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UP FINTECH HOLDING LIMITED SPON ADS EACH REP 15 ORD SHS CL A (NASDAQ:TIGR)
Q3 2020 Earnings Call
Nov 25, 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 Holdings Limited third-quarter 2020 earnings conference call. [Operator instructions] I must advise you that this conference is being recorded today, Wednesday, November 25, 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 Soucy

Thank you, Rovati. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's third-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 from 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, November 25, and our annual report on Form 20-F filed on April 29, 2020. We undertake no obligation to update any forward-looking statements, except as required under applicable law.

It is my pleasure to now induce 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.

Tianhua Wu -- Chairman and Chief Executive Officer

Hello, everyone, and thank you very much for attending our Q3 2020 earnings conference call. As a result of rapid growth in client numbers, as well as our strong commitment to continuous upgrade of our trading platform and services, operational and financial metrics, displayed strong improvement, in the third quarter, total revenue was $38 million, an increase of 148% from the same period last year and a record high for our firm. Operating income and net income also demonstrated healthy growth. Operating income reached $7.4 million, and net income reached $3.8 million and $5.3 million on GAAP and non-GAAP basis.

In the third quarter, we added 46,800 funded accounts, seven times the quarterly growth rate in the same period last year. And total funded accounts reached 214,700, an increase of 110% on the same period last year. I am also happy to report that on October 28, 2020, we reached a major milestone as total client accounts reached one million. This is especially notable given our five-year operating history.

Total account balance continued to grow nicely and reached $10.9 billion this quarter, a 188% increase over the same period last year. Average client assets also increased 37% from $37,000 same quarter last year to $50,000 this quarter as client numbers and assets continue to increase at a healthy pace. I am confident that our firm will continue to produce satisfactory results for our shareholders. In the past half year, our firm reached three major milestones.

First and foremost, our internationalization strategy is showing good results. Today, we have licensed subsidiaries in the U.S., Australia, Singapore, and New Zealand. Every day, we have investors from these countries choose us to open accounts and trade despite the relative scale of our firm. We are an international company that enables global clients to use one account to trade global equities in the U.S., Hong Kong, Singapore, Australia, and China through the connect programs, as well as other securities, such as futures, options, and a wide range of mutual funds, that invest in equities, bonds and currencies.

Overseas clients now account for over 20% of our newly funded accounts, and we are confident this number can increase to more than 50% in the next 12 to 24 months. Second, we have evolved from a pure discount broker to offering more comprehensive services. Presently, some may harbor the impression that we are still a discount online broker that facilitates retail clients to trade U.S. and Hong Kong equities.

Of course, this is where we were when we started our business five years ago. But as of today, our business model has evolved with brokerage as the core, augmented by strong parallel growth in institutional services, investment banking, ESOP, and our international expansion. In addition to serving our highly engaged clients, we also service institutional investors. In addition to brokerage business, we are also a tech investment bank.

Year to date, in 2020, we have served as an underwriter in 12 Chinese ADR IPOs. In Q3, we underwrote the IPOs of Lee Auto and Xpeng Motors, among others. In Hong Kong, we were also an international underwriter for New Oriental Education's Hong Kong listing. I would like to express my sincere gratitude to the aforementioned firms for placing their trust in Tiger.

It is a testament to the strength of our platform and our reputation in the market that, after commencing our investment banking business just two years ago, we have already become No. 1 in the world by deal count for underwriting Chinese ADR issuers. Our ESOP management system also continues to demonstrate impressive growth as we lower the barriers and reduce complexity for firms to adopt ESOP systems. In the third quarter, we added 23 new ESOP clients.

We expect that these ESOP clients will yield a good number of new, high-quality brokerage clients. In the third quarter, ESOP clients accounted for 12.6% of our newly funded accounts. Due to the strong rapport we have built with potential issuers, we expect to maintain our leading position and further expand our market share. Finally, we are gradually moving to self-clearing.

In July of 2019, we acquired Marsco, a licensed U.S. firm with over 30 years experience in self-clearing. This was an important milestone for our firm as we can leverage our proprietary technology to fully integrate front-end to back-end infrastructure, which strengthens our leading position in R&D and financial operations. Presently, over 10% of our users are having their U.S.

cash equity trades cleared by Marsco, as well as all new clients acquired by U.S. licensed subsidiaries. As I close my remarks, I would like to provide an update on our share buyback program. From April 1 of this year to November 24, 2020, we repurchased 695,287 ADS for an approximate consideration of USD 2.2 million.

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

John Zeng -- Chief Financial Officer

Thanks, Tianhua and Clark. Let me break down our financial performance in the third quarter. All numbers are in U.S. dollar.

Commissions were $19.5 million this quarter, up more than 200% from the same quarter last year on the back of 1.5 times increase in trading volume at accelerated user growth. Blended commission rate was 3.1 bps this quarter, increased from 2.5 bps same quarter last year but a decrease from 4 bps in the second quarter of this year. We didn't offer any discount pricing this quarter. The decrease was primarily due to the increase in trading volume.

Interest-related income increased 26% year over year to $9.8 million. Other revenue, which includes our IPO underwriting business, increased close to six times year over year to $8.8 million. We were very active in IPO underwriting, underwrote eight U.S. and Hong Kong IPOs in the third quarter, and we remain very positive on the incoming deal pipeline.

Total revenue were $38 million, up 148% year over year, another record-high revenue in our operating history. Now switching to the cost. Interest expense was $2.9 million, increased 110% year over year, primarily due to higher-margin balance. Clearing expense was $3.9 million, increased four times, in line with our user growth and the increase in trading volume.

Compensation increased 37% year over year. We keep adding headcount in key position to support our business growth. More than 50% of the salary expense comes from research and product team as we keep investing in R&D. Marketing expense was $3.7 million, an increase of 147% from last year, as we keep spending in user acquisition to take advantage of the favorable market backdrop.

As our brand becomes more popular among investors, we see more organic growth. Our funded accounts acquisition cost actually comes down quarter over quarter from last year. Occupancy expense increased 13% year over year to $1.2 million to accompany our headcount growth. Market data usage expense increased 52% year over year to support our user growth.

SG&A increased 68% due to business expansion. Total costs were $27.8 million. Operating income was $7.4 million. Net income was $3.8 million, compared to a net loss of $1.3 million last year.

Non-GAAP net income was $5.3 million this quarter, an increase of seven times over same period last year. That concludes our presentation. We are open to Q&A. Thanks.

Questions & Answers:


Operator

Thank you. [Operator instructions] We do have a first question from the line of Eric Lu from China Renaissance. Please go ahead.

Jacky Zuo -- China Renaissance -- Analyst

[Foreign language] So let me translate my question. I'm Jacky from China Renaissance, and my question is regarding the ESOP business. I've observed that we had very rapid growth of ESOP business this quarter by adding 23 new customers, which accounted for -- which actually brought 13% of new customers regarding the paying customer. So just wondering, can management help us elaborate more about our business trends and our competitive advantage in ESOP business? And what is the growth outlook for this business? Thank you.

Tianhua Wu -- Chairman and Chief Executive Officer

[Foreign language]

John Zeng -- Chief Financial Officer

OK. Let me just quickly translate. So Jacky, thanks for the question. So in terms of ESOP, this is business we're very focused.

We think it's a priority for our future growth because we think for all the new emerging companies, every company has ESOP plan. So the TAM, the potential market is super big. So that's why we want to invest a lot of resources into this business. So how we grow very fast in the past couple of years is, first of all, given we have multiple license across different jurisdictions, which give us a lot of like strength or, I would say, that leverage to serve those global companies.

For example, Xiaomi, they have employees in 20, 30 different countries, and each country has different jurisdictions, tax code. To be able to serve those people in different jurisdictions is actually a pretty complicated business. Because we have licenses in multiple locations, we will be offer customized service to service the company's needs under different jurisdictions. That's why you can see, in the past year, we pretty much dominate the ADR ESOP business.

More than 50% of the ADR issuers choose us to choose us as their ESOP provider. So I think going forward, given we are working on more cases, especially those company cases, give us a lot more experience to be able to service more future issuers. In the future, we think, from existing clients and the deal with future clients, we'll be able to add more ESOP corporate clients. And in return, it will help us to acquire more high-quality future users.

thanks.

Jacky Zuo -- China Renaissance -- Analyst

[Foreign language] Thank you so much.

Operator

Thank you. [Operator instructions] We have our next question coming from the line of Hanyang Wang from 86Research. Please go ahead.

Hanyang Wang -- 86Research -- Analyst

[Foreign language] So let me translate my questions. I have two questions. First one is regarding on the commission rate. So in my calculation, the commission rate and the margin interest rate in Q3 was down compared with Q2.

So any color on that will be helpful. My second question is about licenses. So do we have any plan to apply for the brokerage license in Hong Kong listed? And a follow-on question on the institutional clients. So how many institutional clients that we are serving now? What are the average assets that we managed for the institutional investors? Thank you.

John Zeng -- Chief Financial Officer

[Foreign language] Hanyang, so I will answer your first question on the take rate and the interest rate, then I will let Tianhua to answer the second and third question. OK. So on the take rate, like I mentioned earlier, so the thing is, right now, because the trading volume has gone up, so the blended commission rate came down. In the third quarter, our pricing is actually the same versus as in the second quarter.

So the decrease of the blended interest -- blended commission was due to the increase in trading volume. And the margin interest rate, actually, in the third quarter, there were quite a few big Hong Kong IPOs, OK? But again, our current business model, we rely our on our clearing partner in Hong Kong to provide the funding. That's why our margin -- the margin income, which is the margin -- the net interest margin was relatively low. This is something we are working on to address in the future.

Tianhua Wu -- Chairman and Chief Executive Officer

[Foreign language]

John Zeng -- Chief Financial Officer

OK. Let me -- OK. Go ahead, Hanyang. [Foreign language]

Hanyang Wang -- 86Research -- Analyst

[Foreign language] So let me translate that question. So if we compare with the inactive broker, we still serve like a small group of the institutional investors. So could you help us understand how big the market will be to serve the institutional investors?

John Zeng -- Chief Financial Officer

So Hanyang, you want to know how big is the addressable market of the -- our potential institutional investor targets, right, overall how big is the size?

Hanyang Wang -- 86Research -- Analyst

Yes.

Tianhua Wu -- Chairman and Chief Executive Officer

[Foreign language]

John Zeng -- Chief Financial Officer

OK. So Hanyang, let me just elaborate a little bit more. So in terms of how big is the market, we think it's very hard to pin down our exact number because there are a lot of new, I would say, institutional investor coming to the market, and some of them has grown from small to a much bigger size. So what we think is there is definitely a huge need for banks like us or for like specialized broker like us to service those smaller institutional investors.

So while we can service them now, just to recap what Tianhua said earlier, is we offer a differentiated service. For example, they can now open account with bigger bank to have a prime brokerage account, but we can help them to set up the account with live traders to help them win all the trades and also help them to grow. Sometimes, we'll help them to do even fundraising as well. So those are the stuff we can offer to smaller institutional investors.

And to your second question on the license. Definitely, Hong Kong is definitely a huge market for us. As you can see in our financial performance, same as the same first question you asked. It's like we left too much money on the table because we don't have the Hong Kong license yet.

So definitely, we will let the market know once we have progress in this space. Thank you.

Hanyang Wang -- 86Research -- Analyst

[Foreign language] Very helpful. Thank you.

Operator

Thank you. We have our next question coming from the line of He Fang from CIBC. Please go ahead.

He Fang -- CIBC -- Analyst

[Foreign language] OK. So let me translate my questions. Well, the first question is about the investment banking business. So we noted that in this quarter, we have made great achievements in existing Chinese companies to list in the U.S.

market. So what kind of special efforts have we made in the investment banking side? And compared to other competitors, what are our unique advantages? And the second question is about the international layout. So how do we acquire customers in countries like Singapore, Australia and New Zealand? And is there any difference in customer acquisition cost between these areas and Mainland China?

Tianhua Wu -- Chairman and Chief Executive Officer

[Foreign language]

John Zeng -- Chief Financial Officer

OK. Let me quickly translate the investment banking question first. So we pioneered the U.S. IPO distribution service back in 2017 on the back of our strong demand from retail and institutional investors.

As you can see, our investment banking business has been growing very rapidly. Since then, within two years' time frame, we have been working on more than 60 U.S. and Hong Kong IPOs. I think this year, we have been working on pretty much all the big name, popular ADR IPOs.

So how we can crack into the market when there are a lot of competition from traditional international and domestic investment banks? Because our principal philosophy is we have to -- we want to bring in value-added service to the issuer. So for example, we provide very steady demand. Those demands, especially during the tough market, like last year, 2019, has been very helpful to the issuer to be able to get the IPO done. And also, we provide very customized DSP and IR/PR services to the issuers, which, traditional banks, they don't really be active in that kind of space.

So this gives us an opportunity to be able to service those new economy issuers. Plus, we have been doing the IPO ourself a couple of years. So we know all the stuffs like the issue -- potential issuers, they have to manage when they are doing the IPO. So that's why we have a huge growth in this space and as an investment basis also help us to drive more institutional and retail brokerage business.

Tianhua Wu -- Chairman and Chief Executive Officer

[Foreign language]

John Zeng -- Chief Financial Officer

OK. So given we are a tech-backed brokerage company, so this gives us the flexibility to enter into new markets and be really adaptive to service the local needs. For example, we saw the needs in Singapore and Australia are the similar opportunities now to what we saw in China a few years ago when we started that business. So we think that there is a huge potential down there.

And the beauty of international expansion is the funded account conversion rate will be much higher. And also, we can offer very differentiated service versus the local brokers. For example, our commission rates will be much lower than the existing local players. And we help the local people not only trade with their local stocks.

And also, we help them to trade in Hong Kong and the U.S. equities. So we are very bullish about our international expansion strategy. We just started international expansion pretty much in the beginning of this year, and we are seeing very promising results.

So we are very confident, in the next 12 to 24 months, our international funded accounts will account for more than 50% of our European clients. Thanks.

He Fang -- CIBC -- Analyst

[Foreign language]

Operator

Thank you. [Operator instructions] We do not have any more questions now. I would like to hand the conference back to our speakers today. Please go ahead.

Clark Soucy

Hello. This is Clark. 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, and have a great day.

Tianhua Wu -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 46 minutes

Call participants:

Clark Soucy

Tianhua Wu -- Chairman and Chief Executive Officer

John Zeng -- Chief Financial Officer

Jacky Zuo -- China Renaissance -- Analyst

Hanyang Wang -- 86Research -- Analyst

He Fang -- CIBC -- Analyst

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