Earnings Call Transcript - TIGR Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to UP Fintech Holding Limited First 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, 10th of June 2022. I'd now like to hand the conference over to your first speaker today, Ms. Zing. Thank you. Please go ahead.

Unidentified Company Representative, Company Representative

Thank you, operator. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's first quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.itiger.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. Fan Lei, CEO of U.S. Tiger Securities; and Mr. Ken 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 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 these in the forward-looking statements. Please refer to our Form 6-K furnished today, June 10, 2022, 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 First Quarter 2022 Earnings Conference Call. The macro environment was more difficult in the first quarter compared to a year ago, which led to a slowdown in trading commission and underwriting revenue. Total revenue in the first quarter was US$52.6 million, a decrease of 35.2% year-over-year. However, interest income remained flat, thanks to the gradual buildup of self-clearing for U.S. securities. On a quarter-over-quarter basis, total trading volume increased by 6% from the fourth quarter last year with a moderate increase in trading commissions. We added 30,150 funded accounts this quarter, with over 80% coming from outside of China. Our total number of funded accounts also exceeded 700,000 by the end of the first quarter, reflecting an increase of 87.1% from the same quarter last year. Our goal is to acquire at least 100,000 new funded accounts this year. Total client assets decreased year-over-year to $15.2 billion due to mark-to-market loss. However, we saw a strong net asset inflow of US$3.5 billion this quarter, demonstrating user confidence in our platform even amidst increased market uncertainty. Now, I would like to update you on several key business developments at our company. Our internationalization is progressing well. In the first quarter, over 80% of newly funded users were derived from overseas markets, demonstrating the appeal of our next-generation fintech platform across regions. In the first quarter, we officially launched in Australia and achieved a leading ranking among competitors in the local iOS app store. Additionally, we have put significant effort into localizing our products; for example, in Australia, we launched options trading for cash accounts. In Singapore, we added Level 2 market data for Singapore stocks and are collaborating with SGX to livestream investor education to promote the Singapore market. We have been in Singapore for only two years, and it has already become our company's largest market and home base. We are confident we can achieve similar results in other countries or regions. We continue to invest in research and development to improve operational efficiency and enhance user experience. In March, we commenced self-clearing and self-custodianship for Singapore equities to fully leverage our self-developed brokerage infrastructure for our Singapore users. In the U.S., by the end of the first quarter, over 90% of cash equities and 70% of options contracts are already self-cleared through our U.S. subsidiaries, further strengthening our competitive advantages in trading U.S. securities. We are also in the process of upgrading our Hong Kong trading system to start self-clearing Hong Kong equities in the next few quarters, which will result in better unit economics. Our IPO underwriting business continued to perform despite a weak market backdrop. In the first quarter, we underwrote IPOs in Hong Kong and in the U.S., we participated as an underwriter for seven U.S. IPOs, making us one of the most active U.S. underwriters according to industry data consulting. In terms of corporate services, we added 13 clients to Tiger community in the first quarter, reaching a total of 300 corporate clients, including clients such as Alibaba and WWS Singapore. We are proud to be the bridge connecting issuers with investors. Our ESOP business continues to expand, with 25 new companies added in the first quarter, resulting in a total of 338 ESOP clients, which reflects a year-over-year growth rate of 105%. We provide comprehensive ESOP services, from plan design to digital management, and have become the go-to choice for many startup and public companies. Now, I would like to invite our CFO, John, to go over our financials.

John Zeng, CFO

Thanks, Tianhua. Let me go through our financial performance for the first quarter. All numbers are in U.S. dollars. Total revenue was $52.6 million, down 35% year-over-year, as a weaker market backdrop in the first quarter slowed down commission and underwriting revenue. In line with market sentiment, margin and securities lending balances also decreased; however, we managed to increase net interest-related income by 80% year-over-year by lowering interest expense and generating more revenue through self-clearing. As mentioned in the earnings release, starting from this quarter, we will report our derivatives trading, primarily U.S. auctions and U.S. futures, using a number of contracts. Cash equities will now be reported on a standalone basis using trading volume. This change will enhance the clarity of previously disclosed operating data, helping investors better understand our operations. For this quarter, commission from cash equities totaled $22 million, accounting for 72% of total commission. The remaining 28% consists mostly of commissions from derivatives trading, based on a total of 34.7 billion in equity trading volume this quarter, yielding a take rate of 6.3 bps for cash equities. In the first quarter of last year, cash equity accounted for 76% of the total commission, whereas derivatives accounted for the remaining 24%. The cash equity take rate was 6.6 bps in the first quarter last year. Now, regarding costs: execution and carrying expenses were $4.5 million, down 45% year-over-year and 34% quarter-over-quarter, primarily due to increased self-clearing of U.S. equities. Employee compensation rose 67% year-over-year to $27.5 million as we continued to expand our headcount to support global growth. Along with the headcount increase, occupancy expenses grew 69% to $2 million. SG&A expenses increased by 12% to $4.5 million year-over-year. Marketing expenses totaled $10 million in the first quarter, marking a decrease of 22% year-over-year. We are very prudent with our marketing spending as we feel that now is not the best window to attract high-quality users. We will closely monitor customer acquisition costs and payback periods to adjust our marketing strategy accordingly. Communication and market data expenses were $6.4 million, an increase of 61% from a year ago due to rapid user growth. Total operating costs were $55 million, up 17.6% from the same quarter last year. The non-GAAP net loss, which excludes share-based compensation and impairment losses from long-term investments, was $1.9 million this quarter. Now, I have concluded my remarks. Operator, please open the line for Q&A. Thanks.

Operator, Operator

Thank you. Our first question comes from Han Pu from CICC. Please proceed with your question.

Han Pu, Analyst

This is Han Pu from CICC. I have two questions. First of all, could you please help break down the new paying clients by region for the first quarter? And how about the mix of our full-year guidance? Secondly, we see that the operating cost per paying client went up significantly in the first quarter. What would be the reason? And how do we see the trend in the coming quarters? Thanks.

Wu Tianhua, Chairman and CEO

This is Han Pu from CICC. I have two questions. First, could you provide a breakdown of the new paying clients by region for the first quarter? Also, what is the mix of our full-year guidance? Second, we've noticed a significant increase in operating cost per paying client in the first quarter. What is the reason for this, and what can we expect regarding the trend in the upcoming quarters? Thank you.

John Zeng, CFO

Let me translate. So, to your first question, about 15% of the funded accounts came from Mainland China, including ESOP clients. 80% came from Singapore, with the remaining 5% from Australia, New Zealand, and the U.S. In total, 85% of the funded accounts this quarter originated from outside of China. Our target is to acquire at least 100,000 newly funded accounts this year, with an expected distribution of around 15% from Mainland China, 60% from Singapore, and the remaining 25% from countries or regions like Hong Kong, Australia, and the U.S.

Wu Tianhua, Chairman and CEO

Fifteen percent of the funded accounts came from Mainland China, including ESOP clients. Eighty percent came from Singapore, with the remaining five percent from Australia, New Zealand, and the U.S. In total, eighty-five percent of the funded accounts this quarter originated from outside of China. Our target is to acquire at least 100,000 newly funded accounts this year, with an expected distribution of around fifteen percent from Mainland China, sixty percent from Singapore, and the remaining twenty-five percent from countries or regions like Hong Kong, Australia, and the U.S.

John Zeng, CFO

In general, market sentiment is weak, leading investors to prefer staying on the sidelines. Consequently, the customer account to funding account conversion rate will be lower, resulting in higher customer acquisition costs compared to a more active market. Aside from market effects, we launched our services in Australia during the first quarter. When entering a new market, similar to our experience in Singapore, branding expenses are higher to promote our company. Branding accounted for around 25% of our marketing expenses in the first quarter, and we expect branding to continue as a significant portion of our marketing strategy in the next few quarters. As a result, these factors contribute to a higher customer acquisition cost when entering a new market. We remain very prudent with our marketing expenditures, evident by our reduction in total marketing expenses year-over-year and quarter-over-quarter. We are closely monitoring our customer acquisition costs and payback periods to maintain a sustainable business model and adjust our marketing strategy dynamically. Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Julia Cheung from Citi. Please ask your question.

Julia Cheung, Analyst

This is Julia Cheung from Citi Research. I have two questions here. First, could you give more color on the progress for U.S., Hong Kong, and Singapore, as well as the target pace in the near to midterm and the expected earnings contribution? Secondly, could you share the update on the Hong Kong business, especially the timelines for acquiring retail customers and the sales and marketing budget, such as the planned customer acquisition costs per head in Hong Kong versus other markets?

Wu Tianhua, Chairman and CEO

This is Julia Cheung from Citi Research. I have two questions here. First, could you provide more details on the progress in the U.S., Hong Kong, and Singapore, as well as the target pace in the near to midterm and the expected earnings contribution? Secondly, could you update me on the Hong Kong business, particularly the timelines for acquiring retail customers and the sales and marketing budget, including the planned customer acquisition costs per head in Hong Kong compared to other markets?

John Zeng, CFO

To address your query concerning Hong Kong, our strategy consists of three stages. The first stage involves being more active in Hong Kong IPOs. Currently, we are very engaged in Hong Kong IPO underwriting and in the first quarter, we worked on multiple deals. Tiger is an underwriter for a major genomics IPO that is currently in the book building stage. We will continue to expand our Hong Kong underwriting business. The second stage will be using Hong Kong for executing and clearing our Hong Kong securities trades. This was slightly delayed due to COVID-19 earlier this year, but we have now completed several rounds of testing with the Hong Kong Exchange and are in the process of upgrading the trading system to handle increased volume. We aim to execute and clear Hong Kong trades within the next few quarters. The third stage involves retail marketing. In addition to enhancing our trading infrastructure, we are also fine-tuning our product experience and developing marketing strategies. We plan to leverage our global operational experience to help expand in Hong Kong, with an aim to begin retail marketing later this year. Regarding customer acquisition costs in Hong Kong, we currently lack concrete figures as we have not yet launched, but we understand that acquisition costs among our peers in Hong Kong are relatively high. Our strategy will be to use their experiences and strategies from other regions to implement effective tactics in Hong Kong. We hope this approach will lead to a sustainable customer acquisition cost and payback model upon launch. As for self-clearing, I will respond in English. Overall, our self-clearing progress is on track. By the end of the first quarter, we had self-cleared over 90% of U.S. cash equities and over 70% of U.S. options. The clearing expense for both products decreased from nearly 20% of commission in the first quarter last year to single digits this quarter. The clearing expenses vary based on trading volume and product mix. For this quarter, the $4.5 million in clearing expenses included about $2.1 million paid to Interactive Brokers primarily for Hong Kong securities and U.S. option clearing, along with around $1.5 million from Singapore local clearing and custodian expenses. We expect clearing expenses to decrease further as we start self-clearing of Singapore equities in April and shift more U.S. options clearing to U.S. Tiger while using Tiger Brokers Hong Kong for execution once we complete system upgrades. Thank you.

Operator, Operator

The next question comes from Cindy Wang from China Renaissance. Please go ahead.

Cindy Wang, Analyst

Okay. I will transfer my question. The first question is regarding the Singapore market. Can management share some details on customer acquisition and also the customer assets in Singapore for the first quarter and also the second quarter as well as the competitive landscape in Singapore? The second question is for the Australian market. Since Tiger Brokers entered the Australian market in March this year, can management share some insights on customer acquisition costs and the number of new customers in the Australian market? Thank you.

Wu Tianhua, Chairman and CEO

The question pertains to the Singapore market. Can management provide details on customer acquisition and customer assets in Singapore for both the first and second quarters, as well as the competitive landscape? The second question focuses on the Australian market. Since Tiger Brokers launched in Australia this March, can management share insights on customer acquisition costs and the number of new customers in that market? Thank you.

John Zeng, CFO

First, regarding Australia, we launched our business there after the Chinese New Year. Currently, our app ranks ahead of competitors in the local app store. At this early stage, we are testing different marketing strategies. For instance, we sponsored a local rocket team to enhance our brand and localize our approach. As it stands, our customer acquisition cost appears relatively high due to branding expenses combined with a small number of funded accounts. Historically, when entering a new market, customer acquisition costs tend to be elevated at the outset. However, we believe that in the next few quarters, we can improve our unit economics by better understanding the local markets. Moving on to Singapore, we hold a leading position there; it is currently our largest market and home base. Over 80% of newly funded accounts this quarter were from Singapore. The quality of client assets remains strong. Despite weak market sentiment in the first quarter, we observed strong net asset inflows from Singapore users. The average deposit for new users this quarter was around $7,500, an improvement from the average first deposit of $6,500 in the fourth quarter. Historical data shows that users we acquired in the first quarter last year have consistently provided net asset inflows each quarter for the past five quarters. This quarter, the Company experienced a net asset inflow of $3.5 billion, with $2.6 billion originating from the Singapore region.

Cindy Wang, Analyst

Sorry, I have one more question regarding the Singapore market. Can you discuss the customer acquisition costs in Singapore as well as the competitive landscape?

Wu Tianhua, Chairman and CEO

Sorry, I have one more question regarding the Singapore market. Can you discuss the customer acquisition costs in Singapore as well as the competitive landscape?

John Zeng, CFO

Currently, in Singapore, recent surveys indicate that we represent about 19% of the population aged 20 and older. We believe we resonate well with the younger generation, and based on the survey figures, there is still significant potential for growth. Our competitive standing is strong compared to our peers in Singapore, and this quarter's performance shows that over 80% of the funded accounts came from Singapore, demonstrating a solid presence in the local market. In terms of customer acquisition costs, there has been a slight increase in recent quarters due to a weaker market environment, with the customer acquisition cost for Singapore users slightly above $250 in the last quarter. Compared to the group's average, this CAC is lower, indicating a more effective marketing strategy and stronger brand presence in Singapore.

Operator, Operator

There are no further questions. I'll turn the call back to the management team for closing remarks.

Unidentified Company Representative, Company Representative

I would 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.

John Zeng, CFO

Thank you.

Operator, Operator

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