Freedom Holding Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2020; comparative periods ended December 31, 2019. The interim financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Freedom Holding provides brokerage, banking, trading, investment banking and related financial services, primarily across Eurasia. It reported more than 229,000 client accounts, approximately 68,000 active accounts during the quarter, and 96 retail offices. The company completed acquisitions of Freedom Bank KZ and U.S. execution broker Prime Executions in December 2020; it had acquired Russian broker Zerich in July.
Key financial metrics
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Net revenue | $100.2 | $29.6 | $226.4 | $91.8 |
| Net income | $42.3 | $4.1 | $90.2 | $20.9 |
| Net income attributable to common stockholders | $42.4 | $5.0 | $89.9 | $22.0 |
| Basic and diluted EPS | $0.72 | $0.07 | $1.54 | $0.36 |
| Net income margin | 42.2% | 13.7% | 39.8% | 22.8% |
| Operating cash flow | Not presented by quarter | $699.0 | $68.6 |
Quarterly revenue grew 239% year over year, led by fee and commission income of $74.3 million (up 261%) and trading gains of $18.9 million (up 194%). Nine-month revenue rose 147%; fee and commission income increased 147% and trading gains increased 180%. Quarterly total expenses rose 96% to $50.2 million, including higher commission, interest and operating costs. The company reported a $7.7 million quarterly income tax expense, versus a $0.05 million benefit a year earlier.
At December 31, 2020, total assets were $1,473.7 million, liabilities $1,248.1 million and total equity $225.6 million. Cash and cash equivalents were $624.6 million and restricted cash $368.3 million. Customer liabilities were $967.3 million, including brokerage customers $664.3 million and bank customers $303.0 million. Trading securities were $345.3 million, of which approximately 83% were debt securities. Debt securities issued totaled $68.4 million; securities repurchase obligations were $144.4 million; and loans received were $3.3 million. These balance-sheet amounts compare with March 31, 2020.
Nine-month operating cash flow included a $647.0 million increase in customer liabilities, alongside a $114.8 million increase in trading securities. Investing cash flow was $98.4 million, including $157.5 million of cash, cash equivalents and restricted cash acquired, partly offset by acquisition payments. Financing cash flow was $62.0 million, principally reflecting repo financing. Cash, cash equivalents and restricted cash together ended the period at $992.9 million.
Material changes versus prior comparable periods
- Growth in revenue and earnings was substantial, with management attributing much of the increase to elevated market activity, client growth, acquisitions and favorable proprietary trading conditions.
- Customer liabilities increased from $168.4 million at March 31, 2020 to $967.3 million at December 31, 2020; cash and restricted cash also rose sharply. The acquired bank and increased customer deposits contributed to the balance-sheet expansion.
- Repo obligations increased from $48.2 million to $144.4 million, while debt securities issued declined from $72.3 million to $68.4 million.
- Common-stockholder equity increased from $131.3 million to $227.6 million. Accumulated other comprehensive loss improved to $33.3 million, including currency translation gains.
Outlook, commentary, risks and contingencies
No specific earnings or revenue guidance was provided. Management said available cash, expected operating cash generation and forecast trading returns should meet working-capital needs for the next 12 months, while cautioning that market, pandemic and political uncertainties could affect that assessment. Management expects integration of Freedom Bank KZ with the brokerage business to continue over 12–18 months and described Prime Executions as the company’s initial entry into U.S. markets.
Management said unusually favorable 2020 market conditions supported customer activity and proprietary trading gains, but it could not predict whether those conditions would continue. Trading results may be volatile: quarterly trading gains included $7.5 million of unrealized gains, and the nine-month amount included $7.7 million of unrealized gains. The company also reported $18.7 million of Level 3 trading securities, whose valuations rely on significant unobservable inputs.
Key disclosed risks include market and currency volatility, leverage and collateral exposure, regulatory compliance, cybersecurity, COVID-19 effects, competition, key-personnel dependence, and potential need for additional capital to support growth. A short sale can expose the company to theoretically unlimited losses. Cash outside qualifying U.S. bank deposits was generally uninsured. Bank off-balance-sheet commitments totaled $6.0 million, comprising $5.7 million of guarantees and $0.3 million of unfunded credit lines. Management described routine legal and regulatory matters but did not expect them to materially affect financial condition or operations. The CEO and Chairman controls a majority interest, according to the risk disclosure. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- How much of the revenue and earnings increase is sustainable if market activity and trading conditions normalize, and what portion came from unrealized or Level 3 valuations?
- How customer deposits, restricted customer cash, and corresponding customer liabilities are managed, including liquidity and any restrictions on use.
- The risk, collateral terms and maturity profile of the increased repo financing, proprietary portfolio and short positions.
- The quality and concentration of receivables: one related-party customer represented 35% of net brokerage and other receivables at December 31, 2020; the filing says management considers related-party receivables fully collectible.
- Integration costs, performance and purchase-price adjustments for Freedom Bank KZ, Prime Executions and Zerich, and the impact of acquisitions on future results.
- The status and potential effects of regulatory, legal, currency and capital requirements across the company’s jurisdictions.