UP Fintech Holding Limited
Q2 2019 Earnings Call Transcript

Published: 23 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the UP Fintech Holding Limited, Second Quarter 2019 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 advice you that this conference is being recorded today Friday, August 23, 2019.I would now like to hand the conference over to your first speaker today Mr. Clark S. Soucy. Thank you. Please go ahead.

[Clark Soucy:]

Thank you, Grace. Hello everyone, and thank you for joining us for the call today. UP Fintech Holding Limited 2019 second quarter earnings release was distributed earlier today and is available on our IR website at ir.iTIGR.com, as well as Globe Newswire Services.On the call today from UP Fintech are Mr. Wu Tianhua, Chairman and Chief Executive Officer; Mr. John Zeng, Chief Financial Officer; Mr. Yonggang Liu, CEO of U.S. TIGR Securities; and Ms. Kenny Chao [Ph], our Financial Controller.Mr. Wu will give us overview of our business operations 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. 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.

[Wu Tianhua [Interpreted]:]

I will now translate for Mr. Wu. Hello everyone and thank you for joining our second quarter 2019 earnings conference call. I am delighted to report that in the second quarter TIGR delivered solid revenue growth across business segments.Total revenues were nearly $13 million, an 88% increase on the same period last year, and a 34% increase from last quarter. Our revenue sources became more diverse as we recognize approximately $3.5 million in net interest income, a large increase on the $1.5 million in the same period last year.Net interest income now accounts for nearly 30% of revenues as opposed to 22.6% during the same period last year. Our other revenues, which primarily comprise corporate services such as ESOP and IPO distribution among others grew 12 fold over the same period last year.I am proud to report that in the second quarter TIGR participated in 5 U.S. IPOs, burnishing our reputation as the market’s leading online broker for U.S. IPOs. Our ESOP business is also exhibiting strong growth. In just under a year since product launch, we have signed close to 30 corporate customers.Now I would like to give you an overview of some of our key business metrics. Excluding share based compensation, our non-GAAP net loss was approximately $800,000, a 76% improvement over the same period last year and a 61% improvement from last quarter. Customer account balances now total $3.6 billion, a 75% increase over the same period last year.Finally, at the end of the second quarter we counted 580,000 customer accounts, an increase of 80% over the same period last year.Our vision is to use technology to give our investors seamless access to global markets. Thus we continually invest in our research and development capabilities to enhance the customer experience, as well as acquire new licenses to expand our global reach. During the second quarter we acquired Marsco, a USA broker dealer with a 30 year operating history that holds a self-clearing license.As we integrate Marsco into our company, we look forward to leveraging their strong knowledge of the brokerage industry and compliance protocols to improve our operations and proprietary technology, by leveraging Marsco’s expertise in combination with TIGRs strong Fintech capabilities, over the next six to 12 months we will unveil new products for our customers and will use the self-clearing license to improve our profitability.Another notable development is that our USA subsidiary, also acquired membership of the National Futures Association, giving it the capability to provide Futures Trading Services to USA customers.In Asia our Singapore subsidiary obtained a Capital Market Services license, which will allow us to provide brokerage services to Singapore Nationals in the coming months. We look forward to using these new licenses to further diversify our global customer base.Finally, I would like to speak to the technological prowess, that is at the core of our business and which we keep investing heavily in. Recently we allow our customers to start streaming USA Level II Real Time Market Data, giving them the ability to examine the depth of book for the equities they trade.On the product side, besides from updating our app at two week intervals, we also upgraded our TIGR Community Interface with new educational resources to increase our customers understanding of investing and global markets.These efforts are already showing promising results with the customers trading a greater percentage of US equities that are not Chinese ADRs. Of the 25 most traded USA listed equities on our platform, only 28% were Chinese ADRs by value, representing a notable decrease from 36% during the same quarter last year. We will continue to allocate resources to invest our education to assist our users to diversify their assets globally.I will now hand the call over to our CFO, Mr. John Zeng, to go over the details of our financial results. Thank you.

[John Zeng:]

Hello everyone! Let me go over TIGR's second quarter financial performance. All dollar amounts are in USD.So, on the revenue side, very encouraging growth across business segment this quarter. Total revenues were $12.9 million, an 88% growth year-over-year and 34% growth quarter-over-quarter.Gross commissions were $6.8 million, an increase of 31% from same period last year, helped by 14% increase in trading volume and the increase in blended commission rates. Combining financing service fee and interest income, total interest was $4.5 million, an increase of 190%, from the same period last year due to higher margin trading and securities lending activities.Other revenue which comprises our 2B business such as IPO Distribution and the ESOP increased 12 folds to $1.6 million year-over-year, solidifying TIGR's leading position in U.S. IPO distribution and the ESOP management for corporate issuers.Helped by all segment growths, our revenue stream is getting more diverse. For this quarter commission, net interest and the 2B revenue, each accounted for 57%, 29% and 14% of our net revenue. While the split was 75%, 23% and 2% in the same quarter last year.With our expansion in more geographical locations and the self-clearing capability up and running in next six to 12 months, we expect our revenue to be more diversified going forward.So now on the cost side employee compensation remains our biggest expense. This quarter our salary expense was $8.1 million, a 79% decrease from same quarter last year. The decrease was due to one-time share-based expense of $32 million recorded the last year.Excluding share based compensation, our salary expense increased by 37%, while our headcount increased 51% from 344 to 520 during the same period. Headcount increase also resulted in a 21% increase of occupancy expense this quarter to $800,000. Execution and clearing expense increased 16x this quarter. Interest expense increased from zero to $1 million. Both increases are due to more consolidated account customer this quarter.Communication expense was $1.7 million, increase by 96% from second quarter last year as we are offering more data services such as the U.S. Level II to our users. Marketing expense was $2 million, a 20% decrease from last year, since we have been optimizing our marketing spending to focus on vendors that can yield better ROI. SG&A increased by 9% to $1.9 million, due to increase in headcount and a professional service fee.To summarize, comparing with same quarter last year, total cost, excluding share based compensation increased to 25%, while topline grew 88% during the same period, which translates to a strong improvement in your bottom line.On a GAAP basis, net loss attributable to the company was $1.9 million, a 95% improvement from last year. On a non-GAAP basis, net loss attributable to the company was $800,000, a 75% improvement from last year.Overall, we are making good progress to improve earning quality in addition to drive user growth. Our revenue streams are more balanced and it is less dependent on commission versus last year. We might incur more headcount R&D and marketing expense in the next few quarters when expanding offshore, but we feel very confident about our business outlook with the strategies we are executing.So now, we have concluded our remarks and is open for Q&A.

[Operator:]

[Operator Instructions]. The first question comes from the line of Judy Zhang from Citibank. Please ask the question.

[Judy Zhang:]

Hi, this is Judy from Citi. I have two questions. The first question is, we are seeing a very strong quarter for the margin financing revenue in the second quarter. Can the management share with us what's the total margin financing balance in the second quarter and how the interest rate trended over the past quarter?And the second question is on the commissions. We see the trading volume has dropped further in the second quarter. Can you give us breakdown by country and by type of securities, and also what is the driver for the weakness in this quarter? Thank you.

[John Zeng:]

Hey, Judy. So let me let me answer your first question, and sorry your line was a little bit fuzzy, so I didn't hear your second question clearly. Can you repeat your second question?

[Judy Zhang:]

Yes. The trading volume has dropped a lot in the second quarter. Can you give us a breakdown for the trading volumes by country and by type of securities? And also can you share with us what is driving the big weakness in the second quarter?

[John Zeng:]

Okay, so let me answer your first question regarding margin balance. So as you know right, so the margin balance we have like – so two type of accounts. One is the fully disclosed account, which the balance is not on our book. So I can give you the number of the balance of the margins on our book is probably $40 million, that's the balance on our book.So overall you know, we have more – can drive more interest out of our own margin balance and then we expect the margin balance will keep growing as we have more consolidated accounting customers coming forward.So the low interest margin, let me just give you a rough estimate. I would say for consolidated accounts, it's about like a 2% to 4% [ph], depends on the user type and for the FD accounts the net margin was much lower. I would say it's probably 50 bps on an aggregate basis. So that's on the margin balance.For the trading volume. So second quarter was down about like, I would say 13% from the first quarter. The reason is now you know that market volatility, actually it came down in the second quarter. So the total you know U.S. equity trading volume, if you look at the CBOE data, it's actually down from the first quarter. So our company I guess experienced the similar trend in terms of client trading activities.But still you know, we are able to optimize our operation to drive higher commission, blended commission rates, because last year we had signing in of promotion programs which expires, so our blended commission rates came up higher versus the first quarter. That's the one, the reason behind the increasing gross commission.

[Judy Zhang:]

Okay, and how about the second question?

[John Zeng:]

Sorry Judy, what's your second question?

[Judy Zhang:]

The breakdown of the trading volume by country and by different types of securities in your second quarter, and what is driving the weakness in the trading volume in the second quarter?

[John Zeng:]

You mean, driving in weakness of the trading volume in the second quarter?

[Judy Zhang:]

Yes, yes.

[John Zeng:]

So like I just mentioned, overall, you know the market volatility, you know if you look at the VIX volatility, actually it came down in April and in June. It came back a little bit in May, but overall you look at market activity at least on our platform is still down a little bit. That's why the trading volume came down.If you look at the breakdown of the countries, so U.S. equity still accounts for like the most of our trading volume in terms of equities. And all the U.S. product, our USD products, I would say accounts for over 70% to 80% of our trading volume. I don't have the exact breakdown by country, but I can just give you the breakdown by currency. So USD product at the most, then followed by Hong Kong HKD product as the second, accounts for like slightly above like 15%.

[Judy Zhang:]

15% for Hong Kong dollar denominated products, right.

[John Zeng:]

Yes. Something like this, about 15%.

[Judy Zhang:]

Okay, and also how about the breakdown by different type of securities like future, equities etc.?

[John Zeng:]

Let me take a look. So for the futures, I would say, equity accounts for about like 40% to 45% of our total trading volume. The future is about the same you know, like 40% to 45% of our trading volume for this quarter.

[Judy Zhang:]

Thank you.

[John Zeng:]

Thank you.

[Operator:]

Next questions comes from the line of [inaudible] from HSBC. Please ask the question.

[Unidentified Analyst:]

Hello, this is Lou [ph] from HSBC and I basically have three questions. First one is, the trend of our commission in revenue and the trend of trading volume, because the trading volume is going down, but the commission is going up. Is the difference because of some IPO commissions?And the second question is also about the financing business, because we see a significant growth in the interest income in the second quarter. Going forward, is that means we are going to have more financing business or more interest income on our balance sheets instead of off the balance sheet. So what is the potential funding source if we are going to continue to grow this business?And third question is about other revenue, because as our CEO just mentioned that other revenue is basically from IPO subscription fee. So how do we going to compete with other investment banks in terms of the IPO subscription business, and is our strategy like low pricing strategy for this business and how important is our 2B business compared with our 2C business? Thank you.

[John Zeng:]

Sure, [inaudible] for the questions. So let me answer your first two questions, then I will let Tianhua answer your third question in Chinese and I will do a quick translation. So for your first question regarding the volume and the commission, so it’s similar to the question Judy asked a little bit earlier. So trading volume actually slowed down a little bit because you know the market activity slows down. So the activity is also slowed down a little bit on our platform.In terms of the increase in trading commission rates, first of all, we have some discount program offering last year and it was expired. And also like for this quarter we saw a little bit higher you know margin product trading, which is more like cash equities versus last quarter. So that's why the blended commission increased compared to the last quarter. So that's to your first question.The second question is on the financing business and what's the future, you know driver for the financing business. I think for this business we have a huge potential, because as I said earlier, like so far the margin balance on our own book is still relatively low. A lot of our margin balance is holding at our you know clearing partners. But going forward once our consolidated account keeps growing, we will have more margin balance on our book, then we can churn out more revenue from those margin balance.I will let Tianhua answer your third question regarding our 2B business and like how we compete with other investment banks and what's the strategy to we're playing in the 2B business.

[Tianhua Wu [Interpreted]:]

Okay, let me just do a quick translation to the third question. So in terms of other revenues, the reason we're participating in those IPO distribution is first of all, our users on our platform, they do have the interest to participate in the U.S. IPOs, because typically U.S. IPO don't open to those smaller investors, but because of TIGR those smaller investors or small institutions are being able to participate in those U.S. IPOs to enjoy the benefits of the U.S. capital market.So how we view this 2B business is it's a very important you know segment of our future growths, because with the corporate issuers, we can provide them with very solid demands. And also you know we can provide them with IR and PR services and we also have very active online communities to shares their equity or exciting growth stories. So those are the differentiation we can offer from the traditional investment banks, because the traditional investment banks, they don't really – that involved like us to be able to offer different value added services.In terms of ESOP, you know traditional ESOP are offered by some, I would say last generation companies. Those ESOP providers are first of all, relatively more expensive, and their software’s not that easy to use. So we see this as good opportunities for us to tap into and we'll combine ESOP and IPO services together to offer as a complete package to the corporate issuers. That's why you can see TIGR has been growing really fast in this segment.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Thank you. [Operator Instructions] Next, we have the follow-up questions from the line of Judy Zhang from Citibank. Please proceed.

[Judy Zhang:]

Thank you. Thank you for giving me the opportunity to ask questions again. I have another two questions. The first question is on your overseas expansion. Is there any meaningful contribution from the non-China based clients in the total new clients in this quarter? And if so, what is the contribution?And my second question is, can management share with us any update on the progress of your licensing application in Hong Kong? Thank you.

[John Zeng:]

Alright Judy, so first of all, how many clients are overseas clients? So far given our overseas expansion just started, we just got all the license in place. So far for this quarter we don't see, I would say a majority of our clients are still you know like the PRC clients. But for the next two or three quarters we would like to see more international clients to be able to use our platform. And for the Hong Kong license, we are in preparation to apply for Hong Kong license.

[Judy Zhang:]

Okay, thank you.

[Operator:]

[Operator Instructions] Ladies and gentlemen, this is the end of the question-and-answer session. We would now conclude today’s conference call. Thank you for participating. You may now disconnect.