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

Welcome back, everyone, to the 20th Annual Global Exchange and FinTech Conference, and we're bringing fintech heavy here now. So our next presenter is Robinhood and the founder -- Co-Founder and -- is a Co-CEO as well.

CEO, yes.

Vlad Tenev. So Robinhood went public in April of 2021 -- excuse me, July of 2021.

July of '21, yes.

They really -- as I have categorized them, one of the most disruptive companies that I followed and still today, I think you are one of them. As far as product innovation goes, they continue to sort of rewrite the landscape so to speak.

Thank you, yes.

Anyway, so a lot of what you've done, Vlad is right -- true to the name of Robinhood, you democratize finance. You did have some different market conditions back when you were coming public. You revolutionized and really spurred on the zero-commission trading. But you really had an impact on the industry. So I guess my question is, back, we had pandemic conditions that enhanced retail activity. We've had the meme stock, and I think I understand that as well as most people about what were -- the real issues were and the uniqueness of the event. But I guess can you talk to us about after making it through those types of scenarios, now we're in a bit of different retail activity level. So if you could just sort of describe that engagement that you see in these days have to be through some couple of very interesting periods of retail trading.

Yes. So -- and I think you can look at it through the lens of what Robinhood has focused on, what products we're rolling out to customers as well because we want to add value to customers across all market conditions and across all of their financial needs. So you look back in the past few quarters, we rolled out a high-yield offering through Robinhood Gold, which in the current interest rate environment is giving customers 4.65% APY on their cash with $2 million in FDIC insurance. And we rolled this product out. It's a little bit different than a typical bank savings account because bank savings accounts have $250,000 FDIC insurance. We actually connect to a network of banks, and that's how we're able to get you protection on more. And the big [ banks' fuel ] aren't really offering these products or at least not emphasizing them because they rely on those deposits as a cheap funding source. So that product has been very successful. We've had over $10 billion in deposits into the Gold program and customers are really very excited about that. And gives us a lot of confidence to keep investing in our Robinhood Gold subscription service. If we can add one new value prop like that, like the high yield Gold on an annual basis, then just think about what it looks like 10 years from now. It will be the best subscription service in financial services, bar none. So we're excited about that. Obviously, Retirement. Retirement is not something that was associated with Robinhood too much prior to us launching this product, even though we had a lot of customers that were buying and holding stocks and building up positions using fractional shares. But our Retirement product has been doing very, very well. So we're the first to offer a 1% match built-in to the product in the form of an IRA account. Of course, customers have been used to getting matches through an employer-sponsored 401(k) or something like that, but this is the first IRA with a built-in match. And you talked a little bit about disruption. I would not be surprised if -- as this product continues to get traction, we get more and more assets and we're seeing a lot of assets migrating from large competitors. I would not be surprised for a built-in match inside an IRA to become industry standard like commissions have become standard, no account minimums, a reasonable user-friendly experience on mobile and, of course, fractional shares, which are all innovations that we've kind of introduced into the brokerage space.

As you get some sort of licensing fees for all these new product categories of the industry.

We should [indiscernible] recognition.

On a serious point, that goes to my point of disruption and rewriting sort of the rules of the road.

Yes. We've been focused on active traders, which in the past, during the pandemic days, we weren't really focused on them. We're focused on serving first-time younger investors who are interested in kind of buying stocks and getting in investing. And you can look at some of the things we've done for active traders, all the work that we've done on Options, including things like Strategy Builder and then more recently, 24 Hour Market, which has made us the first to offer 24/5 trading of single name stocks, including Tesla and Apple and a lot of the popular stocks that young people like to trade. So those are available rolling out but available 24/5 to our customers, which we're very excited about. And it's another -- when you talk about innovation and disruption, one of the things that we've always thought was off about equity markets is how it's tied into East Coast American working hours, right? Like, why is there this emphasis on 9:30 to 4 p.m. And it's just one of these vestiges where trading used to be kind of brick-and-mortar manual and it's gone electronic, but it kind of hasn't gone fully there. So I think the end goal would be to make fractionalization standard, make zero commissions, no account minimum standard, but also, like you should be able to access liquidity 24/7 and not just on weekdays, but on weekends and holidays. And I think it's just the inevitability that we get there, and Robinhood would like to continue to push and kind of be at the forefront of the effort of modernizing our equities trading experience.

And certainly, all those things either alone or in aggregate definitely represent the new product offering that you're -- and the disruption that we talked about. We're going to get into more about growth initiatives. But I think one thing that we noticed and been impressed with has been the work on expenses and improved profitability as well. I compare you to one pair and how quickly you reduce the -- and I'm sure it wasn't a pleasant experience, but you reduced headcount, reduced expenses and reached EBITDA profitability and have been for the past 3 quarters, if I'm correct. So can you talk about -- a little bit about that process? And again, it's probably not the most pleasant thing, but from a financial result, it was a good result for -- as investors look at what happened and adjusting the business model to maybe current market conditions. But can you talk about are there any sacrifices that you had to make -- as you made these pretty quick aggressive reductions in expenses, which pointed to profitability?

Yes, the way that I'd like to operate is I always want to do the right thing, right? This is very hard. And I tried to -- it sometimes comes at a cost of just like being consistent with how we've operated in the past. So 2020 and 2021, extraordinary environment, like all sorts of pressure to staff up headcount across all functions just to keep up with the demand. The market environment shifted, and I think that provided a push for us to start thinking a lot more about efficiency. And I'm incredibly proud of the work that we've done. I mean you mentioned sacrifices. I'm surprised like how many things actually got better in this period despite us sort of like cutting down the expense of them. Customer support has never been stronger. I mean we offer 24/7 support across multiple channels. And we've been driving resolution rates up, [ queues ] down. So we've been making progress, still a lot to do, but like it's never been stronger in the history of Robinhood. And we've also -- it's pushed us toward automating and creating all sorts of self-serve experiences for customers so that they don't even need to contact us. Customer satisfaction. You would think if you're spending a lot -- if there's less people, you're doing less things to make your customers happy. Not true. Our customer satisfaction is measured by Net Promoter Score, but also, all sorts of other measures gone up tremendously. Gone up, I think I announced this, 20 points year-over-year for kind of the typical customer and over 30 points for active traders. And now active traders are more happy than the typical Robinhood customer. And before we kind of shipped it out of the pandemic, that wasn't the case. We actually had -- the more active you were, the less satisfied you were with the Robinhood experience. So we fixed that. There's more to do, and we're continuing to make progress, but customers are increasingly satisfied with the Robinhood experience. And of course, the product velocity, we've been shipping a lot of products, 2020, 2021, great years for customer growth and kind of volumes growth but not great years for Robinhood in terms of pushing new product innovations in market. And I think the pace of new product development, some of the ones that I've told you about already, like Retirement, our spending products, 24 Hour Market, the new Gold service. I mean just in the past couple of quarters, we've just been -- we've been really executing quite well there. The things that we've been deemphasizing naturally as part of kind of deepening relationships with the customers that we have and kind of increasing their satisfaction and focusing on active traders, the sort of like monthly active users and the net cumulative funded account growth, that has been a little bit slower, obviously, than during the pandemic. But we're planting a lot of seeds. And I think over the medium to long term, we're very confident that we can drive those as well.

Yes. I think following the industry for a while, a long time, but following even in the last few years, I think if you're in the space, if you didn't overly staffed customer service, you are falling behind -- the dramatic change, I guess, in demand sort of at least from the outside looking in, some of the reductions were understandable. But it does point me to when you talk about the services to the active trader. I know you made some key hires, my friend, Steve Quirk, I know JB Mackenzie. I know you made hires before that with Mr. Gallagher. So...

All in the audience [indiscernible].

But I guess you made a conscious effort to hire, again, disruptive framework to start, but you've added experienced with high reputation people in those positions. And to me, it's sort of -- you see it in the results, like the satisfaction with the [indiscernible]. I guess could you -- am I -- do I have the right picture, I guess, from looking outside in?

Yes. I mean, talent is incredibly important at Robinhood. Ultimately, like the people that you have around are the ones that are making the important decisions and bringing the products to market, supporting our customers. So we're proud to have such talented leaders. And the goal is just to hire the best people across every position. I think this environment that we're in now gives us an opportunity like to turn the crank on that as well because as a lot of companies are retrenching and laying off, that gives us an opportunity since we've kind of done the right work early to get our business in a position of strength in this environment, we can take advantage of that. And I think talent is a big part of that. So not to say we're going to be hiring a lot, but the people that we do have, we want them to be absolutely like world-class, top to bottom across every level and layer in the organization.

You've hired some good people, I would put them in that category. We won't keep complimenting them, we'll move on. But some of the growth initiatives, you talked about the different products, whether it's 401(k), the high-yield product. But when you look at Robinhood overall and try to imagine growth, how do you -- is it from just those key products -- how do you envision growth of Robinhood going forward?

I think there's a couple of things that we're focused on. One is deepening relationships with our customers, getting them to use more of our products and have more of their financial lives on Robinhood. And that's where things like Retirement come in, our spending and saving products, high-yield Gold. So that's kind of one bucket of activity. Second is active traders. So all the work that we're doing to make Robinhood the best place on mobile, but also overall for an active trader. And then new growth initiatives. You mentioned JB Mackenzie. He's working on Futures. We filed for an FCM. So we're very excited to bring a Futures' product to market, both for active traders, but also we think we can make it usable and understandable and make Futures a little bit more mass market than it's traditionally been viewed international expansion, obviously. And I think we can keep executing on these things while also innovating and driving great customer outcomes, while also delivering awesome returns for shareholders. That's something that we do think about. It's a priority to not just innovate and ship products but do so with building a great business and delivering great results for shareholders in mind.

So I want to ask about the regulatory environment. We're going a little bit -- moving around on the sort of the outline, but the regulatory environment, like we know the equity -- Chair Gensler's equity rule proposals certainly could have an impact. We're not saying what's going to make through. He's pulled back from any outright elimination of payment for order flow. But I guess, Vlad, as an entrepreneur with a fintech [ driving ] high-profile company, you just saw yesterday, and we'll have Brian Armstrong later this afternoon as well as Chair Gensler tomorrow. But your overall commentary on regulation and the way it's -- I don't want to put any [ leading word, ] but just your views on regulation and how it's moving forward at least at this point?

Yes. I mean our approach to it is relatively simple. We want to innovate and build great products and services to customers within the bounds of regulation and the law. And we've been around for not too long but enough to see regulations change and new proposals come in. When they do change, we'll adapt to them. I think we're probably among the most nimble companies out there. So obviously, any time the laws change, we'll adapt accordingly. But anytime there's proposals, like there are with equity market structure and other things, especially if we think that those proposals are going to lead to a worse experience to customers, we want to make our views known and be part of the process and advocate for our customers in what we think is the right thing to do, quite loudly, like as we've been doing with some of that stuff and extensive comment letters filed about the complex web of equity market structure proposals. And there's some stuff in there that we think is pretty good, a lot of stuff that is poorly motivated and we think is overreach. So -- yes, that's my 2 cents on it.

To comment more on equity market structure. It's sort of out there, you've commented in a comment letter. So we'll move on. But I do want to just -- you're not as directly you are involved, but the recent regulatory actions on crypto don't directly impact you, but sort of -- as again, entrepreneur with a leading fintech company, just your feedback or commentary or view on the way crypto regulation is evolving, I guess.

Yes. And I should say like we've been investing in crypto. We've rolled out new products with the Wallet and Robinhood Connect, and we've been pleased with retail market share gains in the U.S. that we've been seeing in crypto as well. Our approach has always been to be deliberate and be a safe and trusted company in crypto. And so 1 to 2 years ago, we were getting a lot of criticism for not adding hundreds of tokens or not offering staking or lending services to customers. And I think we did that because we knew that the space was expanding so quickly that crypto is not just Bitcoin and Ethereum. The [ veneer ] of crypto has expanded to include a lot of things that frankly may not be safe, may not be [ vetted. ] So I think the spirit of crypto, very much important decentralization, putting power that traditionally been in the hands of institutions directly into the hands of the people. Robinhood is going to continue to advocate and support that. But yes, there's also a lot of bad actors that sort of are using that to basically [indiscernible] securities laws and enrich themselves at the expense of others. And so the regulators have to address that problem.

We're learning more about that day by day as far as the crypto regulation.

It's moving very quickly. Yes.

Exactly. We'll stop there. The -- we are moving quickly, time has flown. But the -- I guess, sort of the conclusion questions come from, again, this idea of Robinhood being so disruptive. Do you think right now is a more difficult environment? The balance of being disruptive and you did mention you placed a priority on profitability and shareholder returns. So do you have that balance right now? Was the balance right maybe a year when you IPO-ed, I guess, and then the further reaching question, this is what we're really getting at is what does Robinhood look like? Again, I follow the e-brokerage for longer the [indiscernible] for 20-plus years -- and what is -- Robinhood rewrote the model over the last, say, 5 years, what does the retail e-brokerage industry look like? And what will Robinhood's influence have on it 3 to 5 years from now...?

Yes. So I'll try to hit both of those. In terms of being disruptive, I don't think when Baiju and I started the company, we didn't get together in our Stanford door room and say, "We really want to disrupt the brokerage industry." We saw a gap and we thought we could deliver a product that was better than anything else out there. At the time, commissions were $10, $2,000 account minimums, it took you 2 weeks to open an account. You had to print out the account onboarding paperwork, wet signature, [ fax it ] over to the compliance department of the broker, and they would review it and you trade stocks. You buy your first stock maybe 2 weeks later. Nobody was doing anything on mobile, right? The firms that did have mobile apps, they were kind of scrunched down versions of the web interface. And Robinhood changed that, right? And I think it's no surprise that all of the -- not every single one, but like all of the good investment products kind of resemble Robinhood, right? Like the interface is kind of similar obviously, the commission structure and no account minimums. So we've really become kind of the archetype for what it means to be a brokerage in kind of this new environment. In 3 to 5 years, what does Robinhood look like and what is e-brokering? I think for Robinhood, we want to make our products and services available to people everywhere, not just in the U.S.

More internationally.

Yes. So I think that's a huge opportunity. And there's billions of people out there that are even more underserved than the people here. So I think we can do quite well and do that in a capital-efficient way. I also think that Robinhood is not just going to be an e-broker. We'd like Robinhood to help our customers with every dollar they have, whether it's being invested, traded, spent or saved in retirement. I think any financial need that you have or transaction, Robinhood can help you process that and serve you in the lowest cost and with the best customer experience. And I think we can do those things while being great stewards of capital, running the business efficiently and driving great outcomes for shareholders. So there's a lot of innovation to be done and we can do that while driving great outcomes to shareholders. So very excited about the next 3 to 5 years.

I would just end or conclude because we are up on time, is that as famous and popular brand it is and it is a strong -- I'm sure you done some -- you have some awareness of how strong a brand it is that as far as the investment story, still it's a little bit [ under no, ] like it isn't fully understood, I think, but...

Aren't the best investment stories those, right, until they become obvious?

True. The remake that you've done has gone a little in my opinion, underappreciated. So...

Well, thank you. Yes. And congratulations, I'm honored to be sort of one of your last interviews here on the stage.

I'll add that to my regret [ list ] as I don't get to see -- I do get to see, but I won't be directly, what do you call, writing and reviewing what you do. Again, Robinhood has rewrote the book on several products and not only did the product side but have done the expense side of it as well. So anyway, thank you, Vlad.

Thank you all for listening.