UP Fintech Holding Ltd

NASDAQ:TIGR

Earnings Call Transcript 2023-Q2

[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, Investor Relations]

Thank you Operator. Hello everyone and thank you for joining us for the call today. UP Fintech Holding 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, Chief Executive Officer]

[translated] 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 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 [indiscernible] at least 100,000 new funded accounts in 2023. Total number of funded accounts at end of 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 CAC 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 Tiger Broker brand gained traction among local users in Singapore through positive word-of-mouth referrals, resulting in organic [indiscernible] 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 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, 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 in 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 2B [ph] 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 U.S. IPO. In our ESOP business, we added 13 new clients in the second quarter, bringing the total number of ESOP clients serve to 478 by the end of second quarter of 2023, increased by 31% year-over-year.

Now I’d like to invite our CFO John to go over our financials.

[John Zeng, Chief Financial Officer]

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 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 were $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 was 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 cost were $45.5 million, decreased 12% from the same quarter of last year. As a result, both GAAP and non-GAAP bottom line 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]

Thank you. We will now begin the question and answer session. [Operator instructions]

Our first question comes from the line of Han Pu from CICC. Please ask your question.

[Han Pu, CICC]

[translated] Thanks for taking my question. This is Han from CICC. Congrats 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? Thanks.

[Tianhua Wu, Chief Executive Officer]

[translated] To the first question, in the second quarter around 45% of newly funded accounts came from Singapore, nearly 25% from Australia and New Zealand, about 20% from the U.S. and about 10% from Hong Kong.

After the CSRC announcement on December 30 last year, Tiger Brokers made a prompt response and a comprehensive effort to comply with the regulatory requirements set forth by the CSRC. Subsequently, the Beijing Securities Regulatory Bureau conducted an onsite inspection four weeks before the Chinese New Year. During that time, we provided the regulators with our remediation plan and related reports. We have maintained good and direct communication with the regulatory authority throughout the period and have received clear guidance on certain special scenarios for PRC passport holders to open new accounts with us, for example, allowing PRC passport holders 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 the final remediation report to the CSRC in accordance with regulatory requirements. Subsequently in mid-July, the regulatory authorities conducted an onsite acceptance inspection based on our remediation report.

Thank you.

[Han Pu, CICC]

That’s very helpful, thank you.

[Operator]

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

[Judy Zhang, Citi]

[translated] I will translate my questions. Thank you for taking my question. This is Judy Zhang from Citi. I have two questions.

The first question is after TigerCPT was removed from the App Store, have you seen asset outflows or losing onshore investors? How do you think the long term impact on existing onshore investors’ trading activity and sentiment?

Second question is regarding Hong Kong market strategy. How do you think you can gain market share in the very competitive Hong Kong market, and how is this going to impact the company’s cost for this year and going forward? Thank you.

[Tianhua Wu, Chief Executive Officer]

[translated] Okay, so I’ll take your first question and our CFO John will take your second question.

About your first question, we have been aware of concerns in the market regarding the overall user count in mainland China with almost no incremental growth and gradual loss of existing users; however, based on our data from the first half of this year, we have confidence in the retention of our clients in mainland China.

In terms of user retention, the overall retention rate for users with assets, as well as the retention rate for mainland China users in the first half of this year has remained above 99%.

Regarding clients’ cash flow, mainland Chinese users have shown a trend of net asset inflows in both of the first quarter and second quarter of this year. Besides, there has been no significant change in the trading activity of mainland users, indicating that our existing clients have [indiscernible] understanding regarding recent events since December 30 of last year and their trading velocity and trust in Tiger Broker has not changed.

[John Zeng, Chief Financial Officer]

Okay, hello Judy. [translated] From a user acquisition perspective, Hong Kong accounts for more than 10% of the newly acquired users in the second quarter, up from low single digits in the first quarter. We will keep investing in branding to build our corporate image in Hong Kong so we can reach out to more potential Hong Kong users.

From a product perspective, first of all we offer one of the most competitive pricing. We don’t charge commission [indiscernible] free for Hong Kong trading and we don’t charge commission for U.S. equities or options either. We are also one of the few brokers that offer recurring investment for both U.S. and Hong Kong trading and have USD and Hong Kong D money market funds to help our users manage their liquidity.

In terms of infrastructure, we are now fully self-clearing for Hong Kong equities, which brings down the Group’s total clearing expense to below 10%. Our proprietary system also allows us to offer differentiated services, such as fractional share and offer portfolio buying power for U.S. and Hong Kong trading.

Thanks.

[Judy Zhang, Citi]

Thanks.

[Operator]

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

[Cindy Wang, China Renaissance]

[translated] Thanks management for taking my question. This is Cindy from China Renaissance. I have two questions.

First question is related to customer acquisition costs. Customer acquisition costs in second quarter was US $162, which is at a relative stable level. How do you lower customer acquisition costs and what’s the strategy for customer acquisition costs to--customer acquisition strategy going forward?

The second question is Tiger’s non-GAAP net profit has turned positive for the fifth consecutive quarter, so together with high interest rate environment, the non-GAAP profit margin is over-extending. Does that mean Tiger has reached an inflection point from breakeven to profitability? Thank you.

[Tianhua Wu, Chief Executive Officer]

[translated] Okay, your first question about the CAC. In the second quarter, the average CAC was $162, which was further decreased compared to $171 in the first quarter, reaching historically low levels. In the second quarter, we paid very close attention to CAC quality and payback period, and we will not jeopardize our client quality and reasonable ROI ratio merely for a number of funded accounts. With the underperformance of Chinese ADRs and Hong Kong technology names in the second quarter, our clients experienced some mark-to-market losses; however, strong net asset inflows led to a 7.1% increase in total client assets compared to the previous quarter. This indicates that we have maintained good customer quality while reducing the average CAC.

Furthermore, if we look at the average CAC from newly acquired clients through [indiscernible] channels in the second quarter, their average CAC is more than twice the overall average CAC. This demonstrates that we have gradually gained more organic traffic from overseas regions that can save us some customer acquisition costs. Thank you.

I’m glad to say our non-GAAP net profits reached US $15 million in the second quarter, which is the highest quarterly net non-GAAP profit in the past two years. Looking back at the early stage of the interest rate hike cycle, during reduced market activity we experienced some quarterly losses; however, through optimizing interest income and prudent capital deployment, we gradually improved our profitability. Over the past two quarters, our net profit margin has been expanding, indicating a robust and healthy business model for the company.

Given most of our costs are relatively fixed and tied to market activity, we believe that if we can better penetrate in Hong Kong, Australia and New Zealand markets, or if there is overall improvement in the market backdrop, we can enjoy more operating leverage, which leads to more stable profit margins.

To answer your question, assuming there is no extreme market swings, we should be in the black in terms of profitability. Thank you.

[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]

[translated] Thank you management for taking my questions. This is Ling from Daiwa.

I noticed that there is--you received $7.8 billion other non-operating income under the P&L. Can management provide more color in terms of the breakdown of the non-operating income and [indiscernible] in the next two quarters? Thank you.

[John Zeng, Chief Financial Officer]

[translated] About half of the other income comes from FX [indiscernible] due to USD appreciation against other currencies this quarter, so this is a pure accounting item. The other part of the other income actually comes from our treasury management. As you can see from our balance sheet, our financial instrument balance has increased quarter-over-quarter, so we are doing treasury management. We are investing some of those monies into U.S. short term bonds, so we think this kind of interest income will be sustainable for the next few quarters. Thanks.

[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, 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]

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