UP Fintech - Earnings Call - Q3 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the UP Fintech Holding Limited Third Quarter twenty nineteen Earnings Conference Call. I must advise you that this conference call is being recorded today, Monday, November 2539. I would now like to hand the conference over to our first speaker today, Mr. Clark Sousse. Please go ahead, Thank you,

Speaker 1

Rohit. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's Q3 twenty nineteen earnings release was distributed earlier today and is available on our IR website at ir.itiger.com as well as GlobeNewswireServices. On the call today from UP Fintech are Mr. Wu Tianhua, Chairman and Chief Executive Officer Mr.

John Zheng, 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 business operations and discuss corporate highlights. Mr. Zheng will then discuss our financial results. They will both be available to answer your questions during the Q and A session that follows their remarks.

Now let me cover the Safe Harbor. Today's discussion will contain forward looking statements. These forward looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC. Any forward looking statements that we make on this call are based on assumptions as of today and we do not take any obligation to update these 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. Good evening, everyone, and thank you for attending the Tiger Brokers Q3 twenty nineteen Earnings Conference Call. In the past quarter, Tiger's business achieved several milestones despite the uncertain macro environment of the past few months. In Q3, our revenue was US15.3 million dollars a new all time high and an increase of 67% on the same period last year. Our revenue streams also became more diverse as net interest income accounted for 40% of net revenue, up from just 20% in the same period last year.

The net loss was $1,280,000 a 60% decline from the same period last year. On a non GAAP basis, for the first time ever, we reported a profit of US660000 dollars Total client assets increased 47% year on year to US3.8 billion

Speaker 2

dollars

Speaker 1

I would now like to take this opportunity to reiterate Tiger's growth strategy, expanding our user base and increasing revenue per user. We plan to stimulate customer acquisition through geographic expansion and differentiated product offerings. We recently opened our New York office and in Q1 of next year will formally commence providing securities trading to clients in Singapore. We are confident that integrating different countries to our award winning platform will help us attract more users. We will also continue to invest in ESOP, wealth management and IPO underwriting.

The ESOP business maintains a high growth rate. In Q3, we added 15 new corporate customers. In the future, the employees of our ESOP clients will gradually become Tiger customers. For wealth management, we recently launched Cash Plus, a cash management product actively managed by Tiger. Though the assets under management is still growing, our goal is to accumulate fund management experience, so we may provide greater customization to the future needs of our customers.

With regards to our underwriting business, in the third quarter, we participated in four U. S. IPOs. Since we began our IPO distribution business, we have participated in 32 USA IPOs. We also recently obtained an underwriting license in The United States, which is a great advantage as we may serve U.

S.-based institutional and individual investors. So far our IPO pipeline looks robust. We are confident we will further solidify our number one position among other online brokers. To increase revenue per user, our top priority is to become self clearing, so we may lower clearing costs and increase revenues from margin financing and stock lending. This was our strategic rationale for acquiring We are currently in the process of integrating Marsco into our system and aim to become self clearing in U.

S. Cash equities by Q2 of next year. Going forward, we plan to introduce more trading products for our customers to increase user stickiness. Finally, we view the development of our retail brokerage, underwriting business, ESOP and corporate services as a comprehensive ecosystem that benefits from increasing synergies. We will continue to invest in developing these respective businesses to enrich the value we provide to our customers.

Now I will hand the call over to our CFO, John to discuss financials.

Speaker 2

Thanks, Tianhua and Clark. Let me go over Tiger's third quarter financial performance. All numbers are in U. S. Dollar.

Total revenue reached an all time high at $300,000 an increase of 67% year over year and an increase of 13% quarter over quarter. Even commission revenue was down 13% year over year correlated with lower trading volume versus the same quarter last year. This shortfall was more than compensated by increase in interest related income and 2B revenue. Interest related income, which combines financing service fee and interest income stood at million, an increase of 270% from the same quarter last year. The increase was due to increased margin and securities lending as well as more consolidated account customers versus the same quarter last year.

Other revenues, which includes our 2B services were $2,100,000 an increase of 13 fold from 2018. The increase was primarily due to higher revenue from IPO distribution, advertisement, bank deposit interest and ease of administration fee. Internet interest expense was $1,400,000 an increase from zero in the 2018 as we have more consolidated accounts. Taking our interest expense, net revenue were $14,000,000 this quarter, a 52% increase year over year and 11% increase quarter over quarter. Net interest account for about 40% of the net revenue, up from 20% in the same period last year.

Conditions accounted for 45% of the net revenue, down from 79% same quarter last year. Overall, we think this is a solid quarter as we further diversify our revenue mix while improving the top line. Now on the cost. Total operating costs and expense were $500,000 an increase of 26% year over year and the nine percent quarter over quarter. The cost increase is in line with our revenue growth and business development.

Execution and clearing expense were $700,000 an increase of six folds year over year, primarily due to the increase in consolidated accounts. Employee compensation and benefits expense were $300,000 an increase of 56% from the 2018. Taking our share based compensation, the increase was 46%. This was primarily due to headcount increase from four twenty one employees in the same quarter of last year to five seventy five employees this quarter as we keep investing in R and D and recruiting talents for business expansion. Occupancy depreciation and amortization expense were $1,100,000 an increase of 34% year over year due to an increase in office space and relevant DISCO improvement.

Communication and market data expense were $1,600,000 an increase of 50% year over year. This increase was due to rapid user growth and expanded market data usage by our users. Marketing and branding expense were $1,500,000 a decrease of 52% from the 2018. We optimized our cooperation with business partners, which led to lower cost. We might incur higher marketing expense in the coming quarters as we begin to offer service in The U.

S. And soon in Singapore. SG and A were $300,000 an increase of 15% year over year, primarily due to professional fees resulting from the acquisition of Masco and general expense due to business expansion. Net loss narrowed 60% year over year to $1,300,000 this quarter. Non GAAP net income turned positive for the first time at US660000 dollars versus a net loss of US2.8 million dollars in the same quarter last year.

At the end of third quarter, we have $137,000,000 cash on hand. Liquidity wise, company is fully capitalized. Now we finished our presentation. It's now open to questions.

Speaker 0

Thank you, question and answer session. We So Ladies we have our first question from the line of Vivien Liu from HSBC. Please go ahead.

Speaker 3

Hello management. I have two questions here. The first one is about the margin balance. Do we have a number because we see from the results disclosure that the receivable from customers is actually going down. So do we have a breakdown of on balance sheet and off balance sheet margin balance?

And do we have the target for this balance? And what's the cap of the margin balance backed by our own capital? And the second question is because we can see from the results that the difference between GAAP and non GAAP is mainly from the employee compensation as well as the equity investment loss. So could you explain what is the equity investment for this item? Thank you.

Speaker 2

Sure. Let me thanks for the questions. Let me take a step on the first one, the margin. So the margin on balance and security and the imbalance as we discussed is $967,000,000 as of this quarter. So an increase of 17% from last quarter and a slight decrease of 5% from previous quarter.

So overall, the marginal balance on our book are pretty stable. It's about a $120,000,000 So the increase in our margin revenue primarily due to there are several securities lending products we are doing, which drive up the margin interest income. And also like we extend some margin on to select clients, which yields higher interest income. As you know like so the margin loan on our book so far is still relatively low compared to the total margin balance we have because most of the margin balance is still at our clearing brokers. But I think once we gradually becoming self clear, hopefully in the second quarter of next year, the marginal balance will be gradually moving on to our book.

So for the second question on the equity impairment, I will let Tianhua to answer this question. Yes. So the equity impairment was from early investment we did in Baba Technology back in 2018. So the company we own a minority stake in this company and as a company didn't work out so well. So that's why we incur a loss on our balance sheet as an impairment.

Speaker 3

Sure, sure. Thank you. And I also have a question about the zero commission campaign in The U. S. Does it have any impact to our business or our business in the future?

Speaker 2

Okay. Let me just do a quick translation on what Tianhua just said. So we observed the trend in U. S. Not on our broker are starting to offer zero commission.

But actually some of them just only offer zero commission for cash equities because there are other commission you can generate from options, futures, those kind of stuff. And also like even though some of those broker offer zero commissions, you still can make some of the money back by selling the order flow like some other online brokers is doing in The U. S. From Tiger's perspective, we don't think first of all right now it's going to impact our user base because most of the zero commission strategy are offered to The U. S.

Investors U. S. Domestic investors. And we think Tiger's product are already pretty value added and also it's already very competitive pricing. So we don't think in the near term there will be zero pricing commission pressure on us.

But we'll closely monitor the situation and we will make that adjustment when necessary.

Speaker 3

Thank you.

Speaker 0

Thank you. Shall we move to the next question? We have the next question from the line of Dafin Poon from Citibank. Please go ahead.

Speaker 4

Hi, management. Thanks for taking my question. So two questions from my side. So first one is regarding the commission income. So we noticed that the commission rate on a net basis is down slightly on a quarter over quarter basis.

So can you explain on the reasons behind that, whether it's driven by maybe the different mix in terms of securities in this quarter? And second question is about the OpEx. So first is, we

Speaker 2

noticed

Speaker 4

the marketing expense stands a bit this quarter. So wondering what would be what was the drivers behind? And in terms of the OpEx outlook, so I guess you also mentioned that you will spend more on the marketing side because of your multiple overseas business initiatives. And I would be also want to like to check on the other OpEx such as the headcount or the R and D expense, whether you will also spend more on that front associated with the overseas business? And if possible, can you give us an maybe operating margin outlook for next year?

Thank you.

Speaker 2

Right. Daphne, let me answer your first question. Okay. So the commission rate actually it's pretty stable. I think you look at the financial statements, there are some like actually the report from the fully disclosed on a led basis.

But if we just look at the gross basis, overall, the gross commission rate has been pretty stable. If you take everything all planned together, it's about a three basis points, okay? So it's on par with the last quarter. So the commission came down primarily due to the trading volume came down. I think that's the major reason behind the 10% drop in commission revenue.

In terms of marketing expense, so the reason we spend less on this quarter is, first of all, we think the market backdrop is not that favorable. So we rather keep the cash on hand to spend when we think that there is a better chance we can acquire user. And also given Tiger is already listed, we got a chance to optimize a lot of existing relationship with our business partners. So we can spend less on those business cooperations. And going forward, for this quarter, we are trying to spend a little bit more in The U.

S, The number will be relatively small, think about $500,000 because we want to try that out based on the current strategy we have. And for the next quarter, I would say, starting in 2020, we will be able to spend more money on marketing based on the results we generated from this quarter. So I didn't get your last question, Daphne. What was your question in the end?

Speaker 4

Yes. So addition other than the marketing expense, how about the other OpEx like the headcount or other G and A costs? Would that also increase in association with the overseas business?

Speaker 2

Right. I think first of all for office, those occupancy, I think should be relatively stable, because our office in New York is already open and Singapore already identified the office. So I think for that it should be relatively stable. Headcount wise, I think for Singapore and The U. S, we pretty much should have majority of people in place now.

I think the only people we're going to increase will be the R and D people. Those are our core group of competencies. So we'll keep adding those people. But the growth rate, don't think will be starting from next year will be as high as this year. You can see year over year our headcount cost increased about 50%.

I think next year, I think quarter or year over year should be around 30% something around there. But that being said, if we identify better strategy or better location to get into, we will try to spend more to build our business right there. But so far, I think the headcount costs should be moderated starting in 2020.

Speaker 3

Okay. That's very clear. Thank you.

Speaker 0

Thank you. Ladies and gentlemen, I would now like to hand the conference back to our speakers for any ending remarks. Please go ahead, sir.

Speaker 1

I would like to thank everyone for joining our call today. I am now closing the call on behalf of the management team here at UP Fintech. We do appreciate your participation in today's call. If you have any further questions or concerns, please reach out to our Investor Relations team. This concludes the call and thank you very much for your time.

Thank you. Thank you.

Speaker 0

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may disconnect now.