Robinhood Markets, Inc. (HOOD) Earnings Call Transcript & Summary

Our next company to present is Robinhood, Co-Founder and CEO, Vlad Tenev. He's virtual, I believe, from [ Colton ] San Francisco. But we're also very appreciative to have his Chief Brokerage Officer who I know well from his prior life in the online brokerage agency, Steve Quirk. And I also know the Chief Legal Officer, Dan Gallagher's a former commissioner with the SEC. So thank you. All 3 of you for being here. So Vlad, I guess -- we'll just start out.

We have talked a little bit about the retail activity now. But Robinhood is known for being disruptive. And I sort of categorize it as one of the most disruptive companies that I've seen in my 20-plus years of covering publicly traded companies. So -- but all that said, we are going through a retail pullback. You have democratized finance and even a previous [ speak ] of Thomas Peterffy acknowledged that as well. So the question is, with this retail pullback, how are you adapting and how do you take this disruptive DNA and apply it to market conditions that have changed, I guess, since the first quarter of 2021?

Thank you. By the way, it's good to be there with you, gentlemen, virtually. Yes. I think this macro environment, first of all, I think we acknowledge that it's challenging for customers. Customers are going through a lot of things potentially for the first time. You have very high inflation, the likes of which we haven't seen in the U.S. in something like 40 years. And then you're also seeing high gas prices, right? And investing historically has been much more of a luxury for a lot of our customers, and they tend to invest their assets once they've paid for a lot of their essentials like gas at the pump and day-to-day spending. And despite that, you saw our customers actually depositing healthy amounts of money into Robinhood as of Q1. So the -- the focus continues to be on customers rolling out products that help them, not just in kind of a bull market, but in these challenging new conditions that we're in. And on a company level, making sure that we use this as an opportunity to get stronger, much like we've used all of the other crises that we've had to deal within the past, including the global pandemic and the surge of new retail accounts. I think with this particular market environment, we've shifted a lot to focus on cost discipline. We have a very strong balance sheet with over $6 billion in cash. That I think gives us an incredible position, but it doesn't mean that we can't ignore -- it doesn't mean that we can ignore cost discipline. In fact, it's something that's been very, very important to us, and something that we're using to push the company forward and of course, initiatives to increase the revenue and get the company back to profitability, especially in these market conditions. So it's a challenge it's like any challenge, exciting, but keeping our customers in mind and giving them new products to help them take advantage of this environment and help them save money and more value is always top of mind. And maybe Steve can talk a little bit about -- I mean we've rolled out a lot of new products recently that I think directly help customers during challenging market environments and have been well timed.

Yes. I'm happy to, Vlad. So as Vlad said, the customers of Robinhood are -- 50% of them, this is their first brokerage account. So this is new to them. These market environments are very, very new to them. And so the first thing we want to do is make sure that we're catering and making sure that they're comfortable in this environment. But again, there are a lot of people who are seasoned who aren't comfortable. But so we have to amp up our content, our education, but we also have to give them other tools so that they can navigate these markets. So some of the things we've been rolling out recently are cash sweep at 100 bps, which has resulted in some nice deposits so that their money can get some yield. Fully paid securities lending, so they can generate some income on this portfolios that they already hold. The Cash Card, which lets them round up and give rewards, and one of the other things which has seen nice traction is reoccurring investing. So for young people, learning how to deal with the emotions of investing in a market that's moving around 2% a day, it's pretty difficult. More seasoned people are accustomed to navigating that. They've seen it before. Younger people have not. So one of the ways you remove the emotion is you just systematically invest, and that's something which I think they find particularly useful. I've noticed it in my own kids who are all in their 20s. They yell at me every time the market is down. So I've got them in this program, and I get fewer texts and phone calls.

Do you want that less contact?

Well, I don't mind the contact, but when they're yelling at me every time it's down. They never call me when it's up.

Vlad, you're obviously trying to take advantage and move to products and take advantage of disruptive benefits that you -- again, you democratize finance, you brought a bunch of new accounts. But you also did mention cost controls. And the ability -- look, I think the goal is to be adjusted EBITDA breakeven by year-end. The market continues to -- at least Fintech valuations continue to pull back a bit. We believe retail activity has slowed. So can you give us an update on the outlook of reaching that goal which you've already acknowledged wasn't going to be a super easy goal for the year?

Yes. I mean what I'd tell you is that when we look back at the last few years, 2020 and 2021, the main focus was on making sure that we serve our customers well through the period of hyper growth. And what that meant was system stability, first of all, just making sure that we add more redundancies to our infrastructure so that we have less service interruptions. You guys might remember that the biggest challenge in the beginning of the pandemic and throughout was really handling all the scale, all the new customers that were coming in, all the activity, both from those new customers and existing customers. And the team did really a tremendous job scaling up and making sure we had excess capacity to handle that. And on the operational side, making sure that we not only kept up with customer support, but made it even better. And so we rolled out 24/7 live phone support last year for all of our customers and have been expanding that and making that even better. But -- so serving the demand was clearly top of mind. And maintaining focus on cost discipline and efficiency was secondary during that time period. Now we're in a position where we've made a lot of these investments. We have a really strong foundation. We've been really, really pleased with how the systems have scaled, and how we've been there for customers during, during the past couple of years. And the support structure is in place. Customers can get live phone support, and we've made a lot of progress on automation to make things easier. So we feel like we're very, very well positioned to ask our teams to think hyper critically on where every dollar is going and really using our engineering resources to drive more automation and efficiency. And we've been seeing some really, really good wins with that. And on the flip side, as Steve mentioned earlier, there's a lot of opportunities to improve the monetization of the business as well, both in making the experience really, really solid for the customers that are active, and the active advanced customers do tend to be the ones that are engaging more in all environments. So the casual customers tend to engage more when markets are good and things are going up. Advanced customers have strategies and utilize tools both in bear markets. So historically, we focused much more on the first timers and more novice investors, but we do have lots of people that come to Robinhood for the cost structure. The fact that we charge 0 commissions and on options, we have no contract fees. So the value proposition is very, very strong. Just making sure that the experience for those customers is flawless, we think will drive revenue and monetization of the business significantly. And then diversification in the new products, stock lending on the fully paid side, the Cash Card, which gives us access to that interchange revenue those, that I think are going to be increasingly important in the new market environment.

Vlad, you led me right into the next question about the active trader. We have -- I can only -- that cell phone is mine, so I take blame for that.

That's an alert. He's about to trade.

I got to debate on whether I use Robinhood or Interactive Brokers for that [ triggers ]. [ Which is better for you, too ]? So anyway, but leading into the next question on active trader, you highlighted that on the last call. Chief Brokerage Officer, Steve Quirk, who has experience with active option traders at prior at [indiscernible]. So I guess the question is, as you focus on the active trader, how do you define an active trader at Robinhood? And how does he look compared to -- again, you've had...

He or she?

Did you say -- what?

He or she?

Excuse me, he or she, thank you for that correction. Compared to what you've seen being an expert experienced at analyzing and creating products for that -- for the active trader.

Yes, I can start, Vlad. I said that 50% of the customers are first-time brokerage clients. That means 50% aren't. But really, if you kind of take a photograph of what -- of what the demographic looks like. It's more diverse, younger, of course. They're just earlier in the journey, in the investing journey. But that doesn't mean we don't have people who are experienced and we also have to grow with the ones who are earlier in the journey. And part of that growth, it means rounding out the offering. With all the things that Vlad and I just talked about, but also retirement accounts, having -- lining up your support. So we did a lot to create a CX team, but now you have to align that so that you have the right people talking to the people who are the most knowledgeable which we just did an exercise in. You have to also deliver some of the things that they've been looking for. Yes, we have a great cost structure, easy-to-use interface. It's amazing, but we have to enhance some of it. We need some more advanced tools with respect to charting, some of the screening, some of those things, the configurations on your order types, some of the strategies, the education, which has to be married to these advancements because we have to teach people how to use them. All those things sort of come together to create an environment which is really good for them to sort of grow with us. We have 23 million people. They would love to stick with us and grow, but we have to provide the avenues so that they can do all the things that they're looking to do. And that's really the path that we're on. And we're in a pretty good place. But we're really splitting out new things at a really fast clip right now.

Good hire, Vlad.

Too good hires here. As we have a great team, that's one of the things I'm most proud of. These 2 gentlemen and the people that are in our offices and we're both are just fantastic. We've been able to build a great team.

So as long as you brought up the subject, Steve, how much -- what percentage of your active traders are female?

I actually don't know that. But I think overall, our average is like 35% of our customers overall, which is I think it's higher than the industry average. I don't know about the active. I'm not sure.

I know you've highlighted in the past about the number -- the demographics and the females that you brought on, so that's why [ I joked ] bring that. It's not a joke. But why bring that up. So Vlad, another area that you highlighted as growth is crypto. And with the acquisition of Ziglu, if I pronounce it, hopefully, I've pronounced that correctly. So can you update us you have crypto wallets that you've launched new tokens, then again, Ziglu, can you update us on your expansion in crypto internationally, I guess, an overall crypto offering?

Sure. Yes. We've been doing a lot on crypto, and Steve has been very involved in that space as well. I think crypto, historically, has been -- we've been thinking about it as an asset class, not just at Robinhood, but industry-wide. So we started out thinking about it, like how do we give our customers exposure and the ability to diversify? How do we take the same value propositions of what made Robinhood so appealing and successful with stocks and options trading and apply it to this new asset class. So when we launched the value prop was very much 0 commissions as well as an incredibly easy-to-use interface. And I think that's why so many people turn to us for crypto, especially in the past couple of years. And over time, you've seen us continue to listen to customers and buttress the offering. So we've added wallets and the ability to send crypto in and out. We've added more coins and really improved our selection recently. And a couple of weeks ago, I was down in South Florida, and I announced what we're calling Robinhood 3, which is a noncustodial wallet. That's something we're very interested in because, one of the really surprising things about crypto to me was how much people can do in terms of rich financial transactions without giving up custody and control of their keys. So essentially, this technology allows you to be your own bank, and you can do a lot of these traditional banking services without actually -- without a middleman or a third party, just you in the blockchain. So you're seeing not just holding on to crypto, which is what self-custody meant 3 or 4 years ago, but people actually doing trading on decentralized exchanges. You're seeing staking in lending in a fully decentralized manner. You're seeing all of these rich applications, and I think especially in the environment that we're in today, with so much concern by customers around their privacy and around security, self-custody I think, is a really, really big trend. And I think another one that we're thinking about is crypto and blockchains really having the potential to basically replace a lot of the legacy infrastructure in the traditional financial system. So we've talked a lot about how the settlement system underlying the U.S. equity markets is antiquated. It takes 2 days. There's so many intermediaries. There are so many third parties. And I think some of the technologies that we've seen developed in crypto have the opportunity to kind of replace that layer over time. And that's something that we're certainly interested in. Any time there's an opportunity to improve efficiency to lower cost of processing transactions, that gives us an opportunity to pass back those savings to customers and continue to lower cost for them. And we really think that that's kind of what crypto and blockchain is going to provide in the future. And it's yet under explored in the U.S. And I think Robinhood can be a leader there.

Thanks, Vlad. I want to switch gears a bit and get to the topic du jour seems what has evolved this week at the conference and did get involved because I know we set an expert on this. Regulation is the topic. So we got 2 big things that are going to be discussed throughout the [ conference ], especially at lunch today. But one would be the SEC's, at least what's been reported by the media, some people that are right here in the room about auctions, new rules around retail equity trading inflows. So first, thoughts on that. And then also, this week, what has come out is the crypto bill release -- I don't know whether it's released, but Senator Gillibrand, Senator Lummis from Wyoming, Gillibrand from New York blocked a partisan bill that's being floated on crypto as well. So a couple of big things that could impact Robinhood. So Vlad or Dan, could you give us our initial thoughts? Anything that, that first comes in mind that you'd like to highlight and you'd want investors to know in regard.

Don't say the first thing comes to mind.

Say the tenth thing that comes to mind. Vlad, do you want me to go first?

Of course, yes.

Okay. So yes, I guess we'll see it lunchtime what Chair Gensler talks about as far as equity market structure. Reform, obviously, there have been hints and rumors going around. I think most folks have heard them about the new auction process proposal. Obviously, there's no written proposal that's gotten through the commission yet, so there's nothing to react to by way of details. And as I learned in a very hard way, in my years on the commission, the devil is in the details and oftentimes, the devils in the footnotes. So we'll see. I'm guessing something this big, typically coming out of the agency would be in the neighborhood of 1,000 pages. And there better be a lot of economic analysis around it to within those 1,000 pages because my personal reaction -- I'm not going to speak for Robinhood right now, and I don't want to embarrass Vlad, but it feels a little bit to me, just off the cuff as a solution looking for a problem. And when you have that type of regulatory initiative, justifying it by way of cost benefit analysis, market conditions and everything else is pretty hard. So I'll be really interested to read those details and understand exactly what the impetus is to regulate in this space. We talked a lot when I was on the commission about the so-called holistic review of equity market structure. It never happens. That was 2012, I think, when I gave that speech at SIFMA that launched -- I wanted it to launch 1,000 [ ships ]. That launched like a robot. Nothing really came of it. A review where you look at all of the interdependent pieces of the equity market structure, right, the status of SROs, right, the NMS and the order protection rule and all these other things as they work together and then decide is it working well? For customers, do we need to make changes? Is there more clarity needed? And then any potential rulemaking after that? That is, to me, a holistic review of equity market structure and leading with regulation, though and then making the review being the comment process is a different way to go about things, let's just say. So we'll see what's in the details. It's obviously -- it's Chair Gensler's prerogative, right? As Chair, he runs the agenda. Let's take a look at this. He obviously has deep concerns about certain things within the equity market structure. It's beyond cliche to say that retail investors have never had it better. I mean everyone's probably said it, it's probably been said 3x already take, but it's real, right? No commissions. As Vlad said, no account minimums, lightning fast executions, price improvement for the vast majority of orders, I mean it is a really good climate for retail. So to go in and muck with it right now, to me, is a little worrisome. And the one thing that -- one reason Robinhood, I'm really intensely invested in the mission. I really believe in what Vlad and Baiju put together. I know Steve feels the same way. Bringing people into the markets that were not only not served, but were neglected or affirmatively kept out of the markets historically, sorry, for the feedback. That's something that Robinhood does. If you look at Fed data on the diversity of retail investors, right, the number of retail investors has grown as Robinhood has grown. The diversity of those retail investors has doubled right? We're reaching important constituencies here. And to take a step back and say, "Oh, geez, because of what happened with GameStop or because of payment for order flow, maybe we don't want these people in our markets? Maybe we should have regulations that make it harder for people to invest? I don't know if you saw the Matt Levine speech yesterday. That's effectively what he was saying. That's really disturbing to me as a policy matter. I mean I spent years giving speeches and in a very bipartisan way, many folks in Washington policymakers have said we want to increase participation in our capital markets. It had been declining since the '70s. And all of a sudden, you have this technology that has enabled it and to say whether it be through gamification regulations or payment for order flow, we don't want that anymore. We don't want these people in our markets, I think, is very disturbing. So anyway, we'll see what happens. With market structure, we're going to engage the process, right? As all of you are, we're going to read the proposal. We're going to write comment letters, we're going to engage and try to make any potential final rule-making here. Workable for our customers because that's all we care about at the end of the day, as Vlad said. And then on the crypto side, I think we're still digesting the bill, the Lummis bill. At a macro level, all I can say is the great thing about it is, it would give clarity. Because operating in the crypto space as we do right now without transparency, without guidance on regulation is really just not the way to run a railroad, right? They're wondering what might be magically deemed to security one day versus the next 2? Who's going to be required to come in and register as an exchange, whatever that may be in the crypto world, right? It's not a good way to run a business, and it's a business that's catering to customer demands, right? And we at Robinhood sit back and think, wow, we're highly, highly regulated, as you know on our brokerage side. We have the skills. We have the talent to bring controls into the crypto space, right? We have Steve's expertise right, to make sure that the execution quality is great. We have my background and the compliance folks we brought in, we can really bring a controlled crypto environment to our customers, and they want crypto. And if we can't do it, they're going to go elsewhere, right? They're going to go create an international account. They're going to go to some of our competitors who are wholly unregulated, and that's not a good thing for investors. And so if this bill results in some sort of clarity, if we can get like a JOBS Act moment, where we get bipartisan support and the President feels he needs to do this for whatever reason and have a model, we'll engage it fully. We'll be excited to operate in a more certain atmosphere.

Vlad, I'll reiterate a point I said earlier, nice hire.

We're happy to have both of these guys.

So again, I'll remind Dan was a former Commissioner at the SEC. But I did want to clarify 2 points and correct me if I'm wrong. This -- what has been floated. It's not even a proposal yet, right? So this is all sort of leaks, I guess, is what you call it, inform leaks, we put it that way. That's what we suspect. So there is no proposal. Once a poll does come out, it goes from review period, comment period, et cetera. So we're well far from that. And second is that any rule changes, sort of the [ lipids ] test, the legal [ lipids ] test for rule changes is the economic analysis of it. So that's what you were sort of...

Yes. So under the Administrative Procedures Act, which any federal rulemaking must follow, you have to have a notice and comment period. You have to take those comments seriously before you have a final rule making, and you need to conduct the cost benefit analysis. So you have a couple of things. When you're making deep regulations like this one, you have to think about your authority? Do you have statutory authority to do it? With equity market structure, there's pretty broad authority for the commission to regulate. And then you have the APA requirements. And cost benefit is one, as you've seen over the years, where the SEC has gotten hung up really badly on rule-makings. If you remember, proxy access in 2011, right? Dodd-Frank comes along actually gives the statutory authority for a proxy access rule, which didn't exist before. The agency rushes within a month to put out a rule making, and they get sued in the DC circuit, came back with a scathing opinion. This is when I started on the commission, we were dealing with the fallout from this opinion. We didn't probably had a rule for 9 or 10 months because we're trying to figure out how do we do economic analysis in a way to appease the DC circuit to make them feel like we're really doing something. And that resulted in a memo being made public on how the SEC conducts cost benefit analysis. And it's really serious stuff. You have to identify a problem, right? You have to identify something that needs to be remedied. And here, as we've been talking about for retail investors, which this proposal apparently we'll target, I don't see it.

Well, we're certainly looking forward to our lunch here. I'm going to give you the wrap-up. And again, I'll go back to how I sort of introduce Robinhood as probably the most disruptive company that I've [ experienced ] and followed over a long period of time. So -- but there's also no doubt there's been some significant tailwinds. And unfortunately, given the macro environment with some headwinds now. But overall, given how you're trying to move and take that DNA of innovation and disruption and sort of diversify the model, focus more on active trade. Where do you see Robinhood, let's just say, Vlad in 3 years if things go the way you hope that they should go or will go?

Well, I think there's 2 things when we talk to customers that they really, really love from Robinhood. One is the fact that we enable them to invest and use products at great value and low cost. And the second is that the user experience is very, very simple and well designed. And those are kind of the 2 through lines that you see throughout all of our products. You see it in equities, options, crypto and of course, the Cash Card. The 1% interest that we give on uninvested cash. It's really -- we try to -- we try that to put that through everything. Now Robinhood historically has served novice investors very well as well as active investors. So the bulk of our efforts throughout challenging market environments are going to be on that core business, making sure that we improve the quality of service. We continue to be the best place to invest for novice and active, but it's still actually a relatively small segment. And we see a huge opportunity to expand beyond that and to be the best place for long-term investing in retirement savings. So you heard Steve talk a little bit about retirement accounts. There's a lot more to do for passive and long-term investing on Robinhood as well, and we think that's a space where we can provide a lot of value. Crypto, we're still very much in the early innings, and there's a lot more we could do both with crypto as an asset and in kind of viewing crypto technology and in making sort of traditional assets better. You've heard us talk about the Cash Card, which we're very excited about. I think it's going to be very important in this market environment. And of course, the last piece that I think is a big focus right now is giving access to customers outside of the U.S. So we have 23 million customers, a significant portion of the U.S. population, but we're not -- we're not serving customers outside of the U.S. yet. And I think that's a huge part of the mission. There's a lot of people that are underserved in emerging markets in overseas. We're doing a lot to bring our crypto offering there with the acquisition of Ziglu recently and also with Robinhood 3, the noncustodial wallet. We plan for that to be global by default. And I think that, that's going to be useful to all of these customers outside of the U.S. who have lacked access to great financial tools. It will also be very significant for the business. Once we're able to expand overseas, that increases the market of people that we serve by an order of magnitude or more. So there's a lot more to do. We're very much at the beginning, and we see a huge opportunity ahead of us. And we have a great team with these 2 guys, in particular, that we're going to rely on to get us there.

Vlad, we could go on for a lot longer. But thank -- first, I want to thank you for devoting all the resources here, having Dan and Steve participate yourself as well. Innovation, this has been the first hybrid presentation that I've had in 18 years.

So usually, I'm not able to see the folks on the stage when we've done this. So very -- thank you for -- thank you for making it good and high quality.

Thanks. So again, thanks to Vlad and his team for participating, and I know investors appreciate you keeping them informed as well.

Thanks, Rich.

Thank you Vlad. Next up, little turn around period and we'll have Galaxy Digital up next.