Earnings Call Transcript - TIGR Q2 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to UP Fintech Holdings Limited second quarter 2023 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, August 29, 2023. I’d now like to hand the conference over to your first speaker today, Mr. Aaron Li, Head of IR. 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 Holdings Limited’s second quarter 2023 earnings release was distributed earlier today and is available on our IR website at ir.itigerup.com, as well as GlobeNewswire services. On the call today from UP Fintech are Mr. Tianhua Wu, Chairman and Chief Executive Officer; Mr. John Zeng, Chief Financial Officer; Mr. Huang Lei, CEO of U.S. Tiger Securities, and Mr. Kenny Zhao, our Financial Controller. Mr. Wu will give an overview of our recent accomplishments 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. Some 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 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, August 29, 2023 and our annual report on Form 20-F filed on April 26, 2023. 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 Broker’s second quarter 2023 earnings conference call. In the second quarter, we remained committed to our strategy of optimizing our revenue mix and expense management. Total revenue increased by 23.5% year-over-year, reaching US $66 million. Our net profit attributed to UP Fintech was $13.2 million, representing a turnaround from a net loss in the same quarter last year and an increase of 66% compared to the previous quarter. The non-GAAP net profit attributable to UP Fintech was $15.3 million, about 4.5 times the same quarter last year and a significant increase of 48% compared with the previous quarter. Non-GAAP net profit earned this quarter has already exceeded the total non-GAAP net profit for the entire year of 2022. In the second quarter, we added 29,077 new funded accounts, bringing the total number of new funded accounts in the first half of this year to approximately 60,000. We are confident to deliver our annual guidance of at least 100,000 new funded accounts in 2023. Total number of funded accounts at the end of the second quarter reached 840,000, representing growth of 15% compared to the same quarter of last year. In terms of total client assets, the trend of asset inflow remains strong with net inflow over US $1.6 billion in the second quarter. After neutralizing the impact of our mark-to-market loss, total client assets in this quarter increased by 7.1% compared to the first quarter, reaching US $17.3 billion. Additionally, our average customer acquisition cost further decreased to $162 in the second quarter, representing a 5% decline compared to the previous quarter. This reduction highlights our success in expanding our international addition strategy as the Tiger Broker brand gained traction among local users in Singapore through positive word-of-mouth referrals, resulting in organic growth and cost efficiencies. Moving forward, we will dynamically adjust our customer acquisition strategy based on market conditions. We are enhancing user quality while steadily increasing the client base and profitability. We have continued to increase our investment in research and development to enhance operational efficiency and user experience. We are delighted to announce that our TigerGPT feature, after six months of internal testing, was officially launched in July this year. It is now available for free to registered users in all the markets we enter, except mainland China. We will continue to refine and optimize the user experience of this feature. In our Hong Kong business, following our entry into the retail market in December last year, we have successfully achieved self-clearing for the majority of Hong Kong equities in the first half of this year, helping to bring down the total clearing expense as a proportion of commissions to below 10% in the second quarter. Additionally, we introduced recurring investment features for Hong Kong shares in the second quarter, catering to long-term investors and those with a fixed investment budget. This makes us one of the few brokers that offers recurring investment functions for both U.S. and Hong Kong equities. We also added Hong Kong futures in June to better serve our local clients. In the wealth management business, following the introduction of a USD-denominated money market fund in the fourth quarter, we introduced a Hong Kong dollar-denominated money market fund in the second quarter, providing users with more options to manage idle cash during rate hiking cycles. Our business continues to perform well. In investment banking, we underwrote seven U.S. and Hong Kong IPOs in the second quarter. Notably, we served as the exclusive lead underwriter for Ispire Technology’s U.S. IPO. In our ESOP business, we added 13 new clients in the second quarter, bringing the total number of ESOP clients served to 478 by the end of the second quarter of 2023, an increase of 31% year-over-year. Now I’d like to invite our CFO, John, to go over our financials.

John Zeng, CFO

Okay, thanks Tianhua and Aaron. Let me go through our financial performance for the second quarter. All numbers are in U.S. dollars. Total revenues were $66.1 million this quarter, flat quarter-over-quarter and increased 23.5% year-over-year primarily due to a 146% jump in interest rate-related income versus the same quarter of last year. Cash equities take rate was 6.3 BPs this quarter, remained unchanged from the last quarter. Within commission revenue, about 60% comes from cash equities, 30% from options, and the rest comes from futures and other products. Now onto costs, interest expense was $10.4 million, increased by 195% from the same quarter of last year as interest expense and securities lending expense both increased in line with the rate hike. Execution and clearing expense were $2 million, decreased 47% from the same quarter of last year primarily due to more efficiency in self-clearing for U.S. and Hong Kong securities. Employee compensation and benefits expense were $23.9 million, a decrease of 7% year-over-year due to a one-time expense we incurred last year when restructuring our ESOP business. Actual headcount increased year-over-year as we keep adding people to support our global expansion. Occupancy, depreciation and amortization expense slightly increased 2% to $2.5 million due to an increase in overseas office space and relevant leasehold improvements. Communication and market data expense were $7.8 million, an increase of 8% year-over-year due to the increase in user base. Marketing expense was $4.7 million this quarter, decreased 44% year-over-year. Average CAC dropped 5% quarter-over-quarter from $171 to $162 as we didn’t see market conditions in the second quarter to be suitable for major marketing campaigns. We will dynamically adjust our marketing strategy based on the market sentiment in different regions. General and administrative expense were $4.5 million, a slight increase of 5% year-over-year. Total operating costs were $45.5 million, decreased 12% from the same quarter of last year. As a result, both GAAP and non-GAAP bottom lines increased year-over-year. GAAP net income turned positive to $13.2 million versus a GAAP net loss of $0.9 million in the same quarter of last year. Non-GAAP net income was $15.3 million, about 4.5 times higher compared to 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. We will now begin the question and answer session. Our first question comes from Han Pu from CICC. Please go ahead with your question.

Han Pu, Analyst

Thanks for taking my question. This is Han from CICC. Congratulations on the strong quarter results. I have two quick questions. Firstly, could you please provide the original breakdown of new funded accounts in the second quarter? Secondly, could you please give us more recent updates on the mainland regulation requirements? Thank you.

Tianhua Wu, Chairman and CEO

To the first question, in the second quarter, approximately 45% of newly funded accounts were from Singapore, nearly 25% from Australia and New Zealand, about 20% from the U.S., and roughly 10% from Hong Kong. Following the CSRC announcement on December 30 last year, Tiger Brokers quickly responded and made comprehensive efforts to meet the regulatory requirements set by the CSRC. Subsequently, the Beijing Securities Regulatory Bureau conducted an onsite inspection four weeks before the Chinese New Year. During that period, we provided the regulators with our remediation plan and related reports. We have maintained effective communication with the regulatory authority throughout and have received clear guidance on certain unique scenarios for PRC passport holders opening new accounts with us, such as allowing those who work or live overseas to open accounts and permitting the transfer or opening of new securities accounts for users from other brokerage firms. Recently, in mid-July, we submitted our final remediation report to the CSRC as required. Then, in mid-July, the regulatory authorities carried out an onsite acceptance inspection based on our remediation report. Thank you.

Han Pu, Analyst

That’s very helpful, thank you.

Operator, Operator

Thank you Han. Our next question comes from the line of Judy Zhang from Citi. Please ask your question, Judy.

Judy Zhang, Analyst

I will translate my questions. Thank you for taking my question. This is Judy Zhang from Citi. I have two questions. The first is, after TigerCPT was removed from the App Store, have you seen asset outflows or losses of onshore investors? What do you think the long-term impact will be on the trading activity and sentiment of current onshore investors? My second question concerns your strategy for the Hong Kong market. How do you plan to gain market share in such a competitive environment, and how will this affect the company's costs this year and in the future? Thank you.

Tianhua Wu, Chairman and CEO

Okay, I’ll address your first question, and our CFO John will handle your second question. Regarding your first question, we are aware of concerns in the market about the user count in mainland China, showing minimal growth and a gradual loss of existing users. However, based on our data from the first half of this year, we are confident in our clients' retention in mainland China. The overall retention rate for users with assets, as well as the retention rate for mainland China users, has stayed above 99% in the first half of this year. In terms of cash flow, users in mainland China have demonstrated a trend of net asset inflows in both the first and second quarters of this year. Additionally, there has been no significant change in the trading activity of mainland users, which indicates that our existing clients have a solid grasp of recent events since December 30 of last year, and their trading velocity and trust in Tiger Broker have remained unchanged.

John Zeng, CFO

Hello Judy. From a user acquisition perspective, Hong Kong now represents over 10% of the new users in the second quarter, a significant increase from the low single digits in the first quarter. We will continue to invest in branding to enhance our corporate image in Hong Kong, aiming to connect with more potential users there. From a product standpoint, we provide highly competitive pricing. We do not charge commissions for trading in Hong Kong, U.S. equities, or options. Additionally, we are among the few brokers offering recurring investments for both U.S. and Hong Kong trading, and we have USD and Hong Kong dollar money market funds to assist our users in managing their liquidity. On the infrastructure front, we are fully self-clearing for Hong Kong equities, which has lowered the Group’s total clearing expenses to under 10%. Our proprietary system also enables us to provide unique services, such as fractional shares and portfolio buying power for U.S. and Hong Kong trading. Thank you.

Judy Zhang, Analyst

Thanks.

Operator, Operator

Thank you Judy. Our next question comes from the line of Cindy Wang from China Renaissance. Please go ahead, Cindy.

Cindy Wang, Analyst

Thank you, management, for addressing my question. This is Cindy from China Renaissance. I have two questions. The first relates to customer acquisition costs, which were US $162 in the second quarter, remaining relatively stable. How do you plan to reduce customer acquisition costs and what is your strategy for acquiring customers moving forward? My second question is regarding Tiger’s non-GAAP net profit, which has been positive for the fifth consecutive quarter. Considering the high interest rate environment, the non-GAAP profit margin seems to be extending significantly. Does this indicate that Tiger has reached a turning point from breakeven to profitability? Thank you.

Tianhua Wu, Chairman and CEO

Okay, your first question about the customer acquisition cost. In the second quarter, the average customer acquisition cost was $162, which decreased from $171 in the first quarter, reaching historically low levels. We focused closely on the quality of customer acquisition costs and the payback period, ensuring we do not compromise client quality and reasonable return on investment just for the sake of attracting more funded accounts. Despite the underperformance of Chinese ADRs and Hong Kong technology stocks leading to some mark-to-market losses for our clients in the second quarter, strong net asset inflows resulted in a 7.1% increase in total client assets compared to the previous quarter. This shows that we maintained good customer quality while lowering the average customer acquisition cost. Additionally, when we look at the average customer acquisition cost for newly acquired clients through organic channels in the second quarter, it is more than twice the overall average, indicating that we have gradually attracted more organic traffic from overseas regions that help reduce customer acquisition costs. I’m pleased to report that our non-GAAP net profits reached $15 million in the second quarter, marking the highest quarterly net non-GAAP profit in the past two years. Reflecting on the early stages of the interest rate hike cycle, we did face some quarterly losses during periods of reduced market activity; however, by optimizing interest income and practicing prudent capital deployment, we progressively enhanced our profitability. Over the last two quarters, our net profit margin has expanded, demonstrating a robust and healthy business model. With most of our costs being relatively fixed and tied to market activity, we believe that with better penetration into Hong Kong, Australia, and New Zealand markets, or an overall improvement in the market environment, we could achieve greater operating leverage, leading to more stable profit margins. To answer your question, barring any extreme market fluctuations, we expect to remain profitable. Thank you.

Operator, Operator

Thank you Cindy. Our next question comes from the line of Ling Tan from Daiwa Capital Markets. Please ask your question, Ling.

Ling Tan, Analyst

Thank you management for taking my questions. This is Ling from Daiwa. I noticed that you received $7.8 billion in other non-operating income under the P&L. Can management provide more details regarding the breakdown of the non-operating income and expectations for the next two quarters? Thank you.

John Zeng, CFO

About half of the other income is attributed to foreign exchange transactions resulting from the appreciation of the USD against other currencies this quarter, making it mainly an accounting matter. The remainder of the other income is derived from our treasury management activities. Our balance sheet shows a quarter-over-quarter increase in our financial instrument balance, indicating we are actively managing our treasury. We are investing some of those funds in U.S. short-term bonds, which we believe will generate sustainable interest income over the next few quarters. Thank you.

Operator, Operator

Thank you. I’m showing no further questions. Thank you very much for all your questions. I’ll now turn the conference back to Mr. Aaron Li for closing comments.

Aaron Li, Head of Investor Relations

Thank you, Operator. 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 on 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.