Q2 2022 Robinhood Markets Inc Earnings Call

August 3, 2022

Okay.

Good day, and thank you for standing by for each of the Robinhood second quarter 2022 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.

A question. During this session you will need to press star one one on your telephone. 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 head of Investor Relations. Please go ahead.

Thank you Victor welcome everyone and thank you for joining us for Robin Hood second quarter 2022 earnings call with US today, our CEO and co founder of <unk> and CFO , Jason Warnicke before getting started I want to remind you that today's presentation will contain forward looking statements about our financial outlook and our strategic and operational.

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 yesterday the related slide presentation on our Investor Relations website. Our Form 10-Q filed this afternoon and then our other SEC filings today's discussion will.

It also includes 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 Dot Robinhood dot com with that let me turn it over to Vlad.

Thank you Chris for that Great introduction, and thanks to everyone for joining.

Last week was the one year anniversary of our IPO.

In the 12 months since we've had to navigate.

Two challenges one of adapting to the public markets.

And two are also dealing with an abrupt reversal of the macro environment.

For our customers many of whom are younger it looks like they may be facing a recession for the first time in their adult lives. If the last two quarters of negative GDP growth or any indication.

Customers are seeing this high inflation, along with high interest rates bear market in stocks and crypto winter.

This all adds up to less money to spend and therefore less to save and invest.

You can also see this reflected in the drop in assets under custody that we reported despite strong net deposits of over $5 billion. In Q2, you can see that our assets under custody dropped.

And this shows the customers have been hurt by devaluation across crypto currencies and growth stocks in particular.

And while we can't control the macro environment, we've been hard at work building products to help our customers navigate it products like the cash card stock lending and high yield on their uninvested cash.

I'd have to say 2022 is by far our most prolific year yet of delivering products to customers and we've got much more in the works.

For Robin Hood in the seven or so years since we first launched in the U S. We've consistently adapted to changes improved and become more robust and resilient as a company. If we're headed into our first recession in the company's history, we recognize it would be a challenging time, but strong companies use these times as opportunities and we.

Look forward to navigating through this environment and coming out even stronger.

To that end, we made a tough call to further reduce our staff, which we announced the details of yesterday.

These are hard decisions, but we believe.

They better position our business for the long term.

So alongside the reduction in force, we organized the company into a general manager structure for each of our core business units. We've been thinking about this change for for some time and Im confident that it will speed up decision, making increase accountability.

And ultimately it will help us deliver even faster for our customers. This is just one part of our leaner operating model and Jason will share more color on this in his remarks.

Now onto the quarter.

Despite the environment weakening we were able to both increase our revenues and lower our expenses in Q2 compared to Q1 now this was a company wide effort and I am proud of the team for the hard work and dedication it took to get here certainly wasn't easy we believe we're making swift progress toward our goal of being adjusted EBIT.

Positive by the end of the year.

So, let's move on and talk a little bit about our product roadmap remember our goal is to deliver low cost simple products in a seat customer experience that give everyday people control over their finances and access to the same tools that wealthy people have enjoyed for generations. We have organized our efforts into three.

Product areas brokerage crypto and money so I'd like to review each of those with you.

Let's start with brokerage.

To put things in perspective, Robinhood is the most downloaded brokerage app in the U S.

We achieved this leadership position by aggressively innovating, which in turn fueled our account and asset growth to continue driving growth. We have focused our brokerage product development. This year on two key areas one introducing retirement accounts in the second improving our customer experience, particularly for advanced customers.

So starting with retirement accounts I can't tell you. How excited we are about this product we feel like we've come up with a way to offer retirement that is uniquely robinhood and we know our customers will love it as much as we do we're piloting them now with plans to launch later this year.

Additionally, retirement accounts will be the first time, our customers will be able to have multiple brokerage accounts with us. We think this creates a big opportunity for us to broaden our support for and deepen our relationships with our customers over time. It's also a new Avenue for us to drive account and asset growth and increase our total share of wallet.

Next let's turn to our advanced customers in Q1, we extended market hours. So customers now have more flexibility to trade when they want and customers have now treated over $9 billion in volume during these additional hours.

Extending trading hours, we view as the first step towards 24, seven stock trading and we are making progress towards making this a reality.

In Q2, we also rolled out fully paid securities lending to give customers. Another source of passive income on their stocks, which is especially important in the current environment. We're encouraged to see the early progress with over $3 billion of equity value already enrolled and available to land we have.

Also been making a ton of improvements to our options product.

We believe our options operating as the lowest cost and best user experience offering out there most of our competitors say, they're zero commissions, but they in fact charge of 65 Commission for every contract treated which is $65 for a 100 contract trade, we charge $0 per contract.

We've added options and cash accounts, which has been a top requested feature by our options customers. We've also been doing a ton of in person research with this group and we recognize they care a lot about advanced charting on the platform. So we're making our charting in technical indicators much better and there is plenty.

More to come.

Keep the feedback coming our team has been working tirelessly to make robinhood by far the best place to trade.

Now, let's turn to our crypto efforts, our vision with crypto has to be the most trusted platform for customers to invest in crypto as well as the most trusted on ramp to the decentralized web that is why after first introducing crypto investing in 2018, we've been relentlessly focused on three things provides.

The best value the best user experience and being the safest. So let me tell you what we are delivering for customers and crypto by highlighting two areas that we've been working on this year, adding more coins and giving customers more control over their crypto.

Starting with coins.

Customers tell us that they want us to introduce more coins onto the platform. Some other crypto providers have come under scrutiny for listing unregistered securities on their platforms. This can be dangerous and misleading for customers because they may expect these cryptos to be more decentralized than they really are we employ a rigorous listing framework, which in the short term.

Like we aren't moving fast enough, but we think this approach will pay off in the long term frankly.

Frankly, one of the benefits of being heavily regulated in the U S. Based companies is that it has helped us learn how to build with customers safety in mind, so far in a deliberate and considered manner. We have introduced a number of new coins. This year and customers have been pleased with the offerings to date.

Yes.

Turning to our efforts to give customers more control over their crypto in April we launched our crypto wallet. So customers can move their crypto in and out of robinhood in a simple safe and seamless way.

Heard feedback that customers want faster withdrawals and larger daily limits. So we raised our withdrawal limits from 3000 to $5000 per day and are working on improving this even more.

Later this year, we will be rolling out our non custodial wallets. This will be a separate standalone app, where customers can trade in swap crypto with no network fees and maintained full custody of their crypto throughout all with the simplicity and great user experience. They have come to expect from Robin Hood, we're seeing good interest as or not.

Custodial Weightless continues to growth in our early internal version of the product looks awesome, we think customers are going to love it.

Okay, let's now move to our product development efforts related to Robin Hood money, which includes our new cash card, we hear from customers that they want to start saving and investing but the current environment is hard with inflation and high gas prices. We don't we want to help them by giving them a good way to build saving and investing habits, even in the <unk>.

Current environment and to that end in March we launched the new Robinhood cash card custom.

Customers are using the card to make day to day purchases and roundup their spare change into stocks Etfs in crypto and of course, not only are we not charging any monthly fees for this but we're actually matching a portion of their roundups to help them build their portfolios. So it's a fantastic value for customers and we've been pleased with the week over week.

<unk> and the cohort retention we've been seeing.

Since launch we've been making steady improvements to the user experience as well and last week. We started rolling out cashback offers at select merchants, including on gas doing our part to help customers with these high gas prices.

We believe we have a huge opportunity to become the primary place where customers deposit their paychecks, which drive their spending and investing and while it's still early we're excited about our potential to grow this offering with both existing and new customers and drive additional customer loyalty as well as revenue diversification over time.

Now before passing it over to Jason I wanted to reiterate how extremely proud I am of all of the progress we've made over the past quarter with the new products, we've shipped and the work we've done to improve the experience for our customers and when I look ahead, I feel even better positioned to execute on our roadmap and serve our customers.

With that let me turn it over to Jason.

Thanks glad it's good to speak with everyone today.

In the second quarter, we remain focused on serving our customers growing our business and driving long term shareholder value.

While the environment was volatile debt funded accounts were steady and net deposits were strong and the combined strength of our team platform and balance sheet.

<unk> us to continue delivering on our 2022 product roadmap.

I'm also pleased that we've increased our productivity and efficiency driving improvements to adjusted EBITDA from Q1.

We've made great progress so far this year and I'm energized by the opportunities to drive value for our customers and shareholders going forward.

Before we review our Q2 results I'd like to share some context for the August workforce reduction that we announced yesterday.

We spoke last quarter, we've continued to aggressively execute on our product roadmap and serve our customers, while working hard to get to a leaner operating model, including by slowing our hiring and significantly lowering third party spend.

But the macro environment has continued to soften inflations at a 40 year high and our customers are experiencing bear markets and equities and crypto.

It's clear we needed to do more to manage our costs and so yesterday, we announced a 23% reduction from current levels to a head count of approximately 2600.

At this new level, we believe we are appropriately staffed to be cost efficient, while continuing to deliver great service and innovation for our customers to be clear even with this reduction we believe we are well positioned to continue delivering on our roadmap.

With that context in mind, let's review the second quarter, starting with our business results net funded accounts for $22 9 million in Q2 up 100000 from the prior quarter and notably steady given the current environment.

Looking at monthly active users they were $14 million in Q2, while this is down $1 9 million from Q1, we are encouraged by our continued industry leading engagement through a volatile quarter.

Turning to assets under custody. They were 64 billion in Q2 down 31% from last quarter.

While funded accounts continue to grow and customers continued to make net deposits through the volatile environment.

Assets under custody declined along with decreases in market valuations, especially for high growth stocks in crypto currencies.

Looking at July it's encouraging to see that customer assets increased back over $70 billion as markets rebounded.

Looking more closely at net deposits. They were $5 2 billion in Q2, which translates to a 22% annualized growth rate relative to Q1 assets under custody.

So while assets were lower in Q2, if we think about our long term potential for asset growth. We believe the combination of strong net deposits and long term rising markets can drive meaningful asset growth over time.

Now, let's turn to our Q2 financial results, which reflect good progress on increasing profitability.

Adjusted EBITDA improved $63 million sequentially to negative $80 million in Q2.

This improvement was driven by revenue growth and expense discipline that drove operating leverage.

Looking ahead, we continue to push towards a positive adjusted EBITDA run rate by the end of the year. This goal is an important step along the way to delivering higher levels of profitability over time.

We feel that our progress over the past quarter has better positioned us to reach our goal by year end, which will take continued improvements in both revenue and costs. So let's start with revenues.

Total net revenues were $318 million in Q2. This was a 6% increase from Q1, primarily driven by higher net interest and other revenues, partially offset by lower transaction revenues Q2, total revenue translate that translates to <unk> $56 up from $53 loss.

Quarter.

Now moving to transaction based revenues they were $202 million in Q2 down 7% sequentially. The decrease was primarily driven by lower trading volumes consistent with the macro environment.

And turning to net interest revenues as we've discussed in the past we believe that over the long term interest income will drive a larger portion of our revenue.

That is why we are encouraged that Q2 net interest revenues reached a new high of $74 million and drove nearly a quarter of total Q2 revenues.

The 35% increase from Q1 was primarily due to the March and June fed rate hikes, partially offset by lower margin balances.

I'd also note that interest, earning assets, which are comprised of customer cash corporate cash and margin balances were $16 billion at the end of Q2.

This includes customer cash sweep balances, earning 1% which totaled over $2 billion in Q2.

As we look ahead interest rates are widely expected to continue rising which would drive meaningful additional revenue from our interest earning assets.

One way to see that benefit is to look at our recent experience from the June and July fed rate hikes that totaled 150 basis points.

On average we estimate that we are realizing about $40 million of annualized run rate revenue per 25 basis points of rate hike, given our current balances and customer rates of course, the precise benefit of rate hikes will depend on how the benefit of rate hikes will depend on how.

Balances and customer rates vary over time.

Moving on to other revenues they were $42 million in Q2 up 62% from Q1, primarily due to the seasonal increase in proxy related revenues.

Together net interest and other revenue made up 36% of total revenue in Q2 up from 27% in Q1.

Continuing to broaden our product offering can help us further diversify our revenues going forward.

Let's now look at our Q2 expenses, starting with operating expenses prior to share based compensation.

There were $446 million in Q2, which includes $17 million of severance related to our April workforce reduction.

This was an improvement of $24 million or 5% from Q1, reflecting our work to be more cost efficient, including with third parties.

Given this progress on our ongoing expenses and our August workforce reduction, we're lowering our full year expense outlook.

Our updated outlook for 2022 operating expenses prior to share based compensation as a range of $1 7 billion to $1 76 billion, which would be a year over year decline of 7% to 10% and operating costs.

This updated outlook includes the cost of an estimated $45 million to $60 million of severance and restructuring expenses related to our August workforce reduction.

Turning to share based compensation expense, which as a reminder reflects the number of shares and our share price at the time the awards were granted.

It was $164 million in Q2 down by $56 million or 25% from Q1.

The decrease was primarily driven by a $24 million reversal of previously recognized share based compensation related to our April workforce reduction.

And a reduced pace of hiring this year.

I'd also highlight that 50% of our Q2 expense was driven by pre IPO market based awards for our two founders that will vest only as our share price reaches levels from $50 to $300, but are recognized on a GAAP basis as expenses over time.

These awards won't increase our share count until our share price appreciates considerably which would be a great outcome for shareholders.

As for our 2022 outlook for share based compensation, we are lowering our expense outlook for the year. We now anticipate 2022 share based compensation expense to be in the range of $760 million to $840 million down between 47% to 52%.

From prior year levels.

This updated outlook includes the benefit of an estimated $40 million to $50 million reversal of previously recognized share based compensation related to our August workforce reduction.

I also want to highlight that given our reduced pace of hiring and workforce reductions. We are now on a significantly lower trajectory of diluted share count growth than we have seen over the past year.

While we believe that it's important to align the interest of employees with shareholders. This will be an area, we will be managing closely.

Now, let's turn to capital management and.

In the current environment, it's even more important to have a strong balance sheet and cash position that is why we like our position with no debt and $6 billion of corporate cash on hand that provides strength and flexibility and financial runway to continue serving our customers executing on our product roadmap and a.

<unk> potential acquisitions.

As I mentioned last quarter, we have roughly $2 5 billion of excess cash above our risk scenarios.

In closing we continue to make good progress in Q2, and we're very optimistic about the opportunities ahead of us to deliver value for customers and shareholders.

With that Chris let's move to Q&A.

Thank you Jason leading into this quarter's Q&A session will start by answering the top questions from say technologies ramped by number of votes.

I will pass over any questions. There are already covered on the call and grouped together questions that share common theme after that we'll turn to live questions from our analysts.

As a reminder, we skipped over some of the top questions because Vlad and Jason already covered in their remarks, so with that I'll kick it off with a couple of our top questions that are on a similar theme from say technologies.

These are both I think for Jason So Massie, our asks having billions of dollars of cash are you planning on buying back shares since the stock is at a low price and then Seth G asks any future plans for robinhood to offer a dividend on their stock.

Thanks for each of those questions.

We think the best use of our cash right now is to fund the business both our <unk>.

Organic initiatives to drive growth.

As well as potentially to use for acquisitions, I think a better time to be thinking for us to be thinking about returns of cash to shareholders is when we reach some goals further down the line around generating positive adjusted EBITDA and kicking off positive cash flow, but I appreciate the question.

Alright. Thanks, Jason next question is from John P, who asks following up if Robin Hood can give out its gold services, if a retail owner owns enough stock and robinhood and also any update on adding more advanced chart trading features onto the App and website. So I do want to take that one yeah I'll take it thanks, John for the <unk>.

Question and it's good seeing you up here.

With the top voted questions quarter after quarter.

So on gold for shareholders, we don't have plans to offer that right now and to bundle gold with.

With shareholder status, but I do want to touch on rewards to shareholders and Robinhood gold briefly.

So on the first you might have seen that say.

Which we're all using for this Q&A launched a product called Oct with say recently, so this will actually allow us to work with our corporate partners to identify shareholders and offer them perks and rewards. This is a first of its kind offering really allowing public companies to identify.

Their shareholders and we're excited to have Tesla being the first partner with us, but we think this is something that.

That more companies should be doing and we'd like to we're happy to offer the technology to make that easier for them.

Now on the gold side, we think there is tremendous value in gold and we've got a team of people hard at work to provide even more value and we want gold to be so valuable that it's a no brainer for all of our customers to be gold customers.

Yes.

Alright, Thank you Vlad.

So the next question.

On the M&A front, so any word on being acquired by FTE X or Charles Schwab.

Sure I'll take this one so in one word no.

I think we're in a great position as a Standalone company I Love Us as a Standalone company. We've got a strong balance sheet, we've got an awesome team and we're delivering on our product roadmap as I mentioned at a pace that we haven't seen before so actually I'd flip it on the other side, we actually see.

Opportunities.

Particularly in this market environment to leverage the balance sheet that we have that's about $6 billion.

Acquired companies that can help us accelerate our roadmap. So we continue to be on the look out there.

We remain really excited by the opportunity we see ahead of us.

Alright, Thanks, Brian and thanks, Paul W. For asking that question. The next question is also from <unk>, who asks.

Also on the M&A front can you provide us with an update on the igloo acquisition and strategic plan for international expansion for this year sure and John I think I also missed the second part of your question before about advanced trading so.

Advanced charts is something that we've heard from customers about and.

We've got we've got some good tools for you in the work. So just stay tuned we hope to we think Youll really love them.

On the <unk> acquisition and strategic plan for international expansion. So as we mentioned in the last call. We had entered into an agreement to <unk>.

<unk> now these agreements.

Take normally a little while to close so we're going through that process right now and we're still on track to close by the end of the year and I'm very excited to bring mark and the team on board and accelerate.

Our entry into the U K and the rest of Europe .

Very very excited about that.

Hopefully it goes smoothly, we believe it will.

Alright next question is from NJ S who asks.

First stage that the five year historical charts don't seem good enough and can we do more Max like others.

Alright, yes. Thank you for that feedback always love hearing feedback about the tools, we hear customers loud and clear that they want better chartering more flexibility more advanced charging and more data so.

We've been making lots of improvements to our offerings and charting will continue to get better and better. So just stay tuned and we've got some good stuff in the works for you.

Okay. Thanks, Matt.

The next question is from Andrew <unk>, who asks why not allow us to start trading when the pre market session opens at four am eastern.

Yes, I'll field that as well thanks, Andrew for the question. So earlier this year, we announced.

Our goal of making equity markets accessible 24, 7%, we think that it's actually silly that with all the technology we have nowadays.

U S equity markets are still tight.

East Coast, United States working hours, so as the first step of that process, we extended our already extended trading hours too.

For am Pacific to five PM Pacific, So that's 7% to eastern.

The goal is to make that $24 seven along the way, we might see opportunities depending on customer interest make incremental progress and add more hours.

Which we'll certainly pursue and consider so.

Adding <unk>.

For him to seven am Eastern I believe is certainly something we're thinking about.

Great and lets take one more top question. So the last one is from Anthony <unk>, who.

Who asks would robin who would be able to provide a service that lets people get loans against their assets.

Yes, I'll field this one as well thank you Anthony.

So we already do provide a form of this so.

In our margin offering.

We allow customers to.

Get alone against their assets already within Robinhood and were actually previously. This this offering was only available to robinhood gold customers, but we're actually making it available to all customers under different rates.

So this will allow you if you have over $2000 in in securities to borrow against them you can either use that to buy more securities or even withdraw it.

To your bank account or spend it through.

Through the Robin Hood spending account and cash card so yes.

Yes, it's a very useful service.

Customers don't know that you can actually withdraw against your margin loan and get some liquidity without selling securities. So we will definitely look to communicate that a little bit better.

And also looking at different ways to.

Help customers generate some more liquidity, especially in this environment going forward.

Alright.

Thanks, a lot.

And for top question for today from say so thank you everyone for your questions. We really appreciate all the thoughtful engagement from our shareholders and customers. So it's time to open up the line and we would ask each analyst to limit their questions to one question and one follow up so with that I'll ask Victor Please to open up the line for questions.

As a reminder to ask a question press star one one on your telephone.

Please standby, we're compile the Q&A roster.

Our first question from the line of Devin Ryan from JMP Securities. Your line is open.

Great Good afternoon, everyone.

Hey, Kevin Hey, Devin and good afternoon.

First question just want to talk about marketing spend a bit here. It was only $24 million in the quarter is down 75% year over year.

A little bit surprising just given all the new products that you're rolling out including cash management. So just trying to think about whether.

It makes sense to maybe lean in more on marketing, particularly with all the new products launching or do you guys see other ways to maybe get the word out and engage with.

New and existing.

Investors just.

With all these new products and just particularly in a competitive market to get the name out.

Yes.

I'll field that I think historically robinhood has been very much.

Driven by word of mouth growth and.

Even though the marketing expense that we accrued through 2021 in large part was as a result of our referral program.

We did do a little bit of a brand marketing as well but.

I think performance in referral program.

We're largely driving 2021 and as the environment has kind of changed through 2022, we've been heads down focusing on products and improving the service quality, but we actually do see an opportunity to get the word out and do more brand marketing and make it.

Clear.

Customers, what Robin Hood stands for and in our mission and our position in this segment as you point out so.

Yes, I would expect to see a little bit more on the brand side.

And on the performance as I am sure Jason can add.

We're very much focused on efficiency and we think that.

Organic and referral based marketing as is kind of the best way and we'll see that pick up as the macro environment changes and as we continue to improve our our products as you think about modeling. This we'd expect marketing expense to increase in the back half of the year and it's incorporated in the guidance that we provided.

Yes, Okay, alright, thanks, guys and then just a follow up here. So funded accounts were up slightly I may use down I think 12%.

Most other incumbent brokers.

Used but I'm assuming engagement.

And down at a number of firms just in the uncertain macro backdrop.

Does it feel like we're approaching a bottom for engagement and they use I'm not sure. If you have any data or kind of historical.

Mark is to look at and then of that 14 million is 20% driving 80% of the trading activity in revenue or what does that split look like I'm assuming.

Of the 14, Theres still kind of a small amount that's driving the majority, but love some more color there too.

Yes Devin.

We do follow a power law here, so the more active customers do drive more of the.

The revenue versus the less active customers in that.

That's been true for some time in terms of <unk>.

Predicting the bottom it is hard to predict.

The market the first half of the year has been about the worst that we've seen in about 50 years hard to know exactly when thats going to bottom out and turn around I think we saw some life in in July more broadly in the markets and Thats an encouraging sign.

And I commented in my prepared remarks about the.

The effect it had on our.

Customers rebound in assets under custody.

What we are focusing on right now is just continuing to improve the user experience I do think <unk>.

Firstly this is a cycle and we're in a cycle other cycles will come long term very optimistic that.

It's going to be great for retail investors to continue to invest in the stock market and participate in wealth building over the long term.

Okay. Thanks very much.

Seven.

Thank you.

For next question.

Our next question comes from the line of Richard Repetto from Piper Sandler Your line is open.

Yes, good evening glad or good afternoon, flattened and Jason.

I guess the first question is on regulation Glenn.

FCC Chair Gensler came out again.

June and talked about.

We've talked about the retail equity market structure, I think you stopped short of any seen any specific bands but.

Sounded like he was.

Proposing a wanted to propose things that would.

Hinder the wholesalers maybe payment for order flow so any incremental comments from you on on what you.

You know what your thought is talking any other insights in regards to.

Sure.

Yeah.

Yes sure rich.

I think the first thing to say is we're obviously paying close attention to what's coming out of the commission and what chair Gensler is saying.

I don't know if you heard former FCC share.

Jay Clayton yesterday.

Who was asked about this as well and.

We agree with the sentiment there that.

Payment for order flow and the current structure that has allowed has provided a great all in cost of execution for retail investors. One that's in fact unmatched in history and we've got.

Retail customers are getting a great deal. So we're a little bit concerned obviously, we're fine with things.

Improving but.

Yes, we think that.

The barrier to or the sort of threshold to clear for making changes in this extremely complicated setup has to be quite high given that retail customers are are getting great execution quality right now.

On in terms of what it would do to our business again, we're paying attention to it equity's payment for order flow right now comprises about 9% of our total revenues. So we've seen.

Better diversification Q2 versus Q1 more of our revenue is driven by.

Net interest income and equities.

Payment for order flow, even within the transaction segment.

It's been on a downward trend. So certainly 9% is significant but I think all in all we feel pretty comfortable that we're giving customers a great deal and over time, you should see our revenues continue to diversify as we roll out more products.

Okay got it that's very helpful. Todd. Thank you and my follow up would be this is following up to a previous question earlier.

On the M&A front.

I know that question asked about specific companies.

So I'm just trying to get your broader thoughts.

Given the share the control of the shares the voting power.

Would there be any scenario, where you could see a partner that.

Again may not be an acquisition, but could get you to the immediacy of.

Product development.

Yeah.

And enrich.

The progress Youre trying to make I guess, you envision any scenario or is that just.

Not really in the cards at this point.

Rich I mean, as I mentioned before if I look at Robinhood right now I think we're incredibly well positioned to continue to execute on our plans as a standalone independent company, we've got <unk>.

$6 billion in cash we make we've made great progress towards.

Both increasing revenues and decreasing costs and I think in particular in these environments great companies that are in our position have been able to set themselves up for the future.

Just taking advantage of.

Opportunities that are out there for.

For acquisitions and M&A. So I think we see an opportunity actually to use our balance sheet and our financial strength.

To accelerate our own roadmap.

That's that's how we've been thinking about and approaching our strategy.

Yes.

Understood.

The companies that made it through the Internet.

When the Internet bubble broke where the one that the state focus flat so.

Thanks for the answer.

Thanks Rich.

Thank you we'll move for our next question.

Our next question comes from the line of Michael Cyprus from Morgan Stanley . Your line is open.

Great. Thanks, good afternoon.

I wanted to touch upon the net new deposits, which continued to hold up quite strong. Despite the challenging environment. So I was hoping you could provide some color around that including maybe touching upon the profile of the customers that are driving the M&A versus the installed base how much of the M&A relates to recurring preset.

<unk> and how much of that is going into the cash management program. Thank you.

Yes. So I'll go ahead and start in the slides you can feel free to add some color. So we feel really good we increase the.

Interest rate that we're offering to our customers in the cash sweep program.

It is now at 1% and.

We've got about $2 billion.

Of customer cash there so.

So offering a really nice value proposition in terms of the net deposits $5 $2 billion during the quarter.

22% annualized growth rate in terms of that deposits relative to the beginning of period.

AUC, so really strong indication that our customers even in this tough environment.

<unk> to engage in putting their money to work for the long term.

In terms of customer cohorts, we haven't provided.

The breakout detail between the various cohorts in <unk>.

<unk> of net deposits what I would tell you is that there is broad participation.

The patient of where the net deposits are coming from including from the installed base.

The net increase in our funded accounts has been modest these last couple of quarters. So I'd point more to our installed base, but we do like what we're seeing from the new investors that are joining the platform and think we're really well positioned for them to grow with us.

Yeah, and the only thing I would add to that is some of the things on the near term roadmap that we've mentioned before in particular retirement accounts and.

Making improvements for our more advanced customers, we think those will drive meaningful net deposit increases over time as well.

Great and just a follow up question regarding the $6 billion cash position that you flagged that you have on the balance sheet. I guess the question here is just how much do you need to run the business in terms of cash versus how much is excess that might be available for M&A that you were mentioning before that you may have some interest in an eye on.

So you mentioned about $2 5 billion of excess above risk scenarios, but I think that includes your 3 billion lines of credit so that would suggest no excess in our risks scenario. So I'm just hoping you can elaborate around what that scenario is and how to think about that.

So in our risk scenarios, we have $2 5 billion of excess cash. So that is just that is just excess.

And on a typical day, we are using very little of our corporate cash to run the business. We've just had periods of time in the past where.

For example, the MIM stock rally, we saw moments, where there was extreme volatility and that caused the risk scenarios that we were modeling today.

And that's what I'm, referring to moments like that where we continue to have in excess of $2 5 billion above scenarios that are that resemble what we saw back then.

Great. Thank you.

Thanks, Michael.

Thank you and we'll move to our next question.

Our next question comes from the line of Steven <unk> from Wolfe Research. Your line is open.

Hey, good afternoon, Vlad good afternoon, Jason.

Thanks, Steve wanted to start off with a question on stock based comp Jason you made some earlier comments just highlighting your internal focus to rein in future dilution.

And I was hoping you could help us size the incremental dilution associated with the share based comp that's not yet been recognized and given your strong excess liquidity position I heard the earlier comment on capital management, but any potential plans to offset that future dilution with incremental buybacks.

Yes, we don't have plans right now.

To implement our share buyback plan as I mentioned in my earlier comment.

To the same question, we think that'll be a more appropriate.

Hi.

As we turn the corner on profitability.

In terms of unrecognized share based compensation, we just filed our.

Our 10-Q. This afternoon I think that number is in the Q I don't have it top of mind.

The unrecognized as is in there and then just to.

Reiterate that about half of our share based compensation as from the.

Pre IPO market based awards that were given to the founders.

And those those vast at significantly higher dollar share prices than where we're at today.

Thanks for that and for my follow up just on the NII sensitivity you spoke of the $40 million benefit per rate hike just given the sheer number of hikes. We've seen so far the NII expansion in <unk> certainly healthy you cited a record, but it was a bit lighter than we had anticipated.

<unk> I recognize there are a lot of moving pieces impacting the sensitivity, though it might be helpful. Jason If you could just speak to the sensitivity across the different buckets margin balances swept cash corporate cash that's underpinning some of that $40 million for height guidance that you offered up.

Yeah, we're actually really pleased with the pass through that we've seen from our banking partners.

On these on these rates so far in pretty optimistic that we'll continue to see good results from there.

<unk> balances we have increased as Vlad mentioned, we've also separated it from gold.

<unk>.

Customers, who are not part of goal to participate.

And in the margin program, but at higher rates.

And in terms of kind of go forward guidance, what I would just say is that we will continue to see.

A meaningful portion of these rates.

Through to shareholders.

But balanced by our.

Our intension to also offer participate value for customers.

That's great. Thanks, so much for taking my questions.

You bet. Thank you.

Our next question.

Our next question will come from the line of will Nance from Goldman Sachs. Your line is open.

Hey, guys. Good afternoon, thanks for taking the question.

Wanted to ask another question on the expense base.

Follow up on an earlier question on stock based comp as well.

Given the moving pieces in the expense space, a handful of restructuring charges in the back half Jason I'm wondering if you could talk for both kind of like Opex and the SBC lines as you look out into 2023, what's the exit run rate for some of these line items and I guess, particularly on SBC. If you do if you have an exit run rate for us is that 50 <unk>.

<unk> level that impacts ongoing dilution still going to be the right number.

For the foreseeable future.

Yes, I think Theres a couple of things that I can say that will be helpful. But we haven't provided guidance on an exit run rates.

The stock based comp for the.

Market based awards that were given pre IPO to the founders that is recognized on an accelerated basis and so that will decline.

Over time.

Recognizing more in earlier periods and less in later periods also as we hit those share prices at will.

It will cause an acceleration of the <unk>.

Related tranches that are affected by that so it'll be accelerated and also potentially lumpy as we hit those.

Those triggers.

Really proud of the team both on Opex, primarily on Opex both for.

Third party spend in particular.

Making great progress a lot of collaboration across the teams.

One area to highlight is the focus that our engineering team has had on <unk>.

Proving our efficient use of our web hosting.

But we've got lots of examples kind of across the company are just driving improvements all reflected in the.

Pretty favorable.

Favorable incremental guidance that we gave in our release.

Got it I appreciate that and then I just.

Kind of nuanced question on the transaction revenues I think the implied take rate on the crypto currency trading this quarter I think it was up sequentially versus.

The first quarter of this year I know you guys, obviously renegotiate at the beginning of the year, but any anything to call out on what drove the higher spread this quarter.

Yes, we were able to achieve.

Higher negotiated rate than what we had previously it is disclosed on our.

On our web on our App and website.

We took it from.

It was kind of low <unk> to now 35 basis points.

Got it Super helpful. I appreciate you taking all my questions.

Yeah, you bet. Thanks, we'll achieve.

Higher negotiated rate than what we had previously it is disclosed on our.

On our web on our App and website.

We took it from.

It was kind of low <unk> to now 35 basis points.

Got it Super helpful. I appreciate you taking all my questions.

Yeah, you bet. Thanks Bill.

Thank you.

Our next question.

Our next question will come from the line of John .

Josh Beck from Keybanc capital Your line is open.

Thank you for taking the question.

Yes, I was just.

Kind of curious when we think about.

Our two and where it can go in and the mid term.

Obviously with the current macro kind of stable.

What would be the key drivers that we should be focused on in terms of trying to build out scenarios, where that metric could go overtime.

Yeah I'll go ahead and take it and then Vlad can jump in.

We're really focused on is improving the user experience <unk> mentioned, a couple of things around.

The brokerage user experience, we're continuing to add new coins for crypto.

In a very diligent way.

And also looking to new products that we roll out <unk>.

He paid securities lending, which we recently rolled out we're seeing really nice early traction with $3 billion of equities under management.

That are already enrolled.

The cash card is another area, it's a new product and one that we're really excited about improving the user experience and then of course, we're going to see some benefit from the rising interest rate.

Couple of the rate hikes that happened in Q2 happened late.

In the quarter and Youll begin to see that flow through at a higher rate than in <unk>.

Q3.

So.

I think.

We like we like our focus on user experience and new products.

Sure.

That thats going to begin to show through in our financials over time.

Okay.

Thanks.

I had a follow up.

The market conditions have been challenging for everyone.

You did raise a substantial amount of capital and do have.

Certainly leading scale. So I'm just curious when you think about that.

Pettitte environment, and particularly maybe some of the.

Lower scaled companies, perhaps with less funding if you have seen any any changes maybe on.

The customer acquisition or front or anything else notable there.

Yes, I would say that.

Overall customer acquisition is slower right now.

In periods of more market enthusiasm.

We found that customer acquisition it comes a little easier and right now it's a little lower we've pulled back on marketing we've found that.

Chasing growth in this environment doesn't have the same ROI is in periods, where you have higher intent.

Customers. So it's it continues to be competitive we continue to work on kind of the inputs of customer experience and we expect that.

At some point hopefully soon we'll work our way through this cycle.

Yes, I would just add that I.

I think historically robinhood has been a company that has focused a lot on new customer acquisition and.

We probably focused historically again, a little bit less on the customers that we've already had this year I think has been a really healthy focus on valuable customers that have grown with us and have been using the platform quite a bit.

Improving the customer experience for.

Our most advanced customers and the people that we already had we think.

Has been very very valuable and youll see that pay dividends for the business, but.

It is cyclical and as time goes on I would expect that that shift that mix to shift and.

We would definitely.

See opportunities over the long run to Reaccelerate, new customer acquisition.

Very helpful. Thanks, Jeff Jason Blip.

Thank you.

Well that's very good question.

Our next question comes from the line of Benjamin Brutish from Barclays. Your line is open.

Hi, guys. Thanks for taking the question.

Maybe first on the fully paid securities lending you mentioned I think $3 billion in eligible balances I'm just wondering given the revenue share you've got with customers that opt in the target of one to two times the size of your margin based securities lending revenues, how big do you think that needs to be to kind of hit that goal.

It's early.

I don't know off hand, if we have shared the revenue split.

I don't believe so.

I am not going to lean into into that particular aspect of your question.

Early we've got about $50 billion of equities under management today $3 billion of that is enrolled the teams are hard at work at making sure. Our customers are aware of the program aware of the way that they can increase their passive.

Income by participating in the program and.

We like we like the growth that we're seeing kind of on a weekly basis.

Look forward to updating you, but it's early and we've got a ways to go before it reaches that potential.

Okay Fair enough and then maybe one for flat you mentioned that.

Kind of another M&A question, you mentioned that you see yourselves as more of an acquirer than an acquiree could you maybe talk about what your priorities might be would it be more things like particularly where you are looking at international expansion or product expansion or I don't know kind of the general question, though.

Yes, I'd say international as you mentioned with Zig Luiz definitely it's something we've looked at in the past and will continue to explore.

The other areas just.

Opportunities for us to take advantage of our large scale in terms of customers and.

Plug in new products, and new services and assets that our customers would find valuable.

Yeah.

Particularly.

Only those trading at attractive good business is trading at attractive valuations, which.

You can find in environments like this.

Sure understood. Thanks for taking the questions.

Thank you.

Q1 will be for next question.

And our last question for today will be from Ken Worthington from Jpmorgan. Your line is open.

Good afternoon, and again, thanks for taking the question.

Maybe for Vlad and yes, one the mission statement was the democratization of finance for all.

As we've been running the numbers, we see that your clients have pretty significantly underperformed since the mean bubble burst in both up and down markets, even when accounting for crypto and growth. So two questions around this Ken Robinhood do better for customers and drive better performance results for them.

And if so how do you get there what tools do they need and how long it will take and I would say things like cash card in the wallet and retirement accounts as stock lending.

Interesting and probably Youll see big demand, but it doesn't seem like they addressed the key issue of under performance and then as we think about driving better performance for the end customers can you do it in a way given your customer asset levels in a way that's profitable for Robin Hood and your shareholders.

Yes, I think.

Thanks for the question.

It's always hard to have a very short term view on this I mean, when you look at performance kind of.

Right in the depths of crypto winter and.

And after a bear market that's hit.

Technology, and innovation, particularly hard I think youll get a skewed results.

But over the long run we believe in innovation, we believe in technology, we believe that these customers.

Who many of whom are at the beginning of their financial journey isn't.

Our starting relatively younger than.

Previous generations have with investing will end up doing quite well because the American economy. The engines of innovation in the short term you might have.

You might have bear markets, but over the long run we think that they will do quite well so.

We're very very committed to providing the best tools for.

For our customers to benefit from these markets and make it easier to invest I don't think that a bear market should call. Our mission and the question I think the mission is incredibly important in bear markets are opportunities that <unk>.

Investors, particularly wealthy ones have used.

Set themselves up for long term success and I think it's very very important.

For us to offer these services to not just the wealthy.

Okay, Great and then just maybe a data question.

How much or how many gold accounts cash cards non custodial wallets on the waitlist, where do those numbers sort of stand as of the end of the second quarter.

So sorry go ahead and repeat that list again for me, Ken Yes, Im sorry, and I apologize I tried to go through the K or the Q I didn't see anything gold accounts cash cards and the non custodial wallet waitlist.

Yes, we have about a 6% attach rate on gold cash card. It's early we haven't said.

The number of.

Users at this point, we're focused on really right now is just improving the user experience last.

Last week for example, we rolled out merchant incentives, which give customers cashback on.

Spending their card at places like.

Gas stations.

Pizza parlors, and so on which we think it's great for customers. So we're really focused on is improving user experience improving the value proposition and then just getting the word out finding ways within the app and otherwise other questions about marketing earlier.

To get the word out to customers about the products that we have and the great value proposition that we have for them and I think on the non custodial wallet that waitlist number is actually public on the website and I believe.

Recently crossed the $1 million.

Yeah, great. Thanks for your questions, Ken and thanks to everyone for questions today.

Yes, Thank you guys.

And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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[music].

Good day and thank you for standing by what you said, a robinhood second quarter 2022 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 will need to press star one one on your telephone please.

Be advised that today's conference is being recorded.

I'd like to hand, the conference over to your Speaker today, Chris Cagle head of Investor Relations. Please go ahead.

<unk> plans.

<unk> results could differ materially from our expectations and we have no duty to provide updates unless legally required.

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 Dot Robinhood dot com with that let me turn it over to Vlad.

Thank you Chris for that Great introduction, and thanks to everyone for joining.

Last week was the one year anniversary of our IPO.

In the 12 months since we've had to navigate.

Two challenges one of adapting to the public markets.

And two are also dealing with an abrupt reversal of the macro environment.

For our customers many of whom are younger it looks like they may be facing a recession for the first time in their adult lives. If the last two quarters of negative GDP growth or any indication.

Customers are seeing this high inflation, along with high interest rates bear market in stocks and a crypto winter.

This all adds up to less money to spend and therefore less to save and invest.

You can also see this reflected in the drop in assets under custody that we reported despite strong net deposits of over $5 billion. In Q2, you can see that our assets under custody dropped.

And this shows the customers have been hurt by the valuation across crypto currencies and growth stocks in particular.

I'd have to say 2022 is by far our most prolific year yet of delivering products to customers and we've got much more in the works.

For Robin Hood in the seven or so years since we first launched in the U S. We've consistently adapted to changes improved and become more robust and resilient as a company.

We're headed into our first recession in the company's history, we recognize it would be a challenging time, but strong companies use these times as opportunities and we look forward to navigating through this environment and coming out even stronger.

To that end, we made a tough call to further reduce our staff, which we announced the details of yesterday.

These are hard decisions, but we believe.

In a better position our business for the long term.

So alongside the reduction in force, we organized the company into a general manager structure for each of our core business units.

We've been thinking about this change for for some time and I'm confident that it will speed up decision, making increase accountability.

And ultimately it will help us deliver even faster for our customers. This is just one part of our leaner operating model and Jason will share more color on this in his remarks.

Now onto the quarter.

<unk> by the end of the year.

So, let's move on and talk a little bit about our product roadmap remember our goal is to deliver low cost simple products and a seat customer experience that give everyday people control over their finances and access to the same tools that wealthy people have enjoyed for generations. We have organized our efforts.

The three product areas brokerage crypto and money so I'd like to review each of those with you.

Let's start with brokerage.

To put things in perspective, Robinhood is the most downloaded brokerage app in the U S.

So starting with retirement accounts I can't tell you. How excited we are about this product we feel like we have come up with a way to offer retirement that is uniquely robinhood and we know our customers will love it as much as we do we're piloting them now with plans to launch later this year.

Extending trading hours, we view as the first step towards 24, seven stock trading and we are making progress towards making this a reality.

<unk> also been making a ton of improvements to our options product.

Options in cash accounts, which has been a top requested feature by our options customers. We've also been doing a ton of in person research with this group and we recognize they care a lot about advanced charting on the platform. So we're making our charting in technical indicators much better and there is plenty more to come.

Keep the feedback coming our team has been working tirelessly to make robinhood by far the best place to trade.

Now, let's turn to our crypto efforts, our vision with crypto has to be the most trusted platform for customers to invest in crypto as well as the most trusted on ramp to the decentralized web.

That is why after first introducing crypto investing in 2018, we've been relentlessly focused on three things providing the best value.

Best user experience and being the safest. So let me tell you what we are delivering for customers and crypto by highlighting two areas that we've been working on this year, adding more coins and giving customers more control over their crypto.

Starting with points customers tell us that they want us to introduce more coins onto the platform. Some other crypto providers them come under scrutiny for lifting unregistered securities on their platforms. This can be dangerous and misleading for customers because they may expect these cryptos to be more decentralized and they really are we employ a rigor.

This listing framework, which in the short term may feel like we aren't moving fast enough, but we think this approach will pay off in the long term.

Frankly, one of the benefits of being heavily regulated in the U S. Based company is that it has helped us learn how to build with customers safety in mind, so far in a deliberate and considered manner. We have introduced a number of new coins. This year and customers have been pleased with the offerings to date.

Yes.

We've heard feedback that customers want faster withdrawals and larger daily limits. So we raised our withdrawal limits from $3000 to $5000 per day and are working on improving this even more.

Non custodial weightless continues to grow and our early internal version of the product looks awesome, we think customers are going to love it.

Current environment and to that end in March we launched the new Robinhood cash card.

Rose and the cohort retention we've been seeing.