Earnings Call Transcript - TIGR Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the UP Fintech Holding Limited Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by the question-and-answer session. I must advise you that this conference is being recorded today, Wednesday, November 25, 2020. I would now like to hand the conference over to your first speaker today, Mr. Clark S. Soucy. Thank you. Please go ahead. Thank you, Revati. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited’s third 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 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.

Wu Tianhua, Chairman and CEO

Hello, everyone, and thank you for joining our Q3 2020 earnings conference call. We experienced rapid growth in client numbers and demonstrated a strong commitment to upgrading our trading platform and services, leading to significant improvements in our operational and financial metrics. In the third quarter, our total revenue reached $38 million, reflecting a 148% increase from the same period last year and setting a record for our firm. Both operating income and net income showed robust growth, with operating income at $7.4 million and net income at $3.8 million and $5.3 million on GAAP and non-GAAP basis, respectively. We added 46,800 funded accounts this quarter, which is seven times the growth rate from the same period last year, bringing our total funded accounts to 214,700, a 110% increase year-over-year. I’m also pleased to announce that on October 28, 2020, we reached a significant milestone with our total client accounts reaching 1 million, especially considering our five-year operating history. Our total account balance grew to $10.9 billion this quarter, marking a 188% increase compared to the same period last year. The average client assets also rose by 37%, from $37,000 in the same quarter last year to $50,000 this quarter. As we continue to see healthy growth in client numbers and assets, I am confident that we will deliver strong results for our shareholders. Over the past six months, we have achieved three major milestones. Firstly, our international strategy is yielding good results, as we now have licensed subsidiaries in the U.S., Australia, Singapore, and New Zealand. Each day, investors from these regions are choosing us to open accounts and trade, despite our firm's relative size. We provide a platform that allows global clients to trade various securities, including global equities in the U.S., Hong Kong, Singapore, Australia, and China, among others. International clients now represent over 20% of our newly funded accounts, and we believe this could increase to more than 50% over the next one to two years. Secondly, we have transitioned from a discount broker to offering a wider array of services. While some may still view us as a discount online broker for retail clients trading U.S. and Hong Kong equities, our business model has evolved with a focus on brokerage complemented by rapid growth in institutional services, investment banking, ESOP, and international expansion. In addition to our retail clients, we also support institutional investors and have established ourselves as a tech investment bank, having been the underwriter for 12 Chinese ADR IPOs in 2020, including those of Li Auto and XPeng Motors. We were also an international underwriter for New Oriental Education’s listing in Hong Kong. I want to express my gratitude to these firms for their trust in us, reflecting the strength of our platform and reputation. Just two years after launching our investment banking business, we have become the number one firm globally by deal count for underwriting Chinese ADR issuers. Our ESOP management system is also growing impressively as we simplify the adoption of ESOP systems for firms; in the third quarter alone, we added 23 new ESOP clients, which we expect will lead to high-quality brokerage clients. ESOP clients represented 12.6% of our newly funded accounts in Q3, and we plan to capitalize on our strong relationships with potential issuers to maintain and expand our market share. Finally, we are gradually moving toward self-clearing. We acquired Marsco in July 2019, a U.S.-licensed firm with over three decades of self-clearing experience. This significant step allows us to integrate our front-end and back-end infrastructure using our proprietary technology, reinforcing our leadership in R&D and financial operations. Currently, over 10% of our users are having their U.S. cash equity trades cleared by Marsco, along with all new clients from our U.S. licensed subsidiaries. As I conclude, I want to update you on our share buyback program. Between April 1st and November 24, 2020, we repurchased 695,287 ADS for around $2.2 million. I would now like to invite our CFO, John, to present our financial results.

John Zeng, CFO

Thanks, Tianhua and Clark. Let me break down our financial performance in the third quarter. All numbers are in U.S. dollars. Commissions were $19.5 million this quarter, up more than 200% from the same quarter last year on the back of a 1.5 times increase in trading volume with accelerated user growth. Blended commission rate was 3.1 bps this quarter, increased from 2.5 bps in the same quarter last year, but a decrease from 4 bps in the second quarter of this year. Within the operating and discount pricing this quarter, the decrease was primarily due to the increase in trading volume. Interest-related income increased 26% year-over-year to $9.8 million. Other revenue, which includes our IPO underwriting business, increased close to six times year-over-year to $8.8 million. We were very active in IPO underwriting under our U.S. and Hong Kong IPOs in the third quarter, and we remain very positive under the incoming deal pipeline. Total revenue was $38 million, up 148% year-over-year, another record high revenue in our operating history. Now, switching to the costs. Interest expense was $2.9 million, increased 110% year-over-year, primarily due to a higher margin balance. Clearing expense was $3.9 million, increased four times in line with our user growth and the increase in trading volume. Compensation increased 37% year-over-year. We keep adding headcount in key positions to support our business growth. More than 50% of the salary expense comes from the research and product team as we keep investing in R&D. Marketing expense was $3.7 million, an increase of 147% from last year as we continue to spend in user acquisition to take advantage of the favorable market backdrop. As our brand becomes more popular among investors, we see more organic growth. Our funded account acquisition cost actually comes down quarter-over-quarter from last year. Occupancy expense increased 13% year-over-year to $1.2 million to accommodate our headcount growth. Market data usage expense increased 52% year-over-year to support our user growth. SG&A increased 68% due to business expansion. Total costs were $27.8 million. Operating income was $7.4 million. Net income was $3.8 million, compared to a net loss of $1.3 million last year. Non-GAAP net income was $5.3 million this quarter, an increase of seven times over the same period last year. That concludes our presentation. We are open to Q&A. Thanks.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. We do have our first question from Eric Lu from China Renaissance. Please go ahead.

Jacky Zuo, Analyst

So, let me translate my question. So, thanks for taking my question. I am Jacky from China Renaissance. And my question is regarding the ESOP business. I’ve observed that we have very rapid growth of ESOP business this quarter by adding 23 new customers, which actually brought 13% of new customers regarding the paying customers. So, just wondering, can management help us elaborate more about our business trends, our competitive advantage in the ESOP business, and what is the growth outlook for this business? Thank you.

Wu Tianhua, Chairman and CEO

Thank you for taking my question. I am Jacky from China Renaissance. My question is about the ESOP business. I've noticed that our ESOP business has grown rapidly this quarter by adding 23 new customers, which accounted for 13% of our new paying customers. I'm curious if management can share more about our business trends, our competitive advantages in the ESOP sector, and the growth outlook for this business. Thank you.

Clark Soucy, CEO

Okay. Let me just quickly translate. So, Jacky, thanks for the question. In terms of ESOP, this is where we are very focused. We think it’s a priority for our future growth because we believe for all the new emerging companies, every company has an ESOP plan. So the total addressable market, or TAM, is super big, so that’s why we want to invest a lot of resources into this business. So how we grew very fast in the past couple of years is, first of all, given we have multiple licenses across different jurisdictions, which give us a lot of strengths or, I would say, leverage to serve those global companies. For example, Xiaomi has employees in 20 or 30 different countries, and each country has different jurisdictions and tax laws. To be able to serve those people in different jurisdictions is actually a pretty complicated business because we have our licenses in multiple locations. We offer customized service to meet the companies’ needs under different jurisdictions. That’s why you can see in the past year, we dominate the ADR ESOP business. More than 50% of the ADR issuers choose us as their ESOP provider. So, going forward, given we are working on more cases, especially with those company cases, we will gain a lot more experience to be able to service more future issuers. In the future, we think from existing clients and dealing with future clients, we will be able to add in more ESOP corporate clients, and in return, it will help us to acquire more high-quality future users. Thanks.

Jacky Zuo, Analyst

Thank you so much.

Operator, Operator

Thank you. We have our next question coming from Hanyang Wang from 86Research. Please go ahead.

Hanyang Wang, Analyst

So let me translate my questions. I have two questions. First of all, is regarding the commission rate. So, in my calculation, the commission rate and the margin interest rate in Q3 were down compared with Q2. So any color on that will be helpful? My second question is about licenses. So do we have any potential clients for the brokerage license in Hong Kong recently? And a follow-up question on institutional clients, so how many institutional clients that we are serving now? What are the average assets that we manage for the institutional investors? Thank you.

John Zeng, CFO

I will first address your question about the take rate and interest rate, and then I will allow Tianhua to respond to your other questions. Regarding the take rate, as I mentioned earlier, the trading volume has increased, which led to a decrease in the blended commission rate. In the third quarter, our pricing remained the same as in the second quarter, so the reduction in the blended commission was due to the rise in trading volume. As for the margin interest rate, there were several significant Hong Kong IPOs in the third quarter. However, in our current business model, we depend on our clients and partners in Hong Kong for funding. This is why our margin income, or net interest margin, was relatively low. We are actively addressing this issue for the future.

Wu Tianhua, Chairman and CEO

The decrease in blended commission was due to the increase in trading volume. In the third quarter, there were several significant Hong Kong IPOs. However, our current business model depends on our clients and partners in Hong Kong for funding, which is why our margin income, or net interest margin, was relatively low. This is an issue we are actively working to resolve moving forward.

Hanyang Wang, Analyst

So, let me translate that question. So, if we compare with the Interactive broker, we still serve a group of institutional investors. So, could you help us understand how big the market will be to serve the institutional investors? Thank you.

Clark Soucy, CEO

So, Hanyang, you want to know how big the addressable market of our potential institutional investor targets, right? Overall, how big is the size?

Hanyang Wang, Analyst

Yeah.

Wu Tianhua, Chairman and CEO

So, Hanyang, you want to know how big the addressable market of our potential institutional investor targets, right? Overall, how big is the size?

Clark Soucy, CEO

Okay. So, hi, let me just elaborate a little bit more. In terms of how big the market is, we think it’s very hard to pin down the exact number because there are a lot of new institutional investors coming to the market, and some of them have grown from small to much bigger sizes. So, what do we think is, there is definitely a huge need for banks like us or for specialized brokers like us to service those smaller institutional investors. So what we can service them now, just to recap what Tianhua said earlier, is, we offer differentiated service. For example, they can now open accounts with bigger banks to have a prime brokerage account. We can help them to set up their accounts like traders to help them win all the trades and also help them to grow; sometimes we will help them to give them fundraising as well. So those are the things we can offer to smaller institutional investors. To your second question on the license, definitely, Hong Kong is a huge market for us. As you can see, our financial performance, the same as the first question you asked is like we left too much money on the table because we don’t have the Hong Kong license yet. So definitely, we will need the market once we progress in this space. Thank you.

Hanyang Wang, Analyst

Very helpful. Thank you.

Operator, Operator

Thank you. We have our next question coming from the line of Hui Han from CICC. Please go ahead.

Hui Han, Analyst

Okay. So let me rephrase my questions. First, I'm interested in the investment banking business. We observed that in this quarter, we achieved significant success in helping Chinese companies go public in the U.S. What specific efforts have we made in investment banking? Additionally, how do our advantages compare to those of our competitors? My second question is regarding our international strategy. How do we attract customers in countries like Singapore, Australia, and New Zealand? Is there a difference in customer acquisition costs between these regions and Mainland China?

Wu Tianhua, Chairman and CEO

In this quarter, we have made great achievements in assisting Chinese companies to list in the U.S. market. What special efforts have we made on the investment banking side? How do our unique advantages compare to those of our competitors? Additionally, regarding our international presence, how do we acquire customers in countries like Singapore, Australia, and New Zealand? Is there a difference in customer acquisition costs between these regions and Mainland China?

Clark Soucy, CEO

Okay. Let me quickly translate the investment banking question first. So we pioneered the U.S. IPO distribution service back in 2017 on the back of our strong demand from retail and institutional investors. As you can see, our investment banking business has been growing very rapidly. Since then, within two years of time, we have been working on more than 60 U.S. and Hong Kong IPOs. I think this year we have been working on pretty much all the big name, popular ADR IPOs. So how can we crack into the market when there are a lot of competitions from traditional international and domestic investment banks? Because our principal philosophy is we want to bring value-added services to the issuer. For example, we provide very steady demands. Those demands, especially during tough markets, like in 2019, have been very helpful to the issuer to be able to get the IPO done. We also provide very customized DSP and IRPR services to the issuers, which traditional banks are not really active in that kind of space. This gives us an opportunity to be able to service those new economy issuers plus we have been doing the IPO ourselves a couple of years ago. So we know all the stuff the issuer, potential issuers have to manage when they are doing the IPO. This is why we have huge growth in this space, and as the investment basis helps us to drive more institutional and retail brokerage business.

Wu Tianhua, Chairman and CEO

We offer customized DSP and IRPR services to issuers, which is not something traditional banks are actively involved in. This provides us with the opportunity to serve new economy issuers. Additionally, we successfully managed our own IPO a couple of years ago, giving us insights into the challenges potential issuers face during the IPO process. This expertise contributes to our significant growth in this area, and as our investment base expands, we can drive more institutional and retail brokerage business.

Clark Soucy, CEO

Okay. So given we are a tech-backed brokerage company, this gives us the flexibility to enter into deal markets and be more adaptive to service local needs. For example, when we saw the need in Singapore and Australia, we are seeing similar opportunities now to what we saw in China a few years ago when we started that business. There is huge potential down there. The beauty of international expansion is that our conversion rate will be much higher, and we can offer differentiated services versus local brokers. For example, our commission rates will be much lower than the existing local players. We help the local clients not only to trade in their local stocks, but also to trade in Hong Kong and U.S. equities. Therefore, we are very bullish about our international expansion strategy. We just started international expansion early this year, and we are seeing very promising results. We are very confident that in the next 12 to 24 months, our international funded accounts will account for more than 50% of our paying clients. Thanks. Thank you. We do not have any more questions now. I would like to hand the conference back to our speakers today. Please go ahead. Hello. This is Clark. 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.

John Zeng, CFO

Thank you. Have a great day.

Wu Tianhua, Chairman and CEO

Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect your lines now.