UP FINTECH HOLDING LIMITED SPON ADS EACH REP 15 ORD SHS CL A (TIGR) Q3 2021 Earnings Call Transcript

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UP FINTECH HOLDING LIMITED SPON ADS EACH REP 15 ORD SHS CL A (TIGR 5.30%)
Q3 2021 Earnings Call
Nov 30, 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 third quarter 2021 earnings conference call. [Operator instructions] There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Tuesday, November 30, 2021. 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, Strategy and Investor Relations

Thank you, operator. Hello, everyone and thank you for joining us for the call today. UP Fintech Holding Limited third 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, CEO of US Tiger Securities; and Mr. Kenny Jao, 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 US 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 30, 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.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

Hello, everyone and welcome to the Tiger Brokers' Third Quarter 2021 earnings conference call.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

Our global expansion is progressing well. We added 82,900 new accounts in the third quarter, of which over 80% came from outside Mainland China. Total new funded accounts for the first three quarters of this year numbered 353,300, already surpassing our 350,000 annual guidance. Total customer accounts at the end of the third quarter increased by 118,000 and totaled 1.77 million, almost double year over year.

Total funded accounts stood at 612,000, triple that of the same period of last year.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

Total revenue for the third quarter was $60.8 million, an increase of 60% year over year. Non-GAAP net income was $5.3 million, an improvement from the loss in the second quarter. Total client assets were $20.6 billion, up 88% year over year, but a drop of 14% from the second quarter of this year. The quarter-over-quarter decline in total client assets is primarily due to the drop in client position values caused by subdued market conditions.

The firm continued to see healthy net asset inflows from both new and existing clients.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

An important milestone for Tiger Brokers is that we've obtained a Hong Kong broker-dealer license last month. This license will have a big impact on Tiger's business going forward. For example, we may start acquiring users in Hong Kong. Hong Kong is a true global financial center with a substantial number of high-quality investors, both retail and institutional.

With the HK license, we will be able to generate more income from margin loans, Hong Kong IPOs and commissions, among others, to improve revenue per user. We may also further improve the user trading experience for Hong Kong securities, as trade execution and clearing will be integrated into Tiger's system.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

In addition to Hong Kong, the company was admitted to the Securities Association of Singapore. We also reached a notable landmark in Singapore. Tiger Brokers Singapore became the first online broker to be admitted as a trading member of Singapore Exchange Securities Trading, Singapore Exchange Derivatives Trading Limited and a clearing member of The Central Depository. In total, Tiger Brokers has obtained 46 licenses and qualifications in 36 categories in Hong Kong, Singapore, New Zealand, the United States and Australia.

We also decided to set up a global dual headquarters in Singapore to expedite our international expansion.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

I would now like to take this opportunity to give updates on four other key business initiatives.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

Tiger Brokers presently has offices and holds licenses pertaining to brokerage, investment banking and asset management in the United States, Australia, Singapore, New Zealand and Hong Kong. As previously stated, our firm is rapidly internationalizing. And in the third quarter, 80% of our accounts came from outside Mainland China. Tiger Brokers has only been executing on our internationalization strategy for a little over a year.

Being able to acquire so many international users in such a short period of time validates our capability to compete in global markets. We remain confident in our internationalization strategy. We already exceeded our 350,000 annual guidance for new funded accounts in 2021. And we expect that next year, we will exceed the 1 million mark for total funded accounts.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

With regards to corporate and institutional services, we continue to invest in scaling our investment banking and ESOP business, which augments our brokerage business.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

ESOP remains in a rapid state of expansion. In the third quarter, we added 46 new clients, of which five were A-share companies and 41 were Hong Kong and US listed companies as well as unlisted companies. The scale of our ESOP business has more than doubled in the last year and the cumulative number of corporate clients added in the first three quarters of this year was 266.7% higher than the same period last year. Our enterprise account service in the Tiger Community, which corporates use to directly connect with investors and build their brands, also added 53 new accounts in the third quarter.

On the investment banking side, we participated in four US IPOs, three of which were SPACs and one of which was a local American company. We were also grateful to serve Xpeng as an underwriter for its dual primary listing in Hong Kong.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

All new clients are having their US cash equity trades cleared by TradeUP, formerly known as Marsco, a self-clearing broker we acquired in 2019. As of the end of the third quarter, 70% of our clients were using TradeUP to self-clear US cash equities.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

Clark S. Soucy -- Vice President, Strategy and Investor Relations

As previously communicated, we are applying for cryptocurrency trading licenses in the US and Singapore, so we may provide local residents with crypto access. I am pleased to announce US Tiger Securities just received approval as a money transmitter from the State of New Jersey, which enables us to provide crypto trading from New Jersey residents. We look forward to obtaining more crypto licenses in the future. I would now like to invite our CFO, John, to go over our financials.

John Zeng -- Chief Financial Officer

Hello, everyone. Thanks, Tianhua and Clark. So let me walk you through Tiger's financial performance for the third quarter. All numbers are in US dollar.

Commission for the third quarter was $33.5 million, increased 72% year over year, in line with the year-over-year increase in trading volume. We saw slightly lower trading volume in the third quarter versus the second quarter, but we still managed to grow commission by 8% quarter over quarter with more derivatives trading such as US options and more volume from Hong Kong. Take rate also increased from 3 bps in the second quarter to 3.6 bps in the third quarter. Interest-related income, which combines financing service fee and interest income, was $20.1 million, an increase of 105% year over year and 5% quarter over quarter.

The year-over-year increase was in line with higher margin and security lending balance. The quarter-over-quarter increase is primarily due to a more efficient self-clearing margin operation given lower margin balance in the third quarter versus the second quarter. Other revenue, mostly our underwriting revenue, was $7.2 million, down 19% year over year and 30% quarter over quarter due to a weaker IPO market, especially in the Chinese ADR listing in the third quarter. The drop in underwriting revenue partially offset the growth in commission and interest-related income.

As a result, total revenue was $60.8 million in the third quarter, increased 60% year over year and flat quarter over quarter. Now, on the cost. So interest expense increased 44% year over year to $4.2 million, in line with user growth and increase in margin balance. Execution and clearing expense were $9.5 million this quarter, increased 145% year over year and 45% quarter over quarter.

The increase is primarily due to more custodian fees in Singapore. Before Tiger became a SGX trading and clearing member in October, we used an external custodian to custody client assets and the custodian expense grows in line with user growth. We expect such custodian expense to gradually go down as we will self-custody more assets in Singapore. Employee compensation increased 71% year over year to $21.8 million, as we keep adding headcount in R&D self-clearing to support our global expansion.

Along with headcount increase, this quarter, occupancy expense increased 39% year over year to $1.66 million. SG&A increased 30% year over year to $5 million. Communication and data usage also increased 116% year over year to $5.3 million this quarter as a result of rapid user growth. Marketing expense was $11.2 million in the third quarter, up 200% year over year, but down 53% quarter over quarter.

Given the choppy market backdrop in the third quarter, we scaled back our marketing to be prudent with customer acquisition costs. That being said, we will increase marketing spending when we see the right window. So net income for third quarter was $20.5 million. And adjusted for fair market value change on private CB and other non-GAAP items, our non-GAAP income for this quarter was $5.3 million.

Now, I have concluded our presentation. Operator, please open the line for Q&A.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Han Pu from CICC. Please ask your question.

Han Pu -- CICC -- Analyst

[Foreign language] Thanks for taking our question. This is Han Pu of CICC and I have two questions. Firstly, could management give us more color on the current regulatory environment and the potential impact to our business? Secondly, could you give us some update on the operation of Q4? Have we already seen some impact on the user acquisition during previous regulation-related use? Thanks.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

John Zeng -- Chief Financial Officer

OK. So let me just quickly translate what Tianhua just mentioned regarding the latest regulatory deals and those news in the media. So basically, our business model is no different than overseas broker servicing domestic investors. We follow the same KYC, AML procedures and regulated by relevant security regulators in different regions.

So our innovation is not on business model but more on R&D, which brings some parallel user experience so we can bring more customers. We have always attached great importance to business compliance since our first inception and we have conducted several rounds of self-examination of our business units and business lines with the support from external experts to ensure we are in compliance. If there will be policy coming out from the regulators, Tiger, as one of the leading players in the industry, definitely we will develop the resource to make sure we are in compliance. And we definitely will keep monitoring the situation and make sure we can -- we will be in compliance when such policies put into effect.

And regarding the Personal Information Protection Law, so the law went into effect on November 1. And actually before the law, we, as an international brokerage, we already formulated and implemented serious policies and procedures on personal information protection and data security with high standards in accordance with applicable laws and industry requirements. And besides, we did a lot of preparation in advance before this new law. We hired top industry experts and lawyers to self-exam all the operations involving personal information and have reflected the rules under this new law into our current process, policies and user agreement to ensure users' benefits are maximized.

And of course, going forward, we will pay close attention to the development of this new law and making sure we can properly adjust when there is new guidance from the regulator. [Foreign language] So we saw some net outflow following the news, very small scale and now it's already back to normal. For non-Chinese users, we keep seeing that asset inflow. And actually, since October, the average first-timer deposits from our Singapore users actually, around $5,000 or above.

It's actually even more than an average initial deposit of $4,000 we saw for new users acquired in the second and third quarter, which shows our brand service is still attracting high-quality international users. Thank you.

Han Pu -- CICC -- Analyst

[Foreign language] Thanks.

Operator

The next question comes from Alan Kwong from Citi. Please ask your question.

Unknown speaker

[Foreign language] Hi, management. This is Julia from Citi Research. Thank you for giving me the opportunity to raise the questions. I have two questions here.

First, it's encouraging to see that the new funded customer number in the first nine months has already surpassed the full year guidance of 350,000. Could you also share guidance about the key regions of focus in terms of customer acquisition and the mutual growth target? Also, could you give us more color in terms of the fourth quarter operational plan, including the customer assets and trading volume? Thank you.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

John Zeng -- Chief Financial Officer

OK. So in the third quarter, we added 82,900 funded accounts, of which over 80% came from outside of China, which shows our international strategy is progressing really well. Going forward, our focus right now, of course, will be in Singapore and Hong Kong. So in Singapore, we just obtained a self-clearing depository license from SGX.

These qualifications will help us better service Singapore local clients. We just got a license in Hong Kong. So Hong Kong is definitely another key area we will focus. Now we are developing -- devoting more resource to ramp up our trading infrastructure in Hong Kong.

In the US, we haven't really launched a big marketing yet. Focus now is still on the infrastructure self-clearing. We believe this will give us some more competitive advantage over our peers in the US market. And of course, as Tianhua mentioned earlier, we just got the crypto trading -- the money transmitter license in New Jersey.

We feel this could be another tool for us to tap into the US market when we officially launch our marketing in the States. And of course, outside of those areas, we are also evaluating other markets. We will do a comprehensive analysis before entering new market. We will review its TAM, competitive landscape, what value we can bring and what kind of UE we can generate.

Based on our experience in Singapore, we are confident our user experience R&D capability will give us an edge when entering new markets and we are optimistic of our internationalization growth outlook. [Foreign language] So regarding fourth quarter outlook, so right now we still monitor the market condition to decide how much marketing, we will spend on user acquisition. When we evaluate our user acquisition strategy, we will of course monitor the CSE, monitor the payback. So as of right now, given the market backdrop, we are still relatively scaled back and waiting for a right opportunity to ramp up our marketing.

And trading volumes, so far, is similar to third quarter. Total volume might be smaller than Q3 given more holidays in the fourth quarter, but higher UE product cash equity options, we see similar volume versus Q3. And for Q4, our focus is on R&D. So we will spend more resources in R&D to beef up our infrastructure in Hong Kong and Singapore to make sure we can provide better trading experience for our users.

Thank you.

Operator

Your next question comes from the line of Hanyang Wang from 86Research. Please ask your question.

Hanyang Wang -- 86Research -- Analyst

[Foreign language] Thanks, management for taking my questions. So I have two questions. The first one is regarding on the business expansion in Hong Kong. The company obtained the Hong Kong broker license to acquiring Ocean Joy Securities this quarter.

So we know the competition is quite intense in Hong Kong. So what will be the strategy for your user acquisition in Hong Kong? And how shall we expect the incremental new users come from Hong Kong going forward? Second question is about the IPO-related business. So we observed that the tech IPO started to resume in Hong Kong this quarter, so while the listing of the Chinese ADR still faced uncertainties. So what's your view on the development of the underwriting business? Thank you.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

John Zeng -- Chief Financial Officer

Yeah, let me translate first. OK, so first of all, as everybody know, Hong Kong license is very important to us. So with the Hong Kong license on the one side, we have -- we can tap into the Hong Kong local residents, which we're missing out from the Tiger's user base before. And on the other hand, we will be able to increase ARPU from our user base.

So our plan for Hong Kong basically will be three steps. First of all, on the institutional business, no matter it's for serving the institutional investors or ESOP or Hong Kong IPO underwriting. So with the Hong Kong license, we'll definitely be more aggressive and more active in the institutional space. The second step will be gradually to move from IB clearing for Hong Kong securities to our own self-clearing Hong Kong.

As a lot of you know, traditionally, we use IB to clear Hong Kong trades and the clearing expense is very expensive. So our UE for Hong Kong product was really low before. But this will be gradually changed once we switching from IB clearing in Hong Kong to our own clearing in Hong Kong. The third step will be launching our retail marketing in Hong Kong.

We know we have a lot of peers in Hong Kong and we give them a lot of credit for what they have done, very good companies and apps. But we feel Tiger has our own competitive advantage. And especially, a lot of Hong Kong product, for example, like Hong Kong IPO subscription, naturally, will give us a chance to tap into more users. So we feel pretty confident we can grab good market share in Hong Kong.

Wu Tianhua -- Chief Executive Officer and Director

[Foreign language]

John Zeng -- Chief Financial Officer

OK, so let me quickly translate. So from a financial perspective, yes, given the recent Sino-U.S. relationship, we do see a drop in underwriting revenue for third quarter. We don't know when the Chinese ADR IPO will resume, but we do believe both sides could reach an agreement.

And hopefully, by sometime next year, we will see more Chinese ADR back to the market. But in the meantime, given now we have Hong Kong license, we can be more active in Hong Kong IPO underwriting to drive underwriting revenue to compensate the potential loss from the US underwriting market. I just want to reiterate how we see the Tiger investment banking business. So our underwriting business is different from traditional investment bank.

Underwriting fee, of course, is important. But more important to us is the synergy generated by underwriting business with ESOP and brokerage business, so we can provide more value-added service to our corporate and retail clients and the increased user stickiness and ARPU. So in short, we understand, in the short term, there may be some headwind for our underwriting business, but we are committed to putting into resource into Tiger underwriting business to make sure we can employ more synergy to our other business units and provide more values to our corporate and retail users. Thank you.

Hanyang Wang -- 86Research -- Analyst

[Foreign language] Thank you. Very helpful.

Operator

At this point, I would now like to hand the call back to Mr. Clark S. Soucy for the closing remarks.

Clark S. Soucy -- Vice President, Strategy and Investor Relations

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.

Operator

[Operator signoff]

Duration: 45 minutes

Call participants:

Clark S. Soucy -- Vice President, Strategy and Investor Relations

Wu Tianhua -- Chief Executive Officer and Director

John Zeng -- Chief Financial Officer

Han Pu -- CICC -- Analyst

Unknown speaker

Hanyang Wang -- 86Research -- Analyst

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