UP Fintech Holding Limited (NASDAQ:TIGR) Q3 2022 Earnings Call Transcript

UP Fintech Holding Limited (NASDAQ:TIGR) Q3 2022 Earning Call Transcript November 23, 2022

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the UP Fintech Holding Limited Third 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, November 23, 2022. I would now like to turn the conference over to your first speaker today, Mr. Aaron Lee, the Head of IR. Thank you. Please go ahead.

Aaron Lee: Thank you, Operator.Hello, everyone, and thank you for joining us for the call today.UP Fintech Holding Limited’s third 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; and Mr.Huang Lei, CEO of U.S.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.Both will 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 on factors that could cause actual results to materially differ from those in forward-looking statements, please refer to our Form 6-K furnished today November 23, 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.

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Wu Tianhua: Hello, everyone. Thank you for joining us for Tiger Brokers’ third quarter 2022 earnings conference call. The macro environment showed no significant improvement over the fourth quarter. Price tightening and rate increase has slowed down market activity and transaction volume, restricting our trading commission and IPOs underwriting income. This income from margin financing and securities lending benefited due to the higher interest rate. The total revenue of the third quarter slightly increased by 3.6% from the previous quarter to reached US$55.4 million. Non-GAAP net income was US$6.6 million, increased 91.3% quarter-over-quarter and 26.2% year-over-year. GAAP net income also turned profitable at US$3.3 million, compared to a net loss in the first half of this year, demonstrating the resilience of our business model and prudent capital deployment.

We added 22,700 funded accounts this quarter, total number of funded accounts also exceeded 750,000 by the end of this third quarter, an increase of 23.2% from the same quarter last year.We have acquired over 80,000 new funded accounts in the first three quarters. So we are confident to deliver our annual guidance of acquiring 100,000 new funded accounts this year.In the third quarter, mark-to-market loss still had an adverse impact on the total net assets, which decreased by 12.8% to US$13 billion compared to the end of the second quarter, but the trend of healthy asset flow continues. Net asset inflows exceeded US$700 million this quarter.Funded account retention rate exceeded 98% this quarter, demonstrating user’s confidence and trust in our platform.

We see very few potential to client quantity, we will not jeopardize ROI merely for the growth of funded accounts. In the third quarter, the overall average ASC was US$326, a slight increase from last quarter due to several marketing campaigns, but remains one of the most efficient within our ASC .We are very glad to see the quality of our newly acquired customers further improved in the third quarter. Taking Singapore as an example, our company’s largest market in terms of both incremental and existing clients, the average net asset inflows of our newly acquired clients in Singapore exceeded US$11,000 in the third quarter further increased from over US$9,000 in the second quarter, represent our healthy business model in balancing customer acquisition efficiency and client quality.

We continue to invest in research and development to improve operational efficiency and to enhance user experience. With self clearing, the execution and clearing cost as a percentage of the trading commission down to 13%, further decreased compared with the previous quarter. Specifically, the execution and clearing costs as a percentage of the trading commission for U.S. cash equity has come down to only 3%.As a leading online brokerage with comprehensive risk control and self-clearing capability, we have added fractional shares trading for U.S. equities this quarter, aiming to provide retail investors with easier access to high quality names. In wealth management business, we keep optimizing cash management products to better serve our users. In Singapore, we launched Tiger Vault, our wealth management platform in the third quarter to help users diversify their portfolio and combine cash management and other investment products.

Our Tubi business continues to perform well. In the investment banking business, we underwrote 11 U.S. and Hong Kong IPOs in the third quarter. In west we were the lead bank in two U.S. IPOs. In terms of ESOP, in the third quarter, we added 29 new companies to a total of 393 ESOP clients, a year-to-year growth rate of 50%.To better grow the ESOP business, we hired Peter , a reputable valuation specialist to provide his opinion on valuation and closed angle around financing that build strategic investors.In terms of Hong Kong business, we have improved the capability of our Hong Kong IPOs underwriting, self-clearing efficiency and completed the Hong Kong infrastructures asset.We are now very excited to announce that we are ready to onboard Hong Kong retail marketing in December of this year.

Now I would like to invite our CFO, John to go over our financials.

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John Zeng: Thanks, Tianhua and Aaron. So let me go through our financial performance for the third quarter.All numbers are in U.S.dollar.Total revenues were $55.4 million, a decrease of 9% year-over-year due to a slowdown in the market activities, which dragged down commission and IPO underwriting.On a quarter-over-quarter basis, total revenue increased to 4%, primarily due to a 69% jump in interest related income versus last quarter.Cash equities take rate was about 6.7 bps this quarter, slightly better than 6.5 bps of last quarter.Within commission revenue about 60% come from cash equities, 30% from options and the rest from futures and other products.On cost side, interest expense was $4.3 million, a slight increase from the same quarter of last year as we still have some margin borrowed from interactive brokers, so the borrowing cost increased in line with the rate hike.

Execution and clearing expense were $3.2 million, decreased 66% from the same quarter of last year, we expect further reduction in clearing expense when we started out clearing Hong Kong equities.Employee compensation increased 11% year-over-year to $24.2 million this quarter, as we added headcount during last year to support our global expansion.Along with the headcount increase, occupancy expense increased 50% to $2.5 million. General and administrative expense decreased 30% year-over-year to $3.5 million due to some one-off professional service fee occurred last year. Marketing expenses were $7.4 million this quarter decreased 34% year-over-year.Our marketing strategy has been the same for the past few quarters.We don’t just chase for the number of new users, instead we are focused on quality of new users and keep a close eye on CAC and payback.

We will dynamically adjust our marketing strategy based on market environment. Communication and market data expense were US$60 — US$6.5 million, an increase of 23% from a year ago due to rapid user growth and expanded market data coverage. Total operating costs were $47.3 million, decreased 13% from the same quarter of last year.As a result, GAAP net income turned positive to $3.3 million versus a GAAP net loss of $0.9 billion last quarter. Non-GAAP net income further increased to $6.6 million from $3.5 million of last quarter.I have concluded our presentation. Operator, please open the line for Q&A. Thanks.

Operator: Thank you. Our first question comes from the line of Pu Han from CICC. Please go ahead. Your line is open.

Yoyo Jiang: Okay. I will translate my question. Thanks management for taking my question. This is Yoyo Jiang from CICC. I have two questions here. First one is that considering the interest rate hike cycle, how do you evaluate its impact on our income statement and how do you make any changes in business strategy to better adapt to the rate hikes? Secondly, we have seen that meaningful contribution of new paying clients in Australia and Zealand in the past few quarters, and at the same time, we still have well controlled cash, would you please introduce more on the strategies and innovation in these two markets, unless we have some targets to further challenge in this market?

Wu Tianhua: Okay.

Aaron Lee: So in terms of your first question regarding the impact from rate hike, so as you can see from our third quarter results, our overall net impact from rate hike is positive, growth in interest related income won’t be offset the decrease in trading community underwrite — underwriting due to a tightened liquidity. So in terms of business strategy, we will keep investing in our U.S. business, particularly in self-clearing infrastructure, so we can better utilize our asset base during this rate hike cycle. We expect to see more interest related income from Hong Kong as well once they become self-clearing and don’t need to share interest income with our clearing partners in Hong Kong. It’s a little bit hard to quantify the impact for Hong Kong yet, as this will be determined by the growth of our Hong Kong operations. Okay, Tianhua, so question number two on Australia and New Zealand.

Wu Tianhua:

Aaron Lee: Okay. I will translate. We have entered Australia market for two, three quarters. So nearly 20% of our new funded accounts in the past two quarters were from Australia and New Zealand. And we saw a quarter-over-quarter decrease in CAC in Australia during the third quarter. That being said, our expansion there is still in early stage. We think the total addressable market is big. But to be honest, we haven’t found the most effective marketing strategy yet. We will keep progressing with more user feedback and data analysis. So in terms of our product offering, we have clear competitive advantages compared to local brokers. Our self-developed infrastructures allow us to be more flexible to meet local needs such as 8.0 version app with both pro and lite version, and our fractional shares trading function. Thank you.

Yoyo Jiang: Thanks for answering.

Operator: Thank you. We will take our next question. Our next question comes from the line of Alan Kwong from Citi. Please go ahead. Your line is open.

Unidentified Analyst: Okay. I will translate my questions. My first question is about overall average customer acquisition cost, as we see CAC increased in third quarter and I would like management to elaborate a bit on the reason behind it and also how do we expect the CAC trend in the future? The second question is the regional breakdown of the new funded accounts in third quarter and how do management expect the breakdown of total funded accounts by end of 2022? Thank you.

Wu Tianhua:

Aaron Lee: The average CAC was around US$326, a slight increase from last quarter. The increase was primarily due to our sponsorship of ASEAN Football Club, which will take place in December. The agreement will be Tiger Brokers’ first ever partnership with Southeast Asia’s flagship football competition and we will see the firm become the tournament’s official online trading platform for stock, options, funds and futures. So it will help us better reach out to potential users in the region of Southeast Asia. If we deduct this branding expense, the average CAC was around US$175, decreased 12.5% compared to about US$200 in the second quarter. In the next few quarters, our CAC might go up after we start to on-boarding Hong Kong. It’s very normal to incur more branding expense after entering a new market, but our long-term strategy of balancing user quality and capital deployment will remain the same.

Wu Tianhua:

Aaron Lee: Okay. So regarding the question about the regional breakdown of our new funded accounts. Our International division is progressing well. In the third quarter, above 20% of funded accounts came from Mainland China, more than 60% came from Singapore and nearly 20% were Australia and New Zealand. We expect the trend of regional breakdown will remain fairly consistent in the fourth quarter and we will expect to see more users from Hong Kong region next year. Thank you.

Operator: Thank you. We will take our next question. Our next question comes from the line of Cindy Wang from China Renaissance. Please go ahead. Your line is open.

Cindy Wang: Now I will translate . So congrats on completing the infrastructure updates in Hong Kong and ready to onboard Hong Kong retail investors in December. So my question is, since your bottomline has shown positive trend over the past two quarters, so how do you balance customer acquisition costs in Hong Kong and the company’s healthy margin in the next few quarters? The second question is related to your product upgrades. So could you provide more colors on fractional shares for U.S. stocks and Tiger Vault, your wealth management platform in Singapore? Thank you.

John Zeng: So in terms of Hong Kong, so Hong Kong, of course, is a very important market for us.So I think a lot of people already know before we had the Hong Kong license, we couldn’t onboard Hong Kong clients, which restricted our user growth, it also hurt our profitability, because we had to give out third-party for exclusionary clearance of Hong Kong securities.So once we start offering our retail service in Hong Kong, we look to improve on both ends starting next year.So our customer acquisition strategy in Hong Kong is the same with our strategy in other regions.So we focus on user quality, all right, and payback and we are confident we can earn the trust of Hong Kong users with comprehensive product offerings, friendly user experience and a high quality trade execution.

We understand Hong Kong is very competitive.So in the near-term, with more marketing spending or branding campaigns we might see some fluctuations in CAC, but we will stick to our core marketing strategy and adjust accordingly with market condition and user feedback.Thanks.Wu Tianhua, question number two.

Wu Tianhua:

Aaron Lee: In the third quarter, we rolled out U.S. fractional share trading function. This fractional share trading will make high quality names such as Amazon and Tesla more affordable for retail investors. They can invest in these names with $5 instead of paying few hundred for just one share. You have seen our in-house fraction of — fractional share execution and clearing infrastructure, we can be innovative in product offering to better serve global retail users.

Wu Tianhua:

Aaron Lee: In Singapore, we also upgraded our cash management products to Tiger Vault, a more comprehensive platform combined currency management with different trading products, with price tightening is still on the horizon, we will rollout more of our wealth management products for users with different risk appetite to help them diversify for pure equity investment. Thank you.

Cindy Wang: Thank you. Very clear.

Operator: There seems to be no further questions at this time. I would like to hand back to Aaron Lee for closing remarks.

Aaron Lee: Thank you, Operator. I would like to thank you everyone for joining our call today. I am now closing this 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: This concludes today’s conference call. Thank you all for participating. You may now disconnect.