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

All right, everybody. Welcome back to the 2024 Piper Sandler Global Exchange and Trading Conference. I'm Patrick Moley, senior research analyst covering the exchanges, online brokers and trading companies. Happy to be joined by our next guest, Mr. Steve Quirk, Chief Brokerage Officer at Robinhood. Steve is a veteran in the brokerage industry over 35 years of industry experience, some in brokerage, some in market-making. Joined Robinhood in 2022 from TD. Prior to TD, he was at Thinkorswim and was part of that acquisition back in the late 2000s.

That guy over there, back there, you just had on acquired.

But -- but thanks for joining us. This should be a good one.

I'm going to start it off a week or 2 ago. You lowered margin loans from 8% to somewhere between 5.7% and 6.5%, I think. Can you talk about that decision, share some of the success that you've seen recently, if you're willing to share?

Oh, yes. So we've been doing a series of things to deliver more value to the engage, really engaged investors that we've started to see come to Robinhood. We started an ACAT match program, which basically gives people a 1% match if they bring over their assets. And the customers that we've seen come over, and I think you heard it in a couple of panels this morning, are -- were net positive ACATs to every single publicly traded broker. But the customers that are coming over, our average account size for 24 million accounts is 5,000. They're over $100,000. And so it's very clear we need to deliver value for them across the entire offering. So one of the areas that the most recent areas where we're trying to compress the margins and let them generate better yields is in margin. And we launched that 10 days ago, and we've seen 10% growth in 10 days, over 10% growth. Half of those -- so 3/4 of that is coming from existing users who have increased their margin balances, about 1/4 of that is coming from our competitors, and the margin balances are bringing over between $100,000 and $1 million. So it's -- and we haven't started marketing it yet. So when we do, we anticipate that we're going to get some nice traction.

So I think that's now the lowest in the industry.

They are the lowest in the industry and virtually every segment.

You mentioned the matching incentive. That's maybe a good place to move next. Your -- the big key focus areas from your CEO are increasing wallet share with customers, winning with active traders, expanding internationally. You've seen a lot of success with these matching programs. Can you talk about how much of those deposit inflows are coming from new and existing customers and maybe just parse out a little bit more like where that's coming from and how sustainable you think it can be?

Yes. I should -- I think it would be helpful to sort of set up our thinking because we got -- we get a lot of questions on the Match program. Is this something you're going to do episodically? Is it sustainable? Are you getting the associated yield necessary to pay for acquiring these customers. I'll kind of start there. We've shared publicly that we look at every single cohort every week that comes in, we look at the size of the account, we look at their yield every single week, and we are covering that in less than a year. So it's definitely working out quite well. But what prompted it was really an evolution. The evolution is, listen, Robinhood started as a self-directed trading app. And our customers were very young. They're close to 30 years old, half of them first-time brokerage clients, very diverse, very young, but they're growing up. And so they need retirement accounts. They need yield, they need securities lending. They need other ways to be able to continue on their financial journey. And when you start delivering those things, we get rewarded by having more engagement. Our attrition used to be like 85. Now it's -- or sorry, used to be -- our attrition used to be about 15%. Now it's like 4%, right? So they're sticking with us in a much better way than they used to because they have no reason to leave us. We have all the things necessary. So once you enhance the offering, let me take -- I'll pick on something that doesn't exist anymore, so I don't insult anybody besides threadback there. TD Ameritrade, a TD Ameritrade client who has been with them for 20 years, and says, "I think of Robinhood as a self-directed shop and nothing else, and I have many financial needs. We're not that anymore. That's changed dramatically. Now we have a holistic offering but I need to give you a reason to come and take a look. So a 1% match gives you a reason to come and take a look. It's quite lucrative. And when they take a look, they say, "Oh my gosh, wow, with these margin rates with a complete offering, and I would argue really a better experience overall. It kind of becomes a pretty much for no-brainer. So the deposits that we're seeing now, as I said, we're net ACAT positive against every single competitor. And I mentioned the average account size is 5, 000. This is over 100,000 that the people that are coming over. The deposits are coming from both existing customers and from new customers. And so it's very attractive for both our current customers who, by the way, or accumulating wealth at the young age of 30 something, at a faster pace than the industry, which is naturally going to grow our deposit base, but we're also attracting so many other people from our competitors.

So on the active trader front, you're someone who probably for the majority of your career has focused on web-based traders. And you say that you have this holistic offering, but I would challenge you a little bit there and say, I think your web offering compared to others, maybe you have more work to do there.

Yes. it does.

But that's a big part of the market that you haven't even tapped into yet.

Yes.

So in your thinking and your experience how important do you think it is and how much of a step function could it be in having a more robust web interface where traders maybe have a little more real estate. It seems like that to me could be the thing that really allows you to attract traders from other platforms.

Yes. So I should start by saying if -- if in 8 years ago, you would have told me that there is a company that was #2 in market share and option trading and equity trading, and it was all being done on that little device. I would have told you you're crazy. Like I just didn't think it would be -- we would not think that would be possible with that amount of real estate, but that's where Robinhood sits today, which is quite interesting. So when I first arrived at Robinhood, one of the challenges we had was the most engaged users we had the lowest NPS score of all of our users. That's an upside down model that really doesn't resonate with the highly engaged active trader. So we went on a journey to change that. Now it's the highest NPS. But there is -- to your point, there's a missing component. So 95% to 99% of the trades that Robinhood customers do is on a mobile device. In order to attract -- and by the way, the industry is headed that way. So I would like -- I'm glad to be in that position because that's where the industry is coming. But in order to bring over people who are highly engaged with large accounts and need more capabilities, they're going to want to complement or that you're going to want a primary, which is a web-based application. That's what we're building right now. And in doing so, now we can accommodate, let's take the total market share of all retail trading. Probably 50% of that is done on a web-based application or a software-based application and we don't get any of that. To your point, our web is not very attractive right now. So we're building a web-based application that will roll out in H2. And I think you'll see we will have an ability to attract a lot of customers as a result of that. And even have our own customers who graduate up to a larger need than a mobile application, we'll have an accommodating product for them.

And with that, I think another thing in attracting users of other platforms will be offering futures, index options, how important do you think those will be to kind of winning active traders from other platforms? And is that still planning to do that in the fourth quarter this year?

Yes. We still plan to do that in H2. I got Fred staring at me right now back there. So I try to get him -- by the way -- he already knows this, and if the [ CBO ] team knows this, that's our #1 request from our active engage traders. That's coming in H2. A whole bunch of other capabilities are coming as well, like a joint accounts. Again, our customers are growing up. And so their needs are evolving, and we're just delivering on those. But yes, we will have index options. We have futures coming. So all the things that I need as a sophisticated investor are being delivered along with the technologies associated to be able to use them.

I want to touch on the environment that we're seeing. We sort of seen these like many meme-stock rallies Roaring Kitty fellow is coming back. I hear it's actually one of JJ's aliases. But -- do we -- what are you seeing? I mean, is it the same as it was last time? I think I saw you on CBC, you said it was like a 1/4 of the volume you're doing before. What are you kind of seeing from that?

Yes. It's -- so -- the question that they asked me on CBC was number one, what is -- what's the behavior going on? Like is it crazy town over there again. Everybody is trading these. The overall volumes, at least within Robinhood, were probably 1/4 of the peak during the first game stop episode. I think, and I think there have been quite a few articles written about it. A lot of -- more of it was institutional. I just think there was -- it was a bigger mix. Maybe they're protecting themselves. Again, I don't know. I don't want to speculate. But we didn't really see -- we saw an uptick, but we didn't really see a massive uptick in volumes. The other point that we made because I think where they were trying to go was hey, is this like take us back to the days where we're viewed as a meme-stock brokerage. And the point that I made to them is 80% of the people who started during that era are still with us and they've evolved. They've grown up and they're investing in trading in other ways. They've opened retirement accounts and just become customers that have sort of continued on in their investing journey. The other question they ask because it's actually an interesting question is -- is this a good thing or a bad thing for the market? Now again, I don't -- I'm not going to speculate on what's driving it and all the things behind it. There's plenty of things happening in the financial media that you can look at there. But, my point is if it brings more people into the marketplace and they evolve and become more sound investors than just speculating on memestock, it's an awesome thing. There's a reason why we're sitting at 58% of U.S. households. We're the envy of the world right now. U.S. households, 58% of them are participating in the market. We explore internationally, they would kill for that. Europe, Asia, they would kill for it. They want that participation. So my argument back is like sure, you might have made a mistake in your early days of investing. But if you evolve and become a more, what I'll call, a suitable investor, it's awesome. It's great.

And let's talk about international expansion. You launched in the U.K. late last year. Can you update us on how that's going and where you are in the overall product road map? Have you started even marketing over there?

Not really. We've been -- we want to get the offering to a point where we started light marketing. But we want to get the offering to a point where we think we can put our foot on the gas. As I said, U.K. elected officials, even the regulators are very receptive. They welcome -- Robinhood is very good at compressing margins and making it a more competitive marketplace and making it a lot easier to understand how to invest and giving them the facilities to do so. So even at our earliest meetings when we were talking about self-directed, they're like, please come into the ISA and SIPP market, which we intend to do, the retirement market there. So we've had good traction and early traction, but we intend to continue there. But more broadly, on the international front, I've also been in international in my prior career. And when I've been around the globe, there's a Robinhood of every single country or region, every single one. So why wouldn't we just be the original, right? Why wouldn't be the OG, the real one instead of the fake. And that's kind of what we're -- like we have the ability to go and do what we did in the U.S. Adena said it on a panel, the FIA. She's like every country, every region wants a Robinhood effect. They want it. They want that to happen. So that's our mission.

So taking a step back, you've seen significant growth in the Robinhood Gold subscriber count. You reached 1.7 million at the end of the first quarter '24.

Can I drop them a new number, Chris? He'll kill me if I do.

Yes. Let me -- So I mean, you've been in the -- if you want to drop a number...

I can't. They'll come up here and strangle me.

Yes. I'm sure it's higher than 1.7 million. Can we agree on that?

We can agree on that.

So you've been in the industry a long time. What are your thoughts on the subscription model and the competitive advantage that, that offers you? And is it something that you think competitors will start to offer. It's just -- help me understand like how you think about it in the overall industry?

The -- so it's more prevalent in Europe than it is in the U.S. But I think what we noticed when we look at -- and it's a nice bundle. So there's yield, there's a whole bunch of things in there that have nice value. And as a result of that, the people that go in there, they become more engaged with us. So the -- if I'm a Gold Member, I have twice the deposits. I have 5x the adoption of all of our other products, retirement accounts, everything else, securities lending, et cetera, et cetera. My account is 8x the size. It's a great value for them, and it's a great value for us as a publicly traded company because it's recurring revenue and it's a value. So every time we do anything, we always think about how we can add something to gold that will continue to make that such a valuable experience because these are your engaged customers who want to interact and do more things with you. Most recent thing we did is the credit card with the 3% back. And so we don't want to stop at self-directed at wealth management. We want to continue on basically all your financial needs.

I don't know if he'll kill you if I ask you this question.

He's going to kill me for most of the things I've said.

If we -- you keep adding features and bringing more value to Robinhood Gold, it's remained at $5 a month. How are you feeling about pricing? Do you think that's where you want to be? Or do you think that when you -- when we add a web platform, we had a credit card, we add these futures index options, do you think you can start adjusting pricing higher? Or how do you feel about that?

Yes. So Robinhood is such a data-driven company. We do a lot of testing, and we've tested this as well. I mean we're continuing to test it. So I don't want to -- I don't want to get ahead of myself and say that we are going to move that price point or not, but it's something we think about a lot. The thing we think more about is what can we continue to add in terms of driving value there? So that it becomes something that people are willing to pay more for because then those tests become a much easier exercise.

Let's talk about retail options trading. We've obviously seen a big spike over the last several years. There is sort of growing discussions about seeing 0DTE broaden out into single stocks. How do you think about that? I know there's some market structure hurdles that maybe could be overcome before we get there. Just what are your overall thoughts on that?

I love this topic because it's in every panel anybody ever does. And I think what gets missed is like people are assuming that the products are driving the behavior, the behavior is driving the products. What I mean by that is, go look at the duration of an investment in any asset class 10 years ago and look at it today. It's shorter today, right? So it's not because somebody put out products that are shorter dated. It's because -- that's the way people are investing. And if you look at it in an even longer time horizon, a lot of publicly traded companies don't last. Like it's not [ 1970 ] , you don't buy IBM and hold it for 40 years. A lot of these companies are gone. And so I have to change the duration of by investing to match what's happening in the environment. And I think with shorter dated options, the ability to -- if you told me that I owned a home and I knew exactly what day a storm could happen, but I only had to buy insurance for one day. And I said, but you can buy it for a month or a week. I'd kind of be an idiot to do that, wouldn't I? So again, I'm using an extreme example, but, if I know -- if I have healthy gains in NVIDIA, and I know when their earnings date is, and I want to protect that portfolio. I don't want to tip the tap -- the capital gains hit. It's an awesome way to account and to take care of that. So I think it's a product that, in my mind, is basically evolving to the behaviors of the people who want to use it.

So if we talk about -- do you think -- I asked Vlad about this on the call, but when you do introduce zero days to exploration trading and index options overall. Do you think it will cannibalize your SPY option volume at all or any other sort of index options that your customers are trading? Or you think it will be additive?

I think it will be additive. Every time we had the same conversation in my previous life about futures trading, and we measured it every single month, every single week. It's additive. It's -- like what generally happens, you'll see people graduate. They'll take their portfolio -- core portfolio, they'll use options to generate some income and then they'll use futures to be more pointed in any investment thesis that they have. So, we don't anticipate that it will be cannibalizing. And that's -- same question came up around the ETFs, the Bitcoin ETFs will they cannibalize in from everything we saw, all it's doing is creating a larger marketplace.

So I think we have time for one more. I'll end on a big picture question. You've done a lot to, I think, change the perception of what a Robinhood user is from 2021 in the meme-stock era. If we look out in 5 years, what do you think -- how do you think that compares today? What do you think the public perception what the Robinhood is?

I think that Robinhood customer will be heavier, older, 5 years does that to people. But more seriously, I do think there'll be -- there'll be a customer that is doing more. And I don't mean more -- I mean more in individual self-directed investing more in wealth management, more in spending, more like what we strive to accomplish is having those customers be having Robinhood be a destination where they want to do everything they do from a financial standpoint, whether that's depositing a check to spending, to investing, and we make it super seamless. Like when you have the new credit card, you get rewards and you click a button and boom, it goes right into a high-yield account where you're earning 5% if you want to do that. I also would say they're global. Like we won't be thought of as a domestic company exclusively. It will be a global company, and that's going to be really cool.

Maybe one last one because we have some time, but we had dinner with Vlad last month. I think it was the first day that you had launched the credit card and the cash back for the test group. What have you seen in terms of customers getting cash back, are they immediately turning around and trading it? And do you think that's a big growth driver going forward when you do roll that out?

It's really early. So we haven't really seen -- like it's probably too early to say is there any one behavior that we're seeing. But having that in the ecosystem is really powerful because these are big customers that even if they're just credit card customers or big customers and they're part of Gold. So again, they go back into the ecosystem where it's 5x the products, 8x the account size, 2x deposits, and it sort of feeds on itself and it's an ecosystem where they can do pretty much anything they want.

Sure. All right, Steve, thanks so much for joining us over today.

Yes. Thanks for the time. I appreciate it.