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

All right, everyone. So we're going to get started. So joining us today, we're pleased to have Vlad Tenev, CEO, Co-Founder and Chairman of Robinhood. Vlad co-founded the company in 2013. He's been a pioneer in introducing innovative and disruptive brokerage products, features such as free trading on stocks, options and crypto, fractional trading, the subscription service in Robinhood Gold and just yesterday announced a suite of retirement products in which the company is offering the first 1% match for every dollar contributed to IRAs. Today, Robinhood is one of the largest digital disruptors in the brokerage space with a funded account base of roughly 23 million users. So Vlad, thank you so much for joining us today.

Yes, thanks for having me. Really a pleasure to be here.

Maybe we could just kick it off with a question into 2023. I mean you have product ambitions spanning 3 major areas: traditional brokerage, money and banking and crypto. How do you think about prioritizing investments across the product portfolio? And how those investment priorities shifted maybe over the past couple of years?

Yes. I think Robinhood is in an awesome position right now. I think right now, when I think about us, we are a lean, scrappy company with a ton of energy. Product execution has been really fast this year. I think probably the fastest and most prolific that we've been in the history of the company despite the macro headwinds and sort of the need to reemphasize leanness and operating with lots of constraints. So I think we've had a really positive year. And as I look ahead to kind of the next couple of years, there's a couple of things that excite me. The vision of the company, it's all about building exceptional products that give ordinary people control over their financial lives and in particular, giving open access to tools that were previously available only to elites or the wealthy. You mentioned a couple of them; retirement, which we announced yesterday. This is something that's been in the works for a while. We've been thinking about how not only to just roll out another account type, which is, I think, how most of the industry views retirement, but how can we lean into the changing nature of work and help our customers actually reach their goals, which is to retire with a good nest egg. So it's the first and only IRA with the match built in. So yes. And we're excited about that. Close to 0.5 million people have signed up for the wait list just in the past 24 hours. We're seeing it continue to grow. And the interest in retirement actually tends to be much higher in January, February, right, as you kind of get into tax season. So we're looking at that. Yes, in terms of kind of more specific things, I see a lot of opportunity. One is just continuing to make our core service better and focusing on our key constituents of the active investor. These sort of long-term retirement savers, someone who is looking to build up a portfolio over time, and we see an opportunity to be their entire portfolio. So whether it be your discretionary trading, your long-term investing, your retirement savings, your paycheck and some of your spending activity, we've built sort of best-in-breed tools for all of that. And that's kind of one category. The other is extending to all basic financial services in the U.S., and that's where things like our cash card, that's where the market-leading 3.75% interest for Gold members comes in, and we see an opportunity to do that in particular with our Gen Z young customers. And the third is being a global company. And we've done a lot of work in the past year in particular, getting our infrastructure in a really good place so that we can make Robinhood available to people outside of the U.S., and we're going to do that through multiple paths: the noncustodial wallet, Robinhood Wallet. But also, we feel like we're in a good position to do with brokerage as well and give traditional access to U.S. stocks and things like retirement worldwide. And yes, with sort of the lean footprint and the product engine firing on all cylinders despite all the headwinds that we're seeing in the macro environment, I've never felt more optimistic about 2023 and 2024.

That's great. I mean I think you, along with a number of other fintech firms, had to make some difficult decisions to rightsize the cost base in 2023. And I think that helped you achieve your goal, I think a quarter early on reaching EBITDA profitability in the third quarter. You said on the earnings call that you feel kind of good about where the cost structure is today. How are you thinking about the trade-off between incremental investments going forward and generating positive operating leverage in the years to come?

Yes. It was a hard thing, and Robinhood was early to this. I think now you're just hearing about all sorts of companies sort of being surprised by the growth of their cost base and having to be reactive. And we sort of looked at it under the principle of -- we need to demonstrate to not just the market but to our customers that this is a sustainable institution, even in hard economic times. So we know that the business model works quite effectively when interest rates are 0 and people are interested in investing in bull markets and we did quite well in COVID in 2021. So the goal was to actually sort of reset the company and make sure we were operating in a sustainable way in kind of poor market conditions. And we're incredibly proud to have driven adjusted EBITDA profitability a quarter early. So we set the goal to do it in Q4. We hit it as of our last earnings call in Q3. And we did that despite doing all the things I just mentioned, which is having the fastest product velocity that I've seen from the company. And aside from kind of the value in showing that we can be profitable and we have a path to that, I think the operating under constraints has been incredibly healthy for the organization. As we just finished our annual planning process, and we're sort of zeroing in on the things that we're going to build in 2023. And kind of the contrast of how that planning process felts in the ambition of it, with the constraints that we imposed relative to kind of the past couple of years where it's been less, we've been looser with headcount, frankly, than we should have been, has been really awesome. I mean I think that the road map is the most ambitious that I've seen. The team is hungry. The constraints have a lot to do with that and we actually do see opportunities to lean even more into automation. And we've asked the teams to look for areas to drive even more efficiencies, and we're excited about that. We think we can continue to kind of lead into being an efficient and lean company and go even harder at some of those efficiency metrics.

Got it. And that makes a ton of sense. I mean, you mentioned the business works very well in a low rate environment. I think higher rates in general has been a pretty big tailwind for the company in recent quarters. I think we have something like doubling this year and doubling next year in terms of NII. I think one thing 2022 taught us is that rates can move a lot faster than anyone had thought. So as you think about that windfall from higher rates, we do eventually see rates coming back down, how do you expect to manage the cost base in that sort of environment? And maybe what sort of offsets do you have in the business in that low rate environment than maybe we don't have today on the top line?

Yes. I mean I should mention around the high rates that one of the other things I'm very proud of and excited by is we haven't -- our approach to the high interest rate environment hasn't just been to pass it all on to the bottom line and sort of use it as a profit opportunity for Robinhood. It has led to that, like we have been able to diversify away from transaction-based revenue, and you've seen net interest margin grow, but we've also been able to offer great deals to customers. I mean, the 3.75% yield on uninvested cash for Gold members is just another great example of that. So we've been careful not to build a dependency on that and actually build a business model where we give customers a very competitive rate on their cash, if they're non-Gold members; an industry-leading rate if they are Gold members. Hence, we make a reasonable margin on these products, but not to the point where we feel like we're dependent on it. We want customers to get a great deal, both on transactions and on assets on the platform. And then with sort of the layer of Gold on top, we see this actually progressing us towards our vision of having all of our customers' assets and meeting all of their needs on one platform. If you can get a great experience for your trading, a great experience for your retirement savings where we're the only ones offering a match, a great experience for your uninvested cash, for your cryptocurrency, then you see a world where everyone has a very, very strong reason to direct deposit their paycheck into Robinhood for uses, for their spending, their bill pay, all of their investing and have all their money there. And it's through the combination of really good customer experience on all these products and really low cost and great value. And so yes, one way to say is like we've been diversifying both in terms of products and revenue, and we feel like the company that we're aiming to build is one that is incredibly strong across all market conditions.

Yes. That makes sense. Switching gears a little bit, I think this morning, you released monthly metrics. And I think we saw a slight pickup in trading activity, a slight tick down in margin. It seemed like the highlight of the month though was the really significant tick-up in the sweep balances.

Yes.

Maybe you could speak about some of the success that you're seeing from the Robinhood Gold offering and how you expect that to trend over the next couple of months or years?

Yes. I think it's all coming down to the fact that the environment we're in is changing, right? The nature of work is changing. Obviously, interest rates, I don't know if any of us a year ago would have been able to predict that the federal funds rate would ramp up as aggressively as it has. But the reality of the situation for our customers is as the federal funds rate goes up, investing in the stock market becomes less interesting. I mean the stock market, if it generally appreciates 7% to 10% per year, of course, this year has been a little bit different, and you're getting 4% or 3.75% sitting in uninvested cash, the calculus is different. And so we want to be there for our customers and giving them the best quality tools for all market environments. And I think if you see the interest rate going down, we expect that, that would make investing more attractive, and you should see that reflected in trading volumes and things like DARTs. But if the interest rate environment is higher and rates are higher, then sweep balances and cash on the platform, our Gold offering becomes much more attractive as well. And so I think as we continue to add more of these things, Gold, in particular, should be the best deal in financial services. I mean for any use case, if you're kind of a long-term investor, if you're an active trader, we should have the best in-market products and technologies for every environment that you're in.

Makes sense. I think account growth has been one of the areas that's been a little bit slower since the time of the IPO since 2021. What's top of mind when it comes to stimulating growth in funded accounts as you look out into 2023?

Yes. I think the environment -- the sort of like reality of our business was that account growth has heavily been driven by our trading products. And we did incredibly well in 2020 and 2021, in particular, when everyone was interested in investing, and we had 0 interest rates. And you mentioned close to 23 million net funded accounts, which if you look at our competitors, even the largest ones took decades to get to that number. So the products that we have that are going to drive net funded account growth are less mature in a nontrading environment. So we've recently rolled out a Robinhood Gold offering with a high interest. Retirement started rolling out yesterday. We have our cash card and spending product, which rolled out a couple of months ago. So I think we do expect to drive accelerating net account growth as we continue to diversify our products in the U.S. and expand internationally. But it's going to take some time. And actually, given the market environment, November was a pretty solid month. You saw -- yes, quite healthy net funded account growth in our metrics release there.

Makes sense. I guess maybe just a follow-up on the account trend. The active account base within the funded accounts has been seeing some normalization of -- just as activity levels fall. Where do you think we are in terms of the normalization of customer engagement within the funded account base?

Yes. I mean it's really hard to predict how these things are going to shake out in the future because the macro environment is a pretty big determining factor as is sort of like exogenous events like everything that's been going on in the crypto markets over the past month. I think despite the headwinds we've been seeing, as we look at sort of revenue and activity relative to assets under custody, I mean you look at our customers. And since our customers are younger, they're sort of disproportionately invested in emerging technologies, in growth stocks, in fintech and cryptocurrencies. And these are the things that have gotten particularly hit hard in the current macro environment. So assets under custody is at about $65 billion to $70 billion range as opposed to sort of north of $100 billion last year, and this is despite a very strong net deposit growth. So that's been a little bit of a headwind to deal with. But despite that, we've been able to reach adjusted EBITDA positive a quarter early and ship a lot of products. So again, I mean I'm just -- I think we're in an awesome position, and it's a little bit paddling hard against like this really strong current, that's the macro environment that we're in. But with $6 billion in cash and kind of the position that we're in, I think we're feeling really, really good about the future.

Yes. Makes sense. I mean, Robinhood historically had very strong customer acquisition metrics. The referral program has been a big driver of low-cost acquisitions, word of mouth. I know you've been doing a little bit more brand advertising than you historically have. Can you maybe talk about what you're seeing and how you think about leveraging alternative sources of marketing to drive customer acquisition?

Yes. The way we've been thinking about brand advertising and marketing is that traditionally, the way that we've been able to get customers has largely been word of mouth and referrals. And we've done a little bit of performance marketing around stock trading and kind of first-time investors. And we got to a very large scale on the backs of kind of our products, which were geared towards first-time investors as well as people that are interested in stocks. And this year, we've diversified the products quite a bit. Now you can get a whole lot from Robinhood. I mean retirement yesterday, high yield on uninvested cash spending and direct deposits. And the purpose of brand marketing is largely to communicate that we now offer all sorts of things to people, and it's not just for first-time investors, but it's a great offering if you're an advanced investor, if you're a trader. And if you're just kind of waiting on the sidelines, seeing an opportunity, but you want to be in cash and invest later. So we've been doing some experiments. We've been testing some various messages and we're doing a lot of learning. It's a new environment for us as well. But the goal is to just get the word out that we actually offer a lot of things and aren't just for traders.

Yes, makes sense. So maybe we could spend a little bit of time on some of those products then in the core brokerage platform. So maybe just the most obvious, you've announced the Retirement product, innovative structure with a 1% match. And I know this is a highly requested feature. You mentioned, I think, 0.5 million people on the wait list already. Maybe you could just talk about your vision for that product and how you see this kind of split between kind of net new customer acquisition versus wallet share gains with the existing base?

Yes. The story of the retirement product is really a story about the changing nature of work. And even before the pandemic, we started hearing from our customers that a lot of them aren't using the traditional single employer model where you join a company, you work for many years. You build up either a pension or more recently, an employer-sponsored 401(k) with a match. More and more people are taking advantage of multiple sources of income. They're freelancing, they're working contract jobs. Gig economy has kind of taken the U.S. by storm. And there really hasn't been a retirement product built for this type of customer because the traditional mechanisms for getting people to retire have all been centered around the employer-sponsored 401(k) with a match. And that's actually been tremendously effective. So the safety net provided by the government and kind of the single employer has eroded over time. And there's a lot of uncertainty around things like social security, and we see an opportunity for Robinhood to step in and actually provide that safety net for customers. And that's what led to kind of this idea that we could be the first and only IRA account that offers a match to customers and kind of step in and provide that. And in doing so, simplify and kind of clear up the jargon around retirement. I mean it's confusing to people. You don't know whether you should be opening a Roth IRA or a traditional IRA, what the sort of withdrawal restrictions are, the contribution limits. And we could solve that problem, but go beyond that and kind of provide the safety net. So I think we anticipate at first the uptake to be stronger from our existing customers that are already using us for self-directed trading. But over time, as they sort of gain an appreciation of the product, and it becomes more top of mind, especially as we enter tax season in the next couple of months, we do think it will lead to new customers joining Robinhood for that product as our customers that we have now are more excited about it. And if they really love it, we do see it as something that they could tell their friends or their family about, and we think that will lead to net funded account growth over time.

That makes sense. I think we've seen a lot more success at Robinhood in attracting more assets to the platform. And I would guess IRAs is kind of right there in that vein. When we look at Robinhood versus some of the incumbents in the space, a lot of the peers have a much greater degree of fee-based revenue or kind of ways to monetize the noncash assets on the platform, and you kind of have this unique space of dominating so much retail shelf space in the investment area. So how do you think about kind of monetizing that going forward? Where are fee-based revenue products on the products horizon?

Yes. I mean I prefer to think about it in terms of what needs do customers have? And can we build a product, an exceptional product that meets those needs and make the business model work while at the same time, like having it be clear to customers that it's a Robinhood product, which means not just a great customer experience, but really best-in-breed value for our Gold members and competitive for non-Gold as well. So we have kind of as a consequence of that, diversified our revenue. I mean you're noticing a lot more NIM aside from kind of the cash sweep in the Gold products. We've rolled out stock lending, which allows us to monetize and share with our customers the revenue from stocks that are just being held on the platform. And if you look at both Gold subscriptions and kind of retention, we felt that those have been quite strong. The Gold retention metrics, in particular, as we've added these things have improved, and we feel really good about that. So I do think you will see diversification of the revenue model as we kind of fill more customer needs. But sort of optimizing the fee-based revenue hasn't been kind of a direct goal in and of itself.

Yes. No, that makes sense. And I guess just lastly, to round out the brokerage discussion. Active trading is kind of in the roots of the company. I think you mentioned on the earnings call that Net Promoter Scores on active traders are exceeding that of the kind of the nonactive traders on the platform, I think, for the first time in a while. Can you just talk about the opportunity to deepen the relationship and expand some of the functionality for active traders on the platform?

Yes. And I think, yes. The -- this has been a little bit of a -- this has been a gradual but significant shift that we've made this year. So the last 2 years have been all about -- or I should say, 2020 and 2021, those 2 years were all about like doubling down on first-time investors and helping get as many of them onto the platform and really communicating the benefits of Robinhood for those that are just getting started. And then this year, we recognize that the people that are really engaged in trading in this environment are the people that are more sophisticated and more active. And we have great products for them. I mean just options trading, as an example, we not only are commission free with our options offering, but we also don't charge contract fees. So a typical brokerage will advertise that they're commission-free but charge $0.65 per contract. Now to me, that's a commission by another name, but we don't charge that. So for 100 contract options trade, you could be paying $65 for that trade, which is incredibly significant. So the economic value and the user experience for active traders on Robinhood is quite good and not just with options, but margin rates are competitive for Gold customers. Our cryptocurrency product is extremely competitive as well. And we weren't really doing a great job of talking about that, and we weren't kind of catering to the needs of that specific customer up until this year. And there's a lot of low-hanging fruit, which we've done like options trading and cash accounts, a better customer experience around sort of options, bills, more tools around advanced charts, which has been really well accepted by those customers. We've had sort of like events where we invite our active traders to our offices, and we walk through prototypes with them and we get their feedback. So I think it's been really a shift. And next year, we'll not only continue that, but we're also going to continue to innovate on their behalf and bring new products and new experiences that they expect that are valuable to them. So I think it's going to be very valuable. And from the business level, it will continue to diversify the business. So of course, we'll invest in retirement. We'll invest in our passive investing tools and cash, but active traders are generating a lot of revenue, and they're an important group, and we'll continue to make sure they're super happy with the platform and that they find a lot of value from Robinhood.

And maybe switching gears to speak kind of beyond the core brokerage platform. You announced the cash card this year. And I guess we talked a lot about at the time of the IPO about Robinhood, the vision of being the single money app. So how do you think about additional products and services on top of the brokerage platform? And what's the strategy to kind of tie them all together?

Yes. And the cash card is a young product. It's been live for a few months, but we're really happy with what we see in terms of kind of the retention metrics and the early trends of usage from customers. We've had a couple of iterations of rolling out a debit card and adding functionality for that use case and direct deposit. And with the cash card, you get 2-day early pay. You can get the ability to do roundups so you could round up your spending into investments and stocks or cryptos of your choice. And you can actually auto invest your paycheck. So if you wanted to get paid in stock or crypto, we can automate that for you and do that commission-free. So we're excited with what we're seeing. And the next step is to actually transfer all the cash management customers, which we have 6 million plus of, onto the cash card and continue to add functionality that makes it really, really useful to people that are using it as kind of a spending and paycheck service. So it's a long road. We're patient with this. We've been working on it for a bit, but we are seeing promising signs and excited to invest more in that.

Yes. No, that's great. Maybe I'll switch gears over to the crypto side. Obviously, lots going on. I'm sure we could spend the entire time talking about what's happening in crypto right now. But -- maybe we could just spend a moment on the direct impacts of what's happened over the last month or 2 on Robinhood specifically?

Yes. So -- yes, it's kind of been interesting, right? Because there's been a lot of contagion. There's been a lot of companies that have had sort of exposure to FTX and kind of the affiliates. Robinhood has had no direct exposure. And so we've seen sort of -- we've seen increases in market share and sort of the effects of customers that are seeking a safer, more regulated platform. So it's a little bit hard to tell what the long-term fallout of everything is going to be. But in the short term, we feel really good, and we benefited from that. And of course, we've been in the news about the ownership of the -- I think it was a 7.6% stake in Robinhood, and that's kind of been transfigured into sort of some kind of partnership. But the reality of it is it's a public stock, we're a public company. Anyone can buy the stock. And so the indications that reflect some kind of deeper relationship are just inaccurate. And I think we've had to deal with that a little bit. But as time goes on, I think that's becoming more and more clear to the public as well. And we feel like it's an opportunity. As these events weed out the weaker companies that have sort of invested less in risk management and compliance, and we've invested quite a bit in both of these things. And we feel like we're in a good shape to continue taking share.

So I guess -- does -- what's happened in the crypto market, does that in any way impact how you're thinking about investing in the asset class or in the ecosystem, either the last 2 months or even we zoom out, the decline in price as the crypto lender over the past year. How has kind of the appetite to invest in that ecosystem evolve?

Yes. I think that there can be a tendency industry-wide to be overly reactive to market events and to say we're going to invest less. I think for us, we try to temper that. Obviously, with everything, we want to be extremely prudent and not overinvest and not underinvest and invest the right amount given what's going on in the macro environment. And we see opportunities all over the place. We do see opportunities in crypto. We see opportunities with retirement and with traditional financial products as well. But yes, certainly, we wouldn't -- we're very keen that markets are cyclical and crypto is here to stay for traders and as an asset class and as a technology. We want to make sure that we establish ourselves as a leader and kind of a trusted party in the space, and that's going to take some investment.

Yes. Makes a lot of sense. We've got about 2.5 minutes left. I wanted to ask a question on capital allocation. I think it's one of the most common questions that we get. I'm sure no different for you. You've got several billion of cash over and above sort of your internal liquidity requirements. The company has now turned EBITDA positive. So there's incremental cash flow generation. So there's a lot of firepower now at your disposal. How are you thinking about the allocation of that cash going forward? And what sorts of uses you could put it to?

Yes, stewardship of capital and making sure we're just excellent capital allocators is top of mind, certainly. And yes. We just see incredible opportunity being cash flow -- being adjusted EBITDA positive and having strong cash flows and having $6 billion plus in the balance sheet, billions over our risk scenarios is just a great position to be in. Now I think you could say that we could have been more aggressive on M&A through the year, but also prices have been going down. And I think the sort of like prudence with which we evaluate deals, I feel really good about that. So of course, we'll continue to look at opportunities to accelerate our road map. We do see a lot of different companies and assets that are trading at attractive multiples, and we can put that balance sheet to work prudently. And we also feel like we're in a great position to take that and invest in accelerating our business as we enter 2023. So I feel really good. I do think you should expect to see some M&A activity, and we're always open to that. And yes, we feel incredibly fortunate to be in this position, and we've made some good moves to be here.

Got it. Maybe just in the last minute here, I know international is a big priority for the team, and you've talked about entering with the noncustodial wallet with the brokerage services. I know you had a pilot back in the day in the U.K. So just kind of talk about the plans for international expansion and how you're thinking about the trajectory or the time lines around that?

Yes. I think that we've had a couple of at-bats here to be fair. And in 2020, when we had the pilot in the U.K. with all that was going on in the U.S. and the tremendous growth and the need to kind of double down on that, we focused on the U.S. And over the past couple of years, we've really invested in infrastructure and our systems, and we've built really good teams on the engineering side, but also legal and compliance. And we feel like we're at the point where we can make a significant investment in the coming years. So you should expect to see us going international. We think that our product lends itself very well to being a global product because the 2 value props are accessibility and ease of use on mobile and great value for customers. And that's even more attractive internationally in some cases than it is in the U.S. So we're in a position to do it. We've got a couple of different paths of getting there that we're going to pursue. You mentioned noncustodial wallet, but also through traditional brokerage and making stock trading and our other products accessible across the world as well.

Right. Well, I think with that, we're out of time. But thank you so much for being here. I really enjoy the discussion.

Thank you. Yes, I appreciate you all listening.