Q2 2023 UP Fintech Holding Ltd Earnings Call
Participants
Aron Lee; Head of IR; UP Fintech Holding Limited
Fei Zeng; CFO & Director; UP Fintech Holding Limited
Tianhua Wu; Chairman & CEO; UP Fintech Holding Limited
Han Pu; Analyst; China International Capital Corporation Limited, Research Division
Judy Zhang; MD & Head of China Banks & Brokers Research; Citigroup Inc., Research Division
Ling Tan; Research Analyst; Daiwa Securities Co. Ltd., Research Division
Yun-Yin Wang; Research Analyst; China Renaissance Securities (US) Inc., Research Division
Presentation
Operator
Ladies and gentlemen, thank you for standing by, and welcome to UP Fintech Holding Limited Second Quarter 2023 Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, August 29, 2023. I'd now like to hand the conference over to your first speaker today, Mr. Aron Lee, the Head of IR. Thank you. Please go ahead.
Aron Lee
Thank you, operator. Hello, everyone, and thank you for joining us on the call today. UP Fintech Holding Limited Second Quarter 2023 earnings release was distributed earlier today and is available on our IR website at ir.tigerup.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. Qingli Zhao, 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 follows their remarks.
Now let me cover the safe harbor. The statements we are about to make contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about factors that could cause actual results to materially differ from those in the forward-looking statements, please refer to our Form 6-K furnished today, August 29, 2023, and our annual report on Form 20-F filed on April 26, 2023. We undertake no obligation to update any forward-looking 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 English translation. Mr. Wu, please go ahead with your remarks.
Tianhua Wu
(foreign language)
Aron Lee
[Interpreted] Hello, everyone. Thank you for joining Tiger Brokers Second Quarter 2023 Earnings Conference Call. In the second quarter, we remain committed to the strategy of optimizing our revenue mix and expense management. Total revenue increased by 23.5% year-over-year, reaching USD 66 million. Our non-GAAP -- our net profit attributed to UP Fintech was $13.2 million, representing a turnaround from a net loss in the same quarter last year and an increase of 66% compared to the previous quarter. The non-GAAP net profit attributable UP Fintech was $15.3 million, about 4.5x in the quarter last year and a significant increase of 48% compared to the previous quarter. Non-GAAP net profit earned this quarter has already exceeded the total non-GAAP net profit for the entire year of 2022.
In the second quarter, we added 29,077 new funding accounts, bringing the total number of new funding accounts in the first half of this year to approximately 60,000. We are confident to deliver our annual guidance of acquiring at least 100,000 new funding accounts in 2023. Total number of funded accounts at the end of the second quarter reached 840,000, representing a growth of 15% compared to the same quarter of last year. In terms of total current assets, the trend of asset inflow remained strong, with net inflow over USD 1.6 billion in the second quarter.
After neutralizing the impact from mark-to-market loss, total current assets in this quarter increased by 7.1% compared to the first quarter, reaching USD 17.3 billion. Additionally, our average CAC further decreased USD 162 in the second quarter, representing a 5% decline compared to the previous quarter. This reduction highlights our success in expanding our internationalization strategy as Tiger Brokers brand gained traction among local users in Singapore through positive word-of-mouth referrals, resulting in organic traffic and cost efficiencies. Moving forward, we will dynamically [adjust] our customer acquisition strategy based on market conditions, prioritizing user quality while steadily increasing client base and profitability.
We have continued to increase our investment in research and development to enhance operational efficiency and user experience. We are delighted to announce that our TigerGPT feature after 6 months of internal testing, officially launched in July this year. It is now available for free to registered users in all the markets we entered except Mainland China. We will continue to refine and optimize the user experience of this feature. Our Hong Kong business, following our entry in the retail market in December last year, we have successfully achieved (inaudible) for the majority of Hong Kong equities in the first half of this year, help to bring down the total current expense as a proportion of commission to below 10% in the second quarter.
Additionally, we introduced recurring investment feature for Hong Kong shares in the second quarter, catering to long-term investors and those with a fixed investment budget. This makes us one of the few brokers that offer recurring investment function for both, U.S. and Hong Kong equities. We also added Hong Kong Futures in June to better serve our local clients. In wealth management business, following the introduction of a USD-denominated money market fund in the fourth quarter, we introduced a Hong Kong dollar-denominated money market fund in the second quarter, providing users with more options to manage their idle cash in the rate hike cycle.
Our [TV] business continues to perform well. In Investment Banking, we underwrote a total of 7 U.S. and Hong Kong IPOs in the second quarter. Notably, we serve as the exclusive lead underwriter for us by technology, U.S. IPO. In our ESOP business, we added 30 new clients in the second quarter, bringing the total number of ESOP clients served to 478 at the end of second quarter of 2023, increased by 31% year-over-year.
Now I'd like to invite our CFO, John, to go over our financials.
Fei Zeng
Okay. Thanks, Tianhua and Aron. Let me go through our financial performance for the second quarter. All numbers are in U.S. dollar. Total revenues were $66.1 million this quarter, flat quarter-over-quarter and increased 23.5% year-over-year, primarily due to a 146% jump in interest-related income versus same quarter for last year. Cash equities take rate was 6.3 bps this quarter, remain unchanged from the last quarter. Within commission revenue, about 60% comes from cash equities, 30% from options, and the rest comes from Futures and other products. Now on cost. Interest expense was $10.4 million, increased by 195% from the same quarter of last year as interest expense and securities lending expense both increased in line with the rate hike.
Execution and clearing expenses were $2 million, decreased 47% from the same quarter of last year, primarily due to more efficiency in self-clearing for U.S. and Hong Kong securities. Employee compensation and benefits expense were $23.9 million, a decrease of 7% year-over-year due to a onetime expense we incurred last year when restructuring our ESOP business. Actual headcount increased year-over-year as we keep adding people to support our global expansion. Occupancy, depreciation and amortization expense slightly increased 2% to $2.5 million due to an increase in overseas office space and (inaudible) improvements. Communication and market data expense were $7.8 million, an increase of 8% year-over-year due to the increase in user base. Marketing expense were $4.7 million this quarter, decreased 44% year-over-year.
Average CAC dropped 5% quarter-over-quarter from $171 to $162 as we didn't see market condition in the second quarter was suitable for major marketing campaigns. We will dynamically adjust our marketing strategy based on the market sentiment in different regions. General and administrative expense were $4.5 million, a slight increase of 5% year-over-year. Total operating costs were $45.5 million, decreased 12% from the same quarter of last year. As a result, both, GAAP and non-GAAP, bottom-line increased year-over-year. GAAP net income turned positive to $13.2 million versus a GAAP net loss of $0.9 million in the same quarter of last year. Non-GAAP net income was $15.3 million, at about 4.5x higher compared to the same quarter of last year.
Now I have concluded our presentation. Operator, please open the line for Q&A. Thanks.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Han Pu from CICC.
Han Pu
(foreign language)
[Interpreted] This is Han from CICC. Congrats on the strong quarter results. I have two quick questions. Firstly, could you please provide the regional breakdown of new funded accounts in the second quarter? Secondly, could you please give us more recent updates on the Mainland regulation requirements?
Tianhua Wu
(foreign language)
Aron Lee
[Interpreted] For your first question, in the second quarter, around 45% of newly funded accounts came from Singapore, nearly 25% from Australia and New Zealand, about 20% from the U.S. and above 10% from Hong Kong. After (inaudible) announcement on December 30 last year, Tiger Brokers made prompt response and comprehensive efforts to comply with the regulatory requirements set forth by the CSRC. Subsequently, the Beijing Securities Regulatory Bureau conducted an on-site inspection for a week before the Chinese New Year. During that time, we provided the regulators with our remediation plan and related reports.
We have maintained good and direct communication with the regulatory authorities throughout the period and have received clear guidance on certain special scenarios for PRC passport holder to open new accounts with us. For example, allowing PRC passport holders, who work or live overseas to open accounts and permitting the transfer or opening of new securities accounts for users from other brokerage firms. Recently, in mid-July, we submitted the final remediation report for the CSRC in accordance with regulatory requirements. Subsequently, in mid-July, the regulator authorities conducted an on-site acceptance inspection based on our remediation report. Thank you.
Operator
Our next question comes from the line of Judy Zhang from Citi.
Judy Zhang
(foreign language)
[Interpreted] This is Judy Zhang from Citi. I have two questions. The first question is after TigerGPT was removed from app store, how do you think asset outflow are loading onshore investors? How do you think the long-term impact on the existing onshore investors trading activities and segment? And second question is regarding Hong Kong market strategy. How do you think you can gain market share in the very competitive Hong Kong market? And how this is going to impact the company's like cost like for this year and going forward?
Tianhua Wu
(foreign language)
Aron Lee
[Interpreted] Okay. So I'll take your first question and our CFO, John, will take your second question. About your first question, we've been aware of concerns in the market regarding the overall user comp in Mainland China with almost no incremental growth and gradual loss of our existing users. However, based on our data from the first half of this year, we have confidence in the retention of our clients in Mainland China. In terms of user retention, the overall retention rate for users with assets as well as the retention rate for Mainland China users in the first half of this year has remained above 99%. Regarding client cash flow, Mainland Chinese users have shown a trend of net asset inflow in both, of the fourth quarter and second quarter of this year. Besides, there has been no significant change in the trading activity of Mainland users, indicating that our existing clients have (inaudible) understanding regarding recent events at December 30 of last year and their trading velocity and trust in Tiger Brokers has not changed.
Fei Zeng
(foreign language)
[Interpreted] So from a user acquisition perspective, Hong Kong accounts for more than 10% of the newly acquired user in the second quarter, up from low single digits in the first quarter. We will keep investing in branding to build our corporate image in Hong Kong, so we can reach out to more potential Hong Kong users. From a product perspective, first of all, we offer one of the most competitive pricing. We don't charge commission and a platform fee for Hong Kong trading, and we don't charge commission for U.S. equities (inaudible). We also on the first -- one of the few brokers that offer recurring investment for both, U.S. and Hong Kong trading, and have USD and Hong Kong money market funds to help our users manage their liquidity. And in terms of infrastructure, we are fully self-clearing for Hong Kong equities, which brings down group's total clearing expense to below 10%. Our proprietary system also allows us to offer differentiated services such as fractional share at (inaudible) portfolio by powerful U.S. and Hong Kong trading. Thanks.
Operator
Our next question comes from the line of Cindy Wang from China Renaissance.
Yun-Yin Wang
(foreign language)
[Interpreted] This is Cindy from China Renaissance. So I have two questions. First question is related to customer acquisition costs. So customer acquisition cost in the second quarter was USD 162, which is at a relatively low level. How do you lower customer acquisition costs? And what's the strategy for customer acquisition cost to customer acquisition strategy to going forward?
The second question is: Tiger's non-GAAP net profit has turned positive for the 5 consecutive quarters. So together with high interest rate environment, the non-GAAP profit margin is also expanding. Does that mean Tiger has reached the inflection point from breakeven to profitability?
Tianhua Wu
(foreign language)
Aron Lee
Okay. Your first question about the CAC. In the second quarter, the average CAC was $162, which was further decreased compared to $171 in the fourth quarter, reaching historically lower level. In the second quarter, we pay very close attention to class quality and payback period, and we will not jeopardize our client's quality and risk ROI ratio merely for the number of funded accounts. With the underperformance of Chinese ADRs and Hong Kong technology names in the second quarter, our clients experienced some mark-to-market losses. However, strong net asset inflows still led to a 7.1% increase in total client assets compared to the previous quarter. This indicates that we have maintained good customer quality while reducing the average CAC. Furthermore, if we look at the average CAC from newly acquired clients through advertising channels in the second quarter, their average CAC is more than twice the overall average CAC. This demonstrates that we have gradually gained more organic traffic from overseas regions and can save us some customer acquisition costs. Thank you.
I'm glad to see our non-GAAP net profit reached USD 50 million in the second quarter, which is the highest quarterly net non-GAAP profit in the past 2 years. Looking back at the early stage of the interest rate hike cycle, during reduced market activities, we experienced some quarterly losses. However, through optimizing interest income and product capital deployment, we gradually improved our profitability. Over the past few quarters, our net profit margin has been expanding, indicating a robust and healthy business model for the company. Given most of our costs are relatively fixed and tied to market activities, we believe that if we can better penetrate in Hong Kong, Australia and New Zealand markets, or if there is an overall improvement in the market backdrop, we can enjoy more operating leverage, which leads to more stable profit margins. So to answer your question, assuming there is no extreme market swings, we should be in the [black] in terms of profitability. Thank you.
Operator
Our next question comes from the line of Ling Tan from Daiwa Capital Markets.
Ling Tan
(foreign language)
[Interpreted] This is Ling from Daiwa. I noticed that the USD 7.8 billion other nonoperating income under the P&L, can management provide more color in terms of the breakdown of the nonoperating income, and is it sustainable in the next few quarters?
Fei Zeng
(foreign language)
[Interpreted] So about half of the other income comes from FX gain due to USD appreciated -- U.S. dollar appreciation against other currencies this quarter. So this far is a pure accounting item. The other part of the other income actually comes from our treasury management. As you can see from our balance sheet, our financial (inaudible) balance has increased quarter-over-quarter. So we are doing (inaudible) management. We are investing some of those monies into U.S. short-term bonds. So we think this kind of interest income will be sustainable for the next few quarters. Thanks.
Operator
I'm showing no further questions. Thank you very much for all your questions. I'll now turn the conference back to Mr. Aron Lee for closing comments.
Aron Lee
Thank you, operator. I would like to thank everyone for joining our call today. I'm now closing the call on behalf of the management team here at Tiger. We do appreciate your participation in today's call. If you have any further questions, please reach out to our Investor Relations team. This concludes the call, and thank you very much for your time.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
