Robinhood Markets, Inc. (NASDAQ:HOOD) Q1 2024 Earnings Call Transcript May 8, 2024

Robinhood Markets, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Robinhood First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Chris Koegel, VP of Corporate FP&A and Investor Relations. You may begin.

Chris Koegel: Thank you, Joanna, and thank you to everyone for joining Robinhood's Q1 earnings call. With us today are our 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 we issued today, the earnings presentation, and our SEC filings, all of which can be found at investors.robinhood.com. Today's discussion will also include non-GAAP financial measures. Reconciliation 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, Chris. Hi, everyone. I again will keep my remarks short so that we can have plenty of time for questions. So, just to remind everyone, Robinhood is focused on three things: number one, winning the active trader market; number two, increasing wallet share with our customers; and number three, expanding internationally. We believe the strategy is working and it led to strong business outcomes in Q1. First, retail market -- retail trading market share. It can continue to increase in Q1 and it was really bolstered by our product innovation. As a result, year-over-year notional trading volumes were up significantly across equities, options and crypto. Net deposits, they were a record $11.2 billion with strong diversity across brokerage, cash sweep, and retirement.

This translates to a 44% annualized organic growth rate and continues our multi-year track record of delivering 20%-plus net deposit growth. And customers are also moving their assets to Robinhood in record numbers. Q1 was the second quarter in a row we had net asset inflows from every other major brokerage, totaling nearly $3 billion, more than twice our Q4 level. I also wanted to highlight Gold subscribers. Customers are finding our Gold offerings compelling across high-yield cash, retirement, margin rates, and now our Gold credit card. This led Gold subscribers to reach 1.7 million in Q1, higher than at any other point in our history. The 260,000 Gold subscribers we added in Q1 was the fastest in the past three years. It's also exciting to see that nearly 20% of new funded customers in Q1 subscribed to Gold, and that's more than double a year ago.

Putting this all together with continued expense discipline led to record revenues of 40% year-over-year, and record GAAP EPS of positive $0.18. Now what's even more exciting is that we continue to deliver amazing value to customers. And before I share more about what we're doing for our Gold customers, let's have Jason review our financial results.

Jason Warnick: Thanks, Vlad. It's good to speak with everyone today. As a reminder, last year we drove significant profitable growth, with revenue up 37% and adjusted EBITDA margins expanding by 36 points. In 2024, we are focused on driving another year of profitable growth and we had a strong Q1, with 40% year-over-year revenue growth and 14 points of margin expansion from a year ago. We also set records in Q1 for quarterly revenues, adjusted EBITDA, adjusted EBITDA margin, net income, and GAAP EPS. Looking more closely at our Q1 results compared to a year ago, total net revenues grew 40% to $618 million; adjusted EBITDA more than doubled to $247 million; incremental margins were 75%, demonstrating the scalability of our cost structure even while we increased marketing and growth investments; and adjusted EBITDA margins expanded by 14 points to 40% as we make progress over time towards the 50%-plus levels we see from incumbents.

All of this led to net income of $157 million, or $0.18 of EPS. We're pleased with our results in Q1 and we aim to continue delivering profitable growth in 2024. Now, let's move to our first quarter business results. Assets under custody finished Q1 at around -- at a record $130 billion, up 65% year-over-year. A key driver of that asset growth was strong Q1 net deposits of over $11 billion, which is more than double last year's quarterly average, and translates to a 44% annualized growth rate. We are encouraged by the breadth and durability of Q1 net deposits. So, let me share a little more color. First, we saw strong participation from both existing and new customers, with about 75% of net deposits coming from customers who've been at Robinhood for over a year.

Second, we saw a nice mix of continued strong contributions from customers and wins versus brokerage incumbents. The mix was about 75% contributions from customers and 25% net wins from incumbents. And third, deposits into our platform were balanced across product categories, a little more than half of Q1 net deposits went to brokerage, another quarter went to cash sweep, and the last 20% to retirement. So overall, we are really pleased with the diversity of net deposits as customers engage with us across our platform. Looking at Q2, so far it's off to a good start as well, as April was our highest month of the year for net deposits with nearly $5 billion. And with our continued progress in early May, we've already brought in more net deposits year-to-date than the $17 billion we did in all of 2023, with most of the year still in front of us.

We're also delivering growth in Robinhood Gold. As a reminder of how Gold subscribers on average compare to our customers overall, in Q1, Gold subscribers had 8 times the [assets] (ph) with an average of over $40,000, grew net deposits roughly twice as fast, and had 5 times the retirement account adoption. Gold ARPU is also multiples of our average customer, which includes annualized recurring subscription revenue approaching $100 million. And in Q1, we grew Gold subscribers to 1.7 million, up 42%, or 500,000 from last year. This momentum has continued into Q2 as we added another 140,000 Gold subscribers in April, more than half of our Q1 growth. Let's now turn to our financial results. In the first quarter, we generated net income of $157 million, up 5x sequentially as we grew revenues and stayed disciplined on expenses.

Looking at Q1 revenues, transaction-based revenues increased sequentially across equities, options, and crypto, and net interest revenues grew as a result of higher balances and securities lending activity. So far in Q2, we've continued to see robust trading. In April, equity notional volumes were about $70 billion; options contracts were a monthly record of roughly $125 million; and crypto notional volumes were around $10 billion. Now let's turn to first quarter expenses. Combined adjusted OpEx and SBC was $460 million in Q1, as we stayed disciplined on expenses even as we increased investments in marketing and growth. Looking ahead, while the year is off to a strong start, we know it's important to stay disciplined on expenses. So, our full year adjusted OpEx and SBC outlook is unchanged in the range of $1.85 billion to $1.95 billion.

Before I pass the call back to Vlad, I want to share some perspectives about our opportunity to drive profitable growth in 2024 and the years to come by growing revenues and expanding margins. First, we believe we can continue our multi-year track record of delivering 20%-plus net deposit growth rates, supported by a young customer base gaining share of global wealth, share gains in existing markets, and expansion into new markets and product categories that give us more opportunity for growth. Second, as customer assets grow over time, we believe this will drive strong revenue growth as well. We are naturally hedged between interest rates and trading, and we continue to diversify our business as we introduce new products and enter new markets.

And third, we're a technology company and a highly scalable platform with about 90% fixed costs. So, as our revenues increase, we believe we can drive significant margin expansion and free cash flow. In closing, we had a strong Q1, and we have a lot of momentum to start the second quarter. We remain focused on driving profitable growth for shareholders as we work to maximize EPS and free cash flow per share in 2024 and the years to come. Now, I'll turn the call back to Vlad.

Vlad Tenev: Thanks, Jason. As I said earlier, the second part of our strategy is increasing wallet share with customers, including growing Robinhood Gold subscriptions, which hit an all-time high of 1.7 million in Q1. In March, we held Robinhood's first-ever keynote event to introduce even more value that we are providing Gold customers, including an all-new customizable app experience, a 1% unlimited deposit boost for Gold customers that's launching soon, and a brand new Robinhood Gold credit card with 3% back on all purchases. We're seeing lots of commentary about how amazing of a deal Gold is, and we're happy customers are recognizing that and starting to spread the word. Over 1 million people have signed up for the Gold card waitlist, only half of which are Gold subscribers today.

So, we believe we can substantially grow Gold adoption as we roll out the card. We love seeing the progress we're making, attracting, retaining, and expanding Gold customer relationships on the journey to be the most trusted, lowest-cost, and most culturally-relevant money app worldwide. I want to thank our customers for continuing to trust and advocate for the platform as we make progress on our mission to democratize finance for all. The business is in a great position because of you and we're just getting started. And you should know our team has been working incredibly hard to deliver even more value to you. The roadmap is full. There's so much to do. And now, let's move on to questions.

A - Chris Koegel: All right. Thank you, Vlad. For the Q&A session, we'll start by answering the top few shareholder questions from Say Technologies ranked by a number of votes. We passed over questions that we had already addressed on this call or in prior quarters and grouped together questions that shared a common theme. After the Say questions, we'll turn to live questions from our analysts. So, we'll kick it off with our first question from Say. Alexander M. asks, what impact will the SEC Wells notice have on the business? Jason, do you want to start on that one?

Jason Warnick: Yeah, I'll maybe start and then Vlad can add some thoughts. First, for our customers, your accounts are not affected by this. It's business as usual for Robinhood Crypto. We're, of course, disappointed to have received the notice. As you know, we've operated our crypto business in good faith. We've been very conservative in our approach in terms of coins listed and services offered. And we're a highly regulated company and have applied the same legal and compliance standards we use for our brokerage to the way we run our crypto business. So, it's disappointing to see more regulation by enforcement here. Vlad?

Vlad Tenev: Yeah. I mean, echoing Jason, this is a disappointing development. We firmly believe U.S. consumers should have access to this asset class. They deserve to be on equal footing with people all over the world. And at the end of the day, we're going to defend the firm and continue to advocate for our customers.

Chris Koegel: Great. Thank you. The next question is from Joseph C., who asks, when are the new credit cards getting fully released? It seems that many are still on the waiting list. Vlad, do you want to start that one?

Vlad Tenev: Yeah, I'll take that one. Thanks for the question. First of all, we are really excited about the Gold card and the value that we're going to be providing to customers. We've seen a ton of demand. I mentioned earlier, over 1 million customers have signed up for the waitlist so far. And the product is looking great. You might have noticed we've dropped the credit card app on the app store and we've rolled it out to the first customers outside of the company. As we think about this roll out, we really want to balance the desire to get the card to customers as quickly as we can with making sure that we are managing risk to the capital well as we enter a new market for us. So, we are starting with an initial group in the tens of thousands of customers over the next few weeks.

And then, we're going to observe them carefully, look at the data, watch the spending activity and the borrowing activity, and we're going to use that information to inform the broader roll out of the card. We really want to make sure that we're being very, very prudent as we do this roll out since this is a new business line for the company.

Chris Koegel: Great. Thank you, Vlad. And then, the third question from Say is from Daniel R., who asks, 24 Hour Market was halted. How can we trust that the platform when markets become volatile, what steps are being implemented to handle future volatility?

Vlad Tenev: Well, first, it's really been awesome to see how much interest there is in our 24 Hour Market offering. Over 10 billion in volumes have transacted in the overnight section since it launched a year ago. And we now offer overnight trading in over 900 names. And really, this is one of the core differentiators of Robinhood. You don't find this type of offering elsewhere easily. As for why trading was affected? So, in order to facilitate these trades, we route to a third-party ATS. The ATS we use went down for the evening. This affected us, but also other firms that route to it. But the ATS was able to support trading again in a handful of hours. Looking ahead, we're really on the frontier with this offering, but as we continue to invest in it, the offering will improve over time and it will get more resilient. So, believe us when we say that we're committed to making sure this offering is reliable and more feature-rich going forward.

Chris Koegel: All right. Thank you, Vlad. That concludes our shareholder questions from Say Technologies. We appreciate our shareholders taking the time to ask these questions to Vlad and Jason and look forward to more next quarter. Now, I'll turn the call over to Joanna to lead Q&A from analysts.

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