regarding the business outlook. As the market sentiment was weak in 2022, what's management's preview and guidance for 2023? Do we observe any business recovery lately? Thank you.

John Zeng, CFO

Okay. So, let me answer the first question regarding the tax rate. In terms of the tax rate, a large portion of the $2.3 million, which is about $2 million, was due to unrealized foreign exchange losses. This was caused by the continued appreciation of the U.S. dollar in 2022, resulting in non-cash foreign exchange loss for our subsidiaries in Singapore and New Zealand. According to local tax regulations, those losses cannot be deducted as expenses before tax. Therefore, we had to add them back as a tax basis, which resulted in the current context of our $2 million in the consolidated P&L for the fourth quarter. Of course, those expenses are allowed to be reversed with the depreciation of the U.S. dollar in the future and vice versa. Thank you. You may go for the next question.

Wu Tianhua, Chairman and CEO

Okay. Our second question is about the preview and guidance for the upcoming year. Despite the challenging and uncertain market conditions of 2022, we achieved a non-GAAP profit of $12.7 million for the year, gained over 100,000 new funded accounts, and saw net asset inflows exceed $7 billion. These results highlight the trust we've earned from users worldwide, the profitability of our business model, and the effectiveness of our financial operations. The online brokerage industry has been performing very strongly. Since our relatively recent entry into the markets of Australia, New Zealand, and Hong Kong, we aim to acquire at least 100,000 new funded accounts this year in 2023. In 2023, Tiger Brokers will continue to enhance our international focus and improve operational efficiency in our existing markets. After launching in Singapore, we achieved profitability in under two years. However, depending solely on Singapore for growth is not a sustainable business model in the long term. Therefore, whether in Australia, New Zealand, or Hong Kong, we will work to enhance user experience, diversify our product offerings, and improve self-clearing efficiency, with the hope that these markets will become as successful as Singapore. This strategy will help us better manage our fixed costs and navigate market fluctuations while maintaining stable profitability. Thank you.

Operator, Operator

Thank you. That was the last question. As there are no further questions at this time, I'll hand the call back to you for closing remarks.

Wu Tianhua, Chairman and CEO

I would like to thank everyone for joining the call today. I'm now closing the call on behalf of the management team here 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.

John Zeng, CFO

Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please standby.