Futu Holdings Ltd (FUTU) Q4 2021 Earnings Call Transcript

Futu Holdings Ltd (FUTU 5.37%)
Q4 2021 Earnings Call
Mar 11, 2022, 7:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen, welcome to Futu Holdings fourth quarter and full year 2021 conference call. [Operator instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. And I'd like to turn the conference over to your host for today's conference call, Daniel Yuan, chief of staff and head of IR at Futu.

Please go ahead, sir.

Daniel Yuan -- Chief of Staff and Head of Investor Relations

And thank you for joining us today to discuss our fourth quarter and full year 2021 earnings results. Joining me on the call today are, Mr. Leaf Li, chairman and chief executive officer; Arthur Chen, chief financial officer; and Robin Xu, senior vice president. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control.

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause the actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the company's filings with the SEC, including its registration statement. So with that, I will now turn the call over to Leaf.

Leaf will make his comments in Chinese, and I will translate.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Thank you all for joining our earnings call today. 2021 marked another year of rapid client base expansion as we exceeded our full year paying client guidance by adding approximately 728,000 paying clients. This brings our total paying clients to over 1.2 million, translating to 141% growth year over year. We added 77,000 paying clients in 4Q with about 90% of new paying clients coming from Hong Kong and other overseas markets.

Paying client retention remained around 97% despite the negative impact from a series of headline news. Looking into 2022, we are guiding for 200,000 net new paying clients, representing 16% year-over-year growth in total paying clients. We will dynamically adjust our growth target subject to market condition. In a moment, net addition, we expect roughly one-third to come from the Greater China region, one-third from Singapore, and one-third from the U.S.

and Australia.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Our client assets were HKD 408 billion, up 43% year over year and down 4% quarter over quarter. While a tumbled equities market and some headline news weighed on total asset balance, asset inflows remain positive in each market, totaling more than HKD 10 billion. In Singapore, strong asset inflow pushed every client asset up by 26% quarter-over-quarter despite a negative mark-to-market impact on their holding.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Total trading volume was HKD 1.2 trillion, flattish year over year. Due to fewer trading days in the fourth quarter, total trading volume slipped 9% sequentially despite a higher turnover of 3.1 times. Trading volume for U.S. stocks were HKD 177 billion, up 14% quarter over quarter, driven by surging trading volume in some U.S.

tech names, higher U.S. options trading volume and higher trading volume from Singapore clients. Trading volume for Hong Kong stocks was HKD 403 billion, down 33% quarter-over-quarter due to dampened market sentiments, especially around Chinese tech stocks.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Our wealth management business maintained resilient growth, with total client assets reaching around HKD 19 billion, up 84% year over year and 6% quarter over quarter. In Singapore, we have established partnerships with 20 fund houses, and we will continue to expand our mutual fund product offerings and services in the quarters to come. In Hong Kong, we established new partnerships with four prominent asset managers, including Fidelity and AXA. As of quarter-end, approximately 140,000 or 11% of our paying clients held wealth management positions.

In the fourth quarter, we launched auto-rebalancing function for our mutual fund portfolio product and distributed a flagship multi-asset hedge funds, managed by a leading global alternative manager. Private fund asset balance as a result grew substantially by 120% quarter-over-quarter. We believe alternative assets are an integral source of diversification for our high-net-worth clients during market turmoil and we intend to onboard more private funds in coming quarters.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

As of year-end, Futu I&E had 236 IPO and IR clients and 400 ESOP clients, up 125% and 152% year over year, respectively. We acted as joint book managers for several high-profile Hong Kong IPOs, including that of SenseTime, to which we contributed over 20% of the retail subscribers and retail subscription. As of quarter-end, over 800 companies, including more than 200 listed companies with market capitalization above HKD 10 billion held enterprise accounts in our social community to interact with retail investors.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Arthur Chen -- Chief Financial Officer

Thanks, Leaf and Daniel...

Daniel Yuan -- Chief of Staff and Head of Investor Relations

I'd like to invite our CFO, Arthur, to discuss our financial performance.

Arthur Chen -- Chief Financial Officer

Thanks, Leaf and Daniel. Please allow me to walk you through our financial performance in the fourth quarter. All the numbers are in Hong Kong dollar, unless otherwise noted. Our total revenue was HKD 1.6 billion, up 35% from HKD 1.18 billion in the fourth quarter of 2020, ending a strong year as full year 2021 revenue grew 115% to over HKD 7 billion.

Brokerage commission and handling charge income was HKD 857 million, an increase of 19% year over year and a decrease of 8% Q over Q. The increase was driven by higher blended commission rate of seven basis points. The blended commission rate expands as commission rate for U.S. equity rose year over year and that the direct trading contributed a higher proportion of brokerage commissions.

The Q over Q decrease was mainly due to lower trading volume for Hong Kong stocks. Interest income was HKD 618 million, an increase of 83% year over year and a decrease of 2% Q over Q. The year over year increase was driven by higher margin financing income as a result of higher daily average margin financing balance. Other income was HKD 128 million, down 2% year over year and 23% Q over Q.

The year over year and the Q over Q decrease was both primarily due to lower IPO financing service charge income. Our total costs was HKD 217 million, a decrease of 10% from HKD 242 million in the fourth quarter of 2020. Brokerage commission and handling charge expenses were HKD 88 million, down 34% year over year and the 30% Q over Q. The expenses didn't move in line with our brokerage commission and handling charge income due to our upgraded service package with our U.S.

clearing house and the lower IPO subsequent fees. Interest expenses were HKD 56 million, down 14% year over year, and 25% Q over Q. The year over year decrease was due to lower IPO financing interest expenses, partially offset by higher interest expenses, associated with our security borrowing and the lending business. Interest expenses declined Q over Q primarily due to lower blended funding cost.

Processing and servicing costs were HKD 74 million, up 65% year over year, and 9% Q over Q. The increase was primarily due to higher cloud service fees to support overseas market expansion and to process a larger number of concurrent trades. As a result, total gross profit was HKD 1.39 billion, an increase of 47% from HKD 944 million in the fourth quarter of 2020. Gross margin was 87% as compared to 80% in the fourth quarter of 2020.

Operating expenses was up 127% year over year and up 8% Q over Q to HKD 826 million. To break it down, R&D expenses were HKD 271 million, up 64% year over year and 21% Q over Q. The increase was mainly due to increase in R&D headcount as we continue to support new product offerings, invest in the U.S. self-clearing capabilities and the customized products for international markets.

Selling and marketing expenses was HKD 337 million, an increase of 200% year over year and a decrease of 16% Q over Q. The year over year increase was due to higher marketing and the branding spending, especially in international markets. The expenses decline Q over Q as performance marketing spending came down amid tempered market sentiments. G&A expenses was HKD 218 million, up 145% year over year and up 59% Q over Q.

The rise was primarily due to increase in headcount for G&A personnel with the opening of more international office. As a result, our net income decreased by 6% year over year and 19% Q over Q to HKD 499 million. Our effective tax rate for the quarter was 12.9% and the net income margin was 31%. In addition to USD 300 million share repurchase program previously announced on November 3, 2021, which we have completed in open market transactions, our board has authorized a new share repurchase program, enable us to purchase up to 500 million worth of our ADS until December 31, 2023.

We plan to fund this repurchase from our current working capital. That conclude our prepared remarks. We'd now like to open the call to questions. Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Katherine Liu from Morgan Stanley. Please ask your question.

Katherine Liu -- Morgan Stanley -- Analyst

[Foreign language] I will translate for myself. Hi, management. Thank you very much, management, for giving me this opportunity to ask a question. I'm Katherine Liu from Morgan Stanley.

So I have two questions. First, as -- can management give us some guidance in terms of the year-to-date operation results in terms of, for example, like new client addition, geographical breakdown on assets and also turnover rate? And second, this is about the overseas markets. Can management give us some guidance in terms of their plan and target for the Australian market and how they compare the Australian market with Singapore market? And also, is there any update in terms of U.S. self-clearing progress and also the expectations on revenue -- on profit making? Thank you.

Arthur Chen -- Chief Financial Officer

Thank you, Katherine. This is also Arthur. Maybe I can answer your last question first. Then, I will leave the first two questions to Leaf himself.

In terms of self-clearing, so far we have already migrated dollar value around 40% of our U.S. stock holdings from our U.S. stream business partners to our own clearing house in Dallas. And our target is, we try to complete this migration toward the end of the third quarter, because we want to ensure the stabilities and the systems scalabilities during these transitions.

So yesterday, we have already seen positive impacts from this self-clearing, which have generated revenues alongside a lot of zero -- essentially, zero cost fundings to our operations outside of the U.S. And we -- as we mentioned that in our previous earning calls, we do have some very rough calculations after -- just self-clearing completions. For 2022, we do expect there will be around HKD 116 million operating revenues incrementally from this self-clearing migration. And the majority part will be translated into the pre-tax profit.

Thank you.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

In terms of business update, our client addition kind of slowed down a little bit this year due to the negative kind of equities market performance and a less active IPO market. So what's positive around that, is that, we don't see any lingering impact from the headline news on our client attrition and retention. And to break down among different markets, I think our client acquisition in the Greater China region was largely stable, although we saw new competitors entering into the market, we still have a very leading market position. And when there is uncertainties around the market performance and regulations, we'll employ a more steady growth strategy.

And in terms of Singapore, we have seen very healthy net asset inflow which offset the negative mark-to-market impact from the equities market downturn. But our client acquisition in Singapore also slowed down due to negative market performance. In terms of trading turnover, it was largely stable. And in terms of net asset inflow, it's rebounded from the 4Q numbers, but the overall client assets bill trended down little bit due to the negative mark-to-market impact.

And in terms of product offerings, in Australia, we launched the U.S. stock trading -- Australian stock trading, as well as ETF trading and going forward, we'll continue to enrich our product offerings. And as Arthur already mentioned, so for our self-clearing business, we've migrated about over 40%, close to 50% of our U.S. stock holdings to our self-clearing business, and we already see zero cost funding that's brought about by our clearing business.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

And I'd like to talk a little bit about the competitive dynamics in Australia. So on one hand, you see those incumbent players like CommSec and ANZ, their commonality is that their trading account is seamlessly integrated with the bank account, and the bank to brokerage transfer is such very smooth and seamless. But the disadvantage is that they typically charge pretty high commission rates and charge a fee for the idle account. And on the other hand, you see those online brokers like SelfWealth and Stake, their advantages they have a pretty well commission rates.

They have very straightforward trading interfaces. But the general, a lot more sophisticated trading functions, technical analysis, other analytical tools and also a very vibrant community. So these online brokers, they still kind of have a smaller kind of client base right now, roughly around like couple hundred thousand. And that's for us, we think that we have advantages in terms of our product offerings, and in terms of our tech capabilities, that since we are -- we've just entered into the market, it's difficult to gauge market potential and where -- we will come to share more results about our Australian operations next quarter.

Katherine Liu -- Morgan Stanley -- Analyst

[Foreign language] Thank you very much.

Operator

Thank you. Our next question is from Leon Qi from Daiwa Capital. Please ask your question.

Leon Qi -- Daiwa Capital -- Analyst

Hi. Thanks for allowing me to ask questions. This is Leon Qi from Daiwa. I have two questions today.

First one is about your user mix, AUM mix geographically. I appreciate that management just mentioned a very clear guidance on our user acquisition targets in 2022 and the specific regional breakdowns on it. But if we just take a longer time horizon strategically for the next three years, would you expect the overseas markets, I'm referring in particular for the market, example in Mainland China, do you expect that the overseas markets to contributes to a much larger proportion of the users, and AUMs? I appreciate if management could give us a very high-level color on that over a longer timeframe. The second question is about your user acquisition cost.

I understand your user acquisition has been very successful over the past few years. But given the dramatic change in the market conditions over the past few months, well, naturally a lot of our customers and potential customers are becoming more cautious. Would you be keep spending your user acquisition dollars in a way that has been similar over the past few years, or you will be considering some changes in the tactics that you are doing in a market that is less exciting at least for the moment? [Foreign language]

Arthur Chen -- Chief Financial Officer

Thank you for the question. Maybe I take the second question first. I will also leave the first question to Leaf. In terms of the marketing expenses, you're right.

It is highly correlated to the market conditions as everybody can understand. For 2022, we do expect our CAC for each new paying clients will be in the range of around the HKD 62,500 or something. And internally, we will have different parameters to evaluate the effectiveness of the client positions. Not only just, the CAC numbers for each new paying client, but also, we will be more focusing on the payback period for this CAC, i.e.

the clients' effective ARPU versus cap ratios. Depends on different markets, or these more mature markets such as Great China, this payback here will be controlled in the range of six months to nine months as always. But for the -- some new markets such as Singapore, Australia and the U.S., etc. We are more generous in this ratio, because we think in the early stage, the user engagement is still the most important things -- the things we need to consider.

Besides this ratio, we will also look at the other ratio, that is the new client asset acquisition cost, i.e. how much money we need to pay before they migrate incremental new assets into our platform. On a apple-to-apple basis, if we do not consider the market situations year-to-date or which may continue in the next couple of quarters, we do expect our new client acquisition amount, this client net asset new inflow will be increased by 20% to 25%, versus the number at the end of last year. Thank you.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

think in three years' time, we expect the ratio of our paying clients from Mainland China, Hong Kong and other overseas markets to be around one to three to six. And from a client asset perspective, this ratio will look more like two to three to five. Thank you.

Leon Qi -- Daiwa Capital -- Analyst

Thank you very much. [Foreign language]

Operator

Our next question comes from Zoey Zong from Jefferies. Please ask your question.

Zoey Zong -- Jefferies -- Analyst

[Foreign language] I have two questions. My first question is that, when will we launch our digital currency trading services? And my second question is that, among our paying clients, how much were acquired via ESOP? Thank you.

Arthur Chen -- Chief Financial Officer

Sure. I will take these two questions. For the second question, actually the new paying clients contributed by the ESOP channel just account for less low single digits for the fourth quarter. Of course, you can understand the IPO situations, the market was not very strong in the fourth quarter and also year-to-date as well.

For the crypto business, we are still doing the feasibility studies and also certain -- the license application. Therefore, we have not come from -- we do not have a confirmed time scheduled yet.

Zoey Zong -- Jefferies -- Analyst

Thank you. [Foreign Language]

Operator

Thank you. Our next question comes from Zeyu Yao from CICC. Please ask your question.

Zeyu Yao -- CICC -- Analyst

[Foreign language] Hi, management. Thanks for taking my question. This is Zeyu Yao from CICC. Congrats to your strong result in this sluggish market.

I would like to ask two questions. The first one is regarding our business in the U.S. I would like to know what is the new about -- what's new about our customer acquisition strategy in the U.S. market? And what's our next move for business growth in the mid to long-term? And secondly, doing our business expansion in 2022, are we still expected to see a rapid growth in employment related to expenses as we had already seen such increases last year.

Thanks.

Arthur Chen -- Chief Financial Officer

Thanks, Zeyu. Maybe I can share some colors or our initial source for the headcount increase for 2022. Then my colleagues Robin Xu can give you some more color on our U.S. operation and the U.S.

marketing strategy going forward. For the overall count increase on 2022, we do look for another 20% year-over-year growth. This growth will primary be deployed into our R&D functions and also the international market development. The reasons behind for putting more staff into the R&D, yes, we want to do a very significant system migrations, i.e.

from our current infrastructure building on language C++ to [Inaudible] and also we will adopt a more cloud-native technology in our infrastructure. We are dedicated to assign a special task force to develop these two areas. And we do expect this migration will be completed toward the end of this year. After this completion, we do expect our R&D efficiency will be enhanced by 20% to 30% down the road.

And the search migration will ensure our system stability and the scalability in the next three to five years. At the same time, it will significantly enhance the system flexibilities, and to lower the IT spending in the IDC and also the server. These annual IT spending savings will exceed HKD 100 million starting from 2024. Thank you.

Leaf Li -- Chairman and Chief Executive Officer

[Foreign language]

Daniel Yuan -- Chief of Staff and Head of Investor Relations

As our client acquisition picked up in the fourth quarter, I think on one hand, that's because we continue to invest to improve our product experience, and we want to improve the conversion rate from the app downloads to registration, from registration to account opening, and then from account opening to asset deposit. And another reason aside as our outspending in the U.S. market increases, our brand recognition has also risen in the past couple of quarters as a result. So I think we need more time to continue to improve our client acquisition efficiency in the U.S.

Thank you.

Zeyu Yao -- CICC -- Analyst

[Foreign language] Thank you.

Operator

Thank you. Our next question comes from Emma Xu from Bank of America Securities. Please ask your question.

Emma Xu -- Bank of America Merrill Lynch -- Analyst

[Foreign language] So I have question regarding the newly announced USD 500 million repurchase program. Is this accounted for roughly 85% of the cash outstanding by fourth quarter 2021. So, is it because you didn't see much cash needed -- much working capital needed for future investment, or do you see that you can continue to generate enough to cash to fund investment in the future?

Arthur Chen -- Chief Financial Officer

Sure. Thank you for your question. This is Arthur and I can answer this question. Since our IPO, we have conducted three round of equity financings.

So alongside with these fundings from the share placement, together with our user returning generate every year. At the end of last year, you can see our total net assets reached over USD 2.7 billion and then we do think our capability to continue to generate profit and the free cash flow will remain robust in the next one or two years. So, considering our current market conditions and the funding needs for the organic growth, we do think now we have some idle cash, which can be deployed and be utilized to reward our long-term shareholders. Having said that, we will continue to closely monitor the potential and then merger and acquisition situation if appears and also the valuation be attractive.

So it will be -- a share repurchase program covering the next almost 18 months. So it will be very dependent on the market conditions and also the opportunities, whether we can come across. Thank you.

Operator

Right. Thank you. We have reached the end of the question-and-answer session. I will turn the call back to Daniel for closing remarks.

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Thank you, operator. That concludes our call today. On behalf of the Futu management team, I would like to thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives.

Thank you and goodbye.

Operator

[Operator signoff]

Duration: 45 minutes

Call participants:

Daniel Yuan -- Chief of Staff and Head of Investor Relations

Leaf Li -- Chairman and Chief Executive Officer

Arthur Chen -- Chief Financial Officer

Katherine Liu -- Morgan Stanley -- Analyst

Leon Qi -- Daiwa Capital -- Analyst

Zoey Zong -- Jefferies -- Analyst

Zeyu Yao -- CICC -- Analyst

Emma Xu -- Bank of America Merrill Lynch -- Analyst

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