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

[Audio Gap] Subscription product, which is really encouraging. From a new product perspective, one that I'd highlight is we introduced retirement accounts last year. And feel really good about 500,000 customers accounts at the end of [Audio Gap], so the senior management team has really rallied around 3 areas of strategic focus: one, winning the active trader market; two, increasing wallet share with customers and then three, expanding internationally. So I want to kind of drill down into each of these.

I think the brand of Robinhood historically has really been known for bringing investing to first-time investors. That being said, you, guys, have made a lot of progress expanding the offering and active traders have been a big, I think, rally and cry at the firm over the last at least a year. So talk a little bit about some of the things you've been doing with active traders. Why is that an area of the market that you guys strategically want to go after? And what are some of the areas of success there?

Yes. So as you mentioned, 3 priorities, the first being we want to be #1 in overall active trading. Right now, we're #1 in mobile, but we're #2 overall behind Schwab and TD. And we're making progress. We've been zeroed in, as you had said, for over the last year in this area. Last year, double-digit gains in market share across equities, which were up 14%, options up 19%. So really good momentum as we focus in on this important category for us. And this year, we're continuing that focus. One big opportunity for us is we seek to be #1 overall in active trading is delivering a pro trader experience on the desktop. So we hear from our customers and we want to deliver on an experience on the desktop, wider screen real estate for our users to be able to trade the way they want to trade. And we think that there's a big opportunity there. The other area that we're really focused on for active traders is selection. The team is hard at work at delivering futures as well as index options later this year. So feel really good about the progress that we're making but also the plans to keep that progress going.

Great. And wallet share, you touched on retirement accounts is one area, but I'd love to just drill into what does it mean to expand wallet share with your existing customers and probably bring in new customers where you can be more relevant relationship to them. And so how do you think about the wallet share that you have today? I don't know if there's any stats you can give around that? And then what are some of the types of things you're doing to expand that and the success you're having?

Yes. On wallet share, there's 2 primary ways that we measure our progress there. The first is net deposits. And we've been zeroed in on that, again, 20-plus percent net deposit growth rate for some time, 27% last year, and we're seeking to deliver another year of 20-plus percent growth on net deposits. The other area of focus, which is super important is Robinhood Gold. And the reason that's important is our gold customers have over 8x the assets of our average customers. They use more of our products, and they deposit at 1.5 to 2x faster than our average customer. And so we've been making a lot of progress there. Robinhood Gold has added about 100,000 customers so far this quarter, and we're nearing an all-time high. So really, really good progress there. And while we have 23 million-plus funded customer accounts, only about 6% attach rate, 6.1%, that's up from 5% a year ago. But we think from a wallet share perspective, as we increase the attach rate, we'll see the wallet share, that follow.

Great. And then want to hit international. So I think we've been talking about international for years, and now we're actually international with Robinhood. So exciting developments really over the last couple of quarters here. And so talk a little bit about what going international means for Robinhood, what you think your claim to success is why people are going to want to use Robinhood internationally? And then if we can talk about kind of the road map that you see playing out there and how that might compare to what you've been able to achieve in the U.S.

Yes. So we're really excited to take kind of the mission of Robinhood and go global with that. And to start, we've launched brokerage in the U.K. as well as crypto across the EU. And so far, nice early progress, tens of thousands of customers, most on crypto for the EU. We have a waitlist still for the U.K., and we've been rolling customers off. So far what we're hearing, particularly on the brokerage offer in the U.K., customers love the high interest yield that they're receiving on their uninvested cash. They really appreciate the over $2 million of FDIC insurance, no FX fees on trades. What we're hearing that they want more, though, is particularly the tax wrapper around the accounts for ISAs and SIPPs. And those -- that team is working hard on delivering that soon. Also excited about bringing crypto across the EU. We have over 25 coins available. And obviously, I think we all know that it seems to be a good timing with the strength of the market backdrop right now in crypto.

Yes. Great. And as you think about the broader international strategy, what does getting into the U.K. EU crypto, is that leverageable into other jurisdictions? And how do you think about time frame of the ability to maybe even go broader internationally?

Yes. At its core, Robinhood is a software platform, and I think we're really positioned well to move quickly. And the more we build and the more countries that we go into, that technology accrues to the benefit of the next launch that we'll set out to do. We do have ambitions to be all over the world. In terms of speed, I think we also have to be very mindful of every jurisdiction's regulatory environment. And so that will probably be really what keeps us kind of on a careful and deliberate pace as we expand. But like the early progress that we have. We have long ambitions, but it's a marathon that we're embarking upon.

Yes. That's great. I know we're now through February, you, guys haven't given February metrics yet, but any, I guess, high-level update on what you've been seeing in the environment? And anything you can share with us around what you saw in February?

Sure. So on the call a couple of weeks ago, we highlighted strength and momentum in the business in January, and that's continued into February. So customer assets are up versus January. Net deposits over $3.5 billion. That brings the total for the quarter-to-date through February over $7 billion. So really strong net deposit growth. And trading has been up versus January across all asset classes, equities, options and crypto. So the numbers will come out here in the next week or so.

Okay. That's great. I appreciate that. I want to pivot a little bit and talk about some of the things you've done on the expense side. So big theme, you mentioned it, your profitable growth, and as a CFO, I can imagine there's kind of unlimited demands for resources that there's so much in terms of where people want to invest and grow internally and you're trying to balance all that. So how do you think about prioritizing projects, being able to fund all these different growth initiatives, the numerous areas and the product road map while at the same time, this profitable growth mentality, which really has resonated in the market. You see it clearly in results in terms of what you, guys have been able to accomplish.

Yes. So first of all, we're really early in the journey of the company. And when you look at it from a perspective of assets under management, we have about $100 billion of customer assets today, and that's relative to a market backdrop and competitors who measure in trillions. And so we're just getting started, and we think it's really important that we continue to aggressively invest for growth. Now that doesn't mean that we have to do it, everything that we do means more cost. When we look at our core business, we think kind of over the medium to long term, we can be running our core business expense growth in the low single digits. Actually, in 2024, we're planning to decrease our spending in our existing businesses, high single digits, perhaps as much as 10% down year-over-year, and we're redeploying that. We're increasing our marketing spend by about $100 million in our plan for 2024. And we're also pursuing several different areas of new growth opportunities, some of which I mentioned. And so I think there is a lot of opportunity for us to continue to be more efficient, whether it's process optimization, whether it's geolocation of work, there's opportunity for us to continue to get more efficient on the cost side so that we can afford to drop some to the bottom for shareholders as well as pursue growth also for shareholders.

Yes. It's been a great combination. You just touched on the marketing. You, guys, have had some really good success with some of these promotions in the market for different areas of your business model. Talk a little bit about, I guess, one, the success you've been having, and then two, how you measure the ROI? Because I think some people may look at, okay, marketing is going up. Is this still a good trade-off? And so how do you guys, think about that trade-off?

Yes. I think the -- so first of all, what we're seeing so far, early results we're looking at cohorts as they come in and evaluating the return. The marketing team is doing an excellent job zeroing in on high LTV customer accounts, and it's working, and it gave us a lot of confidence to increase our spending in 2024, and we'll continue to monitor that. But the primary measure that we're looking at is LTV relative to the CAC that we're deploying and the early signals are quite strong. So we'll continue to watch this closely and lean in on areas that are working and pull back on areas that we're not as happy with.

Okay. I want to talk a little bit about the interest rate environment. So one nice driver of revenue growth in 2023 was the benefit of higher interest rates, but there's a lot of nuance that goes around that. So as we think about the Fed potentially pausing and then even the extent we start to get rate cuts from here, what does that mean for Robinhood? How do you manage through that? And then what are the other kind of ancillary aspects of the business model. Obviously, transaction activity tends to do well when rates are moving lower. So how do you think about the balancing act of what lower rates could mean for Robinhood?

Yes. With the diversified revenue model that we have, we did see some strength in interest income here over the last year plus as rates were going higher. But I really view, rising rate environment as a headwind, not good just because it's increasing some interest income. When I think about an environment where the rate hikes are pausing and there's expectation for it coming down, there's probably 3 points that I would make. The first is as we look ahead for the expected rate cuts this year, the average Fed rate in '24 is expected to be roughly in line with the average from 2023. So from a growth perspective, rates are fairly neutral input for us in 2024. The second point I would make is over half of our interest earning assets are in customers' gold sweep deposits where we have a fairly fixed spread, whether the rate is going up or down. And so a big piece of our overall interest-sensitive assets aren't sensitive after all because of the fixed spread as we pass the majority of the economics on to customers. And then third is to the point that you were making, rates falling tend to be good for growth. It tends to increase balances, it tends to increase trading. And so I really view 2024 as a year where interest rates move from being a headwind for our business to be in a tailwind.

Yes. When you think about the cash building your customers and you have a very strong value proposition. Is the expectation that a portion of that will just move into risk assets or effectively trading? Is that the point?

Yes, I think when we look at our customers, they're investing. And depending on the rate environment, they might be investing in low or no risk FDIC-insured cash sweeps. But we also have other ways to invest, whether it's our retirement account or the taxable account. And when we look back to 2019, it was a similar situation, cash had been building, those assets have been deployed into investing. So we feel really good about the stickiness of the relationships that we're building with our customers.

Yes. One positive point around the firm and talking to investors that people have really appreciated around the firm is the financial strength and how you guys have built this kind of war chest of cash and no debt, $5.3 billion in cash and equivalents and investments. Talk about what this financial strength means for you and how you think about whether it's deploying the cash or playing offense when maybe some others are playing defense right now.

Yes. It's a great position to be in, particularly in this moment in time, over $5 billion of corporate cash, really 3 areas that are potentials for us. One is just investing in organic growth. We talked about increasing our spending and marketing in 2024, and that's an example, of the flexibility that strong balance sheet gives you. The second is M&A, and we've done some M&A, smaller deals, one that we're excited about was the acquisition of X1, which is a small credit card business. And the team is working hard on rolling out a credit card opportunity for our customers that will be worthy of the Robinhood brand. And so really excited about that. The first will be something that we offer to our gold members. And then lastly, returning capital to shareholders. And you saw us repurchase about 6% of our stock last year and overtime we'll look at more opportunities to do that as well. In terms of the M&A environment, I think the backdrop is getting to be more constructive in terms of valuation expectations. And we'll be mindful and deliberate about the way that we approach this. Looking for opportunities to add great teams, great technology and perhaps accelerate our product road map, and that's really how we're thinking about it.

Yes. Can you talk about Robinhood as an acquirer and the strength that you kind of bring to the table? Because imagine when you're looking at a company, you've got 23 million customers already in-house. And so that really differentiates in terms of your ability to partner with someone and potentially pay for an asset that another firm that doesn't have that advantage is not going to be as competitive. So how has that been in conversations thus far? And then does that open the door for you, guys, to maybe do more if more comes in?

Yes, I think it's certainly appealing that Robinhood has such a high engaged, many, many millions of engaged customers. If you look at the X1 acquisition, that certainly played into the calculus of how attractive it was for us to pursue that. But at the same time, we're not going to overpay because we see that there's synergy value. That's really something that we should be able to capture for our shareholders. And so we'll be careful there. But when we look at combining new assets into the Robinhood platform, certainly, the strength of our customer base comes into play for credit cards, the median credit score of our customers is about 720, 2/3 are prime or prime plus. And so that was one of the reasons why we were really excited about the opportunity in credit.

Yes. If we zoom out a little bit, Jason, I just want to talk about where you see the industry going? Where is the evolution towards and what is making you most excited about where Robinhood sits within that?

Yes. I think, I still think, as I said earlier, we're just getting started. If you look at kind of the last 10 years, it was really about the emergence of retail traders, smaller balance retail traders. Robinhood played a key important accelerant role in that trend. I think as I look out over the next 10 years, not only is the continued trend in the U.S., but also international for us. But I think over the next 10 years, you see the retail trader really come into their own on the strength of increased earnings power, wealth transfer. And I think that Robinhood is incredibly well positioned to serve those customers as they continue to grow.

Terrific. I think that gets us pretty much to time here. But Jason, thank you so much for coming and doing this again. I always appreciate the conversation and look forward to the update a year from now.

Thank you, Devin. Appreciate it. Thank you, everyone.

Thanks so much.