UP Fintech Holding Limited (NASDAQ:TIGR) Q4 2019 Earnings Conference Call March 25, 2020 8:00 AM ET
Clark Soucy – VP of Strategy
Wu Tianhua – Chairman and CEO
John Zeng – CFO
Conference Call Participants
Lesley Liu – HSBC
Daphne Poon – Citi
Han Hui – CICC
Good everyone and thank you very much for attending the TIGR Brokers 2019 Fourth Quarter and Full Year Earnings Conference Call.
Before I elaborate on our business results, I would like to make a brief comment on the virus pandemic. Since we operate an online platform, there has not been a substantial impact on our business. However, the health and safety of our employees is paramount and our firm has taken extra precautions. At our global offices, employees are working in shifts or from home.
I will now continue with my prepared remarks. In the fourth quarter TIGR delivered impressive financial results. Total revenue was $20 million a new all-time high and nearly 110% increase over the same period last year. In the fourth quarter of 2019 we achieved the fastest year-over-year revenue growth of any quarter last year.
In addition I would like to highlight that we continue to optimize our revenue mix, interest rate income plus financing service fee, exceeded commission income and accounted for 38% of total revenue, revenue which includes corporate services, IPO distribution and ESOP administration services increased to 26% of total revenue. This is compared to 2018 or a 74% of our income was derived from commission.
For the fourth quarter we recorded our first ever non-GAAP operating income of US$0.3 million, a significant improvement for the non-GAAP operating loss of UUS2.8 million in the same period of 2018 and a $1.3 million loss in the third quarter of 2019, demonstrating the improvement in TIGR’s operating efficiency and earnings quality.
We are also pleased to report that our innovative platform and differentiated services continue to drive evermore investors to choose TIGR to manage their assets. In the fourth quarter we added approximately 11,300 new accounts with depositors an increase of 86% from the same quarter in 2018.
In addition, total client assets increased to $5.1 billion a nearly 114% increase from the same period in 2018 and an increase of $1.3 billion in the third quarter of 2019.
In aggregate, our 2019 financial results evidenced a solid improvement over 2018. Total revenues in 2019 were $58.7 million a 75% increase over 2018. We also achieved consecutive non-GAAP profit for the third and fourth quarter of 2019.
2019 was a monumental year in the history of our company. In March we successfully reported an asset and embarked on a new journey in our company’s history. 2019 was full of challenges but we remain focused and continue to emphasize transparency and made positive progress on our business.
I would now like to highlight four key components of our corporate strategy that we successfully implemented over the last year. First and foremost we are following our strategy of shifting from relying on clearing counterparty to developing our self clearing capabilities. Self clearing will not only reduce our expenses and drive increased interest income, it will also will impact to revenue from commission volatility.
This without reason for acquiring Marsco in July. System integration is on track contract. We expect to gradually self clear US cash equities for the end of the second quarter of 2020.
Second, our strategy to increase our international reach progressed nicely in 2019. The size of these new adopters we now have presence in the United States and Singapore. We are confident that our international expansion will increase our customer base and give us access to more pivot development opportunities.
Third our ESPO business and IPO underwriting delivered strong growth in 2019. In 2019, we participated in 18 US IPOs in 12 of which we served as underwriter. We were the number one IPO underwater in terms of deal number for Chinese issuers in 2019 by a wide margin and the scale of our IPO business greatly exceeded that of any other Chinese broker.
Besides the contribution to our revenues we view the development a more investment banking services as beneficial to our reputation and accretive to user stickiness. Our ESOP business also grew rapidly in 2019. We developed a large client base in just one year’s time and it started to yield results. I am pleased to report that in the fourth quarter over 20% of new funded accounts came from our ESPO customers.
In addition, we are investing in our asset management business either actively managed cash plus products has delivered good investment returns for our users since March. We also recently launched our Fund Mall where users may choose from over 30 investment funds, leading brokerage and asset management as complementary as our growing range of services increases user sticking.
Over the long term strategy comprehensive develop commission, interest income and asset management fees, diversifying our revenue and increasing customer lifetime value. Finally, after discussion and agreement by the Board of Directors, we have decided to implement a share buyback program. Over the next 12 months we will allocate a maximum of US $20 million through ADS buybacks.
In conclusion we look forward to continuing to implement the four aforementioned points of our corporate strategy and growing our business.
I would now like to invite our CFO, John Zeng to discuss our key financial results.
Thanks Tianhua and thanks Clark, hello everyone. Overall it was a strong first quarter for TIGR. Total revenue was $20 million grew 100% year-over-year and 30% quarter-over-quarter. Commission income was $7.3 million increased 4% from last year and 17% from previous quarter. Cash equity blended commission was 8 Bps this quarter versus 5 Bps the same quarter last year.
Financing service fee increased 18% year-over-year to $2 million this quarter. Interest income grew more than 100 times year-over-year to $5.5 million this quarter as we have more consolidated account customers versus last year. The gross for our financing service fee and interest income also benefited from increased marketing and securities lending activity this quarter.
Other revenue primarily constants revenue from corporate services such as IPO underwriting grew close to 700% year-over-year to $5.1 million. We were active in IPO underwriting last year in terms of deal counts far exceeding any of our competitors. It’s also effective customer acquisition to develop retail and institutional business.
Comparing revenue composition with fourth quarter last year, we are happy to see revenue mix is getting more healthy interest related income this quarter accounts for 38% of total revenue. Corporate services accounted for 26% while in the first quarter last year, commission accounted for 74% of the total revenue. Interest expense grew to $1.5 million this quarter due to more consolidated account customers. After interest expense net revenue was $18.5 million a 94% increase from same quarter last year.
Now expense, clearing expense increased from $0.1 million in the first quarter last year to $0.9 million this quarter, in that ways our gross of consolidated accounts. Salary expense increased to 61% to $10.6 million primarily due to a 49% headcount increase year-over-year. In 2020 we will keep adding key positions but our headcount gross rate will moderate.
Occupancy expense increased 72% to $1.1 million as we opened offices in US and Singapore. Communication and market data expenses also grew 100% year-over-year to $1.9 million as more users are using our services. Marketing expense decreased to 25% year-over-year to $1.7 million this quarter as we optimized our marketing strategies which netted to higher efficiency.
General and administrative expense increased to 14% to $12.8 million primary due to business expansion and professional services. Total expense for fourth quarter was $19.1 million an increase of 46% year-over-year. Operating loss was $0.7 million this quarter an improvement of 80% year-over-year. Non-GAAP operating income turned a positive for the first time at $0.3 million compared to a non-GAAP operating loss of $2.8 million last year.
Net loss for US Fintech was $0.6 million in the first quarter of 2019 compared to a loss of $2 million in the first quarter of 2018. Our net loss of $0.6 million this quarter was primarily due to a $1.9 million foreign currency exchange loss we let out as other expenses.
Let me elaborate a little bit more on this FX loss. As of now we book majority of our revenue and high assets in entity. Under New Zealand regulation financial reporting needs to be in local currency, which is New Zealand while most of our revenue had asset inflows settled in US deal Hong Kong dollar on a daily basis. So when our New Zealand prepares local financial reporting on a monthly or quarterly basis there will be difference due to different exchange rate when revenue and the net asset output and when recording is done.
So in the first quarter New Zealand dollar has been gradually raising against the US dollar and Hong Kong dollar. So we book this difference as a FX loss, there was no FX transaction took place and no cash loss. It’s just a pure accounting to be considered a difference between our consolidated book and local book and our non-GAAP new income was $0.3 million this quarter as compared to the $1.2 million non-GAAP net loss in the first quarter of 2018.
So to summarize we are satisfied with our progress in the first quarter. Revenue mix is more balanced, new accounts with deposits showed a steady gross quarter-over-quarter and year-over-year and a total client asset also grew at a fast pace. We are confident now as execute strategies laid out in earlier remarks we can deliver good growth for 2020.
This concludes our prepared remarks. Now we can open for questions.
[Operator instructions] Your first question comes from the line of out leaving again from Lesley Liu from HSBC. Please ask your question.
Thanks management. I have three questions today, first one is that why is our trading volume down Q-on-Q but commission income up Q-on-Q and second question is about liquidity and risk management, could management share with us liquidity situations and also the margin call situations especially during this month.
And third question is about competitive advantage. So what’s the competition strategy for us as we have seen that a lot of internet brokers for overseas securities trading recently have spread enough in China and also invested by some internet companies quite a lot of apps are joining this completion. So what do you think is our competitive advantage compared to all these competitors, thank you.
Thanks Lesley, I will answer your question number one and number two then Tianhua will answer your question numbers three. So let me answer your second question first, what’s the liquidity issue our wholly managed risk. So we have realty I will say very prudent margin policies. So we do have a team of risk managers to monitor crises positions especially during this volatile time.
So to answer questions there was no margin call or any principal losses we have experienced so far. We will keep exercising our output and strategies going forward to make sure of this volatile market backdrop we’re not going to suffer any losses in those spaces.
And to answer your first question the trading volume differences and commission, the blended commission, so at TIGR we do have a lot of people treating futurists and also a lot of people treating equities. So if you just used overall trading volume to cultivate a blended commission, I think sometime it’s getting more volatile. It’s not really a good indicative commission of how we operate our business. So we give you the pure cash equity commissions which means it’s more stable.
So the reason increased from 5 Bps in first quarter 2018 to 8 Bps in fourth quarter 2019 is because in the US we charge by shares and in first quarter 2019 there are people treating more in low dollar among shares which means even though the total volume looks lower but actually there are more shares to be treated. So that’s our cash equity commission has gone up from 2018 of first quarter.
Let me just quickly translate. So the brokerage business has been around for a long time and same as the reason we started our business six years we think as there are a lot of areas we can improve and there are a lot of leasing we can do. So compared to other internet brokers especially those new start up, first of all TIGR has a lot of licenses for example in the US in Australia, Singapore, New Zealand and it took a while — will take a while for those newcomers to get relevant license and knowledge and knowhow how to run those broker dealer business. So that’s one differentiator we have.
The second differentiator is most of those online brokers especially China online brokers, they don’t have US self clearing license and they cannot clear trades by themselves. That’s the reason we acquire Marsco, we hopefully can be able to self clearing the US. Once we become self clearer it can create a huge barrier of entry because we are already building the infrastructure of brokers from bottom up and this will take a long time and for the newcomers to catch up.
But first thing is on the product offering is want we want to do is to enhance user experience with different type of product offering. So TIGR apparently their IPO subscription for Chinese ADRs and typically retail investors they most likely will get most allocation from TIGR. During the past year we participated in those high IPOs and PDD and also give us a competitive edge in terms of how we offer differentiated product to retail investors.
And also we have those front loads and cash products in those and our wealth management product. It’s also allows us to try to have a comprehensive product offering to enhance user experience. So combine those three points together I think there will always be competition but I think these are the differentiating factors to consider us apart.
Your next question comes from the line of Daphne Poon of Citi. Please ask your question.
So also three questions from my side. The first one is regarding the other revenue. So there is big jump in the fourth quarter, it will then bounce back because of the IPO subscription but can you just help us break down into how much it’s from different category just when the IPO on the regulators and also how much is from the interest income on the bank deposit and whether you see that from other revenue would be sustainable going forward.
And the second question is regarding the current rate cut cycle. Have you done any investment fee analysis on what will be interest on your earnings and whether that will affect the pricing on your margin loans as well and the last question is about regarding the recent coronavirus situation, I am actually wondering like whether that has benefit you in terms of your new growth and also your turnover because we understand that from some of your peers and also from the Chinese investors that the trading accuracy some are pick up points that during this entire offering. So just wanted to get sense of the trend you see in two months.
Thanks Daphne. So let me answer your question two first, then Tianhua will answer your question three and for number one Tianhua and I will split because I think that’s two questions actually in question number one. So in terms of the rate cuts I think your question is how is that going to affect our business right. So the rate cut on the liability side because we don’t have much there on loan.
So it doesn’t help us to reduce any funding cost but going forward way and looking at opportunities to put on that because when if the liquidity is cheap as much as we can generate decent return spread and that’s something we will consider.
And for the first quarter, I think it’s still okay interest income. Starting from second quarter, we will wait and see because right now a lot of banks the vary their interest rate to zero and also our partners may our clearing brokers partners, they also loaded their interest rate to zero.
So if you just look at the second quarter it could have an impact on our interest generating income, but how big is the impact is yet to see because we just started the zero interest rate cycle, but still is some competitors offer interest rates above zero. So we will efficiently allocate our cash or our client assets to make sure we can generally return valuable cash.
To your first question in the other revenue section I will say IPO related is more than 80% I will say 85% of the composition, the rest of it 10% to 15% is from interest income of the bank deposits and I will let Tianhua answer your question how sustainable is the other revenue and also your third question about the coronavirus how does it impact our trading volumes.
All right. Let me translate the other revenue sustainable part first. So what Tianhua mentioned is still right now the pipeline is very strong. Even some of those nine potential usurers the laser timetable due to the virus. Their intention is trying a way out working with a lot of them to help them with preparation because we are a Fintech company. So right now we do a lot of NPR and road show for those guys to help them to manage their IPO timetable. So we think the pipeline is very strong and we still think the business going forward can generate decent returns.
Okay. So just briefly recap what Tianhua mentioned is right now the coronavirus caused a lot of volatility in the market especially in the US market. So the volatility first of all give us — give people multiple interested and got their attention to invest in the US market and give people the two way opportunities they can show. So given TIGR’s reputation in this in US market it actually help us to generate more accounts with deposits and also help us to generate more customer trading volume. So it surely does help our treating patterns and our brokerage business.
Your next question comes from the line of Han Hui of CICC. Please ask your question.
First congratulations on the strong quarter. I have two questions. First about the fund more, could you introduce more on the new business and what kind of degree do we plan to recharge the investors as they found maybe the possible fee rates compared to the peers. And secondly about the [indiscernible] acquisition, we have 11,000 new customers with deposits in the fourth quarter and how many of them were from the mainland China and other from divisions.
So do you have any guidance on the customer acquisition in the coming year as we are at the recent location as we try to do more international business?
Okay. So to answer your first question Han regarding the Fund Mall, so the rational we are doing Fund Mall is traditionally TIGR has a lot of customers, they like to treat themselves, but we also have a lot of customer who don’t really know what to buy. So we don’t have mutual fund products on our platform to give people more choice and we also diversify our product offering from active trading to passive trading. So we can capture all the leads of our customers.
So how we’re going to make money is we’re going to make that work with our partners on selling and also on fund administration fees. In terms of customer acquisition so going forward once we — our operating is fully in Singapore, US, Australia we target to have over a year by this year at least 10% of our dealer concept come from international new clients and also one thing to mention is we hope our ESOP also accounts for 20% of the deal clients on a yearly basis.
And may I have a follow-on question on the AUM of our cash plus product going to be?
Okay. So our cash products by AUM right now is still relatively small like USD25 million at this moment. Whereas recently it has been growing pretty decent because the seven days return given the volatility has been pretty attractive daily. That’s one part is managed by our inhouse asset management team.
Your next question comes the Lesley Liu from HSBC. Please ask your question.
Hi just follow-up question on the cash plus product, it’s now the extremely rate environment, do we see any margin pressure for this product and also just wondering the latest update of Hong Kong license was the obstacles that we are facing for aside for that.
So to answer your first question on the cash plus we don’t have any margin pressure because I first of all it’s not divert and also we are invest in very liquid products that make TPOs and other fixed income. So, so far we don’t have any margin pressure.
And your question regarding the license, we don’t really come under license but I think you can follow our release once we have something to publish.
There are no more further question at this time. I would now like to hand the conference back to today’s presenters. Please continue.
Hello this is Clark. I’d 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.
Ladies and gentlemen, this concludes our conference for today. Thank you for participating. You may now all disconnect.