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Futu Holdings Limited (FUTU -3.83%)
Q4 2019 Earnings Call
Mar 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 Futu Holdings' Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions]
I'd like now to hand the conference to your first speaker today, Chief of Staff and Head of IR at Futu, Mr. Daniel Yuan. Thank you. Please go ahead, sir.
Daniel Yuan -- Investor Relations
Thank you, operator, and thank you for joining us today to discuss our fourth quarter and full year 2019 results. Joining me on the call today are Leaf Li, our 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 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 Li. Leaf will make his comments in Chinese and I will translate.
Leaf Hua Li -- Founder, Chairman & Chief Executive Officer
[Foreign Speech]
Hello, everyone. Thank you for joining us today. I am pleased to once again announce a strong quarter, driven by robust growth in paying clients and total client assets.
[Foreign Speech]
We added 21,620 paying clients in the fourth quarter of 2019, the highest quarterly paying client net additions we have witnessed so far. As of year-end, the total number of paying clients reached over 198,000, representing a 49% increase year-over-year. When we reported our third quarter earnings, our guidance was 190,000 to 195,000 paying clients. We are pleased that our actual results surpassed our previous expectations. In 2020, we are aiming for 45% growth in the number of paying clients, which means that our total paying clients will surpass 285,000 by the end of 2020.
[Foreign Speech]
We attribute our strong paying client growth in the fourth quarter to a combination of optimized marketing efforts, upping market sentiment and high profile Hong Kong IPOs. In the fourth quarter, we selectively worked with a number of targeted third-party channels whose client profile is similar to ours. The active IPO market was also beneficial for us. Our clients' total subscription for Ali Baba and Poly Property Development IPOs both exceeded HKD5 billion. Notably, our clients accounted for 13% of Ali Baba's total number of retail subscribers and 5% of its public tranche allocation. The frenzy around Ali Baba's secondary listing in Hong Kong gives us confidence that our business will be a key beneficiary of the continued dual and secondary listings of high quality Chinese new economy companies in Hong Kong.
[Foreign Speech]
Total client assets jumped 71% year-over-year to HKD87.1 billion. Average client assets totaled HKD439,000 as of year-end, up 15% year-over-year. As we transform to a business model that increasingly relies on AUM-based income, we are encouraged that clients continue to entrust us with more assets, with the growing share of their assets flowing into our mutual fund distribution business.
Total client assets in mutual funds surpassed HKD6 billion as of year-end, about four months after the official launch of the business, representing over 100% sequential growth. We have established comprehensive fund selection criteria and continue to source and onboard the best-performing fund products across asset classes from top notch chain and global analysis. We expect to distribute over 50 mutual funds on our platform by mid-2020. Besides mutual funds, we also plan to rollout other wealth management products in the second half of 2020.
[Foreign Speech]
Our enterprise service in the fourth quarter posted strong results yet again. We added a record 23 new ESOP clients, which brings our total number of clients to 79 as of year-end. In addition, we provided subscription services to eight U.S. IPOs during the fourth quarter. Our enterprise clients continue to make steady contributions to new paying clients.
[Foreign Speech]
Moving on to the current quarter. Despite the outbreak of The COVID-19, our operating matrices have shown resilient growth so far. Many traditional financial institutions that rely heavily on an offline presence for account opening and customer services have had to suspend the operations of their physical branches, which at this difficult time, underscores the merits of a purely online one-stop financial technology platform like us where clients can enjoy an end-to-end mobile experience for everything from account opening and money transfer to trade execution, margin lending, mutual fund investments, market news [Phonetic] and social interacting. The launch of new products and services during the first quarter may be slightly delayed, but it should not weigh on the long-term growth prospects of our business.
[Foreign Speech]
In 2020, we redefined our company's mission and vision as below. Our ambition is to make investing easier and not alone. Our vision is to become a highly influential global financial services platform. To achieve that, we will continue to enhance our technology infrastructure, maintain our relentless focus on user experience, enrich training products offerings, expand our wealth management services footprint and promote social collaboration.
[Foreign Speech]
In 2020, we will continue to focus on our 3 KPIs; namely, paying clients, client retention and net asset inflow. We are confident that we will expand our market leading position and further entrench ourselves as the broker of choice.
[Foreign Speech]
Next, I'd like to invite our CFO, Arthur, to discuss our financial performance.
Arthur Yu Chen -- Chief Financial Officer
Thanks, Leaf and Daniel. In the fourth quarter, we recorded total revenue of HKD254 million, up 37% year-over-year and the 20% Q-on-Q. Let me walk you through some of our key financial details for this quarter. Brokerage commission and handling charge income was HKD152 million, an increase of 34% from the same period in 2018 and up 23% Q-on-Q. Total trading volume in this quarter was relatively flat year-over-year, but was up 7% sequentially. Our blended commission rate climbed to 6.7 basis points in the fourth quarter. This rate hike can be attributable to higher IPO subscription fees amid active Hong Kong IPO market and the growing contributions from derivative tradings. Brokerage, commission and handling charge income contributed about 49% of our total revenues in this past quarter.
Interest income was HKD128 million, an increase of 24% year-over-year and 11% Q-on-Q. This growth was mostly due to a 52% year-over-year in margin financing and securities lending balance. IPO financing interest income also surged due to higher Hong Kong IPO subscription. Interest income contributed about 41% of our total revenues.
Other revenue was HKD31 million. This 185% year-over-year increase was mainly attributed to our new mutual fund distribution business and the higher IPO financing service charges income as well. Other income contributed about 10% of our total revenue. On the cost side, total cost was HKD87 million, an increase of 35% year-over-year and the 24% Q-on-Q. Most of costs grew in line with our revenue. As a result, gross margin was 72%, which was relatively flat compared with the same period the last year.
In terms of the operating expenses, total expenses was HKD181 million, an increase of 81% year-over-year. Bringing down our operating expenses, R&D expenses were HKD74 million, an increase of 63% from the -- from last year and up 4% from last quarter. The year-over-year rise was primarily due to the increase in R&D headcount in 2019 as we continued to enhance infrastructure and enrich our product offering. But as you can see from the Q-on-Q trend, our R&D headcount stabilized in 4Q and we are projecting a moderate headcount increase in 2020.
Selling and marketing expenses was HKD51 million, up 108% year-over-year and 30% Q-on-Q. We further diversified our marketing efforts and partnered with some targeted third-party channels to continue to bring high quality clients. Average assets per paying clients stood at HKD439,000 as of year-end, which was much higher than our peers.
General and administration expenses were HKD56 million, an increase of 80% on a yearly basis. The rise was primarily due to the increase in headcount for general and administrative personnel, as well as higher professional service fees post-IPO. Net income increased by 15% year-over-year to HKD44 million. Non-GAAP adjusted net income increased by 19% to HKD49 million.
Overall, we are pleased with our performance in this quarter. We have demonstrated resilient growth across our operating metrics. And we are particularly glad to see that our paying client growth has accelerated in fourth quarter. We are expecting robust growth in the first quarter this year as well as our purely online business has benefited from the drop in offline activities as a result of coronavirus outbreak. As we continue to increase our -- enrich our trading product offering and execute our strategy of becoming a one-stop digital financing platform, we are confident about the growth prospects of our business in 2020.
That concludes our prepared remarks. We will now like to open the call to questions. Operator, please go ahead. Thank you.
Questions and Answers:
Operator
Thank you. [Operator Instructions] We have a first question coming from Goldman Sachs, Chen Wei. Please go ahead.
Wei Chen -- Goldman Sachs (Asia) L.L.C -- Analyst
Hi, Li, Arthur, Daniel. Can you hear me?
Arthur Yu Chen -- Chief Financial Officer
Yes.
Wei Chen -- Goldman Sachs (Asia) L.L.C -- Analyst
Okay, okay. So congratulations on the strong fourth quarter. I've got two questions. One is regarding the client, second is regarding service pricing. So for the clients, we actually see a very strong new paying client growth in the fourth quarter. I think you elaborated some more on the results about the IPO of Ali Baba and some of the third-party channels you're working with. So can you elaborate more on third-party channels? Like how do they work with you in terms of like client traffic attracting? And secondly is, can you break it down more on the percentage of or the mix of Mainland's investors, Hong Kong local investors and ESOP clients? What's the mix of those three types and the new paying clients? And is there any like profiling of their -- like how they -- how much they're putting money and also how frequent they trade on these three type of clients?
And secondly, just want to ask, you see the brokerage commission rate has picked up quite a lot in the fourth quarter. If we calculate, it's around -- like the gross commission rate is around 6.7 bps. And can you -- yeah, just explain some more on why there is a strong pickup? And also regarding the margin financing pricing, so we see the Hong Kong Bureau has cut the benchmark interest rate. So not the prime rate yet, but would that be subsequent rate cuts on margin financing loans in 2020? Thank you.
Arthur Yu Chen -- Chief Financial Officer
Okay. Thank you, Wei Chen. This is Arthur. I think you mentioned four points. Maybe I'll address the first, the second to fourth questions, I will leave the first question to my colleague, Robin Xu, who can elaborate our cooperations with third-party channels in terms of new client acquisitions in the fourth quarter. In terms of the client profiles, we see a very strong growth from the Mainland in fourth quarter, I think partially because of many hot IPOs such as Ali Baba and Poly Project Management, the names these Chinese clients are quite familiar. So they are more willing to participate in these activities. So far I think at the end of last year, the Hong Kong-based clients accounted for roughly 30% of our total paying clients. And I do think this -- percentage-wise, this portion may continue to increase in the first quarter of this year. We got a very strong momentum in Hong Kong in terms of new client acquisitions.
And in terms of the pricing or the fee rate, I think the major reason as Leaf and I mentioned in the opening remarks, there are certain one-off activities such as the IPO subscription fees, which also we blended into our trading commission rate, into our total commission revenue in fourth quarter. And also, as we mentioned to investors earlier, because certain of our new clients, normally we will offer them three months to six months commission-free period. As more and more people's commission-free period expires, this will boost our blended commission rate.
And in terms of the margin and also the impact of the interest rate cut, we do note that recently the fed cut rates very aggressively. I think for the time being, we will continue to maintain our margin rate policies. Even back we -- just to recall, when we launch our margin business three to four years ago, at that time the fed was also keeping the zero rate. So for the time being, we will continue to keep our fixed margin rate in Hong Kong and in the U.S. as well.
I will leave the first question to Robin.
Robin Li Xu -- Senior Vice President
[Foreign Speech]
So breaking down our new paying client acquisition in the fourth quarter, so our paying clients from word-of-mouth referral is strong as always. And as for ESOP clients, it may take some time for their shares in our view [Phonetic] to get that. So you will see some of the impact from our strong ESOP business later on in the following quarters.
And regarding the third-party channel collaboration, and as we mentioned, the fourth quarter was very hot -- we saw very hot Hong Kong IPO market. And through these third-party channels, we were able to reach a lot of clients that are interested in these high-quality Chinese new economy companies. And in the fourth quarter, roughly 20% of our new paying clients come from those channels.
And in terms of our Hong Kong paying clients, so in the third quarter due to the social situation, the client acquisition growth came down a bit, but we are very glad to see that the growth rate has rebounded in the fourth quarter and the contribution from Hong Kong paying clients continue to increase steadily.
Wei Chen -- Goldman Sachs (Asia) L.L.C -- Analyst
Yeah. Thank you, Robin and Arthur. I just -- I can follow-up a bit on the client acquisition. So given all -- like you said, the social events is phasing out like what we can see from the fourth quarter, new clients from Hong Kong local investors. So is there any changes or marketing strategies in the Hong Kong local markets maybe broadly in overall by in China Mainland. So is there any change of marketing strategy or client acquisition strategies including like the third-party channel, you mentioned that you worked with in the fourth quarter. Would that be a norm that you collaborate in 2020 to attract more clients?
Arthur Yu Chen -- Chief Financial Officer
I will leave the question to Robin.
Robin Li Xu -- Senior Vice President
[Foreign Speech]
All right. So in terms of our Hong Kong strategy, so we see a growing contribution from our online marketing channels. So in the fourth quarter and also in the first quarter of 2020, we have over 90% of our paying clients that come from online marketing. And in the short time being, we'll also prioritize online client acquisition in Hong Kong. And as for our Mainland China client acquisition strategy, I think we want to change our strategy dynamically based on the market sentiment and also based on the hot topics in the market. And obviously, the hot IPO -- Hong Kong IPO market in the fourth quarter kind of fueled the growth of the third-party channels marketing. So we'll also keep an eye on what's going on in the market and timely adjusted our strategy.
Wei Chen -- Goldman Sachs (Asia) L.L.C -- Analyst
Okay. Thank you.
Operator
Our next question comes from the line of Daphne Poon from Citi. Please go ahead.
Daphne Poon -- Citibank -- Analyst
Hi. Hi management. Thanks for taking my question. So I have a couple of questions here, I probably will go one by one. So the first question is about your -- the trading volume or the turnover. Is that -- we observed the turnover has been declining over the past few quarters, which is if we divided trading volume by your average client assets. So I would be wondering whether that is a structural trend because of the change in like client profile, whether new clients are getting less active compared to the previously acquired clients? And yeah, so what is the outlook here? And also related to that is, since you're launching some new securities product, whether that will help improve the turnover going forward?
Arthur Yu Chen -- Chief Financial Officer
Okay. Thank you, Daphne. This is Arthur. Let me answer your questions. I think it is too early to judge whether the investors' profile or characteristics have been dramatically changed. You're right, our -- in terms of trading velocities of our clients in 2019 was softer compared with what they did in 2018. But we think it is mainly due to the market, fluctuations in the market, the overall market and robust slowdowns in 2019. Year-to-date, actually we see the trading velocities increase a lot, partially due to the volatile market and secondly due to our continued expansion of our new clients. So I think it is too early to tell, there is any structural changes for the trading velocity assumptions going forward.
Daphne Poon -- Citibank -- Analyst
Okay. But do you expect like the product launch to have actually to improve or have you seen any impact so far with the launch of the future products?
Arthur Yu Chen -- Chief Financial Officer
Yes. We launched our Hong Kong Option Trading in last fourth quarter. And also we just launched our Index Future Products in Hong Kong this March. We do think -- we do observe that the trading velocity for these new products help our overall trading velocity increased a lot. And I think you know, we will continue to enrich our product in the future, this asset class going forward. So I do think this will help us in regaining the momentum in terms of trading velocity this year.
Daphne Poon -- Citibank -- Analyst
And the next question is about the trading volume right now. And so can you please give us the breakdown by market, Hong Kong versus U.S. and also by product, like how much contribution you have from derivatives [Phonetic] in Q4?
Arthur Yu Chen -- Chief Financial Officer
Sure. Similarly to the previous quarter, in the fourth quarter, the trading volume was roughly evenly spread over Hong Kong and the U.S. And in terms of the asset class, still mainly it comes from the cash products. Given that, we just launched the option trading in Hong Kong last November. I do expect in the coming quarters you can see percentage-wise, the derivatives contribution will become much, much higher.
Daphne Poon -- Citibank -- Analyst
Okay. And the next question is actually a follow-up about the interest rate cut cycle. So you mentioned just now that your product pricing on the margin remains stable. So does it means is that your NIM is actually going to expand in the rate cut cycle because I guess funding costs should be coming down as well?
Arthur Yu Chen -- Chief Financial Officer
Yes. We are still doing the detailed evaluations on the impact. The news was just out early week. On a static basis, I think the rate cut may hurt our top-line by 7% to 8% given we will suffer the interest income from clients' idle cash. Definitely the rate cut will hurt our profitability. But I think on the flip side, it is also an opportunity for us to get closer to clients as people are seeking for more investment products and the useful investment educations. And we will become more determined to move forward our wealth management business initiative this year.
Daphne Poon -- Citibank -- Analyst
Okay. So you mean the decline in the -- basically the client idle cash, interest income will be the key driver here?
Arthur Yu Chen -- Chief Financial Officer
Yes. I think in the -- in terms terms of margin, as I answered Wei Chen's questions before, initially for the time being, we will continue to maintain our fixed rate, which -- the pricing charge to clients. So in terms of the margin spread, actually we will get some benefit from the rate cut. But this plan cannot fully offset the revenue loss we generate from the clients' idle cash.
Daphne Poon -- Citibank -- Analyst
Right, right. Understood. Okay. And lastly is the commission rate, the brokerage commission rate. So can you give us some outlook on the trend here because we've seen that it has been rising in the past few quarters. Do you think that is the current level, the 4Q level 6.7 basis points, is this sustainable or -- yeah. So how should we expect the trend going forward?
Arthur Yu Chen -- Chief Financial Officer
Sure. I think you know, there were some one-off reasons for the fourth quarter high commission rates because of the -- we planned the IPOs' contributions into the commission incomes. So on a like-for-like basis, I do think there is no near-term pressure in terms of commission, pressure from a competitive landscape. So I think the average numbers, which we generate in 2019 can be a reference point for 2020.
Daphne Poon -- Citibank -- Analyst
Okay. Actually related to the IPO contribution. So may I know how do you book that IPO revenue because I see that comes in actually different revenue lines. So that contributed to both your brokerage commission income and also part of that is under the other income. So how do you expect opportunity to categories?
Arthur Yu Chen -- Chief Financial Officer
Yeah. For the Hong Kong IPO, for example, we do some marketing campaigns and the PR activities for these IPO companies or the corporates. So we book the revenue generating from such kind of service into the other income. And for the IPO retail portion participations, besides the normal trading commissions, when people participate IPO subscriptions, we will have additional one-off commission charge. We will book this commission charge into the overall our commission revenues.
Daphne Poon -- Citibank -- Analyst
Okay. Got it. That's very clear. Thank you.
Arthur Yu Chen -- Chief Financial Officer
Thank you.
Operator
Our next question comes from the line of Stanley Xia from Goldman Sachs. Please go ahead.
Stanley Xia -- Goldman Sachs (Asia) L.L.C -- Analyst
Hi, management team. Thank you for taking my questions. I actually want to follow-up a bit on wealth management sector. We see that the total client assets in mutual funds surpassed HKD6 billion, which beats the last management guidance. I was just wondering what is the main driver for this? And on top of that, I would really appreciate management team could provide some more outlook for wealth management business in 2020? Thanks.
Arthur Yu Chen -- Chief Financial Officer
Sure. Thank you. I think one of the major reasons for the increase in terms of the AUMs in the wealth management in fourth quarter is more product offerings, because in the third quarter, we just have less than 10 mutual fund products launched in our platforms. Actually in the fourth quarter last year, we provided more color, in particular we diversified from money market to more fixed income products and also the equity fund, not only just concentrate in Hong Kong, China or Asia, actually will provide a more diversified global products which can further enhance our clients' interest.
We will maintain such strategy. I do think product availability is very important when we start to kick in this new business. As Leaf mentioned in the opening remarks, we do expect in our platforms you can see over 15 new mutual funds products launched in the middle, before the middle of this year. In terms of the, the client assets, it is very difficult to tell, in particular, judging from the recent market volatilities.
We do see a very strong momentum in terms of AUM growth in January and also in February. But suddenly it have been pulled back a lot in the past two weeks because of the market volatilities a lot of people just to redeem their money market funds and to try to average down their stock positions. But despite near-term market volatilities, we do think we should make up very big efforts in terms of the growing the wealth management's AUM this year. I think one of the reasons we have some hesitation last year is because of the rate cycle.
As I answer the questions to Daphne and also Wei Chen before. But this hurdle has been rate given that the fed has cut rates into zero. So the opportunity of course for us now actually become nothing. So we will make more efforts into the fund distribution.
Stanley Xia -- Goldman Sachs (Asia) L.L.C -- Analyst
That's very helpful. Thank you.
Arthur Yu Chen -- Chief Financial Officer
Thank you.
Operator
[Operator Instructions] Our next question comes from the line of Lily Liu from HSBC. Please go ahead.
Lily Liu -- HSBC -- Analyst
[Foreign Speech]
Arthur Yu Chen -- Chief Financial Officer
Okay. Thank you, Lily. This is Arthur. For your two questions, I will answer your second question first. I will leave the first question about the growth and the competitive landscape to my colleagues Leaf and Robin. In terms of margin balance, you're right, we maintained a very good momentum in 2019, partially thanks to the overall good benign market conditions.
In terms of funding source, last year equity fundings, i.e., our own capital contributed about 50% of the funding source and the remaining 50% mainly come from our financial partners such as commercial banks in Hong Kong, etc. Currently, after our last year's IPO, I do think that our leverage ratio is still quite healthy. So in terms of the leverage upside, we still have a very room to -- big room to grow.
Robin Li Xu -- Senior Vice President
[Foreign Speech]
Lily Liu -- HSBC -- Analyst
[Foreign Speech]
Arthur Yu Chen -- Chief Financial Officer
Sure. I think the recent market volatility may less people concerned whether there is any margin cause. I think in Hong Kong market and also in the U.S. market, we still use a very prudent margin policies that we did not provide on a very high leverage to our clients. We do see some small margin close, but I think the overall, the size is not very material compared with our coming first quarter P&L.
Operator
[Operator Instructions] There are no further questions at this time. I would like to hand the conference back to our presenters. Please continue.
Daniel Yuan -- Investor Relations
Thank you. 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 Closing Remarks]
Duration: 47 minutes
Call participants:
Daniel Yuan -- Investor Relations
Leaf Hua Li -- Founder, Chairman & Chief Executive Officer
Arthur Yu Chen -- Chief Financial Officer
Robin Li Xu -- Senior Vice President
Wei Chen -- Goldman Sachs (Asia) L.L.C -- Analyst
Daphne Poon -- Citibank -- Analyst
Stanley Xia -- Goldman Sachs (Asia) L.L.C -- Analyst
Lily Liu -- HSBC -- Analyst
