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

Okay. Great. Well, welcome, everybody, to the Wolfe Wealth Symposium. I'm Steve Chubak, lead analyst covering the diversified banks and brokers. Really excited to have with me today Jason Warnick, CFO of Robinhood. Prior to Robinhood, Jason spent, it was roughly 20 years at Amazon, most recently as the VP of Finance and Chief of Staff for Amazon CFO. As many of you know, Amazon, recently this quarter, they did turn the corner on profitability 1 quarter ahead of schedule. We're really keen, Jason. I'm really excited to have you here to unpack the road map to sustain profitability as well as some of the new product launches and growth initiatives that you guys are pursuing. But before all of that, just given there has been some volatility in the share price today, I was hoping you could speak to, in light of some of the consolidation news, some of the activity in the crypto space: one, whether you have any direct exposure on the balance sheet to any crypto assets given the volatility that we've been seeing; and two, maybe just speak to how additional consolidation maybe impacts your competitive positioning within the space.

Sure. So first of all, we have no direct exposure to the coins that are affected today and have confirmed with our venues that they also don't have any significant exposure. So we feel really good about that. One of the things about our approach to crypto, and it's been a source of some criticism in the past, is that we've tended to move slower than some of our competitors. But our vision is to be the safest, most trusted, lowest-cost on-ramp to crypto for our customers. And so we have a rigorous coin-listing framework that we use. We've been adding coin selection, but we've been very deliberate about the way that we've added that for customers. We also don't have more complex and, frankly, regulatory scrutiny over products like lending on the platform. In terms of consolidation, it's not surprising to see some level of consolidation and disruption here. It's incredibly early for the space at crypto. Long term, we think there's just massive opportunity here. We've been investing significantly in the platform and are really excited to continue to do so.

That's great. Well, we're certainly going to touch on that quite a bit in the discussion. But maybe just to kick things off, Jason, it might just be helpful if you could lay out your strategic priorities, where you've been spending the most time? Where you've been allocating most investment dollars?

Yes. So first of all, it's always good to start with our mission. Our mission is to democratize finance for all. And over time, what we're trying to accomplish is to build a global, much larger, diversified financial services platform that really brings access to the financial system in a way to ordinary people that has previously been limited to folks with more assets at their disposal. And in terms of our priorities and our strategy in the current year, we've been really focused on improving the user experience for our advanced -- more advanced traders. This is things like adding options trading to cash accounts, which historically has been a pain point for some of our options traders. We just recently added advanced charting and technicals to the app as well. And so one of the things that we do is we spend a lot of time talking to our users, asking them about what we can do better and what features they'd like to see. And we've been really implementing that strategy this year in terms of being responsive to them. A couple of things on the horizon, retirement accounts. This will be really the first opportunity for a separate unique account for our customers, 23 million funded accounts, but they're all kind of focused on self-directed trading today. The retirement account will be rolled out in time for the tax season. Super excited to continue to deepen our relationship with our customers. And another area of big focus for us, as I just started to mention, was crypto. We have 1 million people on our wait list for our stand-alone app, which is called Robinhood Wallet. It's a self-custody application for customers who are interested in holding their own -- in testing their own coins. And this is a great opportunity for us to offer kind of a simple design and intuitive user interface for users of the app, but also kind of in an innovative way do so without charging gas fees. So no network fees to our customers and that's not paid for by Robinhood. So really, really excited about the things that we're working on.

That's great. And admittedly, we have to acknowledge the challenging macro market backdrop that we're currently operating in. I was hoping you can give some perspective just in terms of what you're hearing from your clients, what retail sentiment is like, how it's impacting activity levels and engagement across the complex?

Yes. It's been a challenging market, as everyone in this room knows, not just for Robinhood customers, but for all of us. And we're really encouraged by what we're seeing from our users. They're continuing to net deposit funds and build their assets at Robinhood. We have a double-digit growth rate on assets just on the net deposits. And I said last week during our call that we continue to see that in the month of October, about $1.5 billion in incremental net deposits just in the month. So really encouraged there. We do see lower levels of trading, obviously, than we saw in the last couple of years, and engagement is down a little bit. But we're using this opportunity to continue to invest in the product and improve the user experience. And I think we're going to be pretty well positioned when the cycle eventually turns.

That's great. One of the things that we have seen, Jason, is really this renewed focus on efficiency at the firm. You have 2,400 employees. You did pursue some pretty aggressive rationalization efforts. Is that level of staffing adequate to support the 23 million of funded accounts while pursuing a lot of the new growth initiatives and key product launches that you guys have outlined?

Yes. So first of all, super proud of the team. It's been a challenging 6 months of really focusing in on our cost structure and driving cost out. Just in the last 6 months, we've removed $100 million of OpEx cost per quarter in terms of the amount of cost that we've driven out of the system. I think there's more to do there. But in terms of are we positioned to continue to serve customers and continue to innovate, in the 4 years that I've been at Robinhood, we haven't had a faster pace of innovation than what I've seen this year. The employee base, as you mentioned, about 2,400, isn't just in a "keep the lights on" mode, but we are actually building and innovating, and I think that there's a lot more that we can do with the resources we have.

So how do we think about -- you've outlined some pretty compelling at least expense trajectories through the end of the year. I know you haven't committed to a 2023 target yet. I was hoping you could just help think about your philosophy around expense, given you know there are other opportunities that you can pursue in terms of rationalization, how to think about the expense trajectory looking out to 2023 and beyond. Is there more potential to continue to drive that cost base lower? How should we think about the potential growth over the long term?

Yes. So one of the things I talk a lot about with the leadership team and with the entire company is having a DNA that's lean and scrappy. And as you mentioned, I spent 20 years at Amazon and really have learned through the way that they focus on operational discipline that you just have to always question incremental costs and you need to periodically dive deep and kind of do zero-cost budgeting and re-rationalize the spending. So we've made a lot of progress there. Is there more that we can do for efficiency? Yes, there always is. We can always be more efficient. One of the exciting things that we offered this year is 24/7 chat support for customer service. Not only is that just a better user experience for our customers, it also presents a great opportunity for us to be more efficient because a CX agent, for example, on a phone can only deal with 1 person at a time and help out the user. With chat, you can potentially have multiple conversations going on at once, which just leads to more efficiency. So I think from a tooling perspective, process improvements and just continued focus on cost, we can continue to drive efficiencies. Now the counterbalance to that is you don't want to starve the business and starve growth. And so the approach that we're taking there is, first of all, we've got a robust team, 2,400. A relatively large percentage of that are product managers, PMs, and, obviously, engineers. So every time a request comes for incremental resources, we're asking what other things are we doing that's lower ROI and how can we prioritize. So certainly, over time, there'll be incremental investments, but our approach is going to be to try and grow our expenses at a much slower rate than the top line.

That's great. Well, congrats again on getting back to adjusted EBITDA -- getting to adjusted EBITDA profitability 1 quarter ahead of schedule. And one of the big questions that we feel quite often relates to, from a benchmarking perspective, where do you think your operating margins can ultimately get to? When you think about what success looks like, with the product launches complete at scale, is there a credible case to close the gap with your e-broker peers that are running with margins anywhere from 40% to 60%?

Yes, I do think that there's a credible path, and we're focused on it. You saw us just in a short period of time improve from negative margins to positive, but it was a 60-point swing in the last couple of quarters. So I don't see any structural reason why over time we can't considerably improve the margin profile at the company. Our focus is to drive free cash flow and, ultimately, free cash flow per share for our customers. One point I'd make, Steven, is, when you look at our OpEx, the vast majority of it are fixed costs as opposed to variable that moves with activity or even revenue. And so if we can be really disciplined about the way that we operate our company. As we roll out new products, as our customers deepen their relationship with us and as we welcome new users onto the platform, we should be able to generate outsized returns for shareholders.

That's great. I did want to spend some time talking about rate sensitivity. Before we go there, though, just given you talked about the high fixed cost base, the scalability of platform, you've also talked about quite constructively on the opportunity to expand abroad, I was hoping you can speak to your ability to scale and leverage the platform while pursuing that, the international growth that you set out to achieve.

Yes, I mean, we have several vectors for growth. I mentioned kind of growing with our existing customers, 23 million funded accounts. It's a great and enviable base for us. Rolling out new products and attracting new customers domestically, but then also internationally. We think that there's a big opportunity there. We have several opportunities for international expansion. I mentioned the Robinhood crypto wallet. That will be our first kind of foray internationally. And then we are working on closing a transaction in the U.K. with Ziglu, which is based out of the U.K. I mentioned on the call last week that we're working through regulatory questions there. And what we know is that we won't close this quarter, but the teams are working hard to progress that transaction forward. And then over time, I think that there's -- when you think about mission about democratizing finance for all, it's big, ambitious and it's certainly global in nature in terms of a mission.

That's great. And so maybe switching gears to the rate sensitivity discussion. You guys have been clear beneficiaries of the rising rate environment, maybe you sent Powell a fruit basket, who knows? But as we think about the $17 billion in IEA on the platform, what portion of that reprices with Fed fund hikes on a one-for-one basis? And you also launched a very competitive offering for your Gold clients. Are you seeing any acceleration in Gold subscriptions with that launch?

Yes. So first of all, on the $17 billion, that all moves with interest rates. So it is variable and it moves essentially 1-for-1. There's obviously conversations you have to have with some of the banks to make sure it passes through, but we're -- we like what we've been seeing there. Now from there, you have to back off interest expense on the amounts that we pay to our customers that are enrolled in our suite product, which includes non-Gold members that earn 1.5% interest. And then Gold members, we raised the rate last week to 3.75%. And we're really pleased to be able to share this rising rate environment with our customers. We're seeing strong deposits. We like what we're seeing on the Gold subscription side. And I'm looking -- we do disclose our subscriber number. It's 1.1 million as of the end of last quarter, and I'm excited to see how this progresses as we move through Q4.

That's great. And as we think about deposit betas, what should we expect in terms of -- I think about it more holistically as a blended deposit beta given that sweep cash does make up a smaller proportion of the overall $17 billion that needs to be funded.

Yes, we actually enjoy a pretty good position here when it comes to deposit beta. So overall, $17 billion, but a very small portion is customer cash that's subject to interest rate changes. And so what we've been doing so far is holding the non-Gold rate at 1.5%. And Gold members, we've been passing basis point per basis point increases to Gold members recently. So we're going to continue to monitor how our customers respond to that, but that's what we've been doing so far.

That's great. Maybe just switching over to the discussion around crypto, but from a different perspective. We did just get the news that Fidelity is looking to launch their own retail brokerage offering within crypto, the first of like the big behemoths to really make such an announcement. I was hoping to get some perspective on how you think that's going to impact the competitive landscape, the opportunity that you envisage to continue to take share within the U.S.

Yes. I mean it's not surprising that eventually, over time, the larger companies would follow suit. We've been in crypto since early 2018, and we've been investing aggressively there. As I said kind of in my opening comments that, in terms of crypto, we think it's a massive long-term global opportunity. We're investing heavily there for the long term. I think it's widely recognized that we're in a crypto winter. We've been using that opportunity to really double down and innovate for customers, adding coin selection, working on the rollout of Robinhood Wallet. How we differentiate, I think, is around trust, safety, being super deliberate in the products that we introduce to our customers. But also, you should expect us to be out on the forefront innovating as well over time. So it's always going to be competitive. And our focus is really on the user and innovating on their behalf, and I think we're really well positioned.

That's great. Well, maybe switching over to brokerage KPIs broadly. One of the key debates is you had this acceleration of account growth during COVID. The growth has stalled a bit, but you've, at the same time, been driving better profitability outcomes. And how should we think about the TAM that you're targeting? Maybe just help frame the opportunity in terms of what is a durable or sustainable level of account growth that you can achieve? And what are some of the actions that you're pursuing just to accelerate some of that growth?

Yes. So first of all, we think that there is just a massive global TAM and we're just getting started. Today, we offer self-directed brokerage, crypto and recently introduced our Cash Card, which is gaining early traction. But I'll draw from that Amazon experience. When I joined Amazon, they were a U.S. bookseller, and we're beginning to get traction in movies and CDs. And over a long horizon, I think that we have a similar sort of massive TAM opportunity. It's going to be for us up to execution. And I think we've got a good team that's very well positioned to go after this. As we get closer to year-end, we'll be expanding our relationship with customers by rolling out our retirement product, and you should expect that over time, Robinhood will be a place where our customers can have their entire portfolio and their entire wallet all at Robinhood, and that's really what we're going after.

That's great. While admittedly the growth has started to slow, the organic growth has actually been quite impressive. You talked about the net deposit rate north of 20%. That's triple what we see at some of the scale e-brokers, many of whom view high single digits as like a really great outcome. What do you see as a sustainable organic growth rate across the platform? And what informs that view? What are some of the metrics that you look at?

Yes. So first of all, it's been a long-term trend of customers consistently net depositing into the platform. We're incredibly optimistic that as we roll out new products like retirement, like the web3 wallet, as we expand internationally, that we can enjoy growth from the existing 23 million customers as we deepen the relationship, as we welcome new users onto the platform domestically as well as internationally, as well as getting back to a more tailwind environment on long-term market growth as opposed to the contraction that we've been seeing more recently. So we're super bullish on our customers. They tend to be young and diverse. And as they grow, we think that there's definitely a big role that Robinhood can play in growing their assets over time.

And so that's a great segue just to a discussion around graduation risk and being able to retain some of those accounts and clients as they do grow, as they become more affluent over time. What are some of the product offerings that you think are going to enable you to retain more of those folks on -- within the Robinhood ecosystem, rather than graduating to firms that have wealth and other related capabilities?

Yes, it's interesting because I've heard the graduation risk question. We don't really see that. It turns out that most of our churn, which you pointed out is a kind of historic lows and has been moving lower, most of our historical churn have been from moments where we've disappointed customers. And so our focus has been making the app incredibly resilient, making the user experience simple and intuitive and then adding products over time. And you're seeing us add retirement here. There's more natural extensions to our product, advisory is an obvious one. No short-term plans there, but it definitely makes sense for us to be able to further deepen the relationship with our customers and grow with them over time. So we feel like we're really well positioned to continue to roll out products, innovate for customers and, ultimately, retain them over decades rather than years.

Well, you did open up Pandora's box. You talked about advisory. And seeing this is a wealth conference, I was hoping you could provide us some perspective on what that vision could ultimately look like. It doesn't sound like it's anything on the near-term horizon, but what do you think you can introduce, whether it's like a partnership or actually building it yourself in-house?

I think it's probably a little early to speak about some of the details there. What I feel pretty comfortable saying is that, across our 23 million users, many of whom are super comfortable investing in a self-directed way, that over time as they grow and expand kind of their financial footprint, that it will make sense to offer them some sort of advice to help them make decisions for near-term goals as well as long-term goals like retirement. So we'll have to stay tuned there. But just to reiterate, there's no short-term plans here.

Fair enough. Well, maybe let's just switch to a discussion around M&A and maybe just capital management more broadly. There's always been some speculation as to whether you could get acquired. But I think what that loses sight of is the fact that you do have a pretty substantial liquidity or cash flow or war chest that you can take advantage of and actually do deals. And recognizing that a lot of fintech multiples have contracted quite significantly, I was hoping you could provide some perspective on where it might make more sense to ultimately buy instead of build.

Yes. I think, first of all, we feel great about our position, over $6 billion of cash on the balance sheet, 23 million funded accounts and a lot of momentum on the product development side. So we feel great about that. So we're really confident in our ability to grow organically by building it ourselves. But I think over time there's going to be use cases where it makes sense for us to accelerate our product velocity through acquisition. And as you mentioned, there's a lot of great companies out there that have depressed valuations that might make sense for us over time. So we'll be looking at ways to add potentially tuck-in products kind of seamlessly for our customers or with -- as an example, with Ziglu, expand internationally through acquisitions. So it's a great place to be, particularly in this environment, to have kind of the war chest, if you will, of a balance sheet. And we'll have to stay tuned, but M&A is definitely something that we're paying attention to.

Maybe given this renewed focus, too, Jason, on efficiency, as you keep mentioning international, it's certainly an exciting opportunity, but it's one where a lot of brokers have tried and failed, admittedly, over time. Really, just to select few have a great success once they've expanded abroad, maybe you could just outline what are the geographies that you're looking to penetrate. And how do you -- what enables you to at least potentially achieve greater outcomes or better outcomes relative to some of your peers that have really struggled?

Yes. So first of all, it's complicated. It's highly regulated, this industry. And when you go internationally, there's different regulations depending on the geography. So first of all, we've got a great legal and compliance team. We've learned a lot starting from scratch in the U.S. and building to where we are today. And I think that there's a lot of capability there in the technology that we've built, the knowledge that we have in the regulatory and compliance and legal space. That's going to position us very well to, again, deliberately approach expansion. And we're going to do it in a way that you'd expect from a company that's seeking to earn trust and has a safety-first value mentality. But with that mission being so broad, obviously, we're not going to go everywhere all at once, but we're going to pay close attention to the user demographics, their interest in -- access to the financial system. And we're going to move as fast as we can, but in a deliberate way.

Great. And you've talked about that at least the initial vision was around really building the ultimate money app. And one of the things I was hoping to get a perspective on is the payments opportunity, something that doesn't get touched on quite as often, but do you foresee like a clear opportunity for Robinhood to take share within the payment space or ecosystem? And how do you differentiate your value prop relative to some of the more established fintech players in the space?

Yes. We tend to differentiate through just ease of use, simple mobile-first design. On the payment side, we've, I think, somewhat innovatively offered instant deposits. So rather than waiting on the ACH to settle, we'd extend access to funds so customers can begin trading right away. That's something that we've had for a long time. We've just been rolling out instant withdrawals, which rather than waiting 3 to 5 days for your withdrawal to hit your bank account through ACH, you now have access through RTP rails and debit cards to be able to withdraw instantly. And we charge 1.5% for that, which is great for us and for shareholders, but customers also love it. And of course, they always have the option to withdraw for free as well. And so that's the kind of payment activity that we've been doing on the platform so far. Over time, remittances could be an interesting area for us, but it's not something that I would signal is near term.

And just in terms of the product launches, you talked about retirement accounts, getting that ready just at ahead of tax season. And what are the key product launches you've done this year that really resonated the most with your client base? And what are some of the remaining gaps they're hoping to fill over the next, call it, 3 to 5 years?

Yes. So we've made a lot of progress this year. I talked a little bit about our focus on advanced trading in that bucket what I'd say is we rolled out fully paid securities lending. And so that gives our users the ability to sign up for the program, allow their shares to be loaned out and earn a return on that. So passive income generation, which I think in this environment, is pretty meaningful for customers. We've seen really early traction there. The revenue from that program, although it's only been up for a few months, is 15% of our fully -- or sorry, our margin-based securities lending program, which has been operational for years. So that's one area that we're really excited about. The Robinhood Cash Card, which is a spending debit card, is also seeing some traction there. Like 500,000 customers have the card. And with that, if you're not familiar with the product, you -- if you sign up for a paycheck deposit, you get it 2 days early, which is a great feature. You can sign up for roundups. So as you make payments, point-of-sale payments, it rounds up to the nearest dollar, and you can direct those roundups to be invested in crypto or ETFs or stocks of your choice. Robinhood offers a partial match on those roundups as well. And then an exciting incentive that we've been rolling out recently is merchant incentives, so merchant rewards. And there, you can use your Robinhood debit card and get point-of-sale discounts at places like Little Caesars or Chevron. Nike has got a great deal right now at 6% off on spending there. So what we're really focused on is building the relationship end to end with our customers, and we're pretty excited about all the things that we have going.

That's great. One of the things I did want to touch on, Jason, it just relates to the regulatory landscape. And if you can provide some perspective just in terms of regulatory developments on the crypto front, but also there's been speculation around market structure. The nice thing is I'm getting many fewer questions on that topic these days, which is certainly helpful. But any perspective you can share on, given some of the speculation, how you think you're prepared for some of the equity market structure changes that could be coming down the pike?

Yes. And I've been getting a fewer questions as well on the topic of payment for order flow. Look, the regulatory environment in crypto is developing, I think, somewhat quickly now. There's a lot of attention there. On payment for order flow, it's encouraging to hear. I think it's speculation at this point that a complete ban of payment for order flow is off the table. That's encouraging to hear. We think payment for order flow really enabled the market to move to commission-free, where most brokers were earning payment for order flow and commissions. So paying -- customers paying $10 a trade. Now we earn $0.02 per $100 traded. So a very nominal fee that enables Robinhood to power the service for broad access to our 23 million customers. But -- so it's encouraging to hear that payment for order flow ban may be off the table. But as you mentioned, there's a number of proposed changes that could affect market structure. We're going to pay close attention to that and stay engaged with the regulatory process and really advocate for our customers as these progress. But we think the market has really never been better for small retail investors and we'd like to see it stay that way.

That's great. And one of the other really attractive opportunities and something that I think is differentiated, certainly from a pricing perspective, is your options offering. So you're trying to introduce some better tools, but you also have the best price point, which is not charging for share lots. And I was hoping to get some perspective on what sort of progress you're seeing. How is the offering resonating? And do you feel like a lot of the options traders, those are more active, are more willing to come to Robinhood than they were before?

Yes, I think they definitely are. In our focus this year on improving user experience, we've been serving customers. We've been bringing them to our offices and talking to them about what can Robinhood do to either earn your business, retain your business or just make your experience even better on the platform. And we've been using that as inputs to the development of our overall platform, but also for options traders. And it's really resonating the -- it's showing up in our NPS surveys that we send out to customers. One change that I'd highlight is offering options trading in cash accounts, so you don't have to be a margin account, which is -- has historically been a pain point. Extending trading hours for equities traders as well, adding advanced charts and technical. So in terms of opportunities, there's a lot more that we can do, and we're listening to customers. And our goal is to make Robinhood the absolute best place to trade options. You mentioned not only are we commission-free, but we don't charge the per-contract fee, which is something like $0.65 per contract. So a lot of the competitors will talk about no commissions, but they're silent about these per-contract fees. And our objective is Robinhood has just the best place to trade options and the lowest cost. So I think we're doing a good job there.

That's great. Well, I know we only have one more minute left. I've covered a lot of ground here, but is there any parting thoughts or messages for the folks on the webcast as well as those in the room?

Yes, sure. So our mission is big and broad. While we are, I think, in a pretty enviable place with 23 million customers and what I'd tell you is that we think that there is a significant opportunity for us to expand from here. And the way that we're going to do it, we expect to grow our assets over time with our customers, add new accounts as we roll out new products, but then be very diligent about the way that we grow our cost base. And so the focus is really on driving incremental cash flows and cash flows per share for our shareholders.

That's great. We're out of time. Jason, thanks so much for joining us today. I really appreciate it.

Thanks, Steve. I appreciate the questions, and thank you, everyone.