Freedom Holding Corp. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended December 31, 2023; unaudited. Amounts below are in U.S. dollars, generally shown in millions unless stated otherwise.
Business context
Freedom is a diversified financial-services group headquartered in Kazakhstan, with brokerage, banking and insurance operations and newer payment, ticketing, e-commerce and other digital businesses. It reports four geographic segments; Central Asia and Eastern Europe is the largest. The company continued acquisitions and is developing telecommunications and media businesses in Kazakhstan.
Financial results and position
| Metric | Three months ended Dec. 31, 2023 | Nine months ended Dec. 31, 2023 |
|---|---|---|
| Net revenue | $418.6m | $1,170.4m |
| Expenses | $307.0m | $839.5m |
| Income before tax | $111.6m | $330.9m |
| Net income | $96.1m | $279.5m |
| Net income attributable to common shareholders | $96.4m | $280.3m |
| Diluted earnings per share | $1.63 | $4.73 |
| Net interest income | $95.2m | $223.2m |
Net income was approximately 23.0% of net revenue for the quarter and 23.9% for the nine-month period. The filing does not present a conventional operating-margin measure.
- Growth drivers and mix: Nine-month interest income was $588.9m, insurance underwriting income $181.9m, fee and commission income $330.6m, and trading-securities gains $77.5m. Derivatives generated a $71.8m loss.
- Balance sheet at Dec. 31: Assets were $7.449bn; liabilities $6.410bn; shareholders’ equity $1.039bn. Cash and cash equivalents were $561.9m and restricted cash $384.6m. Trading securities totaled $3.680bn.
- Funding and liquidity: Repurchase-agreement obligations were $2.889bn, up from $1.517bn at March 31, 2023. Issued debt securities were $266.3m, including $200.4m of 2028 bonds and $64.5m of 2026 bonds. Customer liabilities were $2.248bn. Company-defined net liquid assets were $2.315bn, versus $1.853bn at March 31.
- Cash flow, nine months: Operating cash outflow was $1.373bn, investing cash outflow $593.0m, and financing cash inflow $1.892bn; cash, cash equivalents and restricted cash decreased $80.5m to $946.4m. Operating outflows principally reflected growth in trading securities and margin receivables. Cash paid for interest was $350.1m.
Changes versus comparable periods
- Quarterly net revenue rose 96% year over year and net income rose 54%; nine-month net revenue rose 107% and net income rose 88%.
- Interest income increased 182% for the quarter and 214% for nine months, supported by larger securities, loan and margin-lending balances. Interest expense rose 152% and 175%, respectively, mainly due to greater repo financing and customer deposits.
- Quarterly fee and commission income rose 49%; nine-month income rose 30%. Payment-processing revenue benefited from Paybox, acquired in the prior fiscal year, while brokerage activity and insurance operations also contributed.
- Quarterly trading securities produced a $5.1m loss versus a $25.5m gain a year earlier, including a $14.4m unrealized loss, principally on Kazakhstan Sustainability Fund securities. Nine-month trading gains increased to $77.5m from $38.9m.
- The company adopted the CECL expected-credit-loss standard on April 1, 2023, recording a $22.8m after-tax reduction to opening retained earnings. Prior-period EPS for 2022 was restated for a mathematical error; the filing says the correction did not affect equity or net assets.
- Acquisitions included Aviata, Internet-Tourism, Arbuz and ReKassa. The company also ceased consolidating Freedom UA from April 1, 2023, stating that sanctions-related circumstances meant it no longer had effective control.
Outlook, risks and unusual items
- No general earnings guidance is provided. The company projects approximately $650m of telecommunications investment over five years, including a $200m bond placement. Management’s model expects Freedom Telecom to lose money in calendar 2024–2026, reach profitability in 2027, and begin contributing significantly to consolidated net income in 2028. These are projections, not guarantees.
- Freedom Media, established in January 2024, is expected to require approximately $54m of investment over five years. The filing gives inconsistent timing for its projected losses and profitability: one passage anticipates profitability in 2026, while another describes losses through 2026 and profitability in 2027.
- Management cited geopolitical and sanctions exposure, market and currency volatility, regulatory inquiries, credit and counterparty risk, and the challenges of managing rapid growth and new businesses. Customer liabilities associated with sanctioned individuals and entities were $96.6m, or 4.3% of total customer liabilities, at December 31; the company described increased exposure related to an omnibus customer whose parent was sanctioned by OFAC.
- Related-party and concentration risks merit attention. CEO and controlling shareholder Timur Turlov owns FST Belize, which is not consolidated; the group reported $27.2m of margin receivables from FST Belize and $84.4m of its deposits at December 31. Trading securities included $2.357bn issued by Kazakhstan’s Ministry of Finance and $721.1m by Kazakhstan Sustainability Fund.
- Management concluded disclosure controls were not effective because of material weaknesses, including insufficient qualified U.S. GAAP reporting personnel and weaknesses in controls over complex transactions, cash-flow and income classifications, and note disclosures. Remediation steps include training, hiring and external consulting; management said weaknesses are not remediated until controls operate effectively and are tested.
- The filing reports $134.2m of lending-related commitments, including unfunded credit lines and guarantees. It also describes ongoing routine legal and regulatory matters and the Tolmakov estate litigation; the company says it does not believe that litigation’s outcome would be material.
- The filing reports a hypothetical 100-basis-point increase in interest rates would reduce investment-portfolio fair value by $133.8m, with losses realized only if investments were sold before maturity. A 10% adverse U.S. dollar move was estimated to reduce pretax income by $39.6m.
Most important facts for investors to verify
- Whether earnings and liquidity remain resilient as repo financing, interest costs and pledged securities increase.
- Credit quality, collateral concentration and potential loss exposure in margin lending, including the large single-counterparty collateral balance.
- The effect of sanctions developments and the company’s exposure to sanctioned customers, counterparties and related regulatory inquiries.
- Related-party dealings, including FST Belize and loans or purchased receivables involving entities controlled by the CEO.
- Capital requirements, financing availability and actual spending and performance against the telecommunications and media investment plans.
- Progress in remediating material weaknesses in disclosure controls, and the implications of the prior-period EPS restatement.