Futu - Q4 2023
March 14, 2024
Transcript
Operator (participant)
Hello ladies and gentlemen, Welcome to Futu Holdings' Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After management's prepared remarks there will be a Q&A session. Today's conference call is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the conference over to your host for today's conference call, Daniel Yuan, Chief of Staff to CEO and Head of IR at Futu. Please go ahead, sir.
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Thanks operator, and thank you all for joining us today to discuss our fourth quarter and full year 2023 earnings results. Joining me on the call today are Mr. Leaf Li, Chairman and Chief Executive Officer, Arthur Chen, Chief Financial Officer, and Robin Xu, Senior Vice President. As a reminder, today's call may include forward-looking statements which represent the company's belief regarding future events which by their nature are not certain and are outside of the company's control. Forward-looking statements involving higher risks and uncertainties.
We caution you that a number of important factors could cause actual results to differ materially from those containing any forward-looking statements. For more information about the potential risks and uncertainties please refer to the company's filings with the SEC, including a 10-K report. With that I will now turn the call over to Leaf. Leaf will make his comments in Chinese and I will translate.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Thank you all for joining our earnings call today. In the fourth quarter we added over 59,000 paying clients. Our total paying clients as of year-end reached over 1.7 million, representing 15% growth year-over-year and exceeding our guidance.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Client acquisition in Singapore sustained high growth into the fourth quarter. Money market funds continue to garner significant client interest amid high interest rate and market volatility. In December we became the first and only distributor of Fullerton Fund Management Singapore Dollar Denominated Money Market Fund, the only T+0 Singapore Dollar Money Market Fund for retail investors in Singapore.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
We continue to gain user mindshare in Japan with our rich market information, comprehensive market data, and interactive social community. In the fourth quarter, the average daily downloads of Moomoo app in Japan ranked top three among all brokers and surpassed those of Nomura and Matsui Securities according to data.ai. With Nikkei recording remarkable gains and hitting new highs, client acquisition in Japan also showed a notable sequential increase in the first quarter. We continue to streamline the account opening process to reduce leakage in the conversion funnel and focused on R&D for key investment products. We launched a NISA growth account in December and will soon roll out Japan equities training. Our clients in Hong Kong and Singapore will also have access to Japan stock trading in the second quarter.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Client acquisition in Hong Kong slowed down due to sluggish market sentiments, yet rebounded in the first quarter along with the recovery of the Hong Kong stock market. In the U.S. we continue to prioritize client quality over quantity, with the average asset balance of new paying clients in their first quarter of onboarding increasing by over 30% compared to the last quarter. In Australia we focused on cultivating brand equity and adding new products, including cash management.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
On February 26 we launched brokerage business in Malaysia and gained significant traction. Over 30,000 clients flocked to our platform within one week of the official launch, representing the fastest growth in any of our international markets. We managed to generate high brand awareness in Malaysia from the outset thanks to our rapid share gain in Singapore over the past three years.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
We observed robust paying client growth across all markets this year. In fact we attracted more paying clients and met asset inflows in the first two months this year than the entire fourth quarter. Given the strong momentum year to date we are guiding for 350,000 net new paying clients in 2024.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Total client assets increased by 16% year-over-year and 4% quarter-over-quarter to HKD 486 billion. The sequential increase was largely due to robust net asset inflow across all regions and the market appreciation of our clients' US stock holdings. In Singapore total client assets and average client assets posted sequential increase of 25% and 17% respectively. Average client assets was over SGD 17,000 due to strong inflows across cohorts. As we continue to build brand equity Moomoo gained traction among high net worth clients in Singapore.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
As of quarter end, margin financing and securities lending balance increased marginally by 2% quarter-over-quarter. While we saw an uptick in securities lending balance for U.S. stocks, margin financing balance declined as clients unwound their positions.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Total trading volume was HKD 957 billion, down 12% year-over-year and quarter-over-quarter. In the fourth quarter Hong Kong and U.S. stock trading volume were down 13% and 12% sequentially. Weak sentiment surrounding Hong Kong equities and lower turnover in U.S. tech stocks dragged total trading volume. Our share gains in the derivatives market in Hong Kong was a bright spot. Hong Kong futures and options trading had 8.5% and 14.7% market share in the fourth quarter respectively.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Total client assets and wealth management increased by 82% year-over-year and 11% quarter-over-quarter to HKD 58 billion, accounting for 12% of total client assets. Clients increased their allocation in money market funds and U.S. Treasury bills to harvest high yields. Total bond holdings as a result increased by over 60% quarter-over-quarter. We continue to enrich our structured products by onboarding the Accumulator Note, a product that allows clients to sell their stock positions at a premium.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Our enterprise business has 414 IPO distribution and IR clients of 24% year-over-year. In the fourth quarter we acted as joint book runners for several high-profile Hong Kong IPOs, including those of J&T Express and UBTECH. We underwrote 37 Hong Kong IPOs in 2023 and ranked first among all brokers according to Wind.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Next I'd like to invite our CFO Arthur to discuss our financial performance.
Arthur Chen (CFO)
Thank you, Leaf and Daniel. Before going through our financial performance, I'd like to give you an update on our latest share repurchase program announced on March 11, 2022. As of December 31st, 2023, the expiration day of the program, we had repurchased an aggregate of 11 million ADS with approximately $365 million total repurchase amount in open market transactions. We have put in place a new share repurchase program which approves and authorizes us to repurchase up to $500 million of ADS before December 31st, 2025. Now please allow me to walk you through our financial performance. All numbers are in Hong Kong dollars unless otherwise noted. Total revenue was HKD 2.4 billion, up 4% from HKD 2.3 billion in the fourth quarter of 2022. We ended 2023 with full year revenue growing 31% to HKD 10 billion.
Brokerage commission and handling charge income were HKD 904 million, a decrease of 14% year-over-year and 10% QQ. The decrease was mainly driven by lower trading volume. Interest income was HKD 1.3 billion, up 17% year-over-year and down 11% QQ. The year-over-year increase was mainly driven by higher interest income from clients' cash deposits due to higher benchmark interest rate and higher margin financing income due to an increase in daily average margin balance. The QQ decrease was mostly driven by the lower interest income from clients' cash deposits due to a decrease in daily average client cash balance. Other income was HKD 137 million, up 46% year-over-year and largely flat QQ. The year-over-year increase was primarily attributed to higher fund distribution income partially offset by lower enterprise public relations service income and underwriting fee income.
Our total costs were HKD 433 million, an increase of 27% from HKD 342 million in the fourth quarter of 2022. Brokerage commission and handling charge expenses were HKD 59 million, down 8% year-over-year and 6% QQ. The decrease was roughly in line with our decrease of our brokerage commission and handling charge income, partially offset by the cost of migrating our SGX equities to our self-clearing system. Interest expenses were HKD 271 million, up 49% year-over-year and down 6% QQ. The year-over-year increase was driven by higher interest expenses associated with our securities borrowing and lending business and the higher margin financing interest expenses. The QQ decrease was mostly due to lower interest expenses associated with our securities borrowing and lending business, partially offset by higher margin financing interest expenses.
Processing and servicing costs was HKD 104 million, up 7% year-over-year and 21% QQ. The increase was largely due to higher crowd service fee for new markets and higher system usage fees. As a result our total gross profit was HKD 1.9 billion largely flat year-over-year. Gross margin was 81.7% as compared to 85% in the fourth quarter of 2022. Operating expenses was up 12% year-over-year and 3% QQ to HKD 916 million. R&D expenses were HKD 363 million up 9% year-over-year and 1% QQ. The year-over-year increase was mainly due to increasing R&D headcount as we continue to support new product offerings in international markets.
Selling and marketing expenses was HKD 182 million up 19% year-over-year and down 14% QQ. The year-over-year increase was due to a 41% year-over-year increase in net new paying clients partially offset by lower customer acquisition costs. The QQ decrease was due to fewer net new clients and the lower customer acquisition costs. G&A expenses were HKD 317 million, up 12% year-over-year and 15% QQ. The increase was primarily due to an increase in headcount for general administrative personnel partially offset by lower professional service fees.
As a result, income from operations decreased 9% year-over-year and 22% QQ to HKD 1 billion. Operating margin declined to 43.1% from 49.1% in the fourth quarter of 2022, mostly due to operating deleverage. Our net income decreased by 9% year-over-year and 20% QQ to HKD 876 million. Net income margin shrank to 36.9% in the fourth quarter as compared to 42% in the same quarter last year. Among our international business, Singapore was the first to achieve break-even on a quarterly basis even with apportioned costs from headquarters.As client assets continue to grow, we believe the unit economics in Singapore will maintain an upward trajectory. That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead. Thank you.
Operator (participant)
Thank you. To ask a question you'll need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question please press star one and one again. So once again that's star one and one to ask a question. Please stand by while we compile the Q&A roster. Thank you. We'll now take the first question. Please stand by. First question today is from the line of Cindy Wang from China Renaissance. Please go ahead.
Cindy Wang (Director)
[Foreign language]
Speaker 11
Thanks for taking my call and I have two questions. First one is what's your progress of improving account opening process in Japan and could you provide more color on new paying clients acquisition in fourth quarter last year versus first quarter this year so far in Japan and when would you expect to launch Japan stock trading? And the second question is regarding to the new paying clients. So we see the new paying client target of 350,000 in 2024 is very impressive. Could you break down by key markets, including like Hong Kong, Singapore, U.S., Japan, etc.? Thank you.
Arthur Chen (CFO)
Thank you, Cindy. I will take your second question first, and I will leave the first question to my colleague Daniel. In terms of our new targets for 2024, the contributions from Singapore, Hong Kong, and, you know, Australia's existing markets on absolute terms should be similar to last year. So the incremental growth drivers mainly come from certain new markets we enter into this year and recently, in the fourth quarter last year, such as Japan, Canada, and Malaysia. Thank you.
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Hi, Cindy, this is Daniel, and I'll take your question on Japan. In the fourth quarter, we continue to optimize our account opening process and to integrate the redundant processes and pages in that process and to iterate on the key friction points. We have seen therefore a very meaningful increase in the conversion rate from users to registered clients to paying clients. In comparison to other international markets, there is still a lot of room for improvement in that conversion number.
To continue to optimize that account opening golden process will be a key priority for us this year. In terms of Japan equities trading, yes, we are planning to roll out Japan equities trading to our Japan clients by the end of March, and then in April or May we're going to roll out Japan equities trading to our clients in Hong Kong and Singapore. Thank you.
Operator (participant)
Thank you. We'll now take our next question. This is from the line of Chiao Huang from Morgan Stanley. Please go ahead.
Chiao Huang (Financial Advisor)
[Foreign language]
Speaker 12
My question is on Singapore. So what's roughly the client number and the client asset contribution, on the overall firm basis? And also I wonder what's the strategy in Singapore for 2024 and how's the competitive landscape changing in Singapore? And also what's the, you know, risk appetite evolving for Singapore clients in 2024 given the US market is still performing quite well? Do you are trading more stocks? Thank you.
Arthur Chen (CFO)
Thank you Chiao. My colleagues Robin will answer this question for you.
Robin Xu (SVP)
[Foreign language]
Speaker 13
So in the fourth quarter, the Singapore recorded very steady client growth and contributed about 30% of our total net new clients for the entire quarter. And thanks to the continued net asset inflow of our existing clients and the higher quality new clients, the total client assets and average client assets in Singapore recorded 25% and 17% sequential growth respectively. And the total client assets recorded sequential increase for every single quarter since we launched the business. And average client assets have been on an upward trajectory for six consecutive quarters.
And as of the end of last year, average client assets in Singapore was over SGD 17,000. And we believe that as we continue to enhance our brand awareness, to diversify and enrich our product offerings and to improve our client services, Moomoo will continue to attract more high net worth individuals. We've also seen the unit economics in Singapore to continue to improve, in the past two years. Taking into account the costs from the headquarters to support Singapore, the Singapore subsidiary broke even for the first time, during the fourth quarter.
We have some very good growth, year to date. In terms of clients' risk appetite, so during the past rate hike cycle, we started to promote our Cash Plus product which is the money market fund product. We continue to cross-sell, different investment products based on our clients' risk appetite. This year we have seen very strong traction, in U.S. equities among our Singapore clients. Thank you.
Arthur Chen (CFO)
Good one, guys. Yeah. Thank you very much.
Operator (participant)
Thank you. We'll now take our next question. This is from the line of Yu Fan from CICC. Please go ahead.
Yu Fan (Research Analyst)
[Foreign language]
Speaker 14
My first question is regarding the blended commission rate. We see the commission rate increase this quarter. So what's the reason behind? And the second question is about the CAC. So we see the CAC decrease a lot this quarter. So what's the reason behind and how do you view the future trend of the CAC?
Arthur Chen (CFO)
Thank you. I will take these two questions. For commission rate, the combined take rate is almost flat, Q-on-Q basis, on a Q-on-Q basis, slightly up because of the product mixtures and more contributions from our derivative products. Then for the CAC, we further optimize our different, you know, marketing campaigns channels, to control and even decrease our CAC, which bore very strong results in the fourth quarter. And looking forward and based on the year-to-date situations, we do expect this year the CAC number will decrease compared with last year, hopefully, by 10%-20%, year-over-year basis. Thank you.
Yu Fan (Research Analyst)
[Foreign language]
Speaker 14
Thank you.
Operator (participant)
Thank you. We'll now take our next question. Please stand by. Next question is from the line of Emma Zhu from Bank of America Securities. Please go ahead.
Emma Xu (Research Analyst)
[Foreign language]
Speaker 15
So I have two questions. The first one is about the client quality in other international markets. You mentioned earlier about the positive progress in the Singapore client quality. But how about other international markets? Do you also see improvement in the average client asset? And for your Hong Kong market, with you penetrating into the mass market, how will the client profile and average client assets change? And the second question is about your trading velocity and trading volume. It declined, the trading velocity declined to a record low in fourth quarter.
And it is quite understandable that the Hong Kong trading velocity declined due to the weak market. However, US markets actually performed quite well in the fourth quarter, but your US trading volume also declined. So how should we think about the connection between the market performance and your trading volume, and your trading velocity? Do we see a notable rebound of your trading velocity in the first quarter?
Arthur Chen (CFO)
Thank you. I will take your second question first and leave the first question to my colleague Daniel. In terms of trading velocity, you are right. The trading velocity is down in Hong Kong and the U.S., in the fourth quarter. Despite the U.S. stock performed very well, in the fourth quarter, but it remains a very strong, continuous uptrend, for the whole quarters. So most of our clients actually use a buy and hold strategy to enjoy the rallies. And implied volatility in the U.S. markets, in the fourth quarter actually, went down, compared with third quarters.
So, the trading velocities, you know, decrease actually, you know, based on our humble observations, is in line with a lot of other U.S. discount brokers operating metrics as well. Then, in the fourth quarter this year so far, we have seen a very healthy pickup, not only in the U.S. but also in Hong Kong in terms of the trading volume and also the trading velocity. Thank you.
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Thank you, Emma. This is Daniel. I will take your question on the client quality in international markets. Actually, we have seen an improvement in average AUM not only in Singapore but also in our other international markets, including the U.S., Australia, and Japan. Mostly because, unlike some of our other peers, I think Futu really cares about quality growth. Net inflow of AUM is a key KPI, very important KPI for all of our marketing teams across different international regions. In the fourth quarter, we have seen very strong AUM inflow, despite weak market sentiments. In the first two months this year, as Leaf mentioned in his opening remarks, we have a higher net asset inflow in the first two months of this year than the entire fourth quarter combined.
Actually, over 1/3 of that net asset inflow comes from international markets. We'll expect a continued upward trajectory in our client assets across international markets. For Hong Kong, in the past couple of quarters, we continue to attract older clients, especially with our offline store. We have seen that these clients typically have higher average client have higher average assets. But because of the large base effect, these new clients didn't change the overall client profile much in Hong Kong. Thank you.
Speaker 15
Thank you. This is really encouraging.
Operator (participant)
Thank you. We'll now take our next question. This is from the line of Leon Qi from Daiwa. Please go ahead.
Leon Qi (Research Analyst)
[Foreign language]
Speaker 16
Thanks for taking my questions. This is Leon Qi. I want to ask two questions today. First is on our Hong Kong marketing and the client acquisition strategy. Just now management shared a lot of details on Singapore, but I'm interested in Hong Kong now. Given we have an increasing number of client base, paying client base now, would management feel that going forward it will be increasingly more difficult for us to acquire new customers? Are we considering gradually shifting our focus from the number of customers into average AUM or the quality of customers?
We do appreciate the new customer guidance that management talked about just now, that Hong Kong new customers guidance in 2024 would be similar to 2023. Second question is on self-clearing in U.S. stocks. May I confirm that all of our trades in U.S. has already been self-cleared? In addition to the positive impact on our net interest income, do we see any improvements, in terms of our trading execution efficiencies, by using self-clearing? Wondering if we can make any comparisons with our competitors in the U.S., such as Interactive Brokers, etc. Thank you very much.
Arthur Chen (CFO)
Thank you, Leon. I let Leaf to take the first question, and I will answer the second one.
Leaf Li (Chairman and CEO)
[Foreign language]
Daniel Yuan (Chief of Staff and Head of Investor Relations)
The Hong Kong market is our home base, and in 2023 we continue to maintain very high penetration among the younger clients. We also steadily improve our penetration into clients from other age groups. As of the end of Q4, our paying client penetration among the adults age 35-55 in Hong Kong was over 10%. In Hong Kong, our goal is to achieve high-quality growth. We focus on acquiring high-quality clients and also focus on attracting net asset inflow from existing clients.
That's why, during Q4 and also in the past where market sentiments were weak, we continue to see very robust net asset inflow from Hong Kong. Going forward, we'll leverage our comprehensive product offerings and have different operational strategies for clients with different asset amount and different investment needs. We'll very closely track the net asset inflow trend in Hong Kong. Thank you.
Arthur Chen (CFO)
For the second question, you are right. We have already largely complete the U.S. self-clearing so far. And I think actually the positive contributions from this migration will continue thanks to the increased client assets cohort and also the contributions from the new markets, such as Japan and Malaysia. And in terms of the operating efficiency, definitely, you know, after the self-clearing capabilities, our service downtimes versus before has been meaningfully decreased. And also the trading execution, in terms of the reporting, etc., will be more smooth. Thank you.
Daniel Yuan (Chief of Staff and Head of Investor Relations)
Thank you very much.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, you can press star one and one on your keypad. We will now take our next question. Please stand by. The next question is from the line of Peter Zhang from JPMorgan. Please go ahead.
Peter Shang (Analyst)
[Foreign language]
Speaker 17
My first question is about the interest income. We notice that interest income had been decreased sequentially in the first quarter. We wish to understand what's the fourth quarter trend for clients' idle cash and Futu's deposit rates. And I also wish to understand what's the trend in the first quarter for clients' idle cash balance. My second question is about operating expense. I wish to understand what's Futu's plan for the high account high account increase in 2024 and what's management's guidance for Futu's operating expense increase or say cost of income ratio trend. Thank you.
Arthur Chen (CFO)
Thank you, Peter. I will take these two questions. For idle cash, roughly the idle cash accounts for 10%-15% of our total client assets in the past quarter. The similar situations happened in the first quarter so far. The decrease of the interest revenue in the fourth quarter, as I mentioned in the opening remarks, is mainly due to the decrease of the average balance for the securities borrowing and the lending, despite if you see the balance sheet data, the margin and the securities lending balance was higher than that in the third quarter.
Then for your second half questions, in terms of headcount, we are looking for mid- to high-single-digit headcount growth, mainly will be deployed for our international market expansion and to further enhance our R&D capabilities. Unfortunately, we do not have a cost-income ratio guidance, given the nature of our business. Our revenue is very volatile and is very difficult to predict due to the market volatility. So, we will focus more on the people side, given this is one of the largest, you know, cost components for our overall cost structure. Thank you.
Peter Shang (Analyst)
[Foreign language]
Speaker 17
Thank you.
Operator (participant)
Thank you. This does conclude the question and answer session. At this time, I would like to hand the conference back to Daniel Yuan for closing remarks. Thank you.
Daniel Yuan (Chief of Staff and Head of Investor Relations)
That concludes our call today. On behalf of the Futu management team, I would like to thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you and goodbye.
Operator (participant)
Thank you. This does conclude today's conference call. Thank you for participating, and you may now disconnect.