Robinhood Markets, Inc. (NASDAQ:HOOD) Q4 2022 Earnings Call Transcript February 8, 2023
Operator: Good day, and thank you for standing by. Welcome to the Robinhood Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be questions and answers from retail shareholders provided by Say Technologies, followed by a live question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Chris Koegel, Vice President and Head of Investor Relations. Please go ahead.
Chris Koegel : Thank you, Latif. Welcome, everyone, and thank you for joining us for Robinhood’s fourth 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 conference call will contain certain forward-looking statements about our financial outlook and plans. 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 our press release issued today, the related slide presentation on our Investor Relations website, our Form 10-Q filed November 2, 2022, 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 on our Investor Relations website at investors.robinhood.com. With that, let me turn it over to Vlad.
Vlad Tenev: Thanks for the intro, Chris, and thanks to everyone for joining. This earnings call marks the end of our first full calendar year as a public company. And I think it’s a great opportunity to really evaluate ourselves and reflect on how the year went, what we promised, what we delivered and how we responded to the twists along the way. Looking back one year, at the Q4 2021 earnings call, we committed to the following things, (ph) equities trading hours, which we delivered with hyperextended hours in March; introducing a new day-to-day spending experience, and we delivered Robinhood Cash Card in March also; rolling out our fully paid securities lending product, which we provided with the launch of Stock Lending in May; adding IRAs, which we launched in December with Robinhood Retirement, the first and only IRA with a built-in match, no employer necessary; we committed to providing faster and more money movement options, which we delivered with the launch of debit card funding, instant withdrawals and support for U.S. DC in Robinhood Crypto.
And we committed to open up our crypto platform internationally, which we did with the launch of our Noncustodial Robinhood Wallet. When we laid this out a year ago, we didn’t anticipate a land war in Europe or inflation at a 40-year high prompting one of the most aggressive tightening policies we’ve ever seen from the Fed. This led to a sharp drawdown in growth stocks and a frigid crypto winner. All these factors presented extraordinary challenges for our customers and our company to navigate. So nine months ago, we committed to returning to adjusted EBITDA profitability in Q4. This was an aggressive goal, and we delivered it a quarter ahead of schedule by both lowering costs and increasing revenues. We also diversified our business as our net interest revenues more than doubled over the course of the year.
And to help customers generate more income in the new environment, we launched a revamped Robinhood Gold that offers customers an incredible 4.15% interest rate on their cash, among the highest rates out there. We also strengthened our core business with a number of improvements to our trading products like options and cash accounts, advanced charts and 24/7 live chat customer support. We did all this and more while having to make some difficult decisions, we ended 2022 with about a third less headcount than a year before. I want to congratulate the team for their tremendous execution. Our product velocity has never been higher, and the quality of talent at Robinhood has never been greater. I also want to mention, and Jason will discuss further in his section that we had a processing error on a corporate action that led to a $57 million expense.
This was really disappointing. We’ve done a full postmortem and remediated the issue. It’s important for us to build a culture of accountability. So following this event, I made the decision to eliminate the executive team’s 2022 cash bonuses. It’s my responsibility to make sure that we learn from this, adjust our systems and processes accordingly and ensure that we do everything we can to prevent errors like this from happening again. Before I review our Q4 product roadmap, I want to provide a couple of shareholder updates. As founders, Baiju and I have always been motivated by our mission, and our goal has been to build a financial services company that does right by our employees, delivers extraordinary value to our customers, and in doing so, generates healthy returns for our shareholders.
It took tremendous sacrifice on behalf of many people throughout 2022 to get Robinhood to the healthy position we’re in today. And so at the end of the year, Baiju and I were reflecting on this. And we were thinking about whether there was more that we could do personally. So we decided we would cancel nearly $500 million of our combined share-based compensation. This lowers our GAAP operating costs by up to $50 million per quarter starting in Q2, and it has already reduced our fully diluted share count by 3.5%. Second, we also announced today that our Board of Directors has authorized us to pursue purchasing most or all of the Robinhood shares that Emergent Fidelity Technologies bought last May. The Board and management team are incredibly confident about the future of our business.
We also have a fortress balance sheet with over $6 billion of cash and feel very well-positioned to execute on our growth plans. So we think this repurchase will be accretive over time and remove the distraction for shareholders. Since there isn’t much precedent for situations like these, we can’t predict how long this will take, but we’ll keep you posted as is appropriate. Now I’ll cover Q4 business results. While assets under custody was down 4% in Q4 from Q3 due to lower valuations for growth stocks and crypto, customer portfolios had a great start to 2023. In January, as valuations rebounded, customer assets grew by 20% to $75 billion, the highest level in the past nine months. This January outperformance is a good reminder of the importance of investing through the cycle.
So we’re encouraged that customers continue to entrust us with billions of dollars each quarter, including nearly $5 billion of net deposits in Q4. Now we’ve talked a lot about our product velocity and all of the new products we launched last year. And as we’ve continued to work on them, we’re now starting to see meaningful traction on several of our new products, which gives us confidence that they can grow into significant business lines over time. First is stock lending, which we launched last May, to help customers generate passive income by lending the stocks they’re holding. It had some good early results by reaching about $15 million of annualized revenue in Q3. Since then, the team has kept iterating on the product relentlessly, speaking with customers, improving onboarding, making more equities available to lend and migrating to a new collateral agent.
By the end of January, we had over 1 million customers enrolled, and we generated over $30 million in annualized revenue. As we look ahead, we see lots of opportunities to improve the product even more and make it even more accessible and useful to customers. Next, Robinhood Gold. In September, we launched an industry-leading 3% yield on cash and then raised the yield 3 more times to reach our current 4.15% rate. The customer response has been terrific. As more and more customers feel, we’re giving them access to one of the best and easiest opportunities to earn yield in the U.S. Gold subscribers increased in Q4 for the first time in over a year, and Gold Net Promoter Scores have moved way up. We’ve also seen Gold cash sweep balances grow to $6 billion at the start at the end of January.
That’s up by about $1 billion per month since the launch. We’re excited to keep investing in our gold offering and deepening these relationships this year. In Q4, we also launched instant withdrawals, a new money movement option to help customers who want faster access to their money for everyday needs at a competitive 1.5% fee. We’re seeing strong early adoption here, growing from 1% of total withdrawals when we launched in October to 7% in January, translating to about $20 million of annualized revenue. These are just a few examples of how the products we’ve launched over the past year are now gaining traction. And we see a path for many of them to drive meaningful revenue growth from here. Finally, I want to give you a preview of our 2023 product road map.
While the macro uncertainty is leading some companies to pull back, we plan to stay aggressive as we believe investing through the cycle is the right long-term strategy. So let me highlight a few of the opportunities we’re working on. First, deepening relationships with our existing customers. As we grow into a larger, more diversified company, we’re shifting our focus from just adding users to driving net deposits as well. Retirement is off to a good start. And we’re working to take our first steps on the path to advisory, which can bring even more customers into the market in the future. Second is becoming the best destination for advanced customers. Last year, we made a ton of progress by launching several new products and features that drove advanced customer NPS significantly higher, a great sign for growth and retention.
This year, we’ll go beyond tools and improved experience and really innovate for our advanced customers. We’re excited to show you what we have in store. Third, international. We recently launched Robinhood Wallet, which empowers customers around the world to custody their own crypto. We’re getting more aggressive this year and have set a goal to offer brokerage services in the UK by the end of 2023. I’m also excited that we hired JB Mackenzie, an industry veteran from Schwab and TD Ameritrade to lead our international brokerage efforts. We’re really excited about the year ahead. The road map is full, and there’s so much to do. With that, I’ll turn it over to Jason.
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Jason Warnick: Thanks, Vlad. It’s good to speak with everyone today. In the fourth quarter, we stayed focused on serving customers, growing our business and driving long-term shareholder value. Our team continued to deliver on our product road map, and we generated positive adjusted EBITDA for the second quarter in a row. I’m proud of what we accomplished last year and look forward to 2023. Before I discuss our Q4 results, I want to provide context around the error that Vlad mentioned. Each quarter, we process hundreds of corporate actions as part of our day-to-day operations. In December, we received notification of a corporate action that was irregular, both in its timing and format and unfortunately got through our controls.
Cosmos Health Inc., a NASDAQ-listed company, affected a one for 25 reverse stock split on December 16. A processing error caused us to sell shares short into the market. And although it was detected quickly, it resulted in a loss of $57 million as we bought back these shares against a rising stock price. While this event was an outlier, as Vlad said, we’re taking it very seriously and have made the necessary changes to do everything we can to ensure this won’t happen again. With that, let’s look at the fourth quarter, starting with business results. We continue to add new customers, growing net funded accounts to 23 million, up about 50,000 from Q3. We’re off to a good start in Q1 as well by adding about 60,000 accounts in January. I’d also note that we only include unique users in our net funded account definition, so this metric doesn’t benefit from existing customers opening retirement accounts.
So we’re working on additional disclosure to show how many of our products customers are using. For monthly active users, they were 11.4 million, down 800,000 from Q3, though MAUs increased back to roughly 12 million in January. I’d also note that the vast majority of our customers continue to engage over time even if they aren’t active every month. For example, if we look at the last three months of 2022, over 16 million unique customers were active. And if we look over the last six months, that figure grows to over 20 million customers. Turning to assets under custody. While they were $62 billion in Q4, down about 4% from last quarter, they rebounded to $75 billion in January as growth stocks and crypto recovered. Looking at net deposits, they were $4.8 billion in Q4, which translates to a 30% annualized growth for the quarter and brings the full year rate to 19%.
We’re encouraged by the resiliency of customer net deposits, which positions us really well for growth as markets rise over time. Now let’s look at Q4 financial results. We grew adjusted EBITDA to $82 million, which was up $35 million from last quarter. This brought our adjusted EBITDA margin to 22% in Q4, which is up nine points from Q3. Going forward, we remain focused on delivering positive adjusted EBITDA and a driving attractive margins over time. Looking at our GAAP results. Q4 EPS was negative $0.19, an improvement of $0.01 from Q3. This included a combined negative $0.08 impact from the processing error and an impairment charge on Ziglu. Q4 EPS prior to these impacts was negative $0.11. Now let’s review our Q4 revenues. Total net revenues were $380 million, a 5% increase from Q3.
This was primarily driven by higher net interest revenues, partially offset by lower transaction revenues. Q4 ARPU was $66, up from $63 last quarter. Next, transaction-based revenues were $186 million in Q4, down 11% sequentially, primarily due to lower equity and crypto notional volumes. In January, we saw equity, option and crypto volumes, all roughly in line with Q4 averages. Moving to net interest revenues. They reached a new high of $167 million in Q4, up 30% from Q3. The increase was primarily driven by higher short-term interest rates and 12% growth in interest-earning assets. These factors were partially offset by lower margin balances and securities lending activity given the macro environment. Looking ahead to Q1, we are encouraged by what looks like likely to be another quarter of net interest revenue growth.
As we consider what we see today for the forward Fed curve, customer balances and deposit rates as well as some pickup in securities lending activity, we anticipate Q1 net interest revenues will be up by roughly $20 million from Q4. Additionally, as we now appear to be in the later stages of the Fed rate hiking cycle, I wanted to note that we’re exploring strategies to reduce our interest rate sensitivity, and we’ll keep you updated when we have more to share on this. Moving on to other revenues. They were $27 million in Q4, up 8% from Q3. Gold subscribers increased by about 50,000 sequentially, and we plan to keep investing so that more of our customers find value in becoming a gold member. Looking ahead to Q1, we expect other revenues to be similar to Q4 levels.
Looking a little further ahead, Q2 is proxy season, which drives a seasonal increase in revenue. And late last year, we transferred our proxy services from a third party to our Say Technologies team. So in Q2, we expect to see a sequential increase of about $30 million from Q1 levels. Now let’s look at Q4 expenses. Prior to SBC, the processing error and some minor carryover from our Q3 restructuring, OpEx was $319 million, which brought our full year total to $1.55 billion. These 2022 results were an 18% improvement versus the prior year as we moved to a leaner cost structure. Looking forward to 2023, we’re planning to improve our costs by another 7% on average as we plan to keep our cost lean, while investing for future growth. Our outlook for 2023 OpEx prior to SBC is a range of $1.42 billion to $1.48 billion.
I’d note that on a quarterly basis, this outlook is about the same as the Q4 2022 range we provided last quarter, as I think this is a good zone to operate our business this year. Turning to SBC, it was $160 million in Q4, which brings our full year total to $654 million. Looking ahead, Vlad and Baiju’s decision to cancel their 2021 pre-IPO market-based awards significantly lowers our outlook for the back half of this year. Under accounting rules, we will record a Q1 non-cash charge of about $485 million for the full acceleration of the canceled awards. We also expect SBC this year, excluding the charge will be in a range of $470 million to $550 million, which is a 22% improvement on average from last year. Including the charge, our full year 2023 SBC outlook is a range of $955 million to $1.035 billion.
For Q1, we expect SBC of $615 million to $645 million mostly from the accounting charge. Given our progress on costs over the past year and improved SBC outlook, we now expect to get much closer to positive GAAP net income in the back half of this year. Beyond that, we think it’s a little early to predict a specific timeline for reaching GAAP profitability as our revenues vary with the market backdrop. That said, we’re focused on getting there by keeping our costs lean and scrappy to drive operating leverage as our business grows, while staying flexible to invest for the long-term. Now to capital management. I want to touch on a couple areas, first, on the Ziglu deal. After careful consideration, Robinhood terminated the deal and we booked a $12 million charge in Q4.
Second, as Vlad mentioned, our Board authorized us subject to final approval to purchase our shares that Emergent Fidelity Technologies bought in May of last year. We’re confident in the future of our business, so we think it would be a smart use of our excess corporate cash to buy most or all of the roughly 55 million shares, while continuing to have a strong balance sheet to invest for growth. In closing, I’m really pleased with all that we accomplished in 2022, delivering on our product roadmap, moving to a lean and scrappy cost structure, and ending the year with two straight quarters of adjusted EBITDA profitability. As we look ahead, we see a large opportunity to grow shareholder value from here. And with that, Chris, let’s move to Q&A.
A – Chris Koegel: Thank you, Jason. Leading into this quarter’s Q&A session, we’ll start by answering some of the top questions from Say Technologies ranked by number of votes. We’ll pass over any questions that were answered on the call already or in prior quarters, and group together questions that share a common theme. After that, we’ll turn to live questions from our analysts. So we’ll kick it off with some of our top questions from Say. So first, so John P asks, what does the product roadmap look like for 2023? Vlad, do you want to take that one?
Vlad Tenev: Yes. Thank you as always, Sajan for the good questions. So I mentioned a little bit in the call, while the macro environment might be leading some companies to be less aggressive, we plan to stay aggressive. And there’s three things that we’re focused on in terms of product roadmap, the first thing, deepening relationships with our existing customers. And you’ve seen that we’ve been very successful in providing value in terms of higher interest on cash with our Gold product. We also rolled out Retirement and are very excited to offer the first IRA with a built in match, no employer needed. We think it’s particularly useful for gig economy workers and other freelancers. So we’re going to continue to invest in that and grow that.
We think that gives us sort of a great entry point towards offering advisory services to customers. Second, becoming the best place for advanced customers. So this is our customers that trade a little bit more actively, use options, engage in equities trading. We’ve made a lot of progress this year and we’re working even harder to deliver innovative new functionality for our more advanced customers. And then the third international, so we recently launched Robinhood Wallet, we’re also working aggressively this year to bring brokerage services internationally. And we’re excited to welcome JB who will be leading the efforts to take our brokerage internationally.
Chris Koegel: Great. All right, thank you, Vlad. The next questions from Jason R who asks, when will Robinhood go global and allow users to buy individual shares from all over the world listed exchanges?
Vlad Tenev: Sure. Happy to field that one. So there’s really two questions there. First of all, for our U.S. customers, we’re very focused on expanding selection and being the best place for you to invest in trade. In terms of access to foreign securities, customers can trade ADRs today via our platform commission free, and that gives investors exposure to foreign traded stocks. The second thing, expanding our operations internationally so that customers based in other countries can access Robinhood services. A huge part of our mission, we think that we’ve done a lot of great work to open up access and to make investing more accessible to people in the U.S. U.S. is comparatively a mature market where access is pretty good relative to some parts of the world.
So we think it’s a natural extension of our mission and a great business opportunity to take our technology and make it available overseas. I talked about Robinhood Wallet, which is available globally and will allow customers all over the world to self-custody, have control over their crypto and trade and swap with no network fees. On the brokerage side, we’re being more aggressive and set a goal to start brokerage operations in the UK this year. So look out for that. We’re very, very excited to make Robinhood available all over the world.
Chris Koegel: Awesome. Thanks, Vlad. All right. The next question comes from GC who asks, there’s a new feature that was implemented by Twitter that directly links users to the Robinhood app. What’s the relationship between Robinhood and Twitter? Is there an official partnership forthcoming?
Vlad Tenev: Yes, sure. Thank you, G. Part of the mission of democratizing finance for all is giving access to the best information whenever and wherever customers need it. So we’ve been speaking to the folks over at Twitter for a while and heard about what they were doing with the stock pages and crypto pages on their platform. And we got excited to create an investing experience that gives value to their customers and makes it easier at a deep link to the Robinhood app. So you’ll see us experimenting with more things like this over time. As of now, we don’t have any plans to expand or form an official partnership with Twitter.
Chris Koegel: All right. Thank you. Okay, so the next question is from William C. What happens if the SEC bans payment for order flow?
Vlad Tenev: Sure, I’ll field this one. The first thing to note here is, as you’ve seen through the quarterly results and the progress we’ve made in diversifying our business, we’ve got a diversified business and are continuing to grow. And we feel like we’re incredibly well positioned. In terms of payment for order flow and the SEC market structure proposals, we think investors have it great right now. The all in costs of investing, the accessibility, the tools and functionality have never been better. And we’re worried that these proposals have the potential to give investors worse execution quality and higher prices in many instances. And these are really complex proposals. It’ll take a long time to work through them. Ultimately we think they are unlikely to pass in their current form.
So we’re going to keep working with the SEC, including our comment letter coming soon and make sure customers continue to receive the best deal and have access to equities trading and make sure we’re continuing to advocate for what we think is right for our customers.
Chris Koegel: All right. Thank you, Vlad. The next question is related. So it asks will from Mark D, will Robinhood become a member of the New York Stock Exchange and NASDAQ and reduce its reliance on payment for order flow?
Vlad Tenev: We actually are already a member of NASDAQ. We have a connection there, and a portion of customer orders are routed there. The way that we think about execution quality and routing orders is the routing is based on execution quality. That’s really the deciding factor. So we aim to send customer orders where they’re getting the best execution quality. And we actually publish execution quality statistics on our website and are very proud of it.
Chris Koegel: All right. The next question is for Jason. Will Robinhood ever work with tax companies like TurboTax to get tax information to clients at a faster pace?
Jason Warnick: Thanks. We already work with TurboTax. And in fact customers get a $15 discount if they upload to TurboTax. We’ve been making a number of changes to the tax experience for customers. This year, we consolidated the tax form for customers who are trading both equities and crypto. So they receive a single tax form from Robinhood this year, which makes it a lot more convenient. And also we’re sending in a form that makes it really easy for customers to upload their data to the tax software of their choice. And then also we’ve already sent well ahead of the deadline millions of these forms out to customers and should have the remaining ones out really soon. So we’re making a lot of progress for customers on the tax front and proud of the team for doing that.
Chris Koegel: Great. Thanks, Jason. All right, let’s do one more before we open the call to analysts. So Vlad, GC asks, any thoughts on creating a Robinhood Pro app with more advanced charts, tools, data and live streaming newsfeeds and chat rooms to keep the more advanced users strict staying strictly on Robinhood?
Vlad Tenev: Thanks, G. So we think serving our advanced customers is incredibly important. As I outlined a bit earlier, it’s one of the top three things we’re working on this year. We made a lot of progress last year really improving the experience for them, and we spent a lot of time talking to our advanced customers. And what we’re hearing is they stay with Robinhood and they love Robinhood because we make things simple and are easy to use. And they actually love the flexibility to be able to see a very simple overview of their portfolio and their holdings and be able to trade simply along with the flexibility to dive into things like advanced charts and tools and features when they need to. So right now we think we can deliver on an awesome experience for advanced customers within the existing Robinhood app. And so we’re not necessarily going to be creating a separate app, but we’re focused on making Robinhood the best tool for our advanced customers.
Chris Koegel: All right, thanks, Vlad. And thank you for everyone for your questions. We really appreciate all the thoughtful engagement from our shareholders and customers. And now it’s time to open up the line for analyst questions. So with that, I’ll turn it to Latif.
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