Robinhood Markets, Inc. (NASDAQ:HOOD) Q1 2023 Earnings Call Transcript May 10, 2023

Robinhood Markets, Inc. beats earnings expectations. Reported EPS is $-0.57, expectations were $-0.61.

Operator: Good day, and thank you for standing by. Welcome to the Robinhood First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be question and answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Koegel, Vice President of Investor Relations for Robinhood. Please go ahead.

Chris Koegel: Thank you, Liz. And thank you everyone for joining Robinhood’s first quarter earnings call. With us today are CEO and Co-Founder, Vlad Tenev; and CFO, Jason Warnick. Before getting started, I want to remind you that today’s call will contain forward-looking statements. Actual results could differ materially from our expectations, and we have no duty to provide updates unless legally required. Potential risk factors that could cause differences, including regulatory developments that we continue to monitor, are described in the press release issued today, the earnings presentation on our Investor Relations website at investors.robinhood.com. Our Form 10-Q filed this afternoon and in our other SEC filings. Today’s discussion will also include non-GAAP financial measures. Reconciliations to the GAAP results we consider most comparable can be found in the earnings presentation. With that, let me turn it over to Vlad.

Vlad Tenev: Thanks for the intro Chris. And thanks to everyone for joining us today. We had a strong quarter. I want to call out three things that I am especially proud of. First our product velocity continued to accelerate with several innovative products delivered to customers. And we’re not slowing down, we’re enabling 24-hour individual stock trading for customers by launching 24-hour market next week. Second, we’re continuing to see significant growth from the new products we launched last year. And third, in the phase of uncertainty in the banking sector, we’re continuing to see strong net deposits and improving customer satisfaction. All of this is leading to financial results that keep getting better as we move closer to GAAP profitability.

I’m excited to tell you about all this. So, let’s start with our business results. In Q1 customer assets under custody were up 26% sequentially to $78 billion driven by rebounding stock and crypto valuations as well as continuing net deposits. If we look at net deposits, we saw $1.5 billion in March. And $4.4 billion for all of Q1 which translates to a 29% annualized growth rate. And perhaps most importantly all of the new products and features we’ve launched in the past year are continuing to drive higher customer satisfaction with Q1 net promoter scores improving more than 20 points from a year ago. Now if you look at financial results, Q1 we grew total net revenues by 16% from Q4. And by keeping our costs lean, we drove nice operating leverage in our business with adjusted EBITDA up 40% sequentially.

I’d also highlight that two new products I mentioned last quarter continue to accelerate. Stock lending and instant withdrawals. Each of these had Q1 annualized revenues that grew 50%, 50% above their January levels. If you combine the Q1 revenue from these two products, it’s approaching the size of our equity trading business. And that’s very exciting and I’m incredibly proud of how well the team is executing. Now let’s turn to our 2023 roadmap. Since we launched over eight years ago, Robinhood has introduced several innovations that have become industry standard today. Mobile trading, seamless digital onboarding, zero commissions and no-account minimums, and fractional shares. With these innovations, we’ve disrupted the US brokerage market and grown our business.

We’re now broadening our offering to include areas like retirement, advisory, and payments, and we’re expanding outside the US. This is not only good for customers, but it also expands our addressable market. And as we’ve organized our 2023 roadmap into three areas, deepening relationships with our customers, innovating for our active traders, and launching new growth opportunities. Let me talk about how we’re deepening our relationships with our more than 23 million existing customers. Our goal is to serve the entirety of our customers’ critical financial needs. We started with trading investing, and more recently, we’ve launched spending, saving, and retirement products. We track our progress here by looking at net deposits and ARPU. In Q1, net deposits grew at a 29% annualized growth rate, and ARPU increased to $77, the highest level since 2021.

Our focus has been on helping customers save and invest their long-term money. In January, we launched Robinhood Retirement, the first IRA with a 1% match, no employer necessary. We’ve continued to enhance the product. Customers have already invested over half a billion dollars into their IRAs. It’s great to see this early customer response. Teams’ roadmap is full, and we think retirement has a ton of growth potential. We also love what we’re seeing in Robinhood Gold. At the end of Q1, gold subscribers continue to increase up to 1.2 million, and Gold cash sweep balances were up to $8 billion. Our Gold yield is now 4.65%, and we’re offering up to 2 million in FDIC insurance starting June 1. We see a big opportunity here to provide differentiated value to customers, and we’re working hard to get the word out even more, including by launching a new marketing campaign across multiple channels.

You may have seen our TV ads during the NBA playoffs. What we’ve seen from Gold in the past six months gives us a lot of confidence to increase our investment, and we’re looking forward to unveiling some new Gold features in the coming months that provide our Gold customers even more differentiated value. Finally, we’re going to deepen relationships with our customers even more by taking our first steps in advisory. Our goal is to provide a personalized advisory experience, much like what high-net-worth individuals have traditionally received from human advisors, but at a much lower price point by using technology. We believe this can help a lot of people who want access to advice, but have been deterred by the traditional 1% annual fee. We’re excited to share more with you later this year.

Now, let’s discuss active traders. Over the past year, our work on options, including advanced charts, cash accounts, and strategy builder helped drive Q1 option contract volumes up 16% and Q1 active trader NPS up over 30 points year-over-year. We feel like we’re on a good trajectory with options, and we have now turned our focus to our core equities offering. In April, we started rolling out stock screeners, a powerful research tool, with the simple and beautiful user experience our customers have come to expect from Robinhood. We really love what we’ve built here, and we’re excited to get it into more of our customers’ hands. And just ahead of this call, we announced the launch of 24-Hour Market, which will make us the first US retail brokerage to offer 24-5 trading of single-name stocks.

This is an exciting upgrade to our stock trading product. It allows our customers to better manage their risk and take advantage of opportunities no matter what time of day they arise. We’re starting with over 40 well-known stocks and ETFs and plan to expand from there. And as we look ahead, we’re also working to add a broader selection of assets to Robinhood. In March, we applied for a Futures Commission Merchant License. Pending regulatory approval, we hope to launch future trading around the end of this year. There’s so much more to build for our active traders, and we’re excited to continue to innovate for them. The third part of our 2023 roadmap is exploring new growth opportunities to broaden the scope and geographical reach of our products so we can add more customers and increase our revenues over time.

In Q1, we rolled out our non-custodial Robinhood wallet, which customers have downloaded in over 130 countries around the world. Customers love having total control of their crypto and NFTs, as well as the no gas fees for coin swaps on the Polygon chain. There’s a lot more to build here, and we’re encouraged by the early user feedback. As we brought Robinhood Wallet to market, we found that one of the biggest problems was that the fiat to crypto on-ramp solutions available in market were too cumbersome and expensive to use. So, we built our own that we’re calling Robinhood Connect, and it leverages the multiple payment rails and robust trading infrastructure we’ve developed at Robinhood. Two weeks ago at Consensus, our crypto GM Johann Kerbrat announced that we’re offering Robinhood Connect to third party developers.

We’re pleased by the early response we’ve seen and believe we’re well positioned to take market share versus early entrance. Finally, we’re making progress towards our ambitious goal of launching brokerage operations in the UK by the end of the year. We have an existing license in place, a brand that resonates, and experienced leaders running the effort. So, we’re excited to launch and start driving innovation in the UK market like we’ve done in the US over the past eight years. We’re really excited about the roadmap ahead of us, and there’s so much to do. With that, I’ll turn the call over to Jason.

Jason Warnick : Thanks, Vlad. It’s good to speak with everyone today. In the first quarter, we stayed focused on serving customers, growing our business, and driving long-term shareholder value. Our team continued to execute on our product roadmap, scale products we launched over the past year, and drive adjusted EBITDA higher. As I look back over the past year, I’m incredibly proud of how our team executed to transform the financial profile of our business. While a year ago, we had our lowest quarter of adjusted EBITDA, in Q1, we matched our all-time high. We grew revenues for four quarters in a row while getting to a leaner operating model. As a result, our Q1 adjusted EBITDA of $115 million is up over $250 million from a year ago.

On an annualized run rate basis, that’s an increase of more than $1 billion. And our Q1 adjusted EBITDA margin of 26% was an all-time high. And we aren’t stopping here. We are committed to becoming profitable on a gap basis, and we’re making good progress on that front. Looking at our Q1 gap results, EPS was negative $0.57. This included a one-time non-cash charge from our founders who canceled their 2021 equity awards that significantly reduces our SBC quarterly run rate going forward. EPS, prior to the 2021 founder award cancellation, was negative $0.03, so we’re getting much closer to gap profitability. Now let’s look at our first quarter business results. Customer assets under custody increased 26% sequentially in Q1 to $78 billion as growth stock and crypto valuations rebounded and customers continued to deposit money into Robinhood.

Looking at net deposits, they were $4.4 billion in Q1, which translates to a 29% annualized growth rate relative to Q4 AUC. These resilient customer net deposits position us really well for continued asset growth as markets rise over time. Turning to net-funded accounts, which represent unique users on our platform, they increased by 120,000 in Q1 to 23.1 million. Additionally, we now have over 250,000 retirement accounts that already have an average balance of over $2,000. The vast majority of these retirement accounts were funded by existing customers who are significantly increasing their average AUC at Robinhood by making these IRA contributions. We’re continuing to work on new disclosures to highlight progress like this as we deepen our relationships with customers.

As for monthly active users, they were 11.8 million at the end of Q1, up from 11.4 million a quarter ago. Now let’s review Q1 revenues. Total net revenues were $441 million, a 16% increase from Q4 as transaction and net interest revenues increased during the quarter. Q1 ARPU was $77, up from $66 last quarter and the highest level since 2021. Transaction-based revenues were $207 million in Q1, up 11% sequentially. Equity and options volumes picked up from Q4, and crypto volumes were in line with Q4. Moving to net interest revenues, they were $208 million in Q1, up 25% sequentially. The increase was driven by higher securities lending activity, cash suite balances, and short-term interest rates versus Q4 levels, partially offset by lower average margin balances.

Q1 interest earning assets were $22 billion, 21%, or $4 billion sequentially, primarily driven by Gold customers continuing to bring more deposits to Robinhood. Looking ahead, we anticipate Q2 net interest revenues will be up roughly $15 million from Q1. This outlook assumes the Q1 level of securities lending revenue and today’s levels of balances, deposit rates, and Fed fund rates. Of course, our Q2 results could be higher or lower depending on how the quarter plays out. Moving on to other revenues, they were $26 million in Q1, roughly flat from Q4. Gold subscribers increased for the second quarter in a row to $1.2 million, up about $40,000 sequentially. We love that more customers are benefiting from gold, and this is also good news for our revenues.

Gold subscribers have ARPU that is multiples of our average customer, as they bring more assets and use more of our services. This is also true for newer cohorts that joined to take advantage of our high-yield offer. This gives us a lot of confidence to keep investing in the Gold value proposition. Moving ahead, as Q2 is proxy season, which drives a seasonal increase in other revenue, and our Say Technologies team is managing Robinhood’s proxy services this year. Because of this, we continue to expect a sequential increase of around $30 million for other revenues in Q2, with Q3 returning to roughly Q1 levels. I also wanted to note that with April being tax month, it’s typical across the brokerage industry to see lower net deposits and trading.

For us, it was great to see customers add another $1.4 billion of net deposits in April, in line with our Q1 average. This drove cash suite balances to a new high of $10 billion earlier this week. For MAUs, they declined about 3% in April, and for trading, while options and equities were off 17% and 27%, respectively, versus the Q1 monthly average, crypto volumes were in line with Q1. We hope this color is helpful ahead of providing our monthly metrics next week. Now let’s review Q1 expenses. At a high level, we really like the operating leverage we’re generating as we stay disciplined on expenses. One measure we track is annualized revenue per employee. In Q1, it was $760,000, which is more than double from a year ago. It was also great to see Q1 adjusted EBITDA grow 40% from Q4, more than twice as fast as total net revenue growth.

Looking more closely at our costs, let’s first review OPEX prior to SBC. It was $352 million in Q1, slightly below the lower end of our full year 2023 outlook range. Looking forward, there’s no change to our full year outlook. We continue to expect 2023 OPEX prior to SBC to be in the range of $1.42 billion to $1.48 billion. And as a reminder, our annual employee merit increases were in March, so you’ll see that full effect in Q2. Turning to SBC, it was $598 million in Q1, which included the one-time $485 million non-cash charge from the founder award cancellation. This Q1 result was about $30 million better than our previous first quarter outlook. We’re flowing this through into our full year 2023 SBC outlook to improve it to $925 million to $1.005 billion.

I also wanted to highlight that over the long term, we think it’s important to manage share-based compensation as a percentage of revenue to lower levels. In Q1, apart from the founder award cancellation, SBC was 26% of total revenues, down significantly from a year ago. And as we look ahead, we’re working to lower that percentage more over time. Now turning to capital management. In Q1, our balance sheet remained strong with about $6 billion of corporate cash and investments. This includes about $500 million that we moved in Q1 from cash into a laddered portfolio of treasuries and other high-quality assets with an average duration of less than a year. As for capital deployment, I wanted to briefly note that we are making some progress on discussions to purchase most or all of the 55 million Robinhood shares that were acquired last summer by Emergent Fidelity Technologies.

We don’t have any specifics to share yet, but we look forward to providing updates when we can. In closing, I’m really pleased with the financial progress we’ve made over the past year while continuing to deliver new capabilities and enhancing customer experience. Q1 was the fourth consecutive quarter of revenue and adjusted EBITDA growth, and we continue to focus on driving profitable growth over time. With that, Chris, let’s move to Q&A.

A – Chris Koegel: Thank you, Jason. For the Q&A session, we’ll start by answering shareholder questions from Say Technologies. These are ranked by number of votes. We’ll pass over any questions that were already answered on the call or in prior quarters. We’ll also group together questions that share a common theme. After that, we’ll turn to live questions from our analysts. So, I’ll kick it off with our first question from Say. This one’s for Jason. So, two questions we’re combining here. The first is, Siraj P. asks, what is the plan to be a profitable company? And Gregory P. asks, what are the primary ways management plans to return value to shareholders in 2023?

Q&A Session

Operator: [Operator Instructions] Our first question comes from a line of Rich Repetto with Piper Sandler.

Operator: Our next question comes from Dan Dolev with Mizuho?

Operator: Our next question comes from the line of Alex Markgraff with KeyBanc Capital Markets.

Operator: Our next question comes from a line of Devin Ryan with JMP Securities.

Operator: Our next question comes from the line of Michael Cyprys with Morgan Stanley.

Operator: Our next question comes from Will Nance with Goldman Sachs.

Operator: Our next question comes from Ken Worthington with JP Morgan.

Operator: Our next question comes from Matthew O’Neill with FT Partners.

Operator: Our next question comes from Mark McLaughlin, with Bank of America.

Operator: That concludes today’s question and answer session. I’d like to turn the call back to Vlad Tenev for closing remarks.

Vlad Tenev: Yeah, thank you guys so much for listening and asking questions. So, we’re very excited by the progress. And check out 24 hour market very excited for that to be launching next week.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.