Earnings Call Transcript - TIGR Q1 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the UP Fintech Holding Limited First Quarter 2024 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, June 5th, 2024. I would now like to hand the conference over to your first speaker today, Mr. Aaron Li, the Head of Investor Relations. Thank you. Please go ahead.

Aaron Li, Head of Investor Relations

Thank you, operator. Hello everyone and thank you for joining us for the call today. UP Fintech Holding Limited's first quarter 2024 earnings release was distributed earlier today and is available on our IR website 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 US 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. 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 US 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 statement. 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, June 5th, 2024 and our Annual Report on Form 20-F filed on April 22nd, 2024. 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 English translation. Mr. Wu, please go ahead with your remarks.

Tianhua Wu, Chairman and CEO

Hello, everyone. Thank you for joining Tiger Brokers' First Quarter 2024 Earnings Conference Call. In the first quarter, we observed a moderate rebound in the market environment. Our total revenue reached US$78.9 million, marking the highest quarter in the past three years, which represents a 12.8% increase sequentially and a 19% year-over-year growth. Our bottom line benefited from optimization in our revenue structure and improvements in operating efficiency, with GAAP net income returning to positive at US$12.3 million, a 55% increase compared to the previous year. Non-GAAP net income was US$14.7 million, reflecting a 13.9 times increase from the previous quarter and a 42% growth year-over-year. The non-GAAP net profit margin improved to nearly 20%. Looking ahead, we aim to leverage fixed costs through our growing user base and improvements in average revenue per user driven by product diversification, which will enhance our profitability in a healthier and more sustainable manner. In the fourth quarter, we added 28,800 new funded accounts, bringing the total number to 933,400 at the end of the first quarter, a 15% increase year-over-year. In the first two months of the second quarter, we've already gained over 35,000 new branded clients and are confident in our full-year goal of acquiring at least 150,000 new funded accounts in 2024. Regarding total client assets, following a historic high in net asset inflows in the fourth quarter of last year, this strong momentum continued into the first quarter of this year, with net asset inflows of US$5.3 billion, primarily from Singapore and institutional users. After adjusting for mark-to-market losses, total client assets reached US$32.9 billion at the end of the first quarter, representing a 7% sequential increase and a 104% year-over-year increase. Our strategy to acquire high-quality clients to ensure long-term profitability remains unchanged. In Singapore, where our headquarters is located, our brand continues to attract quality organic traffic to our platform, with an average net asset inflow of over US$14,000 from newly acquired retail clients in the first quarter. Additionally, we are pleased to report that the average net asset inflow from newly acquired clients in the Hong Kong market exceeded US$18,000 in the first quarter, showing that we have gained better recognition among high-quality local users, and we are dedicated to expanding our presence in Hong Kong. Furthermore, our average customer acquisition cost was around US$150 in the first quarter, and with enhancements to our clearing efficiency in Hong Kong and Singapore, the overall clearing fee as a percentage of commission income has dropped to a historic low of only 8%, both of which are industry-leading levels, signifying our progress in reducing variable costs and improving profitability while maintaining user quality and product experience through our brand advantages and R&D capabilities over the years. In the fourth quarter, we introduced several localized features across different markets to better serve our users and obtained more licenses to diversify our product offerings. In Singapore, we partnered with a local licensed firm to launch the Tiger Vault debit card in February, the first debit card in Singapore that enables users to earn fractional shares rewards from their daily spending. This product connects everyday spending to stock ownership, facilitating local users’ entry into US stock investing. Additionally, we responded to local needs by launching cash boost accounts in April, which operate on a contra trading strategy without the requirement for an initial deposit. Tiger Brokers became the first fintech broker in Singapore to offer such contract facilities. In Hong Kong, we upgraded our Type 1 license to include virtual asset billing services for professional investors in the first quarter and officially launched this feature in April, making us the first mainstream online brokerage in Hong Kong to offer cryptocurrency trading services. We also secured a Type 9 license in March to provide asset management services. Beyond that, we made two significant product upgrades to better address investor needs. Firstly, we introduced an overnight trading feature that allows users, especially in the Asia Pacific region, to trade US stocks and ETFs during local market hours, capturing more market opportunities. Secondly, we enhanced our auction trading capabilities by implementing early access or do-not-access features for US options, enabling our clients to better manage potential volatility risks of in-the-money options and liquidity challenges of deep in-the-money options before expiration. Our B2B business continues to perform well. In investment banking, we underwrote five IPOs in the US and Hong Kong during the first quarter, including Concord Healthcare Group and Lianlian Digitech. In our ESOP business, we welcomed 22 new clients in the first quarter, raising the total number of clients served to 557 at the end of this quarter, a 24% increase year-over-year. Now I'd like to invite our CFO, John, to review our financials.

John Fei Zeng, CFO

All right. Thanks, Tianhua and Aaron. Let me go through our financial performance for the first quarter. All numbers are in US dollars. As Tianhua mentioned earlier, we did see market sentiment improving this quarter versus last quarter. Commission income was $27.8 million, which increased 9% year-over-year and 27% quarter-over-quarter. Interest income was $43.8 million, increased 27% year-over-year and 10% quarter-over-quarter. Please note we reclassified the interest income generated from US TBO from nonoperating gain or loss to interest income in the top line. We see this revenue going forward as part of our routine business, so it should be reflected in our operating income. Together, total revenue reached $78.9 million this quarter, an increase of 19% year-over-year and 13% quarter-over-quarter. Cash equity take rate was 6.3 bps this quarter, slightly decreased from 6.5 bps from last quarter. Within commission revenue, about 65% comes from cash equities, 30% from options and the rest from futures and other products. Now switching to cost. Interest expense was $14.8 million, increased by 70%, sorry, increased by 76% from the same quarter of last year, in line with the high interest rate environment. Execution and clearing expenses were $2.2 million, decreased 8% from the same period of last year primarily due to more efficiency in self-clearing for Hong Kong and Singapore securities. We have gradually moved Hong Kong equity positions to Tiger Broker Hong Kong since we onboarded the Hong Kong retail market, and we have seen cash equity clearing expenses and productivity of commission go down from time to time during the past year. Employee compensation and benefit expenses were $27.8 million, an increase of 14% year-over-year due to head count increase to strengthen overseas growth and R&D. Occupancy, depreciation, and amortization expenses decreased 12% to $2.1 million. Communication and market data expenses were $8.6 million, an increase of 23% year-over-year due to the increase in user base and IT-related services. Marketing expenses were $4.4 million this quarter, decreased 15% year-over-year as we keep optimizing our marketing channels and strategy. General and administrative expenses were $5.7 million, an increase of 26% year-over-year due to an increase in professional service fees. Total operating costs were $50.8 million, an increase of 11% 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 to $12.3 million versus a GAAP net loss of $1.8 million in the previous quarter and an increase of 55% year-over-year. Non-GAAP net income was $14.7 million, which increased 42% compared to the same quarter of last year. Now I have concluded our presentation. Operator, please open the line for Q&A.

Operator, Operator

Thank you. We'll now go to our first question. Our first question comes from Hua Fan from CICC. Please go ahead with your question.

Hua Fan, Analyst

Thanks management for taking my question. This is Hua Fan from CICC. I have two questions. The first one is about the full year guidance. We added nearly 29,000 new funded accounts in Q1, and in April and May we already acquired over 35,000 new funded accounts. Should we still maintain our full year guidance? The second question is about our business progress in Q2. What is the current run rate of asset inflow trading velocity and total client assets?

Tianhua Wu, Chairman and CEO

Hi, operator. Can you hear us now? Yes. You may commence. We place great importance on our profitability model and will not compromise customer quality solely for user growth. In the first quarter, we adjusted our acquisition channels and terminated partnerships with some vendors that did not meet our ROI or payback period targets. As a result, the quality of our new users has improved in the first quarter, with average net asset inflows of new funded clients in Hong Kong and Singapore reaching 18,000 and 14,000, respectively. Recently, we have also seen a recovery in market activity in both the US and Hong Kong markets, prompting us to increase our customer acquisition efforts in the second quarter. The launch of the Tiger Vault debit card and the contra trading feature in Singapore has been well received by local users, and we onboarded over 35,000 new funded users in April and May. Thus, we are confident in meeting our full-year guidance of adding at least 150,000 new funded users. For the first two months of the second quarter, the number of new funded accounts has significantly improved. Our client net asset inflow has maintained strong momentum, and market activity has remained robust, particularly with an increase in our Hong Kong cash equity trading volume. We believe the mix of Hong Kong and US trading volume will diversify as our Hong Kong clientele grows. Interest rate income has also remained stable so far in the second quarter. We have recently rolled out various new features on the Tiger platform, including debit card, contra trading, overnight trading, and crypto to expand our product offerings, enhance user experience, and increase ARPU.

Aaron Li, Head of Investor Relations

Thank you, operator. Please move on to the next question.

Operator, Operator

Thank you. Please hold on. Our next question is from Edmond from CDS. Please proceed; your line is open.

Unidentified Analyst, Analyst

Thank you, management. I have two questions. The first question is what is the regional breakdown for the new fund accounts during the first quarter? The second question is about the Hong Kong market. Does the company believe that business development in Hong Kong meets our expectations? Additionally, considering the competition from peers, does the company have any plans to sustain the growth momentum? Lastly, what is the latest progress of Tiger in crypto trading? Thank you.

Tianhua Wu, Chairman and CEO

In the fourth quarter, over 50% of new funded accounts came from Singapore and Southeast Asia, around 20% from the US market, over 15% came from Australia and New Zealand, and more than 10% from the Hong Kong market. I'll hand the second question back to John.

John Fei Zeng, CFO

After entering the Hong Kong market a year ago, our progress has met expectations. A few key points to note: initially, one of our main goals was to cut clearing costs for our Hong Kong trading. We have successfully achieved this. Prior to obtaining our Hong Kong license, we relied on other brokers for clearing Hong Kong equities, which was costly and made trading unprofitable for us, limiting our investment in the region. Now, clearing expenses for Hong Kong equity are below 20% of gross commission, which has helped bring our overall clearing fee rate down to about 8%. This is crucial as we provide zero commission and no platform fee for local users trading Hong Kong cash equities. With reduced clearing expenses, we can boost our trading volume and allocate more resources to product research and development. As our trading volume in Hong Kong continues to grow, the clearing fees will decrease further. Additionally, we now offer a much more extensive range of products in Hong Kong than before. Tiger Broker Hong Kong currently facilitates cash equity trading for both Hong Kong and US shares, US option trading, loss on trading, and wealth management products like FCN. We've recently introduced overnight trading and plan to add short selling and Hong Kong equity options in the third quarter. Regarding crypto, with our Type 1 license now approved, we are among the first fintech brokers in Hong Kong, enabling clients to trade Spark Crypto along with 11 US Bitcoin ETFs. Over the past year, we've been optimizing our account opening process and experimenting with various marketing strategies, allowing us to expect contributions from the Hong Kong market to reach around 10% of new funded users this quarter. The quality and level of trading activity from our Hong Kong clients have also been impressive, with total client assets rising over 60% quarter-over-quarter and nearly tenfold year-over-year in the first quarter.

Aaron Li, Head of Investor Relations

Okay. Thank you, operator. Please move on to the next question.

Operator, Operator

Thank you. Please stand by. Our next question comes from the line of Alan Chen from Citi. Please go ahead. Your line is open.

Alan Chen, Analyst

Thank you to the management for addressing my questions. I have two inquiries today. The first pertains to the two products that were launched in Singapore. Could the management provide more details about these products and the Vault debit cards? Are there any restrictions on who can apply for the debit card? Can this product serve as a customer acquisition tool for Tiger? Regarding the contra trading function, you mentioned that clients can trade stocks without needing to deposit any funds into their brokerage accounts. How will Tiger manage risks if clients incur losses in trading but have no funds in their accounts? In the long term, how will this contra trading function affect Tiger's financial performance? My second question is about FX gains. Can management share how much FX gain was recorded in the first quarter, and moving forward, have any measures been taken to mitigate the impact of FX gains or losses on your earnings? Those are my questions. Thank you.

Tianhua Wu, Chairman and CEO

Hey, Alan. For the first question about the Tiger Vault debit card, this card is available for both current and new users who can apply for it. We launched this card in partnership with a local licensed provider. The goal of this product is to link users' everyday spending with their stock trading activities. Specifically, the debit card allows users to connect it with digital wallets like Apple Pay and Google Pay for high-value purchases. For every transaction made with this card, 1% of the amount will be credited to the user's security account on the Tiger platform as fractional shares of popular US stocks like Tesla. We believe that these fractional share rewards offer a superior user experience compared to traditional bank card reward systems like cashback, loyalty points, or miles. There are no expiration dates or lockup periods for the fractional shares, and this unique reward system can enhance new users' motivation to invest and increase their loyalty to our platform. It also enables them to gradually build their investment portfolio through daily spending without needing a large initial investment. We are proud to be the first fintech broker in Singapore to provide such services. Since its launch, the product has been very well received by local users. As of the end of May, nearly 7,000 local users have signed up for this card, and the average transaction frequency from cardholders has surpassed our expectations. Regarding the contra trading feature, Tiger was the first fintech broker in Singapore to offer this service, making use of Singapore's comprehensive credit system. This feature serves seasoned traders by giving them immediate access to a trading limit based on their credit assessment without any upfront capital input. From the user's perspective, contra trading allows seasoned traders the flexibility to buy and sell stocks any time before or on the first selling date without needing to deposit funds. It also enables investors without immediate cash to buy stocks using the provided trading limit. If the stock price increases, the difference can be kept as profit. Conversely, if the price falls, investors can settle the difference using their own funds up to seven days later. Due to the credit-based nature of contra trading, we have implemented rigorous risk controls. For instance, this feature is currently limited to users in Singapore, with a strict approval process to ensure the credit rating aligns with the authorized limit. If losses extend beyond two days after the settlement date without a top-up, the limit will be automatically frozen, allowing only closing positions. Limits are also adjusted downward by contra losses until the user replenishes the gap. The FX gains and losses on our P&L are primarily due to fluctuations in the US dollar against the RMB, SGD, and NZD. In Q1, the appreciation of the US dollar compared to Q4 resulted in over $3 million in FX gains. Since FX gains or losses are beyond our control, to provide a clearer view of the group's profitability and operations, we opted to categorize the revenue from treasury bills into our top line under interest income. We believe this will give investors a better understanding of our core business. In Q1, the interest income from US treasury investments amounted to approximately $4.7 million. Thank you.

Aaron Li, Head of Investor Relations

Hey, Mao. Please move on to the next question, please.

Operator, Operator

There are no further questions at this time. So I'll hand the call back to Aaron for closing remarks.

Aaron Li, Head of Investor Relations

Thank you. I'd like to thank everyone for joining our 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.

Operator, Operator

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