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

Firms achieved a lot of milestones recently, GAAP profitability, best-in-class organic growth across all the publics that we track and is engaged in a number of key growth initiatives, which were really keen to untie today.

Vlad, I really want to focus the discussion on your strategic growth priorities, particularly over the long term. Maybe just to start, before digging into that, on the 3Q call, you offered some more measured guidance on 4Q trading and NII. I know that weighed on shares, but wanted to ask what you're seeing across the [indiscernible] that informed that software guide?

Thank you for having me, Steven. Yes, I think, to be clear, we're very long-term focused as a company. We're making a lot of investments to both be #1 in active traders, which is an ambitious goal that I've set for the team while also diversifying the business. We provided some commentary around what we were seeing thus far in Q4, which tends to be a seasonally slower quarter. But we also said that market share for equities and options has continued to increase for Robinhood both year-over-year and sequentially. So if you break it down across both of these 2 things that are under our control, active trader market share and also progress on net interest income generating activities, we actually feel quite good. Market share on trading is continuing to increase, and we're just dealing with some transitory headwinds in the overall market there, but the sort of long-term picture is that of us growing our share, continuing to improve products, and we actually see a ton of things that we can continue to do to make our products even better and continue to grow our active trader market share. So that has a very long runway. Now in terms of net interest income, we also spoke that -- spoke about how securities lending rates had come down. And this is something that we're seeing industry-wide. It's not unique to Robinhood by any means. When we look at take rates from our customers of the securities lending fully-paid product, we're actually incredibly excited about what we're seeing there. We've got over 2 million customers enrolled in securities lending. A larger and larger portion of our most valuable customers continues to enroll. We've made a lot of improvements to the product to actually communicate to customers just how much revenue potential there is in the products for them, and that's had just a great impact on attach rates for the securities lending product, which are continuing to increase. So the sec lending landscape in industry tends to be quite cyclical. Right now, we're coming off the heels of sort of a 3-month period where stocks haven't been doing very well, and that tends to have an impact on sec lending rates. But again, this is cyclical, and we view that as transitory. And the underlying fundamentals of the net interest income that we're generating are very strong, and we see a huge runway ahead of us there as well.

That's really helpful context, Vlad. I mean, admittedly spent enough time at least on a lot of like the near-term cyclical pressures. We'd rather really focus the discussion on hearing about your strategic priorities, and at this juncture, I know you're executing on a lot in terms of product road map, but just where you're spending most of your time and energy at the moment?

Yes. I think there's 3 things. So on a company level, the most important thing is making sure the financial condition of Robinhood is incredibly strong. And to me, what that means is, we know very well that Robinhood has been very successful in a bull market environment. During COVID, we did quite well. We were able to grow revenues tremendously. But there was a question mark when interest rates went up, would Robinhood be able to take the success that we saw in a bull market environment and replicate it across all markets? And so I want to make sure that the business is sustainable in all market conditions. And basically, if you look at the goals that we set starting in 2022 to get to adjusted EBITDA profitability, we met that a quarter ahead of schedule. Last quarter was our first quarter of GAAP profitability, which was very hard to do, and we were very proud of that accomplishment. Even this past quarter, Q3, were it not for the legal accrual for those expenses, it would have been a second consecutive quarter of GAAP profitability there, too. And not to mention the cash we have on the balance sheet. So it's almost -- I want to ignore, in large part, the cash we have on the balance sheet, not use that as an excuse to operate at a loss and make sure that the financial discipline of the business continues to be incredibly strong as we invest in growth. So one of the things I'm proud of there is, we've got a lot of growth initiatives underway. You've seen some of them. We are really doubling down on diversifying our business through Robinhood Gold. We want to get from #2 industry-wide to #1 in active trader market share. And we want to take this business global, expand beyond the U.S. to the U.K. So to be a GAAP profitable business while making all of these investments and having the large balance sheet that we have access to, I feel pretty good about the cash position and the financial health of the company. And of course, we're always -- Jason and I are always scrutinizing us and looking at our investments across the board. We've really kind of turned the crank on that in the past 1.5 years, and that's not going to stop. We're going to continue to make these investments while making sure we continue to get more efficient and keep turning the crank on costs. And I do think there's some runway behind those efforts as well.

That's great. I mean you did mention, Vlad, financial discipline. It will be helpful just to hear how your approach to growth and investment has really evolved as a public company, maybe what have been the 2 or 3 most significant learnings since the IPO?

Yes. I think there's a couple of things. One is, I don't think that -- I think -- we went public in 2021, so it was a little bit over 2 years ago, and that was just a very different environment, as you all know. Interest rates were at 0. There was a lot of liquidity in the system. We were coming down off of COVID, and there wasn't a lot of pressure on profitability. And I think that led to Robinhood becoming less scrappy in a way and losing some of the core aspects of what was in our DNA from the very beginning, which is to do more with less, be a very efficient company that is utilizing technology to solve all of our problems, automating everything, and just the demands placed on our business, in part due to the environment, but in part also because there wasn't a ton of external pressure to be more efficient, led us to, frankly, not be a very efficient company in 2021. And so we corrected that quite intensely in 2022 by looking at headcount, seeing areas that we were overstaffed in, scrutinizing every expense and making sure that we have a smaller team, but a team that has, on average, much higher talent density. And I think the -- 1 of the things I've been very proud of is, and it's obviously always a work in progress, but the team we have and the talent density we have is the strongest, I believe, in Robinhood's history, and you're seeing that reflected in the product velocity. We track lots and lots of metrics when it comes to product velocity, and across multiple metrics, we're seeing that this is the fastest we've moved in our recorded history as well. We're shipping, not just new features, but new innovative products that are the first of their kind, all while going international and improving the service quality for our customers. So I think it's been very healthy. It's not just about cutting costs, but I think the way the company is operating is much, much healthier, much stronger, and there's a much greater degree of urgency in everything that we do.

No, it's refreshing to hear, certainly. And as you noted, while you've been disciplined on costs, there's still that commitment to executing on the product road map. I know you've hit a couple of milestones over the last 12 months. I'm sure there'll be a couple I missed, but retirement accounts, the X1 acquisition, 24-hour trading. Maybe just give a progress report, Vlad, on some of the recent cloud launches, and what do you feel are the biggest remaining gaps, if any, that still remain on the platform?

Yes. Let me break it down into kind of the 3 strategic priorities that we have. So the first 1 is to be #1 in active traders. We want to really take care of our active traders and be the best platform for them. #2 is to diversify our business, or I call it deepening relationships with customers. So we don't want customers to use us just for active trading and discretionary trading. We want them to have the bulk of their finances with us, and for us to have increasing and high wallet share among our customers. And then the third one is sort of planting new seeds in large part that's expanding internationally, going from an addressable market of $300 million in the U.S. to billions overseas. So I'll kind of break it down into each one. Active traders progress thus far has been incredible in the past year. And I think it's a little bit under the surface because overall trading volumes have been going down industry-wide. So it's sort of feels like nobody is doing well who's involved in trading. And I think it's been a tough environment for customers and for a lot of companies that have relied on trading income. But in that environment, we've been growing our market share. We've paid a lot of attention to the needs of our more active traders, particularly options traders, and we're rolling out a ton of features. So the focus right now has been on trading speed and user experience. As we look at our active trading flow, particularly for people that place a lot of trades, it had really evolved to be more of a novice flow. So lots and lots of screens, walking customers through every step of the trading process. And what we found was, for novices that were great, for people that have gone through it, it felt a little cumbersome. So we're really making investments and streamlining it, removing unnecessary steps and just making it more delightful and usable for active traders. We're giving people more tools. So you're starting to see some of that with options chain customization for options traders. P&L tools. A lot of these things are just down the list of things they've been asking for that they get at other platforms, but not necessarily at Robinhood. And then as we look to the future, or looking into making available different asset classes, futures being perhaps the most interesting and innovative one, but also access to things like index options, short selling, joint accounts, tax lot selection, and that's a mixture of things you'll only find done at Robinhood, but also just table stakes features that we find keep customers from switching to Robinhood from other brokers. So if I look at active traders, we're going to be investing more in that area. There's a full road map, and it's relatively clear, the things that we have to do to go from #2 to #1. And I'll add one more thing. We are winning on mobile. So right now, if you look at share of active trading on mobile, Robinhood is #1. And we're happy with that position because mobile is the future. That's the fastest-growing part of our industry. More and more of activity, especially among the younger generation tends to be mobile-centric. But we do think there's room for improvement in the web product as well. We recognize that as people get more sophisticated, they like having multiple screens, multiple charts per screen. And I think for the active trader use case, our web product needs to improve. And I think there's a lot of potential in making those types of improvements, and that's an area we're investing in, particularly now with the TD Ameritrade Schwab integration and the E*TRADE, Morgan Stanley integration, those folks are dissatisfied, and I think that's an opportunity for us to continue to increase share, get more people to ACAT their accounts into Robinhood, and I think web is a core part of making the value proposition even stronger there.

That's great. And admittedly, Vlad, since this is a wealth conference, I know that people are quite familiar with retail brokerage offering and the fact that like trading is really in your DNA. You might be aware of your efforts to launch a Robinhood Wallet and Advice product. Since I know you guys have historically been quite disruptive, maybe just lay out your vision for how you might look to disrupt the traditional wealth channel and compete with some of the larger incumbents that [ merely ] are here at the conference?

Yes. I mean let me tell you a little bit about deepening relationships more broadly and what that means to us, and what we're seeing, and I can kind of get into advisory as well. So one of the big -- kind of the biggest strategic priority in terms of growing wallet share and diversifying our business has been Robinhood Gold. And what we're seeing is more and more of our customers are adopting Gold, which is our premium subscription product. It starts at $5 a month, within the first 7 days of joining. We're seeing that number steadily increase over time. And there's a ton of room to improve that as well. Right now, Gold is not very discoverable. We don't really put it in front of customers in onboarding. And all of those things are getting fixed, and we think there's a long runway to getting that Gold attach rate up. Now once a customer is a Gold customer, they basically get the best of all Robinhood products. So if you want to leave cash in your Robinhood account even if you're not investing it, if you're on Gold, that earns a 4.9% APY and gets you over up to $2.25 million in FDIC protection. So it's a great tool for savings. We also introduced a 3% IRA match. So if you contribute up to $6,500, which is increasing to $7,000 in the next in the next season, that's an extra $200 a year. And then once that compounds, even smaller amounts could lead to just dramatic value to customers. And we've seen that be very successful. And we're looking to add Gold value props to all of our features, not just for savers and for retirement, but for people that are engaged in trading as well. And what we're seeing is when someone signs up for Gold, their account balance continues to grow. Our wallet share of their total balances on and off platform continues to increase. And the ARPU for those customers is very healthy and growing as well. And so we're doubling down on this. We're going to add more Gold features, and we're going to continue to innovate there. And I announced on the earnings call that there's going to be something really special with Gold customers and our credit card offering. So I think that this is just a big step towards, not just diversifying our business, but making Robinhood the place, not just for your trading, but for all of your financial activities. Now when it comes to advisory, I know you started asking about advisory, Robinhood has traditionally been a self-directed platform, and the self-directed sector has been growing very rapidly. And so I think one of the things we've been thinking through is how can we use technology to deliver the same type of advisory product that a high-net-worth individual or someone who has a lot of money, the CEO of a company, would be able to get from a human, but can we deliver that to a much broader audience in digital form, all while maintaining the same ethos that has made Robinhood so successful, which is that Robinhood believes that individuals have the responsibility and the knowledge and the tools to manage their own money. So how can we just remove the friction and make that easier? And the team has been hard at work. We've we've kind of planted a seed with retirement and first trade recommendations of still keeping customers in control of their finances, while giving them more automation and tools. And I think we're very excited with what we can do in advisory. And we're also looking very closely at large language models and all the tools that are available to improve the experience and add a higher level of service across the board, including for advisory.

That's great. Vlad, I guess I look forward to what some of those additional bells and whistles will be as part of the Gold offering. And we have seen that steady inflection. I'm going to pivot to just a discussion around organic growth. Now you sustained more than 20% net deposit growth rate despite what's been more tepid growth in net new accounts. Do you see that 20% flow rate is something that's sustainable? And when do you expect to see some sort of acceleration in terms of net new store account growth, so to speak?

Yes. So right now, we're focused on sort of mid-funnel, mid-funnel being growing Robinhood Gold subscribers, getting not just the attach rate of new customers into Gold higher, but also getting the existing customers that are on the platform, the 23 million net funded accounts, a higher percentage of them to be Gold subscribers. And I think we've got a lot of runway there as we add more and more things to Gold. And as we surface it better in the product, we should be able to increase that much higher than the 6% that we're at now. We'd like to get into double digits and see that consistently growing over time. And I think that, yes, as we look at as we look at gold. I do think, yes, there's a huge opportunity ahead of us there. And the mid-funnel actually will help us, once optimized, get more top-of-funnel growth. I think historically, Robinhood has had a pretty narrow funnel where we get a lot of net funded accounts going in. But a small portion of them become very, very active traders. And the remainder of them, we can engage better and get them into products like Gold that grow their active wallet share. And once we've done a good job streamlining the bottom of the funnel, with the Gold improvements, we're going to improve the mid-funnel. And then once we solve that, I think there's -- there, we'll turn our attention to the top of funnel and growing that.

Got it. It might be a good time since you alluded to this before, Vlad, just to talk about the international expansion. I know that's slated to launch your Robinhood U.K. brokerage offering in the coming weeks. How significant is the brokerage TAM in the U.K.? And how do you plan on monetizing some of the customers in the region given [indiscernible] is precluded? And if deployed successfully, and this is where I'm most interested in, how scalable is this to other pan-European regions?

Yes. I think that's something we've been thinking about a lot as it's guiding our strategy for international. We want to make sure that we expand internationally in a capital-efficient manner. And that's a big part of why we've decided to build organically. We've made significant investments in our infrastructure over the past few years that have made it easier to adapt to new markets and scale the platform to multiple geos. So we made it easier to actually add new funding methods. We've made lots of advances in our onboarding process as well. And if you think about it, from an engineering standpoint, the things that are most different from 1 market to another are the onboarding requirements around KYC and the ways of moving money into and out of the platform. And of course, in some markets, there's translation, there's a need to adapt to kind of local exchanges and local marketplaces. And of course, as you get deeper, local retirement products, for example, in the U.K., they have ISAs and SIPPs that work a little bit differently than IRAs in the U.S. But by and large, our core platform has advanced to the point where we can add a new country and a new market relatively cheaply. And so, in the U.K., we do see a big opportunity. It's a sophisticated customer base. They understand investing. There's interest in U.S. stocks and U.S. companies. And the incumbents that have the bulk of market share are charging commissions. So it's sort of like the U.S. was before the launch of Robinhood. The incumbents have not yet been forced to drop commissions to stay competitive, and we believe we can do that. And we're also bringing to the market all of the revenue streams and ways of monetizing that we've built up and diversified over the past few years, including stock lending, Robinhood Gold and several more.

So maybe pivoting to just a broader discussion around like margins and profitability, Vlad, you alluded earlier on to the fact that expenses, the levers within your control, you've done a good job of executing on that front and including controlling expenses, a bit more financial discipline. Now at the same time, your margins are lagging some of the scale brokerage peers. As you look over the next few years, what do you see as an achievable GAAP operating margin? And how committed is the management team just to delivering positive operating leverage sustainably?

Yes. I see no reason why our margins can't resemble our peers. There's a few things that we have going in our favor. We're a technology company. We don't have brick-and-mortar. We can do more with lower headcount. So it all comes down to a question of, how much are we investing in future growth? And right now, we see a big opportunity to make these investments because not a lot of others are investing. In fact, a lot of our competitors in fintech and the discount brokerages are retrenching. They're cutting their ambitions and cutting headcount, which I think opens up big opportunities for us, both in the U.S. and internationally. So I think, over the long run, we expect the margins to be on par with our peers. But short term, we don't want to pull back from making new growth investments too much because we do think that great companies are built in bear markets. And I see many, many opportunities ahead of us in the coming year.

And so maybe thinking about like the expense rationalization opportunities while still investing for growth. Now your expense per employee is running above many of your brokerage and fintech peers. I know both you and Jason have talked about some opportunity to leverage a largely fixed cost base? And what opportunities do you see to maybe leverage emerging technologies like AI? There was a lot of excitement around our AI panel yesterday. How is that going to inform at least your approach to driving further efficiency gains from here?

Yes. I mean I think we've already been deploying AI quite extensively in the firm. And we've been using it for engineering via copilot, which is sort of GitHub code assistant that is AI-powered. We've been looking at it across all operational teams and actually asking teams to make sure they work with our in-house AI teams and see how they could find efficiencies and make their team members much more productive. We've also been looking at hiring more outside of the U.S. So traditionally, our hiring has been entirely U.S.-based, and there's a lot of talent out there, and we've started to see some success in international recruiting and we expect that to be a long-term driver of more efficiencies.

Great. And maybe just switching to a discussion around capital management priorities and your philosophy. I know you've done some smaller strategic deals. It certainly helped expand the product suite, extend your capabilities, whether it's, say, technologies, X1 with credit cards. Now given your strong capital position, how are you thinking about M&A relative to other potential avenues for capital deployment?

Yes. As you mentioned, there's a couple of things. There's investments that we're making internally and that includes things like international expansion, improving our core offerings in the U.S. and work that we're doing in the U.S. to diversify our business. So that's where we look to first. Acquisitions, of course, the X1 acquisition, we're very excited about. Credit is an area that we've been thinking about for a long time. We see that it is something our customers want and have been asking for. Even before we announced the X1 acquisition, if you've taken a look at the earnings Q&A from customers via the same platform, one of the top 5 questions time and time again is, when am I going to get a Robinhood credit card. So we're glad to have that team on board. They've got a lot of expertise building a credit card in a competitive market in the trenches. They have been quite successful getting to decent scale, large wait list of customers and pretty strong revenue growth as well. And when we saw an opportunity to acquire this company and work with them, it made so much sense. We're getting a great team. Credit card companies were sort of in a cyclical depressed part of the cycle, which made the opportunity very attractive. And we saw an opportunity to really accelerate getting a credit card to customers. So our Corp Dev team is continuously talking to other companies. And ideally, if we see a company that meets these criteria, attractive price, great team, and we could kind of see how it accelerates the road map of what we want to do. We have the ability to pull the trigger. And of course, we want to make sure we continue to be prudent about that. The third thing that you're probably alluding to is share repurchases. And as you probably know, we've executed a rather complex one with the emergent Fidelity Technologies share repurchase a couple of months back. And that reduced the share count quite significantly. So we have the ability to do that. And of course, I do think the share price of the company is at an attractive level right now, but I'm not announcing share repurchase. And I think we obviously can do it, know how to do it, have the machinery to do it, but my focus is on making sure we're driving organic revenue growth and building the business for the time being.

Vlad, is there some expectation? Or as we think about your buyback philosophy, would you look to introduce something that's maybe more mechanistic and predictable down the road as given that you've gotten to GAAP profitability, it feels like there should be more confidence from you and the of the management team around your ability to deliver sustained. Profit to support a buyback program where you're running with a lot of excess capital, seems like an opportune time, just given where your stock is right at.

Yes. No, it's definitely something we evaluate. We take into accounts, obviously, all the progress we've been making, also the macro environment. And as we know, there's been a lot of macro uncertainty in the Middle East and it's something that we're going to continue to evaluate with the team.

That's great. Vlad, I know we only have about 1 minute left here. As I think about just putting a lot of different pieces together, you talked about accelerating top line growth, the 20% NNA as well as growing new accounts with the funnel, positive operating leverage, more consistent buyback and trying to deploy that opportunistically. Maybe just help the group think about as you improve GAAP margins and profitability, what is a sustainable earnings growth algorithm for the company?

I mean I think there's a couple of things there, right? What we're building is an engine that can take customers in. A large portion of those customers increasingly over time will turn into Gold subscribers that we're going to monetize really well. Once you're a Gold subscriber, you're going to put a large part of your net worth into Robinhood over time. And it will be a no-brainer to use all of our services, not just self-directed trading, but our retirement services over time, our savings and spending services like credited cards. And we're going to build these relationships where we -- actually, if you're a Robinhood customer, we're helping you with everything. And we are predominantly targeting digitally native customers. So millennials, Gen Z, Gen X has been adopting Robinhood quite significantly as well. And as these customers continue to grow in their careers, you should expect their account balances to grow and the Robinhood balances to grow consequently. And if we continue to serve those customers well, we believe that multiple decades down the road the long-term trends are all pointing in the favor of this becoming one of the largest financial companies in the world. And that's sort of the goal that I'm working towards, and step-by-step in every decision that we make we are executing on this plan. And I think you'll see increased market share, increasing account balances, more customers, a global footprint, and we'll do this all while generating really strong and healthy returns to shareholders. So that's my commitment.

Really the most ambitious plan that we've heard to close with, but that's a really great update, Vlad. Thanks very much for joining the conference. And hopefully, we'll have you back next year.

Thank you so much, and thank you all for listening.