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

And the tax wrappers and all of that would be on the medium term?

Those are -- yes, shorter to medium term. Yes. In the U.K., the tax wrapper accounts, the ISAs and PEPs, are definitely desired by the customers.

Just the $100 million marketing expense, is that contemplating losses within the credit card product? Or what are the kind of the big pieces within that?

So not in the marketing spend, but the costs associated with credit card are included in our overall OpEx guidance for the year, which at the midpoint, is up 5%.

Maybe just one on the U.K. brokerage, the profile of the customers that you're getting in the U.K., is that similar to the general type of customers that you're getting in the U.S.?

Yes, roughly similar. I think it's probably a little too early to draw conclusions on the U.K., again, with the focus rounding out the product suite. And we haven't turned on marketing yet in the U.K. as we work on offering more products available to customers.

Maybe switching to the EU with the Crypto offerings across the continent, maybe if you can talk about how that's going in terms of what kind of adoption you're seeing there? And I know that's also very early stage.

Yes, it is. Yes, Brian, it is also early stage, but we like what we're seeing, tens of thousands of customers across Europe and the U.K. And in Europe, I think there's a bit more clarity on the regulatory front. And so it gives us a bit more opportunity to innovate and roll out products. For example, we have staking on Solana; we offer additional coins. And you should expect that we'll continue to innovate there. But we like what we see in the early days.

And that's an interesting -- so there's a lot of debate about the regulatory evolution of Crypto here, obviously. Do you see maybe over -- I guess it depends, but maybe over the intermediate term, 1, 2, 3 years, the EU market developing exponentially faster than your U.S. Crypto?

That seems to be the path that we're on. I think you've heard from industry that there is a desire for greater clarity from the regulatory front here in the U.S. We seem to be making some incremental progress with the ETFs for Bitcoin and now for ETH, seems to be queued up. So that's encouraging. But I think there's more work to be done to allow for the innovation. And I think it's right that protecting individual investors is top of mind for the regulators. We want to do that, too. And we just need to find a way to clarify the regulation so that we really untether us and allow us to innovate faster.

Are you optimistic that, that will improve in the U.S.?

I'm optimistic by nature, Brian. We'll have to see how it plays out. But you've seen us over the last several years really be the responsible Crypto platform. In response to indications from the SEC, we've curated our coin selection, been willing to take coins down. We've been very careful about the coins that we offer. We've avoided products and services that the SEC has indicated that they have concern about, things like staking or lending. These are all things that our customers are interested in, but we've really taken the experience that we have as a regulated brokerage and applied it to our Crypto entity. And I think it positions us really well to be that kind of safe and trusted place to buy Crypto. Not to mention the lowest cost, I mean we have incredibly low cost. So if you're buying Crypto elsewhere, you're likely paying more.

Similar to the theme of your business model.

Yes, exactly right.

Maybe sticking with the regulatory backdrop, how do you see market structure changes evolving and the future for payment for order flow for equities, given some of the market structure proposals?

Yes. I mean I think payment for order flow has been something, for literally decades, it has kind of come up and we've moved past several times in recent history. I think we're at a point where there have been a number of market structure proposals put out. We've responded as well as other members of the industry. It looks like we're past the ban on Crypto -- or I'm sorry, on payment for order flow conversation, which is encouraging, and we'll continue to advocate for our customers and respond. But in terms of the 3 proposals that haven't yet been approved, it looks like it's on a track that it wouldn't be approved as written. And so probably some revisions would be necessary and we'll continue to work with and provide our feedback on those.

Yes. Yes. That makes sense. Just -- we just have T+1 settlement starting this week. Any issues or so far so good?

No, so far so good. it is relatively new for the marketplace and it appears that it has gone off without a hitch. We certainly were very diligent in the transition plan and all systems are green at Robinhood.

Okay. Great. Great. Maybe just to switch to -- I have a number of different topics here. But maybe let's go back to the Gold subscriptions and there's obviously a lot of initiatives that, firm-wide, to get more Gold subscribers, the credit card rollout being one of the latest ones. You're still charging $5 a month, given -- and you've added a lot more value, including higher payments for cash balances, you'd advanced that over the last year. Any thoughts of increasing that pricing, given you've added so much value over the last year?

Yes, I think the point you're making, Brian, is it's a great deal, $5 a month, and it's amazing value in the Gold proposition. One of the things that we're very mindful of is when a customer is a Gold customer, they have 8x the assets on average. They deposit funds twice as fast and they adopt more of our products faster. In fact, if you look at Retirement, Gold members are 5x more likely to have a Retirement account than non-Gold members. And so we're very mindful of the downstream effects of being a Gold member. That said, we don't have a philosophy that would be opposed to increasing price. We're certainly adding a lot of value into the bundle, 5% interest, soon access to the Gold credit card with 3% rewards on all purchases. So it's something that we'll experiment with over time, but certainly no plan in the short term. And ultimately, we want all of our customers to be Gold members, and we're at 7% attach rate right now. New customers are attaching at a much higher rate in the zone of 20%, which is encouraging. But given how valuable the Gold bundle is, we think we've got a lot of room to go.

Yes, why wouldn't anyone, everyone, just...?

It should be a no-brainer, and that's really the approach that we're taking.

Is there -- are there marketing -- I guess is that part of the marketing spend? Or is it just...?

Yes. Yes. So when I talk about like higher LTV customers, that's really talking about Gold and targeting customers that are likely to join Gold and engage with us across our platform.

And just thinking about -- thinking about the subscription revenue that comes from Gold customers, the greater usage across your platform for the Gold customers and thinking just about the revenue mix for the company. Obviously, Crypto trading is probably the most volatile aspect of the P&L. Thinking out -- who knows what Crypto volumes are going to do in any given period, of course -- but thinking out over the long term, 3 to 5 years, how do you strategically think about making that revenue mix a little bit more stable, obviously, keeping the growth profile? Are there areas that you're investing in, such as Gold customers, where you are potentially raising that price, subscription price, or whatever it would be to make that revenue stream a little bit more consistent and help the earnings profile?

Yes. I mean I think -- so first of all, we're long-term bullish for Crypto and are going to continue to innovate both domestically wherever possible as well as internationally. And I think there's a lot of room to go for Crypto. On the question of kind of a more steady revenue stream, I think really the approach that we're taking is diversifying our business. And you're seeing that really take form here in the last couple of years, where if you would have gone back a couple of years ago, most of our revenue was highly concentrated in trading activity, and now it's much more balanced. That's things like growing Gold, investing in new product categories like credit cards or Retirement over time, it's things like going into AUM-based fee models, things like advisory, possibly RIA platform, these are all things that are on our minds and over a longer term. But I think there's a lot of opportunity for us to continue to advance the products that we offer to our customers, and we get the benefit of a more diversified revenue model.

Yes, on the advisory side, that would be like a fee subscription type of service, or...?

Well, I don't want to get too far ahead and declare how we would handle that, but we're certainly interested in advisory over time.

We did...

Is there any correlation between Crypto revenues and security lending revenues?

I haven't really thought through the correlation between crypto and securities lending because with securities lending, that's really -- it's really based on the equities in the brokerage side of the house. And there's some market cyclicality around the sec lending business, particularly on the rebates that we'll earn, sometimes there'll be a handful of names that are in much higher demand that will drive some excess earnings. But so far, I haven't seen anything that would draw a correlation with Crypto.

What would be kind of the way to think about the outlook for securities lending, just natural growth in the business grows with it? Or is there anything that's a driver outside of that?

Yes, the main inputs are continuing to improve the data and tooling that's available to the trading desk and enrolling customers into the program, and we're making a lot of progress on enrolling customers into the program. Probably the best way to look at that is assets enrolled, I think it's something like $14 billion as of Q1.

What type of yield improvement enhancement do customers see if they're enrolled in the securities lending program? Clearly, it depends on the markets and the hard-to-borrow.

Yes. It depends on the customer and what they're holding, but we give them a share of the revenue, which is a nice way for them to augment their yield.

It's meaningful enough for them to be enticed?

We're seeing really, really nice adoption and growth in assets enrolled in the program. So I think the answer is yes.

Yes. One last thought on the Crypto question that I had before. Another way to think about reducing the volatility of earnings, would there be a way to -- I imagine incremental Crypto volumes come in with very high margins, given you have a fixed cost base on it and the revenue just simply comes in. Would there be a way that you'd flex expenses to -- not that you'd try to reduce your margins at all, but therefore, reduce the volatility of Crypto on the earnings stream by expensing more against that?

Well, I certainly wouldn't -- well, first of all, we've provided a range of OpEx guidance, that's $100 million in the range. I think that gives us a lot of flexibility to flex up and down based on what we're seeing. I love our fixed-cost OpEx structure, 90% fixed cost, we've managed our costs incredibly closely, and it is kind of demonstrated in Q1 when we saw outperformance on the top line, that most of that drops to the bottom line with incremental margins above 70%, even while we're investing across so many different new initiatives. And this led to $0.18 of earnings when the Street was expecting $0.06. And that's really the power of the model, that as we grow the business and we tightly manage our OpEx, we have a lot of leverage potential to deliver profitable growth, which is just incredibly exciting to me as a CFO.

Yes. How do you think about that, like the medium term, obviously, the product road map is exciting and there's a lot in multiple geographies, so like how do you think about OpEx growth on a medium-term basis? Why not -- on one hand, you want to continue to deliver like you did in 1Q, on the other hand, could you hire a lot more and maybe accelerate some of these product rollouts? Like how do you weigh those two?

Yes. So first of all, I like where we're at in terms of our head count. I mean there's certainly opportunities around the edges to add some resources, but when we look at our product road map this year, it's pretty ambitious and there's a lot going on against all 3 of our priorities, whether it's international, active trading, rolling out a new credit card. So I think that growth is incredibly important and we are investing for growth. But part of the opportunity is, is when we look at our fixed cost structure each year, finding opportunities to be even more efficient and then taking those savings and applying it to the growth initiatives. And so that really takes hold, and is demonstrated by the OpEx guidance above 5%, even while we're investing across the various strategic priorities and increasing our marketing spend by $100 million year-over-year. So I think we're really well-positioned to manage our costs prudently, but also aggressively go after our growth opportunities.

And so when we look at '25, '26, '27 road maps, there's no reason why that fixed cost base would have to jump significantly because this is a pretty big -- active year and you're handling it with the current OpEx?

Yes. This is an active year. We haven't given guidance for the future, but what I would tell you is that our management approach is to diligently question all of our costs constantly and find out ways to self-fund new asks. And so I think in the last couple of years, the operators of the company are very used to having to answer the question, how can I self-fund the asks that I have for something incremental? And 9 times out of 10, they find a way to self-fund, which is just really exciting. We have a company value called lean and disciplined. And I think company values are a great way to get everybody on the same page. And we're all on the same page on being lean and disciplined in the way that we manage our costs.

That's pretty comprehensive. Maybe just talk about interest rate sensitivity a little bit. So first of all, you reduced your -- some pricing on margin loans recently. Maybe you can -- 2-part question, maybe start off with that, what kind of impact are you seeing in activity? And then secondarily, if we do get rate cuts at some point, how do you think about your sensitivity? It's easy to do on the corporate cash side, but how would that play into your philosophy on the rates that you're giving customers on the cash?

Yes. So first on margin rates. So yes, last week, we announced that we were lowering our margin rate table across the board to make it competitive. I think IBKR has historically been the lowest published rates. I think that said, the other brokerages would have a process to offer similar rates to that to their customers through, you just have to call and ask for it. What we decided is we want to be competitive across the market in this space. And frankly, we weren't. And we've been taking market share gains across most aspects of our business, but margin loan and margin lending has been an area that we have been falling behind. And frankly, we just want to take a reason off the table why customers wouldn't bring their business to Robinhood. And I think this is another important step. When you pair that together with competitive margin rates, a desktop pro trader web experience, adding futures, adding cash-settled index options, you start to see the coming together of the strategic priority of being #1 for active traders. So I would just say that's a part of that overall strategy. And it's only been a week, but we're already seeing positive signs on the margin book. So feeling really good about that and we'll update when we have more data.

Do you have a desktop product now or that's going to be a new launch?

It is a new launch. It is a new launch. We do have a website, but it's essentially what you'd experience on the mobile app. And so this is a completely new launch, new product, and it's meant for more sophisticated traders. Brian, you had a second piece on interest rate cuts and sensitivity. So there's probably a few points to make on interest rates. The first is that when we look at interest rates this year and the forward rate curve, we expect rates to be probably on average, neutral to slightly positive versus last year. The second point I would make is of the $35 billion in interest-earning assets, a relatively smaller portion of that is actually sensitive. And you mentioned the Gold suite, for example, we're approaching $20 billion of balances in the Gold suite. We have a spread of around 60 basis points. And that spread is fairly firm. And so as rates go up or down, we've been maintaining kind of that spread. And we're always mindful of where we are relative to the overall market because we want our customers to have a great deal, but we feel really good about the spread that we have there. So it really desensitizes a big piece of the interest-earning assets from rate cuts. In some balances, as rates go down, tend to go up, things like margin lending. And so it's not that the rates go down and the balances would stay the same or fall. Some of those balances would increase. And so -- and then probably the last thing I would say is that an environment of increasing interest rates has been a bit of a headwind for our business. And so we're excited to see as the rates come down, interest rates move from a headwind into a tailwind for our business. And we do believe there's a natural hedge between rates and trading activity. And we're already starting to see that. You saw it in Q1 as retail engagement was picking up and that was a bit of we've reached the top of the interest rate cycle and there's some anticipation for rates to start coming down again, which is encouraging.

We have time for one more question, if anyone has one? We can finish up with the capital deployment. You just announced a $1 billion stock repurchase program to be executed over 2 to 3 years, I think?

That is correct.

Maybe just update us on the capital priorities. How do you view a stock buyback in terms of other alternatives? You've been doing a number of small acquisitions over time.

Yes, we have.

How do you rank those two?

Probably in priority order, I would say investing for organic growth, opportunistically deploying capital through M&A to accelerate our product road map. And then lastly, returning some capital to shareholders. And I think we are incredibly well-positioned to really provide capital in all 3 of those buckets. We have a balance sheet with over $5 billion of cash and investments. We're in a position where we're generating positive earnings and cash flows. And so we think it's prudent to have a share repurchase program. What I would say is when I look at shareholder value creation, I really love the algorithm of increasing earnings and increasing cash flows and decreasing shares over time. And I think that delivers a lot of value to shareholders, and it's a pretty powerful formula. And something I'm excited to say that we're embarking upon with this announcement. And then, of course, last year, we bought back a little over 5% of our shares in a single transaction as well. And so combined with prudent management of shares that we give under the employee stock program, we think our dilution prior to this announcement would be 2% or less. And I think we're well-positioned with this announcement over time to manage that down and possibly lower the shares.

Okay. Great. And so I was going to do a follow-up question on that, but you answered it. Well, great. Well, thanks, Jason, thanks so much for being with us today. Really appreciate it.

Thanks, Brian. Always a pleasure. Thanks for the questions.