Freedom Holding Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2022. The filing compares the quarter and nine-month period with 2021; comparative financial statements were recast or restated as described below. Amounts are in U.S. dollars unless noted.
Business context
Freedom Holding provides brokerage, banking, investment and insurance services, principally across Central Asia and Europe. Its Russian brokerage and banking operations are classified as discontinued operations and held for sale. The company expanded through acquisitions, including insurance businesses and Ticketon, and acquired Paybox Technologies for $11.5 million on February 8, 2023.
Key financial results
| Metric | Three months ended Dec. 31, 2022 | Prior-year period | Nine months ended Dec. 31, 2022 | Prior-year period |
|---|---|---|---|---|
| Net revenue | $214.5 million | $155.2 million | $566.7 million | $597.5 million |
| Income from continuing operations | $46.4 million | $58.2 million | $138.8 million | $319.8 million |
| Net income, including discontinued operations | $62.4 million | $54.1 million | $148.7 million | $316.2 million |
| Basic EPS, total | $1.38 | $0.91 | $2.86 | $5.34 |
Quarterly revenue rose 38%, while nine-month revenue declined 5%. Quarterly net income increased 15%, but nine-month net income fell 53%. Nine-month net income attributable to common shareholders was $150.2 million, versus $316.6 million in the prior-year period.
- Revenue mix and changes: Quarterly interest income increased 138% to $80.3 million, foreign-exchange gains rose to $20.9 million, and insurance underwriting income increased 33% to $28.6 million. Fee and commission income fell 12% to $80.9 million, mainly due to lower retail brokerage activity. The quarter included a $21.5 million derivative loss.
- Nine-month drivers: Interest income increased 128% to $187.8 million and insurance underwriting income increased 53% to $79.0 million. These gains were outweighed by an 80% fall in trading gains, to $38.9 million; 2021 included unusually large trading gains.
- Expenses and margins: Quarterly expenses rose 71% to $163.1 million, including higher interest expense and impairment provisions. Nine-month expenses increased 68% to $401.4 million. Continuing-operations income before tax was $51.5 million for the quarter and $165.3 million for nine months. The filing does not present a standard operating-margin measure.
- Cash flows: For nine months, net cash used in operating activities was $465.8 million and net cash used in investing was $641.3 million; financing generated $1.506 billion. Cash, cash equivalents and restricted cash increased $484.1 million, including favorable foreign-exchange effects of $85.1 million.
- Balance sheet and liquidity: At December 31, cash and cash equivalents were $664.1 million and restricted cash was $450.0 million. Trading securities totaled $1.930 billion; loans issued were $639.4 million. Total assets were $5.368 billion, liabilities $4.686 billion and equity $682.3 million. Management-reported net liquid assets were $3.045 billion.
- Funding and debt: Securities repurchase obligations were $1.234 billion, up from $840.2 million at March 31, 2022. Customer liabilities were $1.786 billion, up from $765.6 million. Debt securities issued totaled $37.2 million; the outstanding Freedom SPC bonds bear 5.5% interest and mature in 2026. The company says subsidiaries subject to regulatory capital requirements exceeded their minimums.
Material changes, outlook and risks
- Russian divestiture: The agreed sale of the Russian subsidiaries was approved by Russia’s central bank on February 10, 2023, and was expected to close by the end of that month. The stated consideration includes assignment of an approximately $91 million deferred-payment obligation and cash consideration structured to total $140 million. The filing recorded a $44.0 million impairment charge on the disposal group. Completion and the expected benefits remain uncertain; the sale will also reduce the company’s operating scale.
- Other significant exposures: On October 19, 2022, Ukrainian authorities suspended Freedom UA’s brokerage license for five years and froze its assets after sanctions-list designation. The company is appealing. The filing also reports $24.0 million of quarterly impairment provisions, including one-off provisions related to restricted customer cash held at Lek Securities and loans issued by a Ukrainian bank.
- Related-party concentration: Fee and commission income from FFIN Brokerage, owned by CEO and controlling shareholder Timur Turlov, represented approximately 54% of total fee and commission income for the quarter and 67% for nine months. Related-party margin receivables were $161.1 million at December 31. The company says it plans to reduce business involving FFIN Brokerage over time.
- Financial reporting controls: Management concluded disclosure controls were not effective due to material weaknesses in controls over financial-statement classification. Prior reports were identified as no longer reliable and require restatement for cash-flow classifications and the presentation of margin-loan interest income. The filing says these classification errors did not affect net income or per-share amounts; remediation is ongoing.
- Outlook: No numerical earnings or revenue guidance is provided. Management expects continued expansion, while noting that growth and the Russian sale may require additional capital; financing may not be available on acceptable terms. The board has not declared cash dividends and the company does not anticipate dividends in the foreseeable future.
- Principal risks: Geopolitical events, sanctions and the Russian divestiture; market, interest-rate and foreign-exchange movements; credit and margin-lending exposure; liquidity and collateralization; regulatory and compliance matters; insurance underwriting and reinsurance recoverability; and the identified internal-control weaknesses.
Important facts for investors to verify
- Whether the Russian subsidiaries’ sale closed on the expected terms and timing, including actual cash proceeds, liability assignment and any further impairment.
- Progress and independent testing of the remediation plan for material weaknesses, and completion of amendments to prior SEC filings.
- Changes in FFIN Brokerage concentration, related-party receivables and customer balances, and the related governance and credit protections.
- Quality and performance of the expanding loan portfolio, including the growth in mortgage and related-party-originated loans and the increase in impairment provisions.
- Availability of unrestricted liquidity after customer funds, regulatory capital requirements and pledged securities are considered; cash and restricted cash should not be treated as equally available.
- Status of the Freedom UA sanctions appeal and any subsequent regulatory, legal or financial effects.