Operator
Good day and thank you for standing by. Welcome to the Robin Hood first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Cagle, Vice President of Investor Relations for Robinhood. Please go ahead.
Chris Cagle
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 we issued today, the earnings presentation on our investor relations website at investors.robinhood.com, a 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.
Liz
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'm 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 face 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% 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 U.S. 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 U.S., This is not only good for customers, but it also expands our addressable market. And as you know, 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 continued 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 U.S. 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 futures 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, Johan Kerbrot, 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 U.K. market like we've done in the U.S. 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.
Chris
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 GAAP basis, and we're making good progress on that front. Looking at our Q1 GAAP results, EPS was negative 57 cents. 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 3 cents, so we're getting much closer to GAAP 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. Looking ahead, as you know, 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 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 remains 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.
Chris Cagle
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 from Jason. So two questions we're combining here. The first is Suraj 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?
Chris
Great. Thanks for the questions. We're really focused on three things to drive shareholder value. First, we want to keep launching new products and improve upon our existing products. We've made a lot of momentum here, and our product velocity is fast as we've seen it so far as a company, so we feel really good about that. The second is we want to drive profitable growth, and we're going to keep our costs lean and find ways to drive even more efficiency over time. This quarter, it was nice to see our adjusted EBITDA grow at twice the rate of our revenue growth. And we're working on driving leverage in our business even more over time. And then lastly, what I'd say is we want to efficiently deploy our capital. This would include how we deploy capital for organic growth opportunities, for possible M&A growth, and as well over time could include returning some capital to shareholders. And I think if we do these three things really well over time, it should create a lot of shareholder value. In terms of reaching profitable growth, I don't want to predict any particular timeline on that, but we are getting really close. We're excluding the founder award cancellation. Our EPS was minus three cents per share. So we're going to keep focusing on rolling out new products and keeping our costs lean, and we should get there over time. Thanks for the question.
Chris Cagle
All right. Thanks, Jason. Next question is also for you. Philip S. asks, what does Robinhood's financial position look like after all the recent regional bank failures? What does Robinhood do to ensure that it doesn't find itself in the same position as those from SBB, Signature Bank, and First Republic Bank? And a similar question comes from Mashur. With so many banks going under, what is the Robinhood exposure?
Chris
Yeah, thanks for these questions. First, I think it's really important to clarify that Robinhood is not a bank. We keep our customer cash liquid, and we don't have the risk of asset liability mismatch that banks have to manage. Also, it's great to see that our customers continue to deposit funds with us. Gold cash suite balances were up 67% from last quarter, up to $8 billion. And in March, when all the banking turbulence happened, our customers deposited $1.5 billion with us. So we think we're in a really good position, and particularly as customers respond to our great offerings for gold members. So thanks for the question.
Chris Cagle
All right. Thanks, Jason. The next question is for Vlad. It's from Edward O., who asks, any plans to add custodial accounts to allow parents to teach their children about investing?
Liz
Yeah. In short, absolutely. This is part of our longer-term roadmap. And we recently launched retirement, as you're probably aware. And we now have hundreds of thousands of customers that have multiple accounts with us. So with retirement, it was really the first time that a customer could open multiple brokerage accounts within our product. And it took a lot of work to build the infrastructure for that and build the product affordances necessary. So now it's much easier for us to add different account types. And we hear from customers. They want to teach their children about investing. They also are interested in joint accounts and would like to collaborate with their finances and manage them with their partner. So these things are definitely part of the longer-term roadmap. We want to make sure we continue deepening relationships with our customers as we've been doing with the launch of retirement. Keen to do it. No specific timeline to share, but stay tuned.
Chris Cagle
All right. Thanks, Vlad. The next question is also from Edward O., who asks, Robinhood launched IRAs about six months ago. How has adoption been? How does it compare to leadership expectations? And are retirement accounts a key part of Robinhood's strategy going forward?
Liz
Yeah, we're really pleased with the contributions we've seen so far. over half a billion in assets, leading to $5 million in matches to customers, and we're seeing customers continuing to bring more of their cash onto the platform. The feedback that we're hearing has been really good as well. Customers love the match. They also love the fact that we're providing recommendations, and the recommendations are now being used by two-thirds of customers that onboard onto retirement. And we're excited about that, especially when we think about what that means for the future of advisory and providing personalized ongoing advice to our customers to help them manage their investments.
Chris
One thing that I'd add is if you look at total accounts that we added this year between brokerage and retirement, it was about the same number of total accounts that we opened in all of last year. So it's really nice to see this kind of acceleration in new account growth.
Chris Cagle
Great. Thank you, Vlad. Thank you, Jason. The next question is for Jason, and Richard S. asks, can Robinhood shareholders have free access to gold?
Chris
Yeah, thanks for the question, and thanks for letting me answer this one instead of Vlad. We want to make gold the best deal in financial services. We think it's a great deal at $5 per month, just a great value overall. We're going to keep investing in the product to make it even better, and for now, we don't have any plans to give it away for free.
Chris Cagle
All right. Thanks, Jason. The next question is for Vlad, and it's from Sajan T., who asks, on the last call, it was mentioned that Robinhood was looking into adding an advisory program to their services. What will this look like, and are there plans to work with a seasoned wealth management company, or will it be kept in-house?
Liz
Hi, Sajan. Yes, we mentioned it on the last call, and we are getting very excited about what we can do in advisory. We've hired some great people, in particular, our head of investment strategy, Steph Guild, who's an industry vet with 20 years of experience at large financial institutions. You might have seen she's got a weekly column where she talks about the markets. That's quite good. And we really think that In Robinhood, we can build the expertise necessary to give our customers amazing advice. And we've got teams hard at work building a great advisory product, and we believe that we can deliver that to customers using the teams we have in-house. So more to come, obviously, as the work progresses, but we think we can build something really great for customers here.
Chris Cagle
Awesome. Thanks, Bob. Vlad, the next question is also for you. GC asks, is Robinhood exploring ways to leverage AI into its services?
Liz
Yeah. I think that over the next few decades, every company will have to transform into an AI company. I mean, looking at the past 20 years and how sort of the companies that have been able to move ahead and create differentiated value have been technology companies. In the same way that every company sort of has needed to become a technology company, I think AI will sort of be embedded into the fabric of all companies. And that's how we're thinking about it. Robinhood has always been early to adopt new technologies like data science and machine learning, both to lower our costs and deliver product experiences and value for our customers. And we're really excited to continue to embed AI as a tool both internally and helping us ship products even faster and incorporating into existing products and new products. So we think that the impact of AI and other tools that we've seen thus far is going to be extraordinary.
Chris Cagle
All right. Thank you, Vlad. The next question is also for you. It's from Justin P who asks, when will Robinhood support an official trading API for creating trade automation like other brokers?
Liz
Yeah, this is something we're excited about and we hear from our active traders about, but we don't offer it today. If you look at Robinhood Connect, which we announced and started rolling out recently, that leverages some of the trading infrastructure on our crypto side for a developer and B2B targeted product. Making it easier for our active traders and innovating for them is top of mind. So this is definitely something we would look to offer over time. So stay tuned.
Chris Cagle
All right. Next question is also for you, Vlad. Tarun G asks, there's a perception that Robinhood is not as safe as other older brokerage firms like Fidelity and Schwab. Is Robinhood doing anything to change this perception?
Liz
At Robinhood, safety is our top company value. And when I think about what that means, several things come to mind. First is great customer support. And we made tremendous progress over the past few years, adding more channels, improving the quality of customer support, overall making it much better. And the progress there continues today. The second thing is making sure that our app and our infrastructure is reliable and available to customers when they need us the most. And we made tremendous progress there, too. The third is the safety of customers' assets within Robinhood. And as we announced earlier in the call – With Robinhood Gold, we're offering a 4.65% APY on customer uninvested cash, and we're also offering 2 million of FDIC insurance starting June 1st. So your money is going to have higher insurance in Robinhood Gold and in our cash sweep than you would get at a typical bank. I should also mention, as with every brokerage account, your brokerage assets are SIPC insured and we also have excess SIPC coverage. So what does this mean? When we look at kind of how customers are engaging with the service, we're seeing higher NPS indicative of increasing customer trust and the results speak for themselves. Customers are continuing to trust us with their deposits. When we see a lot of institutions in the banking sector and elsewhere seeing outflows in this quarter, we're continuing to see strong inflows with $1.4 billion in net deposits and $4.4 billion in Q1. So we feel really, really good about customers increasingly trusting us.
Chris Cagle
All right, last question from Say, and this is for Vlad. It's Jesus A. asks, how is Robinhood better or different from other platforms today? what moves will Robinhood be making to become the top trading platform?
Liz
Well, in my opinion, we are the most innovative trading platform in the marketplace. We've introduced several new industry innovations that have become norms, not just zero commission, no account minimum trading, but also recently retirement with a 1% embedded match trading. which we're very excited about. And with the announcement of 24-5 trading, we're leading the industry once again. So we're going to continue to focus on our customers. We're going to make progress launching products in a way that emphasizes customer safety. But we're going to continue to innovate. And I'm very, very excited about the things that we're launching and we have launched in the past few months.
Chris Cagle
All right. Thank you, Vlad. Thank you, Jason. And that concludes our shareholder questions from Say Technologies. We really do appreciate all our shareholders taking time to ask these questions of Vlad and Jason, and we're looking forward to more next quarter. Now I'll turn the call over to Liz to lead Q&A from our analysts.
Operator
As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. In the interest of time, we ask that you limit yourself to one question and one follow-up. Our first question comes from a line of Rich Rapetto with Piper Sandler.
Rich Rapetto
Yeah, good evening, Vlad. Good evening, Jason. And congrats on the improved profitability of the quarter and great disclosures, too. So my question is on... My questions, Vlad and Jason, is on... The net interest income improved 25% quarter over quarter. And Jason, I know you talked about a $20 million increase, but this turned out to be $41 million. And I guess I'm trying to see what surprised you. I could see the fully paid securities lending was a little bit better, but what surprised you to give you that bump up in NII quarter over quarter?
Chris
Yeah, thanks for the question, Rich. And we were pleased to see the pickup in NII. I mean, there's a few things that I'd call out. You highlighted securities lending. You'll recall that last quarter was a particularly soft quarter for SEC lending. And at the time of the call, we were cautious in the way that we were evaluating the outlook for Q1. And the activity for SEC lending in Q1 was strong. And in addition to the strength of just the activity, which increased the rebates as well as the interest we earned on collateral, we also saw rebate rates tick up meaningfully in the quarter. And so this led to some outperformance. We also saw strengths in customer deposits and also the flow through of interest rate on those incremental deposits beyond kind of what we were anticipating. So overall, really pleased. It was higher than we expected and we were pleased with that.
Rich Rapetto
Got it. And my follow up will be on sort of the product innovation side, Vlad. And, you know, you talked a lot about advisory and hiring a new person. But I would expect when you talk to, you know, that Robinhood could do with, you know, technology driven, I would expect. So any color is going to be more of a robo advisor type platform or any insight into what the product will look like?
Liz
Yeah, I don't want to share too much, but what I'll tell you is we want to go beyond just being a robo-advisor, and we really want to use technology to give personalized advice at scale, much like what a high-net-worth individual would come to expect from a financial advisor, that they'd be paying 1%. 1% AUM advisory fee for. And, you know, Robinhood can build a great experience for that that's mobile first. And, of course, we'll plan to use every technology that we think is going to be useful in the market to make that happen and deliver it in a scalable way. Thank you, guys.
Rich Rapetto
Very helpful. Thanks, Rich.