Earnings Call Transcript - TIGR Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the UP Fintech Holding Limited's Second 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, Tuesday, August 18, 2020. I would now like to hand the conference over to your first speaker today, Mr. Clark Soucy. Thank you, please go ahead.

Clark Soucy, Investor Relations

Thank you, Raves. Hello everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's second 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, August 18, and our annual report on Form 20-F filed on April 29, 2020. We undertake – excuse me, 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 Chief Executive Officer

Good day, everyone and thank you very much for attending the Tiger Brokers 2020 second quarter earnings conference call. We saw moderated market volatility in the second quarter, but our users remained very active, which fueled our strong growth this quarter. Total revenue exceeded US$30 million, a 122% increase on the same period last year. This marks the second quarter this year when revenue growth exceeded 100% on a year-on-year basis. Our operating efficiency and earnings quality keep improving. We achieved consecutive quarters with GAAP profits. In the second quarter of this year, our company reported operating income and non-GAAP operating income of US$5.1 million and US$6.8 million respectively. Please refer to our Form 6-K furnished today, August 18, for a reconciliation of non-GAAP financial measures to GAAP financial measures. Our improving financials are dependent on the trust and goodwill of our users. As Tiger continues to grow our business and our brand, as well as provide more differentiated services, more people entrusted us with their money. In the second quarter, we added 33,800 new accounts with deposits, a new quarterly high for our company, and total accounts with deposits increased 76.7% from the same quarter last year. We saw strong inflows this quarter. Total client assets reached a new high of US$8.3 billion, 133% higher than the same period last year and a 51% increase on the previous quarter. I expect that with high growth in client numbers and client assets, Tiger will keep delivering good financial performance in the near future. While brokerage is of course our core business, investment banking, ESOP and our internationalization efforts continue to develop nicely. Our U.S. and Singapore businesses are on the right track. They are expanding our customer acquisition channels, while diversifying our revenue streams. In addition, we completed our self-clearing infrastructure setup and gradually started to self-clear U.S. equities. Thanks to our growing influence in capital markets, as well as our strong retail and institutional client base. Our investment banking business continues to grow rapidly. In the second quarter, Tiger participated in eight U.S. IPOs. Recently, we also served as an underwriter for Li Auto, solidifying our number one position as the most active ADR underwriter in terms of deal count. We were also active in high-profile Hong Kong IPOs. In the second quarter, we were a joint bookrunner for NetEase's Hong Kong listing, which demonstrates that Tiger is an indispensable partner for Chinese companies looking to enter global capital markets. In the past half year, our ESOP business has grown rapidly. We have invested heavily in this system to gradually improve its functionalities. This system now supports complex plans that span multiple countries and corporate entities. In the second quarter, I am proud to report that we added 16 ESOP customers. In the first half of this year, over 50% of Chinese ADR issuers have chosen Tiger’s ESOP system. We look forward to continuing to grow our dominant market share and are resolute in our conviction that our outstanding service and comprehensive capabilities will attract more clients to our ESOP system. With regards to our wealth management business, at the end of the second quarter, we unveiled our proprietary fund analysis system that assists clients in analyzing the rich range of investments available on our Fund Mall, which presently features over 100 mutual funds from distinguished global asset managers. Finally, I would like to provide an update on our share repurchase program. From April 1st to August 17th, we, in total, repurchased 700,000 ADS for an approximate consideration of US$2.2 million. I would now like to invite our CFO, John, to go over our financial results.

John Zeng, Chief Financial Officer

Thanks Tianhua, and Clark. So, as mentioned earlier, the second quarter was a strong quarter in terms of both operating and financials with favorable market backdrop, increased user base, and trading activities. Commission revenue went up 178% year-over-year to US$18.8 million this quarter. Interest-related income, which combines financing service fees and interest income, went up 65% year-over-year to US$8.8 million, thanks to increased margin trading and securities lending activities. Other revenue also increased 54% year-over-year to US$2.5 million, primarily due to more IPO underwriting. Total revenue was US$30.1 million, up 122% from the same quarter last year. Taking out the interest expense of US$1.9 million, total net revenue was US$28.2 million, an increase of 125% from the same quarter last year. Now switching to cost. Execution and clearing cost were US$2.9 million, which increased almost four times year-over-year as we have a much bigger user base and increased trading volume. Compensation expense increased 39% year-over-year to US$11.3 million. Taking out share-based compensation, the cash portion of compensation expense increased 36% year-over-year. The increase was due to our continued addition of accounts into key positions to support the rapid growth of our business. Marketing expense increased 48% year-over-year to US$2.9 million this quarter as the market backdrop remains favorable for user acquisition. We likely will keep investing in marketing in the second half. Occupancy, depreciation, and amortization increased 42% to US$1.1 million. SG&A increased 43% to US$2.8 million, and both increases are in line with our business expansion. Total operating cost was US$23.1 million, an increase of 52% year-over-year. Operating income, which is a key metric we focus on internally, increased to US$5.1 million this quarter, a significant improvement from a loss of US$2.6 million in the same quarter last year and US$1.9 million in the first quarter of this year. Net income attributable to UP Fintech was US$1.1 million, as compared to a net loss of US$1.9 million in the same quarter of last year. One thing I want to elaborate on is our effective tax rate of 49% this quarter looks very high. The reason is that while we started to make profit on a consolidated group basis, some of our subsidiaries still don’t have profit. So deferred tax assets of US$2 million of those entities cannot apply. We expect our effective tax rate to gradually go down as most subsidiaries will turn profitable and can apply deferred tax asset benefits. That’s it for the management presentation. We are now open for questions.

Operator, Operator

Thank you. Your first question comes from Daphne Poon from Citi. Your line is now open.

Daphne Poon, Analyst

Hi, management. Thanks for taking my questions. So, my first question is how are your commission rates? Do you see a meaningful increase in terms of your net commission rates in the second quarter to 3.4 basis points? Can you explain the reasons behind that? And what’s the outlook going forward? Additionally, regarding your new customer growth, we have seen some very strong momentum year-to-date. Just wondering if it’s possible to get some perspective on your full year customer growth outlook or maybe the run-rate in the third quarter or so far? Lastly, I want to check on your overseas market expansion. We understand you are heading into the U.S. market and also there are a couple of markets since the beginning of the year. Just wondering if you can share any progress there, for example, the number of new clients and also the client access contribution? Thank you.

John Zeng, Chief Financial Officer

Sorry. Okay. Daphne, let me answer your first two questions regarding the commission rate and also the new customer growth. Then I will let Tianhua to answer your question regarding the offshore international expansion, okay? So, our commission in the second quarter has actually been gradually increasing, maybe for the first two quarters of this year. I think the main reason is that first of all, there are more people trading. Second, many people are trading more diversified products. So instead of trading only U.S. equities, we have noticed many of our customers are trading U.S. options, which relatively is a higher margin product. That’s why you can see the blended commission rate also goes up, okay? So that's the answer to your first question. For the second question, unfortunately, I cannot give you a very clear guidance in terms of the total customer growth this year. The main thing is because our international expansion just started. The U.S. market started in the fourth quarter of last year and Singapore started this year. So, for those two regions, so far, the growth has been pretty positive. But right now I still don’t have a full grasp of the growth potential, so I cannot give you very clear guidance, but I can share with you that the momentum is pretty strong. So, I will let Tianhua answer your third question.

Wu Tianhua, Chairman and Chief Executive Officer

Well, in terms of international expansion, so far we see very promising growth coming from the U.S. and Singapore. If you average them up, the international new users are probably more than 10% of our quarterly user growth this year. However, in June, the new user growth in the offshore regions actually grew much faster than in April. Overall, we are very positive on the international expansion. I think we have a good brand, as well as user experience and offerings in those regions. So we are very optimistic about the growth prospects.

John Zeng, Chief Financial Officer

Daphne, do you have other questions?

Daphne Poon, Analyst

Yes. Actually, if I may, can you share the breakdown of your trading volume by different product categories? For example, what is the percentage of trading volume in Q2?

John Zeng, Chief Financial Officer

Sure. So, the cash equity accounts for over 50% of our trading volume. For futures and options, it's around 45%, that’s the total composition of our trading volume.

Daphne Poon, Analyst

Okay. Understood. Thank you.

John Zeng, Chief Financial Officer

Thanks.

Operator, Operator

Your next question comes from Yan Li from CICC. Your line is now open.

Yan Li, Analyst

Hello management. Firstly, congratulations on an impressive financial performance for this quarter and thanks for giving me the chance to ask these questions. I have three questions for you today regarding operational financial performance. First, as for the number of accounts with deposits increased by approximately 33,800 this quarter, I was wondering if you could share more information on the geographical distribution of this number. What are the specific percentages of this number that are from Mainland China, Hong Kong, and other regions, respectively? Secondly, I saw you gradually started to use Marsco Investment Corporation for self-clearing. I was wondering what the percentage of transactions are using the self-clearing right now and what the percentage will be in the future and for the rest of the year? Lastly, regarding your international business, I saw in the news that you signed more U.S. licenses. Could you share more information on how you plan to use these licenses to expand your businesses in the United States? How will you position your U.S. retail sector in the development of your overall company?

John Zeng, Chief Financial Officer

Okay. So I will let Tianhua answer your first question.

Wu Tianhua, Chairman and Chief Executive Officer

In terms of our new users with deposits this quarter, so far, still the majority comes from the PRC region. Okay. But as we mentioned all year, our international business, even though it just started a couple of quarters ago, is seeing positive growth. Going forward, we expect more users will come from outside of China.

John Zeng, Chief Financial Officer

To answer your second question regarding Marsco. As you know, we acquired Marsco back in last July. It took us a year to set up the infrastructure, get the systems fully integrated and we did a bunch of testing. In the second quarter, we finished all the testing and we just did very minimal self-clearing trades to ensure everything is in place and we don’t jeopardize any user experience. Starting in the third quarter and fourth quarter, I anticipate we will gradually put in more trading volume into Marsco. The exact volume percentage is hard to specify right now, but my goal is to have about 15% to 20% by the third quarter, and eventually we aim for another 30% to 40% by the fourth quarter. That’s our goal, but it depends on how the market goes and how the trading system operates in our day-to-day activities. To answer your third question regarding the license, yes, we have a really strong team in the U.S. based in New York, and all the team members are experienced from both bracket firms in the states. We secured a research license, opportunity license, and FA license recently. What we plan to do is explore many avenues to expand our institutional business. This involves engaging with US institutions, which will help us secure IPO mandates. Furthermore, with the research license, we will be able to issue research on those IPO deals we underwrite. We have already started issuing research on Bloomberg, so you can see how we cover Chinese ADR business and also Hong Kong listing companies. Overall, acquiring more licenses in the U.S. will help increase our brand visibility and allow us to attract more users from both institutional and retail investors.

Operator, Operator

Thank you very much. There are no additional questions at this moment. Speakers, please proceed.

Clark Soucy, Investor Relations

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.