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Edited Transcript of TIGR.OQ earnings conference call or presentation 23-Aug-19 12:00pm GMT

Q2 2019 UP Fintech Holding Ltd Earnings Call

Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of UP Fintech Holding Ltd earnings conference call or presentation Friday, August 23, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clark S. Soucy

UP Fintech Holding Limited - VP of Strategy

* John Fei Zeng

UP Fintech Holding Limited - CFO

* Tianhua Wu

UP Fintech Holding Limited - CEO & Director

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Conference Call Participants

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* Judy Zhang

Citigroup Inc, Research Division - Research Analyst

* Lesley Liu

HSBC, Research Division - Analyst, Infrastructure and Industrials Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the UP Fintech Holding Limited Second Quarter 2019 Earnings Conference Call. (Operator Instructions) 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.

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Clark S. Soucy, UP Fintech Holding Limited - VP of Strategy [2]

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Thank you, Grace. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's 2019 second quarter earnings release was distributed earlier today and is available on our IR website at ir.itiger.com as well as GlobeNewswire services.

On the call today from UP Fintech are Mr. Wu Tianhua, Chairman and Chief Executive Officer; Mr. John Zeng, Chief Financial Officer; Mr. Huang Lei, CEO of U.S. Tiger Securities; and [Mr. Kenny Xiao], our Financial Controller. Mr. Wu will give an 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 follow 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.

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Tianhua Wu, UP Fintech Holding Limited - CEO & Director [3]

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(foreign language)

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Clark S. Soucy, UP Fintech Holding Limited - VP of Strategy [4]

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I will now translate for Mr. Wu.

[Interpreted] Hello, everyone, and thank you for joining our second quarter 2019 earnings conference call. I am delighted to report that in the second quarter, Tiger 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 recognized 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 comprised corporate services, such as ESOP and IPO distribution among others, grew twelvefold over the same period last year. I am proud to report that in the second quarter, Tiger 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 USD 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 U.S.A. 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 Tiger's strong fintech capabilities, over the next 6 to 12 months, we will unveil new products for our customers and we'll use the self-clearing license to improve our profitability.

Another notable development is that our U.S.A. subsidiary also acquired membership of the National Futures Association, giving it the capability to provide futures trading services to U.S.A. customers. In Asia, our Singapore subsidiary obtained a Capital Markets 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 allowed our customers to start streaming U.S.A. 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 2-week intervals, we also upgraded our Tiger community interface with new educational resources to increase our customers' understanding of investing in global markets. These efforts are already showing promising results with the customers trading a greater percentage of U.S. equities that are not Chinese ADRs. Of the 25 most traded U.S.A. 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 investor 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.

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John Fei Zeng, UP Fintech Holding Limited - CFO [5]

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Thanks, Tianhua and Clark. Hello, everyone. Let me go over Tiger'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%, 1-9-0, from the same period last year due to higher margin trading and securities lending activities.

Other revenue, which comprise our 2B business such as IPO distribution and the ESOP, increased twelvefold to $1.6 million year-over-year, solidifying Tiger's leading position in U.S. IPO distribution and ESOP management for corporate issuers. Helped by all segment growth, 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 display 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 6 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 onetime share-based expense of $32 million recorded in 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 a 21% increase of occupancy expense this quarter to USD 800,000.

Execution and clearing expense increased 16x this quarter, interest expense increased from 0 to $1 million, both increases are due to a more consolidated account customer this quarter.

Communication expense was $1.7 million, increased by 96% from second quarter last year, as we are offering more data services such as 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 and then we can yield better ROI.

SG&A increased 9% to $1.9 million due to increase in headcount and the professional service fee.

To summarize, comparing with same quarter last year, total costs, excluding share-based compensation, increased by 25%, while top line grew 88% during the same period, which translates to a strong improvement in our bottom line. On 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 USD 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 may 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is coming from the line of Judy Zhang from Citibank.

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Judy Zhang, Citigroup Inc, Research Division - Research Analyst [2]

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This is Judy from Citi. I have 2 questions. The first question is, we have seen 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 rates 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 a breakdown by country and by type of securities? And also, what is the driver for the weakness in this quarter?

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John Fei Zeng, UP Fintech Holding Limited - CFO [3]

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

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Judy Zhang, Citigroup Inc, Research Division - Research Analyst [4]

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

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John Fei Zeng, UP Fintech Holding Limited - CFO [5]

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Okay. So let me answer your first question regarding margin balance. So as you know, so the margin balance, we have -- so 2 type of accounts: one is like fully disclosed account, which the balance is not on our book; second, I'll give you the number of the balance of the margins on our book, is about like USD 40 million. Okay, that's the balance on our book. So overall, we have more -- we can drive more interest out of our own margin balance, and we expect the margin balance will keep growing as we have more consolidated account, new customers coming forward. So the net interest margin, let me just give you a rough estimate, I will say for consolidated accounts, it's about like 2% to 4%. It depends on the user type. And for the FD accounts, the net margin was much lower, I will say, it's about like 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 the market volatility actually came down in the second quarter. So the total U.S. equity trading volume, if you look at the CBOE data, it's actually down from the first quarter. So our company experienced the similar trends in terms of client trading activities. But still, we are able to optimize our operation to drive like higher commission, blended commission rates because last year, we had to sign promotion programs which expires, so our blended commission rates raised up -- came up higher versus the first quarter. That's the one of the reason behind the increase in gross commission.

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Judy Zhang, Citigroup Inc, Research Division - Research Analyst [6]

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Okay. And how about the second question?

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John Fei Zeng, UP Fintech Holding Limited - CFO [7]

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Sorry. Judy, what's your second question?

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Judy Zhang, Citigroup Inc, Research Division - Research Analyst [8]

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The breakdown of the trading volume by country and by different type of securities in second quarter? And what is driving the weakness in the trading volume in the second quarter?

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John Fei Zeng, UP Fintech Holding Limited - CFO [9]

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

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Judy Zhang, Citigroup Inc, Research Division - Research Analyst [10]

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Yes. Yes.

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John Fei Zeng, UP Fintech Holding Limited - CFO [11]

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Yes. So like I just mentioned, the -- overall, the market volatility, if you look at the VIX volatility, actually came down in April and June. It came back a little bit in May. But overall, the market activities at least on our platform are 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 also, U.S. product, our USD product, 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 had the most, then followed by Hong Kong HKD product as the second, accounts for like slightly above like 15%.

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Judy Zhang, Citigroup Inc, Research Division - Research Analyst [12]

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15% for the Hong Kong dollar-denominated products, right?

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John Fei Zeng, UP Fintech Holding Limited - CFO [13]

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Yes. Something like this, above 15%.

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Judy Zhang, Citigroup Inc, Research Division - Research Analyst [14]

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Okay. And also, how about the breakdown by different type of securities like futures, equities, et cetera?

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John Fei Zeng, UP Fintech Holding Limited - CFO [15]

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

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Operator [16]

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Next question comes from the line of Lesley Liu from HSBC.

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Lesley Liu, HSBC, Research Division - Analyst, Infrastructure and Industrials Research [17]

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This is Liu from HSBC. And I basically have 3 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 commission?

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, 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're going to continue to grow this business?

And third question is about other revenue because as our CEO just mentioned that the other revenue is basically from IPO subscription fee. So how are we going to compete with other investment banks in terms of the IPO subscription business? And is our strategy like role-pricing strategy for this business? And how important is our 2B business compared with our 2C business?

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John Fei Zeng, UP Fintech Holding Limited - CFO [18]

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Sure. Giving thanks for the questions. So let me answer your first 2 questions. Then I will let Tianhua to answer your third question in Chinese and I will do a quick translation. So for your first question regarding the volume and commission, so it is similar to the question Judy asked a little bit earlier. So trading volume actually slowed down a little bit because the market activity slows down. So the activities also slowed down a little bit on our platform. In terms of the increasing trading -- the commission rates, first of all, we had some discount program over last year and it was expired. And also, like for this quarter, we saw a little bit higher 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 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 margin balance is holding at our clearing partners. But going forward, once our consolidated account keeps growing, we will have more margin balances on our book and then we can churn out more revenue from those margin balance.

I will let Tianhua answer your third question regarding our 2B business and how we compete with other investment bank and what's the strategy to we playing in the 2B business.

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Tianhua Wu, UP Fintech Holding Limited - CEO & Director [19]

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(foreign language)

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John Fei Zeng, UP Fintech Holding Limited - CFO [20]

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Okay. Let me just do a quick translation, the third question.

[Interpreted] So in terms of other revenues, the reason we participated 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 Tiger, 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 I view this 2B business? It's a very important segment of our future growth because with the corporate issuers, we can provide them with very solid demands and also, we can provide them with IR and the PR services, and we also have a very active online community to share 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, the traditional ESOP offered by some, I would say, last-generation companies, those ESOP providers are, first of all, relatively more expensive and their softwares are not that easy to use. So we see this is good opportunities for us to tap into, and we combine ESOP and the IPO services together to offer as a complete package to the corporate issuers, that's why you can see Tiger has been growing really fast in these segments.

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Operator [21]

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(Operator Instructions) Next, we have the follow-up questions from the line of Judy Zhang from Citibank.

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Judy Zhang, Citigroup Inc, Research Division - Research Analyst [22]

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I have another 2 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?

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John Fei Zeng, UP Fintech Holding Limited - CFO [23]

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Hi, Judy. So first of all, on how many clients are our overseas clients. So, so far, given our overseas expansion just started, we just got all the license in place. So, so far, for this quarter, we don't see -- I would say, majority of our clients are still the PRC clients. But for the next 2 or 3 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.

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Operator [24]

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(Operator Instructions) Ladies and gentlemen, this is the end of the question-and-answer session. I would -- we would now conclude today's conference call. Thank you for participating. You may now disconnect.

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John Fei Zeng, UP Fintech Holding Limited - CFO [25]

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Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]