UP FINTECH HOLDING LIMITED SPON ADS EACH REP 15 ORD SHS CL A (TIGR) Q2 2021 Earnings Call Transcript

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UP FINTECH HOLDING LIMITED SPON ADS EACH REP 15 ORD SHS CL A (TIGR 5.30%)
Q2 2021 Earnings Call
Sep 10, 2021, 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 2021 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference is being recorded today, Friday, September 10, 2021.

I would now like to hand the conference over to your first speaker today, Mr. Clark S. Soucy. Thank you.

Please go ahead, sir.

Clark Soucy -- Vice President, Strategy Department

Thank you, operator. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited second-quarter 2021 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, the 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, September 10, 2021, and our Annual Report on Form 20-F filed on April 28, 2021. 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.

Tianhua Wu -- Chairman and Chief Executive Officer

Hello, everyone, and welcome to Tiger Brokers 2021 second-quarter earnings conference call. Although market sentiment was weaker in the second quarter, we still achieved substantial growth, thanks to internationalization and the strength of our comprehensive product and service offerings. Total revenue in the second quarter was $60.2 million representing 98.7% growth year over year. This quarter, we also increased investment in user acquisition, self-clearing and talent recruitment.

We are confident such investments will bolster our market-leading position and fuel future expansion in our business. Factor in the $13.7 million fair value change to convertible bonds we issued earlier this year, non-GAAP loss is $4.4 million for this quarter. Total customer accounts increased by 249,000 in the second quarter to 1.649 million, which is two times the total number of accounts in the same period of last year. We added 153,000 funded accounts this quarter, 4.5 times that of the quarterly addition last year and a 30.4% increase quarter over quarter.

Number of total funded accounts rose to 529,000. Of the 153,000 new additions this quarter, over 60% came from offshore, exhibiting the growing momentum of our internationalization strategy. Total newly funded accounts in the first half of 2021 reached 270,000, surpassing the total number of funded accounts acquired since our platform went online in 2015 through 2020. Even with a weaker market backdrop, we still see healthy asset inflows.

Total AUM reached $23.9 billion this quarter, up nearly three times year over year and 11.8% quarter over quarter. I would now like to take this opportunity to provide investors an update on three key business initiatives at our company. Tiger Brokers is continually expanding. Our global reach and our network of subsidiaries covers the U.S., Australia, Singapore and other countries.

Our subsidiaries were licensed to conduct a wide range of securities businesses, including investment banking, asset management and brokerage. Our internationalization continues to accelerate. More than 60% of newly funded accounts this quarter came from offshore markets. And as of June 30, 40% of our total funded accounts were from international users.

We only started executing on our internationalization strategy just over a year ago. But our progress thus far is a testament to the value proposition of our platform in foreign markets. We see vast latent demand for our services across a wide range of countries and regions and expect that internationalization will not only slow growth in new accounts but also raise the ceiling for the future size of our client base. As we expand to new countries and add products and markets to our trading platform, our firm gains new experience and knowledge for engaging with regulatory bodies, enabling us to further enhance the client experience.

I am pleased to report that as of today, we already have over 200,000 funded accounts in Singapore. We firmly believe internationalization will drive further growth. Although the market has been weak since the second quarter, we are confident to achieve our guidance of 350,000 new funded accounts this year. 2B services, today, our growth strategy and envisions simultaneously developing our expertise in investment banking, ESOP and brokerage to augment our capabilities to meet our clients' global financial services needs.

The rapid expansion of our ESOP business continues to exceed our expectations. In the second quarter, we added 51 new ESOP clients for a grand total of 216 clients. We serve not only U.S. and Hong Kong listed companies, but we also help Asia companies manage their employee options.

In the second quarter, we participated in 17 IPOs and follow-on offerings in the U.S. market and also served as an underwriter for 14, including Boss, AiHuiShou International, and Dingdong, among others. In light of the recent concerns over ADR IPOs, I would like to highlight for our investors and stakeholders, that we possess extensive capability to act as an underwriter in Hong Kong. In the past year, we participated in many popular listings in Hong Kong, such as those of NetEase, Xpeng, Bilibili, Harbour Biomed and Antengene among others.

Finally, I would like to run an update on our self-clearing capability. In July of 2019, we acquired TradeUP Securities, Inc., formerly Marsco, a broker-dealer with over 30 years experience in self-clearing and its own self-clearing license, because we wanted to establish the technical, operational and compliance capability to manage our own proprietary brokerage system. I am pleased to report that as of the second-quarter 2021, more than 50% of our clients were having their U.S. cash equities self-cleared by TradeUp.

We project that by the end of this year, we will be self-clearing over 70% of our clients.

John Zeng -- Chief Financial Officer

Hello. Thanks, Tianhua and Clark. Let me walk through our first quarter financial performance. All numbers are in USD.

Total revenue was $60.2 million this quarter, up 99% year over year. Commission were $31 million, up 64% year over year, but down 41% from the first quarter of this year. The drop in commission was due to weaker market sentiment in the second quarter, as total trading volume dropped 18% quarter over quarter, plus the proportion of higher unit economic products, for example, cash equity dropped from 50% of the trading volume in the first quarter to 40% of trading volume in the second quarter. The decrease in commission also resulted in a lower blended take rate of three bps in the second quarter versus 4.3 bps in the first quarter of this year.

But in reality, the fee rate remains the same for both quarters. Interest-related income, which combines financing service fee and interest income was $19 million, an increase of 115% year over year and 7% quarter over quarter. The increase was due to higher marketing and securities lending balance and a gradual ramp-up in self-clearing. Other revenue was $10.2 million, up 300% year over year, primarily due to more equity underwriting IR/PR services and currency exchange services.

Now switching to cost. Interest expense increased 154% year over year to $4.8 million this quarter, in line with our user growth as increase in margin activities. Execution and clearing expense were $6.6 million this quarter, increased 131% year over year, as we have more funded our current customers and higher trading volume. Employee compensation increased 82% year over year to $20.6 million, as we keep adding headcounts in R&D, self-clearing, to support our global growth.

Along with head count increase, this quarter occupancy expense increased 32% year over year to $1.5 million. SG&A increased 84% year over year to $5.1 million. Marketing expense had the most uptake with the opex, increased more than 700% year over year to $24 million. We are fully committed to internationalization.

And in the second quarter, we increased marketing offshore mostly in Singapore through both online and offline channel to drive brand awareness and the user acquisition. We firmly believe grabbing more market share right now will help develop -- deliver better financial performance down the road. As a result of rapid user growth, communication and the data usage also increased 143% year over year to $5 million this quarter. With the increased spending to drive growth and our fair value change of $13.7 million on the convertible bonds we issued earlier this year, our net loss for second quarter was $21.5 million.

Taking all the fair value change and other non-GAAP items, our non-GAAP loss for this quarter was $4.4 million. Now we have concluded our presentation. Operator, please open the line for Q&A. Thanks.

Questions & Answers:

Operator

Certainly. [Operator instructions] We have the first question, this is coming from the line of Han Pu from CICC. Please go ahead. 

Han Pu -- CICC -- Analyst

[Foreign language] Thanks for taking my question. This is Han from CICC. I have two questions. The first one is about the guidance of the Q3.

We see the strong growth of users in Q2. Could you give us more color on the number of clients and also current assets, and the cost of clearing it in the coming quarters. The second question is about the clearing fee rate. We are wondering why the execution and the clearing fee rate to our commission wasn't moving up in Q2, while we see the continuous increase in the self-clearing.

Thanks. 

John Zeng -- Chief Financial Officer

So I will answer your two questions. First is on the guidance for the second -- for the third quarter. So looking at all this data, we see higher like UE products like cash equity option, volume went up versus the second quarter. So we feel if market stays like this and we expect commission to have a moderate increase in the third quarter.

But ADR underwriting is on hold due to the current policy from China and the U.S. regulators. So short term, this could have a lingering impact on our revenue. But the impact should be manageable as ADR underwriting only accounted for less than 10% of our revenue.

So we think the ADR equity offering will resume once regulators gives more clarity. And in the meantime, as Tianhua mentioned earlier, we are already active in Hong Kong IPOs as an international underwriter. And we already underwrote Bilibili, Xpeng, those popular IPOs. So this could offset some short-term impact from the holding in U.S.

equity underwriting. In terms of customer acquisition. So the big is opex, is sales and marketing. We expect the third quarter market to -- our marketing expense to be nice or less than second quarter, as we don't offer any offline events in Singapore.

But we will be very opportunistic to acquire users when we see -- when we see fit. In terms of AUM per users. So in July and August, we still see very healthy net inflows for both months. But due to market sentiments, average AUM is down around 10% to 15% by end of August versus May -- end of June.

And your first -- second question regarding the clearing, the clearing expense went up. So the main reason of the increase in clearing expense is we have a lot more Singapore clients and we offer Singapore stock trading. Based on local regulation, if the client is trading Singapore Stock, the client's asset needs to be hold at SGX clearing member. Our Singapore subsidiary is not a SGX member yet, so we paid third-party custodian fee for each clients open account with us.

Given we have over 200,000 SG -- Singapore clients already, we paid close to $2 million custodian fee the second quarter which counted as our clearing expense. As you might know, our Singapore subsidiaries already received [ AIC ] from SGX to become a clearing member. So once we officially become the SGX clearing member, we can greatly reduce the custodian fee. I believe we can see some reduction in custody fee starting in the first quarter.

Operator

Thank you. [Operator instructions] We have the next question, which is coming from the line of Judy Zhang from Citi. Please go ahead. 

Judy Zhang -- Citi -- Analyst

[Foreign language]

Tianhua Wu -- Chairman and Chief Executive Officer

So the funding of clients profile, so we used -- users were acquired last year say second quarter of 2020 as a cohort sample. Initial deposit among that group is around $6,000 to $7,000. One year later, by end of second quarter this year, average client assets is around $30,000. Since second quarter of last year, each quarter this cohort group has net asset inflow, which means they are keeping deposit money into their account and AUM growth is now only due to equity value appreciation.

If you look at new customer we acquired this quarter, second quarter of 2021, their average initial deposit is around $5000, slightly below the initial deposit of the second quarter of 2020 clients. We don't think this is due to a deterioration of client quality. We feel it's more like -- I mean it's more due to the less attractive market backdrops. We feel similar to the clients that we acquired last year after several quarters, they will keep depositing money to trade on Tiger platform.

So on customer acquisition costs and payback, we still use the second quarter of 2020 as a cohort sample. Back then, customer acquisition costs was about $130. And back, the market was more active. So if we only count that commission, excluding interest, the payback was around two quarter for that cohort group.

Looking at nearly acquired user in the second quarter of this year, due to more competition the customer acquisition cost went up to around $160 per person. And their commission also dropped due to a weaker market drop. Still we feel it's still going to be attractive for us to acquire those users, even though the payback increased to four to six quarter, because our users are relatively young. As long as we can get them payback in a relatively short period, there is still more -- a lot of upside for us to monetize.

Thank you, Judy. 

Operator

Thank you. We have the next question. This is coming from the line of Eric Lu from China Renaissance. Please go ahead. 

Eric Lu -- China Renaissance -- Analyst

[Foreign language] Hello. So my first question is, you saw the trading volume decreased quarter over quarter in second quarter, but the net interest income and margin financing dollars both increased, especially the margin financing dollar. So can I ask the rationale behind it? So for the second question, we noted, our number of new paying clients acquired from Mainland China was more than our competitor. So can I ask what's the current -- what's our current customer acquisition strategy in Mainland China and the cost of it?

John Zeng -- Chief Financial Officer

Sure. Eric, so I will answer your two questions. So the first one was on the net interest income. So the main reason of the net interest income increased while the trading volume came down is, we're starting to prep our self-clearing capability.

So once we started, given we have more and more trading volume and asset hold in our own clearing firm, we are starting to use some of clients idle cash, which gives us cheaper funding and also gives us more flexibility in terms of the cap we can then to each customers. And also becoming a self-clearing firm enables us to become a direct counterparty for securities lending business, which is pretty lucrative on the street. So we can generate more interest, we start sharing with other intermediaries. So that's the main reason, our interest -- net interest income increased in the second quarter, while the trading volume came down.

And of course, you know the margin balance, if you look at our balance sheet, also increased versus the first quarter, but the $1 billion margin balance on our balance sheet includes Hong Kong IPO. So take out IPO, which is not that profitable for us -- for the Hong Kong IPO margin basis. Taking out that part, our margin loan balance is about $450 million, while in the first quarter was about $400 million. So those two are the main reasons why net interest income went up in the second quarter.

And in terms of the customer acquisition for onshore customers. So in the second quarter, we have been actually working with more channels or intermediaries to target Chinese investors who already have assets offshore. So this is showing -- so far showing good results. And of course, our ESOP is also a pretty good user acquisition too for us to tap into those Chinese users.

In terms of customer acquisition cost, it's pretty much in line with our previous customer acquisition cost for Chinese users. The major increase of our customer acquisition cost actually came from Singapore, as we mentioned earlier.

Operator

We have the next question. This is coming from the line of Yan Zeng from TH Capital.

Unknown speaker

This is Zella from TH Capital. I have one question. I was hoping management could shed some light on the trading asset distribution. Given the previous experience and regulations on Chinese ADR in terms of your customer transaction behavior, do you see any shift to Hong Kong securities? And can I think this intensive competition was partly due to some kind of transaction has been achieved? That's my question.

John Zeng -- Chief Financial Officer

Sure. I -- you were a little bit breaking up. So you mean the trading volume shifting to Hong Kong and do we see more strong competition from the existing players?

Unknown speaker

Yes. Exactly.

John Zeng -- Chief Financial Officer

OK. So in terms of -- so the thing is, right now, if you look at all the Chinese ADRs coming back to Hong Kong, we think this will likely be a trend. As we mentioned earlier, we have been very active in Hong Kong as a international underwriter for Chinese ADR secondary listing in Hong Kong. So I think that part, we feel pretty confident we can keep getting more corporate clients and also use these opportunities to acquire more retail clients.

And then in terms of trading capabilities, traditionally, our strength was under -- in the U.S. market. But recently, we have developed a lot more resource to develop our Hong Kong trading capabilities. For example, you know, the Hong Kong Level 2 data, I think we are one of the few firms to offer it for free.

And you know the Hong Kong options, we are one of the first firm to offer to investors. So we think the trading, no matter it's from the primary market or the secondary market, we are much more capable versus where we were one or two years ago. So I think the trend, we will still benefit, once we develop more resources into the Hong Kong trading capability and R&D. 

Unknown speaker

Very clear. Thank you. 

Operator

Thank you. We have no further questions at this moment. I would like to hand the conference back to our host for any ending remarks.

Clark Soucy -- Vice President, 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 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.

Duration: 37 minutes

Call participants:

Clark Soucy -- Vice President, Strategy Department

Tianhua Wu -- Chairman and Chief Executive Officer

John Zeng -- Chief Financial Officer

Han Pu -- CICC -- Analyst

Judy Zhang -- Citi -- Analyst

Eric Lu -- China Renaissance -- Analyst

Unknown speaker

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