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Robinhood IPO: We are a tech company first, CFO says

Robinhood CFO Jason Warnick joins Yahoo Finance Live to discuss the company’s public debut.

Video Transcript

- Shares of Robin Hood are set to begin trading on the NASDAQ today under the ticker symbol HOOD. The latest indication showing the shares are set to open at 38.50 apiece after the company priced on the lower end of the range at $38 a share, giving the company a valuation of roughly $32 billion. Let's bring in the CFO of Robin Hood, Jason Warnick, joining us on the big day.

And Jason, it's great to talk to you today. Congratulations on the IPO. You've got a lot of retail investors who are watching this closely, especially given the big allocation that you've set aside, roughly 35% is what we're hearing right now. But give me a sense of how you think investors should be looking at this. On the one hand, you've got a platform that has seen incredible growth, more than 22 million active funds. And yet, you've got a huge regulatory overhang with investigations coming from the SEC, the payout, FINRA.

What's the risk premium you think retail investors should be looking at [INAUDIBLE]?

JASON WARNICK: Yeah. So first of all, thanks so much for-- for having me here today. It is an incredible day for us as a-- as a company, but also, as you mentioned, for our retail customers, who are incredibly excited to continue on our mission of democratizing access to our financial system. And certainly IPO access is a feature that has been limited to traditionally more wealthy individuals and institutions. And so we're really excited to be providing one of the largest retail allocations in IPO history.

You know, in terms of the way that we're thinking about the future, we-- we're looking at building products for our customers and over the long term continuing on our mission so that more and more people across the world have access to the financial system. For so long, they've been left out and really not feeling welcome to participate. And by eliminating trading commissions and being mobile-first and having no minimum account balances, we're just seeing really tremendous participation, millions and millions of customers. Certainly, our customers are more diverse than what we see at our competitors. So we're just really, really excited about the journey so far but also looking ahead to what's to come.

- Yeah. You mentioned your competitors there. We were kind of debating around, you know, the risks that Akiko kind of laid out there. How it would look if regulations were to change the business model, as you know, payment for order flow now well-- well documented, well talked about. Your competitors also similarly use it.

When you look at your competitors, though, much larger if you think about assets under custody, you guys point to about $100 billion there, the expectations for the latest quarter. $7 trillion from a firm like Schwab. How does it impact your guys' revenue moving forward if such a significant chunk comes from payment for order flow, and you guys are much smaller? What does kind of the trajectory look like if those revenues are impacted by regulation?

JASON WARNICK: Yeah. Thanks for the question. Certainly, transaction-based revenues, which includes payment for order flow for options and equities, represents a large percentage of our overall revenue today. But we're incredibly early on this journey. We launched our product only six years ago. We've seen tremendous growth to date, but we have a lot to build on behalf of customers into the future.

And as we build, we'll be seeking to give customers great value but also deliver great returns for shareholders over time. And so what you can expect from us is to focus on the customers, to listen to them and what they want offered by Robinhood's platform. We're hearing from customers that they want access to retirement accounts. They want additional features for crypto, more coins, wallets, ability to deposit and withdraw. All of these are great for customers, but we think over time we'll diversify our revenue further and be great for shareholders.

- Having said that, Jason, to press the point that Zack made, when you've got revenue coming in, more than 80% of that coming in from payment for order flow, it's great to listen to the customers, but you've also got regulators who are working on their own timeline. What's the path forward for Robinhood if, in fact, that model that you have right now that drives your revenue is disrupted? How do you pivot quickly?

JASON WARNICK: Yeah. Well, first of all, we think payment for order flow has been great for small retail investors. Millions of people left out by high commissions that are charged on a per trade basis. What Robinhood did was really innovative. We got rid of trade commissions and monetized the business based on a portion of the bid ask spread from the volume that our customers transact in.

This was incredibly innovative. You saw what's happened. The competitors have followed and matched our business model. And the result is, participation like we've never seen before.

I really think it's a moment in time for us to pause and just celebrate how far we've come in terms of democratizing access to something that had previously been left to the wealthy. And you know, in terms of the business model itself, you know, payment for order flow is a very tiny spread. We make about 2 and 1/2 cents per $100 traded, which is small. We think that there's other opportunities for us to monetize our business, whether it's doubling down on Robinhood gold, which is our $5 a month subscription service, or even doing more heavy lifting in terms of doing more in terms of verticalizing our business.

You know, we rolled out self-clearing a couple of years ago. And there's an opportunity perhaps to do more in terms of internalizing the order flow and passing even more value back to customers. So there's options for us, certainly, within the transaction-based portion of our business. But you know, I would say that diversifying our products is also something to look forward to because we're hearing, frankly, from our customers that they just want more products and features.

- Yeah. Let's talk a little bit more about, you know, that other side of the business that you might have to plead to or lean in on if payment for order flow is disrupted, cause you talked about crypto. And it had become a much larger piece of your guys' revenues in those transactions-- 17% almost compared to about 3% in Q1 last year.

But when you talk about costs around building that side of the business, I'd be curious to see your thoughts on the impact for profitability of the company as you invest more cause you guys promise-- or said you'd be getting them out as soon as possible in March. Still haven't come out yet. I assume it's going to cost a bit more to kind of get that right and avoid the risks of losing customer funds.

So what's the timeline there? And then also, as you add those costs up, what does it look like for profitability moving forward?

JASON WARNICK: Yeah. I mean, I think it's important to highlight that Robinhood is a safety-first company. I think that's probably something that's been generally misunderstood about us. You know, we've had some growing pains certainly as we've grown, you know, incredibly fast and faster than any broker dealer in US history, to my understanding.

But in terms of rolling out additional products and features and doing it safely, you know, we're going to rely on the great team that we've assembled, you know, Dan Gallagher, former SEC commissioner, leading our legal department. His team is just incredible. And they work closely with our product team and also collaborate closely with regulators to make sure that as we roll out products, we do it safely.

- Jason, you know, at the core of your business, really, is user engagement. And inherently, that comes with the volatility in the market. You've already highlighted that sort of in your filing, saying that since the GameStop trade, there are some of those accounts that haven't grown their deposits. And if that continues, then that's going to essentially disrupt your ability to be able to grow the platform.

How do you keep users engaged? I mean, Zack just talked about crypto. Obviously, that's a big driver, too. But when it's so tied to the volatility in the markets in largely the mean trade, how do you keep that engagement going?

JASON WARNICK: Yeah. First of all, I would just highlight that engagement is much broader than trading activity. We've been investing incredibly in our platform. Customers come to read the news, to read research reports, to check their watch lists. So there's a variety of reasons why customers come.

And our customers, as you pointed out, you know, they grow with us over time. One tailwind for our business is that while customers start small, they increase their deposits with us over time, about four times in the first 24 months. And older cohorts are growing from there.

So while we are certainly a member of a broader ecosystem of the broader market, and we'll see periods of higher trading and lower trading, I do have a lot of optimism that we're a tech company first. And we're incredibly lean. We just have a little over 2,000 employees. And they've accomplished and built so much in these first six years. And I think that by using technology and innovation, we'll be able to continue to disrupt the financial system in a way that's really positive for broad retail participation.

- Just lastly, I mean, when we look at the size of the crypto business taking off, and as you said, trying to nail that and get the innovation right there, if you do need to lean more heavily on it moving forward, you guys, the latest update you said that growth in terms of revenue was going to be lower for the quarter ended September due to volatility in crypto. And of course, prices have come down a bit.

But I mean, if that is going to be a bigger piece of the business, how risky does it become to rely on it if that volatility is there? And what do you expect to see as kind of the longer run average of revenues if it went from 3% to 17%, what are you expecting?

JASON WARNICK: Well, it's certainly difficult to accurately predict trading behavior in any market. And so I wouldn't want to pretend that I can give you a tight forecast of what future trading will be. What I'd tell you is that we focus on building customers the products that they want from us. And we'll let our customers decide. And they've given us lots of ideas on things to build. And as we build and deliver these new products for customers, we trust that they'll engage with that, and it will help diversify our business over time.

- Jason Warnick joining us from Robinhood, the CFO there. It's great to talk to you. Really appreciate your time.

JASON WARNICK: Thanks so much for your question.

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