Earnings Call Transcript - TIGR Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to UP Fintech Holding Limited Fourth Quarter 2020 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, Friday, March 26, 2021. I would now like to hand the conference over to your first speaker today, Mr. Clark S. Soucy. Thank you. Please go ahead.

Clark Soucy, Speaker

Thank you, operator. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's fourth quarter 2020 earnings release was distributed earlier today and is available on our IR website at ir.itiger.com as well as Globe Newswire 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 Chao, 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. They will both 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 26, 2021, and our annual report on Form 20-F filed on April 29, 2020. We undertake no obligation to update any forward-looking statement 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

Good day, everyone, and I appreciate your attendance in Tiger Brokers' fourth quarter 2020 earnings conference call. In the fourth quarter, our operating and financial metrics exhibited solid improvement due to a surge in new clients as well as enhancements to our platform and services. In the fourth quarter, total revenue was $47.2 million, 2.4 times compared to that of the same period last year and a new all-time high. Tiger’s operating efficiency and profitability continue to improve. Non-GAAP net income was $10.3 million in the fourth quarter, nearly 30 times the non-GAAP net income in the same quarter last year. In addition, I am pleased to report that we added 44,000 new funded accounts this quarter, nearly quadruple the number from the same period last year. Total funded accounts reached 259,000 by the end of 2020, more than double that of 2019. Growth in client assets was outstanding. Total account balance reached $16 billion, more than triple that of the fourth quarter of 2019 and 46.2% higher than the third quarter of 2020. Overall, for 2020, total revenue was $138 million, more than double versus 2019. We were profitable for the first time on a yearly basis. Non-GAAP net income was $22.3 million in 2020, a big improvement from a non-GAAP loss of $1.8 million in 2019. I would now like to take this opportunity to comment on three notable milestones in our development. First and foremost, our internationalization strategy continues to progress nicely. Tiger Brokers now has subsidiaries and offices in the U.S., Australia, Singapore, and New Zealand that possess a wide range of licenses that span brokerage, investment banking, and asset management, among others. In the fourth quarter, I am pleased to report that our expansion in the aforementioned overseas markets accelerated. International clients represented 40% of newly funded accounts. We expect that in 2021 we will add more than 350,000 funded accounts. International clients will comprise more than 50% of the new funded accounts. Moving on, our investment banking ESOP services continue to lead the market. We are committed to our growth strategy of leveraging Tiger’s core brokerage business to generate synergies among ESOP, investment banking, and internationalization. In 2020, in total, we participated in 26 Chinese ADR IPOs in the U.S. and in Q4 we participated in 8 listings, such as 17 in technology, iHuman Inc. and Yatsen Holding Limited. Recently, we also underwrote the secondary listings of Bilibili and Autohome in Hong Kong. I would like to express my appreciation to all of these companies for their trust at such an important time, reflecting on the development of our investment banking business. In just 2 years, we have become the number one underwriter globally in terms of deal counts for Chinese ADR issuance. ESOP, our system for managing employee stock options, continues to grow at a rapid pace. In the past year, of the Chinese ADR issuers that listed in the U.S., over half chose to adopt our ESOP system, including popular issuers like Li Auto, Kingsoft Cloud, and Yatsen Holding Limited, among others. The growth and adoption of our ESOP system accelerated as we added 35 clients in the fourth quarter for a cumulative total of 124 clients. We expect our ESOP system to maintain its leading position and foresee further increases in market share. Finally, we continue to invest in developing our self-clearing capabilities. In July of 2019, when we acquired Marsco, a U.S. broker-dealer with over 30 years of self-clearing experience, we also acquired their clearing licenses. Our investment to transition to self-clearing remains a key milestone in our firm’s development. We now have the technological and operational prowess to control every aspect of our brokerage system from the front end to the back end. Self-clearing has also created a competitive barrier for our firm due to its extensive technical compliance and operational requirements. The percentage of clients having their U.S. cash equities trades self-cleared by Marsco continues to increase and at the end of the fourth quarter reached over 20%. In addition, Marsco is conducting clearing for all new clients onboarding in the U.S. As I conclude my prepared remarks, I would like to thank the investors who participated in our convertible bond issuance for their support of our firm. In February 2021, we in total issued $65 million of convertible bonds. This capital will accelerate our international expansion as well as support further investments in our research and development capabilities. I would now like to invite our CFO, John, to summarize our financial performance.

John Zeng, CFO

Hello, everyone. Thanks for joining the call. So, let me go through our financial performance for the fourth quarter. All numbers are in USD. Total revenues were $47.2 million this quarter, increased 137% from the same quarter of last year. The increase was due to a broader user base as more people entrust us with their assets and a more active market backdrop. Within the total revenue, commission increased 245% from last year to reach $25.2 million. Interest-related income, which combines financial service fees and interest income, was $13.3 million, an increase of 53% from last year. Other revenue, mostly from our investment banking business, increased 118% from last year to $8.7 million. Interest expense increased to $4.3 million from $1.5 million last year as we have more consolidated account customers. Net revenue after interest expense was $43 million, an increase of 135% from the same quarter last year. Now on the cost, execution and clearing expense were $4.2 million increased by 363% year-over-year due to an increase in user base and more engaged trading activities. The increase in user base also increased communication and market data expenses by 103% to $3.9 million. Employee compensation increased 47% to $15.5 million as we keep adding headcount, especially in R&D and product to support our global expansion. As a result of headcount increase, our occupancy expense increased 12% to $1.3 million. SG&A also increased 70% to $4.8 million year-over-year. Marketing expenses were $6.5 million this quarter, an increase of 277% from the same quarter last year. We will keep spending on branding and customer acquisition to accompany our internationalization. Total operating costs were $36.3 million, an increase of 90% from the same quarter last year. As a result, our net income was $8.5 million this quarter. Non-GAAP net income, which excludes share-based compensation, was $10.3 million this quarter, 30 times the non-GAAP net income in the same quarter of last year. Now, I have concluded our presentation. Operator, please open the line for Q&A. Thanks.

Operator, Operator

Thank you. Our first question comes from Jacky Zuo from China Renaissance. Please ask your question.

Jacky Zuo, Analyst

Hi, management. Thanks for taking my questions. I have two questions. Number one is about our guidance. I heard we expect 350,000 new paying users for this year, just want to understand the drivers behind this guidance, what is the trend in the first quarter this year? And we also mentioned 50% of it will come from overseas markets, so can you give us more details in terms of breakdown of Singapore, U.S. and other countries? And the second question is about our Singapore business, I saw that a competitor actually entered Singapore in March. Do we expect some impact from this in terms of our growth and how do we deal with intensifying competition in Singapore? Thank you.

Wu Tianhua, Chairman and CEO

Thanks, Jacky. So, let me quickly translate Tianhua’s answer for your first question. So, let me put it this way. Traditionally, Tiger’s users mostly are onshore Chinese. So, starting from last year, we started to onboard Singapore clients, so far it is showing good results. This year, we will expand in the U.S. and Australia. So on a high level, more geographic expansion and our experience in Singapore give us the confidence to acquire more users this year. We understand investors are getting nervous recently about the market this year. So, the 350,000 guidance is not based on our high growth in 2020; instead, we used 2019 data when market activity was much lower as our base case. So, in 2019, each quarter we added 42,000 customer accounts. So, assuming in the U.S. and Australia, we will gradually reach their number this year, combining with Singapore, we feel pretty comfortable that each quarter we will have at least 100,000 new customer accounts from offshore investors. Based on our experience, offshore clients have a much higher customer accounts to fund their account conversion, typically loss of 60%, so this translates to around 60,000 funded accounts each quarter from offshore. We are confident onshore clients and ESOP will also add another 20,000 to 30,000 funded accounts each quarter. So combining that, we feel pretty confident we can reach our guidance of 350,000 funded accounts this year. Okay. So regarding Singapore, there will be some competition, but we don’t think it’s a zero-sum game, because we feel the TAM in Singapore is still very big for us to capture. If you look at Singapore’s existing market, based on CDP data, there are about 1.3 million accounts that trade Singapore local stocks and most of them still prefer to place orders by phone. This is a market we haven’t really penetrated yet. Currently, our focus is on the incremental market, the younger generation, similar to our Chinese users, who are more interested in U.S. or Hong Kong stocks, and this incremental market is showing good momentum. We will tap into the existing market by adding more local products on our platform and providing better service to acquire more users from both market segments. Thanks.

Jacky Zuo, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Hui Han from CICC. Please ask your question.

Hui Han, Analyst

Hi, management. Thanks for taking my questions. I am Hui Han from CICC. And firstly, congratulations on the exciting results we have achieved. And I have two questions here. The first one is about our growing customers. We see a total of 44,000 funded accounts added in this quarter and the total paying customers have reached nearly 260,000 by 2020, but we also see the world of higher market environments gratefully. I am wondering first, if it’s a bear market since the second quarter, then what measures will you take on customer acquisition and how to increase customer activeness? And on the second question, regarding our corporate business, in this quarter, we see a record growth of new ESOP clients, with 35 newly added and existing – most of our major competitors, which is management’s shared more with us; that’s why we have grown so rapidly on the ESOP in the recent years. What are our unique advantages? Thank you.

Wu Tianhua, Chairman and CEO

Okay. So, thanks for your questions. To answer your first one, since our inception 7 years ago, we have experienced quite a few market volatility. So, we have experience in that. In general, for our business, especially for the online broker business, we tend to have higher retention, with quarterly retention rates around 98% through our operating history. In terms of how we do to increase user activities and keep the retention, we have been spending resources to optimize our online community operation. So far, we have seen positive results. For example, our content consumers or content creators, in general, have a retention rate that is 20% higher than the rest of the users. Good content can also help users make decisions and increase trading activities. On average, content users' trading activity is more than double. If you log onto the Tiger community, you can see that our offshore clients are actually more engaged in our community; we have seen more and more English posts in our community, which we think is good progress. We will keep investing. Also, for brokerage businesses, volatility to a certain extent is good for us. For example, in the first quarter last year, even during big corrections, user engagements were still pretty high. We think throughout this year, given the media coverage and the transparency of information, market volatility will continue. In the worst-case scenario, if it’s a bear market, we will also have more wealth management products for our users. For example, we are adding a mutual fund automatic investment plan, we also have a cash management product and cash costs. So, I think those wealth management products will help our users manage their investments during bear markets. Regarding ESOP, we think it's pretty high. You need to know how to be able to be a good ESOP provider. First of all, given all of our ESOP clients, they are international companies that have subsidiaries or employees from different countries and regions. As a service provider, we need to be a global company to have the global platform to service their different reaches in employees. So, Tiger, we have licenses in Singapore, the U.S., and Australia, so we feel we are more capable of being customized and tailored to the different needs of our ESOP clients. The second growth driver for our ESOP business is the good synergy we have been generating between ESOP and our investment banking business. We not only help companies get invested to raise funds, we also assist them from the beginning in managing the plan to comply with local regulations and to help them go through the IPO process and to manage their plans when the stock options are listed. We are confident that this strategy will continue to work and provide the best service for our clients. Lastly, ESOP is a complex business, and we are investing heavily in research and development and acquiring talent to be the one-stop solution provider combining HR, tax, legal, compliance, and accounting expertise to make ESOP management more efficient and user-friendly for our corporate users. Thank you.

Hui Han, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Hanyang Wang from 86Research. Please ask your question.

Hanyang Wang, Analyst

Okay. Let me thank you for my questions. I have three questions. The first one is regarding the Hong Kong license; you mentioned the share of the progress of our Hong Kong build its license application? Second question is about our international business. So, you mentioned the increase in the marketing expense was primarily due to global expansion. Could you share the customization costs per paying client in China, Hong Kong, and overseas markets, and how we should look at the revenue contribution from the overseas market after 20 years? And my third question is on commission rate; in my calculation, our commission would increase sequentially during the quarter, any color for that would be helpful? Thank you.

Wu Tianhua, Chairman and CEO

So, to answer your question on internationalization, we are very committed and optimistic about our global expansion strategy. First of all, we see the global expansion strategy as a good way for us to increase the funded accounts and customer account-to-funded account conversion. Many regions have a conversion rate of over 50% and sometimes even 60% to 70%. This will give us big tailwinds once we generate good customers offshore and build good momentum, helping us reach over 1 million funded account customers in the near future. Our goal is to become a one-stop investment platform for global investors, no matter where they are based. We are very committed to internationalization. In addition to operating data growth from internationalization, we believe acquiring more offshore investors will also help us generate better financial results for the company and for shareholders. Regarding marketing and customer acquisition, if you look at our 2020 data, our customer acquisition cost is about $100 per person, which is a decrease from about $200 to $300 in 2019. The decrease is due to better branding now, more natural traffic, and comprehensive services provided to users, so more users are coming to our platform. Moving forward, we think customer acquisition costs will go up when we expand offshore because we will be competing with other players for users. Additionally, entering new markets will take time to build our brand, which means initially we will spend more on branding to increase brand awareness. However, through our past experience, we believe all those marketing expenses are worth it; our customer payback period has actually come down to just one quarter. Thus, we will continue to spend on user acquisition when entering new markets. Regarding commission rates, yes, our commission rates did go up a little bit quarter-over-quarter, but we haven’t done any pricing changes. Our pricing remains the same, about $0.01 per share in the U.S., minimum $2.99, and for Hong Kong, it’s 2.9 bps for Hong Kong securities trading. To answer your question on the Hong Kong license, we resubmitted our application to acquire a Hong Kong stock broker earlier last month. We believe the application contains all the information required by the SFC. As a result of the discussions we initiated with them, we confirmed what was required. The regulator may require further information from us, although we believe we have provided a comprehensive material. So far, they have not asked for any follow-up information, but they might in due course. Typically, the application will take six to twelve weeks to process. Obviously, we cannot guarantee the outcome or timing, but we are as confident as we can be that we have filed everything the regulator reasonably needs to consider our application. Thanks.

Hanyang Wang, Analyst

I have a question on the tax benefits; what costs are tax benefits during the quarter?

John Zeng, CFO

Yes. So, we just breakeven for this year, right. So, as every startup, when they breakeven, before they breakeven, they have huge losses. Once we started to breakeven, we would be able to utilize those tax benefits for this quarter.

Hanyang Wang, Analyst

This is very helpful. Thank you.

Clark Soucy, Speaker

I would like to thank everyone for joining our call today. I am now closing the call on behalf of the management team here at UP Fintech. 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.

Operator, Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.