UP FINTECH HOLDING LIMITED SPON ADS EACH REP 15 ORD SHS CL A (TIGR) Q2 2020 Earnings Call Transcript

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UP FINTECH HOLDING LIMITED SPON ADS EACH REP 15 ORD SHS CL A (TIGR -0.89%)
Q2 2020 Earnings Call
Aug 18, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the UP Fintech Holding Limited second-quarter 2020 earnings conference call. [Operator instructions] I must advise you that this conference is being recorded today, Tuesday, August 18, 2020. I would now like to hand the conference over to your first speaker today, Mr. Clark S.

Soucy. Thank you. Please go ahead.

Clark S. Soucy -- Vice President of Strategy Department

Thank you Ralph. Hello everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's second-quarter 2020 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 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 statement. 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 18, and our annual report on Form 20-F filed on April 29, 2020. We undertake -- excuse me, we undertake no obligation to update any forward-looking statement, 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 -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

Good day everyone, and thank you very much for attending the Tiger Brokers 2020 second-quarter earnings conference call.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

We saw moderated market volatility in the second quarter, but our users remained very active which fueled our strong growth this quarter. Total revenue exceeded $30 million, a 122% increase on the same period last year. This marks the second quarter this year when revenue growth exceeded 100% on a year-on-year basis. Our operating efficiency and earnings quality keep improving.

We achieved consecutive quarters with GAAP profits. In the second quarter of this year, our company reported operating income and non-GAAP operating income of $5.1 million and $6.8 million, respectively. Please refer to our Form 6-K furnished today, August 18, for a reconciliation of non-GAAP financial measures to GAAP financial measures.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

Our improving financials are dependent on the trust and goodwill of our users. As Tiger continues to grow our business and our brand as well as provide more differentiated services, more people entrusted us with their money. In the second quarter, we added 33,800 new accounts with deposits, a new quarterly high for our company. And total accounts with deposits increased 76.7% from the same quarter last year.

We saw strong inflows this quarter. Total client assets reached a new high of $8.3 billion, 133% higher than the same period last year and a 51% increase on the previous quarter. I expect, with high-growth in client numbers and client assets, Tiger will keep delivering good financial performance in the near future.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

While brokerage is of course our core business, investment banking, ESOP and our internationalization efforts continue to develop nicely. Our U.S. and Singapore businesses are on the right track. They are expanding our customer acquisition channels while diversifying our revenue streams.

In addition, we completed our self-clearing infrastructure setup and gradually started to self clear U.S. equities.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

Thanks to our growing influence in capital markets as well as our strong retail and institutional client base, our investment banking business continues to grow rapidly. In the second quarter, Tiger participated in eight U.S. IPOs. Recently, we also served as an underwriter for Li Auto, solidifying our No.

1 position as the most active ADR underwriter in terms of deal count. We were also active in high-profile Hong Kong IPOs. In the second quarter, we were a joint book runner for NetEase's Hong Kong listing which demonstrates Tiger is an indispensable partner for Chinese companies looking to enter global capital markets.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

In the past half year, our ESOP business has grown rapidly. We have invested heavily in this system to gradually improve its functionalities. This system now supports complex plans that span multiple countries and corporate entities. In the second quarter, I am proud to report that we added 16 ESOP customers.

In the first half of this year, over 50% of Chinese ADR issuers have chosen Tiger's ESOP system. We look forward to continuing to grow our dominant market share and are resolute in our conviction that our outstanding service and comprehensive capabilities will attract more clients to our ESOP system.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

With regards to our wealth management business, at the end of the second quarter, we unveiled our proprietary fund analysis system that assist clients analyze the rich range of investments available on our Fund Mall which presently features over 100 mutual funds from distinguished global asset managers.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

Finally, I would like to provide an update on our share repurchase program. From April 1 to August 17, we, in total, repurchased 700,000 ADS for an approximate consideration of $2.2 million.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

Clark S. Soucy -- Vice President of Strategy Department

I would now like to invite our CFO, John, to go over our financial results.

John Zeng -- Chief Financial Officer

Thanks, Tianhua and Clark. So as mentioned earlier, second quarter was a strong quarter in terms of both operating and financials with favorable market backdrop, increased user base and trading activities, commission revenue went up 170 -- 178% year over year to $18.8 million this quarter. Interest-related income which combines financing service fee and interest income went up 69% year over year to $8.8 million, thanks to increased margin trading and securities lending activities. Other revenue also increased 54% year over year to $2.5 million primarily due to more IPO underwriting.

Total revenue were $30.1 million, up 122% from same quarter last year, taking our interest expense of $1.9 million. Total net revenue were $28.2 million, an increase of 125% from same quarter last year. Now, switching to cost. So execution and carrying costs were $2.9 million, increased almost four times year over year as we have a much bigger user base and increased trading volume.

Compensation expense increased 39% year over year to $11.3 million. Taking our share-based compensation, the cash portion of compensation expense increased 36% year over year. The increase was due to -- we keep adding accounts into key positions to support the rapid growth of our business. Marketing expense increased 48% year over year to $2.9 million this quarter as market backdrop remains favorable for user acquisition.

We likely will keep investing in marketing in the second half. Occupancy, depreciation and amortization increased 42% to $1.1 million. SG&A increased 43% to $2.8 million. Both increases are in line with our business expansion.

Total operating costs were $23.1 million, an increase of 52% year over year. Operating income which is a key metric we focus on internally, increased to $5.1 million this quarter, a significant improvement from negative $2.6 million in the same quarter last year and $1.9 million in the first quarter of this year. Net income attributable to our fintech was $1.1 million compared to a net loss of $1.9 million in the same quarter of last year. One thing I want to elaborate is our effective tax rate of 49% this quarter looks very high.

The reason is while we started to make profit on a consolidated group basis, some of our subsidiaries still don't have profit, so deferred tax assets accumulated as those entities cannot apply it. We expect our effective tax rate to gradually go down as most subsidiaries will make profit and our parent apply deferred asset benefits. That's it for the management presentation. We are now open for questions.

Questions & Answers:

Operator

[Operator instructions] And your first question comes from the line of Daphne Poon from Citi. Your line is now open.

Daphne Poon -- Citi -- Analyst

Hi management. Thanks for taking my question. So my first question is about your commission rate. So we see a meaningful increase in terms of your net commission rate in the second quarter to about 3.4 basis points.

So just can you explain the reasons behind? And what's the outlook going forward? And also, in terms of your new customer growth, we have seen some very strong momentum year-to-date. Just wondering if it's possible to give some color on your full year -- your customer growth outlook or maybe the run rate in the third quarter so far. And also lastly, I want to check on your overseas market expansion. So we understand you're tapping into, for example, the U.S.

market and also the Singapore market since beginning of the year. So just wondering if you can share any progress there, for example, the number of new clients and also the -- maybe the current asset contribution. Thank you.

John Zeng -- Chief Financial Officer

Right. OK. Daphne, let me answer your first two questions regarding the commission rate and also the new customer growth. Then I will let Tianhua to answer your question regarding the offshore international expansion.

OK. So our commission rate of -- in the second quarter, actually, our commissioning has been gradually increasing by -- for the first two quarters this year. I think the main reason is, now first of all, there are more people trading. Second thing is now there are some -- people are trading more diversified product.

So instead of trading U.S. equities, we have also a lot of people trading U.S. options which relatively is the higher -- obviously, higher margin product for us, so that's why you can see the blended commission rate also goes up. OK.

So that's the reason for -- that's the answer for the first question. Then for the second question is, now unfortunately, I cannot give you a very clear guidance in terms of the total customer growth this year. The reason is because NetEase, our international expansion just started. So U.S.

started last -- fourth quarter last year, and Singapore started this year. So for those two regions, so far, the growth has been pretty positive. But right now, I still don't have the full grasp on either growth potential, so I cannot give you a very clear guidance. But I can share with you the momentum is pretty strong.

So I will let Tianhua to answer your third question.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

John Zeng -- Chief Financial Officer

Right. In terms of international expansion, so, so far, I -- we see very promising growth out of U.S. and Singapore. So now if you average them up by the international new user or preexisting accounts for more than 10% of our quarterly user growth.

But in June, the new user growth in the offshore region is actually grow much faster than the April composition. So overall, we are very positive on the international expansion. I think we have a good brand and also user experience and our product offering in those regions. So we are really very positive on the growth prospect.

Daphne, do you have other questions?

Daphne Poon -- Citi -- Analyst

Yeah. Actually, if I may, can you actually share the breakdown of your trading volume like by -- given types of products? For example, what is the percentage of Series C trading accounting for your trading volume in Q2?

John Zeng -- Chief Financial Officer

Sure. So the cash equity accounts for over 50% of our trading volume. Other derivatives like futures options is probably like another 45%. That's the total composition of our trading volume.

Daphne Poon -- Citi -- Analyst

OK, understood. Thank you.

John Zeng -- Chief Financial Officer

Thanks.

Operator

[Operator instructions] And your next question comes from the line of Yadi Lee from CICC.

Unknown speaker

Hello, management. So first, a congrats to impressive financial performance for this quarter and thanks for giving me the chance to ask these questions. So after reading your financial performance, I think I've got three questions for you today. So first of all, I saw the number of accounts with deposits increased by 33,800 this quarter.

And I was wondering if you can share with us more information on the geographical distribution of this number. So what are the specific percentages of this number that are for Mainland China, Hong Kong and other regions, respectively? And secondly, I saw you gradually started to use Marsco Investment Corporation to do the self-clearing. So I was wondering, what is the percentage of transactions are using the self-clearing for right now and what the percentage will be in the future and for the rest of the year? And at the last, I have one follow-up question for the previous question about the internalization -- about your international business. So earlier, I saw on the news release that you got five more U.S.

licenses. So could you please share more information on how you will plan to use these licenses to expand your businesses in United States and how you will view or position your U.S. business sector to the development of your whole company? That's all. Thanks.

John Zeng -- Chief Financial Officer

[Foreign language] OK. Yeah. Thanks, Yadi. So I will let Tianhua answer your first question.

Wu Tianhua -- Chairman and Chief Executive Officer

[Foreign language]

John Zeng -- Chief Financial Officer

Right. So in terms of our new user risk deposits in this quarter, so far, still, majority comes from the PRC region, OK? But like we mentioned earlier, so our international business, even though just started a couple of quarters ago, but right now, we are seeing positive growth. So going forward, we expect more users will come outside of China. OK.

To answer your second question regarding Marsco. So as you know, we acquired Marsco back in last July. It took us a year to set up the infrastructure, get the system fully integrated, and also, we did a bunch of testing. So in the second quarter, we finished all the testing, and we just did very minimum self-clearing trades to make sure everything is in place, and we don't jeopardize any user experience.

Starting in the third quarter and fourth quarter, I think we will gradually put in more trading volume into Marsco. Exact volume percentage, it's hard to say right now, but my goal is to have about like 15%, 20% by the third quarter. And eventually, we have another 30%, 40% by the fourth quarter. That's our goal.

It depends on how the market goes and how the clearing system works from our day-to-day operation. So to answer your third question, regards to the license. Yes. So we have a really strong team in the U.S.

They are based in New York, and all the guys used to work for the Bulge Bracket firms in the states. So we got a research license, property license, NFA license recently. So what we're going to do is it's another way for us to expand our institutional business. Because right now, we carry a lot of U.S.

institutions which definitely helps us in terms of getting IPO mandates. And also, with the research license, we will be able to issue researching on those IPO deals we underwrote. So actually, we already start to issue research on Bloomberg. So if you guys can check, you guys can see the Tiger piece in terms of how we covered the Chinese ADR business and also the Hong Kong listing companies.

So I think overall, getting more license in the U.S. will definitely help us to increase our brand and also help us acquire more users, both institutional and the retail investors.

Operator

[Operator instructions] There were no further question at this time. Speakers, you may continue.

Clark S. Soucy -- Vice President of Strategy Department

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, please reach out to our investor relations team.

This concludes the call and thank you very much for your time.

John Zeng -- Chief Financial Officer

Thank you.

Duration: 31 minutes

Call participants:

Clark S. Soucy -- Vice President of Strategy Department

Wu Tianhua -- Chairman and Chief Executive Officer

John Zeng -- Chief Financial Officer

Daphne Poon -- Citi -- Analyst

Unknown speaker

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