Robinhood Markets, Inc. Q3 FY2022 Earnings Call

Hello, everyone, and good day. Thank you for standing by. Welcome to the Robinhood Third Quarter 2022 Earnings Conference Call. Please be advised that today's conference call is being recorded. I would like to now hand the conference call over to Chris Koegel, our Vice President of Investor Relations. Go ahead.

Thank you, Haley. Welcome, everyone, and thank you for joining us for Robinhood's Third Quarter 2022 Earnings Call. With us today are CEO and Founder, Vlad Tenev; and CFO, Jason Warrick. 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 today the related slide presentation on our Investor Relations website, our Form 10-Q filed August 30, 2022 and in other SEC filings. Today's discussion will also include non-GAAP financial measures. Reconciliation to the GAAP results we consider most comparable can be found in the earnings presentation on our Investor Relations website at investors.robinhood.com. With that, let me turn it over to Vlad.

Thanks for the intro, Chris, and thanks to everyone for joining. Six months ago, we set an ambitious goal for us to return to adjusted EBITDA profitability by the end of the year. I'm proud to say that we achieved this milestone a quarter ahead of schedule, and I'm incredibly proud of our team. In Q3, we had adjusted EBITDA of $47 million. In spite of a tough macro backdrop, we were able to simultaneously decrease costs, increase revenues, and demonstrate diversification of our business model. We feel our cost structure is in a good place. So we're now fully focused on delivering great products and services for our customers and growing our business. I'll tell you more about our plans here. But first, let's take a look at how our customers are doing. Amidst the challenging macro environment, customers continue to trust us with billions of dollars of net deposits each quarter as they invest through the cycle for the long term. Excluding those deposits, our customers' portfolios, on average, slightly outperformed the NASDAQ and S&P in Q3. These factors drove customer assets under custody up by about 1% to $65 billion despite equity market values declining again this quarter. This environment highlights the importance of serving our customers' financial needs through the cycle and of diversifying our business beyond trading. So let me tell you more about some of the products we're working on across brokerage, crypto, and money. Starting with brokerage. Today's high interest rates can be challenging for customers with mortgages, student loans, and car payments. At the same time, they present an opportunity for our customers to earn one of the highest yields available on their uninvested cash at levels not seen in over a decade. In September, we introduced a fantastic interest rate for our gold members, 3% on cash via our sweep program with no balance limits and no time commitments that CDs have and FDIC insurance of up to $1.5 million, six times what you get from a typical bank account. We're really excited about this product because it helps customers earn on their cash even when they're not investing. And so far, we like what we see with gold cash sweep balances up by over $1.5 billion since we raised rates. Following today's Fed rate hike, we'll raise the interest rate for gold customers even higher. This is just another one of the investments we're planning for the coming years to make Robinhood Gold the best deal in financial services. We also want to provide great value for customers investing for the long term at Robinhood, so we're excited to launch Robinhood Retirement just in time for the New Year and the heart of IRA season. For our customers looking to open a new retirement account or roll over an existing IRA or taking their first steps in long-term investing, we're excited to share this product with you, and we know you'll love it. Finally, I want to share some of the great work our brokerage team has been doing for our advanced customers. Recall, our advanced customers are those who trade more actively and use more sophisticated products like options. We're one of the very few platforms that offer options trading with no contract fees, which is incredibly valuable for customers who place a lot of option trades. In case you don't know about this, most companies charge something like a $0.65 per contract fee for each option trade. In addition to payment for order flow, at about the same levels we generate. While that may not sound like a lot of money, not paying those fees has saved our customers over $600 million in the past year. We love saving money for our customers like this, and we think customers of a lot of other firms are paying way too much to trade options. At the start of the year, our advanced customers were, on average, less satisfied with our service than our other customers because we listened to their feedback and doubled down on building products designed for them, starting with hyper-extended trading hours and stock lending. We kept hearing they wanted more trading data, tools, and analytics in the app. So in August, we rolled out advanced charts. We built these natively to give advanced customers quick, simple, customizable, and in-depth analysis that they want for trading without cluttering the user interface. Additionally, while churn is at the lowest level in years, a leading driver of advanced customer churn was not being able to trade options in cash accounts. So we are pleased to roll out this feature in July. In the past six months, we've seen a flip where advanced customers now have higher satisfaction with the Robinhood experience than our other customers. Of course, there's always more to do, and we're continuing to invest to make Robinhood a fantastic platform for everyone. Now let's move to crypto. We want everyone to have safe, easy, and low-cost access to the power of the decentralized web, which we believe is the future operating system of financial services. After building a waitlist of more than one million people since May, we're excited that we rolled out the beta of the Robinhood Wallet, our self-custody Web 3 wallet, to the first 10,000 customers last month. While it's early, we're hearing from customers that they love the simple and intuitive mobile experience and the no gas fees. They also tell us that they'd like us to add more blockchains to increase the breadth of coins available for them to swap and trade. We're encouraged to see this enthusiastic early response and we'll keep enhancing the wallet. We're planning to roll the Robinhood wallet out internationally, so we're excited that this will be our first product available to people all over the world. We also continue to roll out more coins over the past quarter in a deliberate and considered manner. One of these was our first stablecoin, USDC from Circle. As part of this rollout, we're creating a new free educational program called Learn and Earn that gives our customers the ability to earn crypto simply by learning about it. We're excited to roll this out and give our customers even more reasons to engage with our awesome educational content. Now let's talk about Robinhood Money, which includes our cash card as well as tools to move money in and out of Robinhood. While it's still early for our cash card, which launched in March, we have over 500,000 customers today. We're focused on continuing to improve the experience so that more customers use the Cash Card as the top card in their wallet. Looking ahead, we're excited to be introducing the new card to our six million legacy cash management customers soon, so they can also enjoy the enhanced benefits. Another Robinhood staple that customers have loved for years is our seamless instant deposits. And this is something that we continue to invest in, including giving gold customers the ability to make instant deposits of up to $50,000. We realized that some customers want to be able to withdraw their money instantly as well rather than wait up to five business days for traditional ACH transfers. Last month, we started rolling out instant withdrawals, providing customers with a new option to withdraw cash instantly to participating banks at a competitive 1.5% price point, while always maintaining the ability to use free ACH transfers. We think customers will really like the experience and pricing of our new expedited service as well as having expanded choice of money movement options. We're excited to roll this out more broadly, and we're going to keep you posted on our progress here. Stepping back a bit, we've seen and managed through a lot of change in the past year, change in the economy, geopolitics, financial markets and change in Robinhood as well. We've gone from an environment of easy money to one focused on constraint in the outside world and within Robinhood itself. While it's been hard, I think this transformation has been incredibly positive for the company. Despite significantly trimming our headcount and expenses, we've seen our fastest product velocity and iteration speed, and our service quality for customers is the best I've seen. Our focus remains on building exceptional products that give ordinary people control over their financial lives and giving open access to tools once reserved for the rich. I'm lucky to be working with such a talented team. Again, I wanted to congratulate them for driving us to adjusted EBITDA profitability one quarter ahead of schedule. With that, let me turn it over to Jason.

Thanks, Vlad. It's good to speak with everyone today. In the third quarter, we stayed focused on serving customers, growing our business, and driving long-term shareholder value. In spite of the macro environment, our team continued to deliver on our 2022 roadmap, which helped maintain steady net funded accounts and drive strong net deposits. As Vlad mentioned, we generated positive adjusted EBITDA in Q3 by continuing to increase revenues and lower costs. I'm pleased with the progress we've made through the first three quarters. Let's look at the third quarter, starting with business results. Net funded accounts were 22.9 million, up about 60,000 from Q2. Our monthly active users were 12.2 million, down 1.8 million from Q2. Despite the difficult environment, we're encouraged by our continued industry-leading engagement and low churn through another volatile quarter. We've also seen net funded accounts continue to tick up in October and MAUs increased to 12.5 million. Turning to assets under custody, they were $65 billion, up about 1% from last quarter. AUC grew as strong net deposits more than offset the impact of lower market valuations. In October, we saw AUC move back up to about $70 billion. Looking more closely at net deposits, they were $2.7 billion in Q3, which translates to a 17% annualized growth rate. We've continued to see net deposit strength in October with customers contributing over $1.5 billion in the month. This is encouraging for long-term asset growth as the combination of strong net deposits in rising markets can drive meaningful asset growth over time. Now let's look at Q3 financial results. Adjusted EBITDA was positive $47 million. This improved by $127 million from Q2 and over $190 million from Q1, and our adjusted EBITDA margin increased more than 60 points over the past two quarters. These improvements were driven by higher revenues and lower costs that drove operating leverage. While delivering positive adjusted EBITDA this quarter was an important milestone, I'd emphasize that we're early in our journey to drive higher profits over time. Now let's review our Q3 revenues. Total net revenues were $361 million, a 14% increase from Q2. This was primarily driven by higher net interest and transaction revenues, partially offset by seasonally lower other revenues. Q3 ARPU was $63, up from $56 last quarter. Now moving to transaction-based revenues, they were $208 million, up 3% sequentially. Notional volumes increased in equities and options but decreased in crypto. For October, we saw trading levels across the three categories roughly in line with September. Looking at net interest revenues, which is a growing part of our revenue mix, it reached a new high of $128 million in Q3, up over 70% from Q2 and driving over 35% of total revenue as the Fed continued to increase rates. I'd like to highlight a couple of things. First, interest-earning assets were up to over $17 billion as of the end of last week, driven by growth in our cash sweep balances, partially offset by strong customer net buying into the market. As of the end of last week, our cash sweep balances were up to $3.7 billion, including $2.4 billion in gold. One of the things that's really exciting is the majority of the increases in gold suite balances are from new deposits with the rest largely coming from upgrades to gold. Second, our fully paid securities lending program, which just launched in May, is off to a good start. It generated about $4 million of revenue in Q3, already reaching 15% of revenues from our margin securities lending. Looking ahead to Q4, we're encouraged by what looks likely to be another quarter of net interest revenue growth. As we consider what we see today for the forward Fed curve, customer balances and deposit rates, as well as a decrease in our margin book and securities lending so far in the quarter, we anticipate Q4 net interest revenues will be up by roughly $25 million from Q3. We could certainly come in higher or lower than that level, so we'll have to see how Q4 plays out. Also, I'd like to note that we've added customer cash sweep balances to our monthly metrics for Q3 and going forward. This should help give additional insight into how our net interest revenues are trending as we move through each quarter. Moving on to other revenues, they were $25 million, down $17 million from Q2, primarily due to the seasonal decrease in proxy-related revenues. The largest driver of these revenues is gold subscribers, which finished Q3 at $1.1 million. We're really excited to be investing in our gold program with our high-yield offer of 3% on customer sweeps driving strong net deposits. We like this early signal, and we're looking forward to finding more ways to add value to the gold program. Now let's look at expenses, starting with OpEx prior to share-based compensation. They were $425 million in Q3, which includes $90 million of restructuring charges. If we look at OpEx prior to SBC and restructuring, they were $335 million, which was an improvement of over $90 million versus Q2. Progress was primarily driven by reductions in workforce and third-party labor and improvements in several other cost categories, including technology infrastructure. Given our progress, we expect Q4 OpEx prior to SBC to be in the range of $350 million to $370 million, which includes planned increases in marketing. I'd note that this Q4 level is roughly $100 million below where we started the year, reflecting the progress we've made getting to a leaner operating position. Turning to share-based compensation, it was $110 million, which includes a reversal of $53 million from our August workforce reduction. For Q4, we expect SBC will be in the range of $150 million to $190 million. As for dilution, I'd like to share a couple of updates here. First, we're adding new disclosure to our quarterly earnings presentation for our diluted share count, which is up by a little more than 4% through the first three quarters of this year. For year-end, we expect diluted shares to be in the same zone as Q3. Second, looking to next year, we're planning for our diluted share count to grow by 4% or less, assuming no change in our stock price from today's level. Now to capital management. I want to share an update on our Ziglu acquisition. While the parties are working hard at it, there's some regulatory uncertainty as to whether the deal will close. What we know at this point is that the deal won't close this quarter. I'd emphasize that we like several pathways to international expansion, including launching our Robinhood Wallet globally early next year. So we remain excited about the opportunity to serve customers around the world over time. In the current environment, it also remains important for us to have a strong balance sheet and cash position. That's why we like our position with no debt, over $6 billion of corporate cash and improvements in our cost structure. This combination provides strength, flexibility, and financial runway to continue serving our customers, execute on our product roadmap, and evaluate potential acquisitions. As I mentioned last quarter, we have roughly $2.5 billion of excess cash above our risk scenarios. In closing, I'm really pleased with the progress in Q3 and 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, we'll start by answering about a dozen questions from shareholders ranked by the number of votes. We'll pass over any questions that were already answered on the call, and 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 one of our top questions from say technologies. I'm going to pair together two questions. The first is from [indiscernible] who asks, will retirement accounts be offered this year? And also another from [indiscernible] asks, are there any plans to add Roth IRA accounts to Robinhood?

I'll field that one. The short answer is yes to both. So we're excited to roll out retirement just in time for the tax season. The team has been working hard at it. I think you'll really like what the product is going to look like and the value proposition for customers. We're polishing it to ensure that it looks great, but we feel good about rolling it out just in time for tax season.

Great. And will that include Roth IRAs as well, Vlad?

Yes, it will. So we'll have additional context as we get closer, but we think people are really going to like it.

Terrific. All right. The next question also on product. Are there any – Brian II asks, are there any plans to add bonds to available investments?

Thanks, Brian. While we don't have near-term plans to offer bonds, we do have a lot of solutions for customers that want exposure to fixed income products. So of course, we already offer bond ETFs. And as I mentioned in the call, we have a very competitive offering for gold customers where we pay them interest on their uninvested cash. So that rate has been 3% since the last Fed rate hike and will actually increase even further after today's Fed rate hike. In terms of bonds and adding more instruments to Robinhood, we haven't been hearing a lot of customers requesting those specifically. That said, we understand that with retirement, and as we continue to add more tools for long-term investors who are diversifying, we might begin to see more feedback about that. So we're obviously always listening to customers, excited to add the products that they care about most. We're going to continue to keep an eye on that.

All right. One more product question from John who asks, are there any plans to launch a credit card at Robinhood?

For credit cards, we don't have any near-term plans here. But today, we offer a debit card with rewards and merchant incentives, and also two-day early pay if you direct deposit your paycheck. This was introduced with the launch of the Robinhood Cash Card earlier this year. So we recognize customers may want access to credit, particularly in this environment. We're going to be looking at that, but no immediate near-term plans for credit cards.

Okay. Thanks, Vlad. The next question is a capital question, so probably for you, Jason. So Erfan asks, are you planning to give dividends in the future?

We don't think giving dividends is the best use of our capital right now. We're focused on using our cash to drive growth through product development and international expansion. We also like the flexibility to grow via acquisitions. But over time, we'll continue to evaluate whether returning cash to shareholders is the right move. But again, right now, it's – we're focused on growth as a higher priority.

All right. Thanks, Jason. Another question from Brian, who asks, when will we see a return of IPO access?

Yes, I'll field this one. So in terms of IPOs that we offer on the Robinhood platform, we have some selection criteria. The fact of the matter is this has been a really slow year for IPOs that would be big enough in terms of market cap to feature to our customer base. Understanding that this is cyclical, as soon as the IPO market turns around and we see more IPOs that meet those criteria, we're going to be hard at work to bring those to our customers so that they can participate.

Great. To ask a couple of questions in a two-parter. Let's take those separately. So – and [indiscernible] he asks, when will Robinhood go global?

Yes, I'll take that one. Thank you for the question, [indiscernible]. The short answer is next year. So we plan to roll out the Robinhood Wallet internationally. This will be available internationally early next year. This will actually be our first product available to customers all over the world. As Jason mentioned, there is some regulatory uncertainty that we continue to work on with our Ziglu acquisition.

All right. And [indiscernible] also asks, when do you think Robinhood might regain its IPO valuation?

Yes. Thanks, Atanu. So as we think about shareholder value, we recognize that the stock performance, as well as the overall market, has been hard for shareholders this year. We're hard at work adding value to our business. Let me tell you how we're thinking about this. First, we're very focused on our cost structure. As you've seen, we've made a lot of progress here in the last couple of quarters, and it's going to be important for us to manage this as we grow from here. Second, we've got a lot of improvements that we've made to existing products. We've introduced new products, and we have tremendous progress here as well. As I mentioned earlier in the call, the product velocity, the improvements in service quality and product quality for our existing products have been some of the best that I've seen since starting Robinhood. I expect that to continue. We're going to be focused and constrained, and we're probably not going to be able to get to as many things as if the market was a little bit better. But I think the things that we do get to are going to be tremendous, and we're going to continue to have good velocity. We think that if we keep doing both of these things, improving the product quality of our existing products and rolling out really impactful new products, we're going to deliver a lot of shareholder value over time.

All right. Maybe the next one is for Jason. So John P. asks, can you talk about how rising interest rates affect the business and where you see the business benefitting from [indiscernible]?

Sure. I can take this one. Our two biggest areas that we generate revenues are from trading activity on the one hand and interest revenues. With interest rates increasing, we've seen trading come down recently. But we have about $17 billion in assets that generate interest. So when rates increase, those assets generate more interest revenue for us. It's not just us that benefits from rising interest rates. Customers also benefit. As Vlad was talking about today, we've increased the rate that gold members can earn on their cash. It's currently 3%, and we're really excited to increase that further now that the Fed increased rates further today.

All right. The next one is from Heckman P who asks, when will 24-hour trading be offered at Robinhood?

Yes, I'll field that one. This is something that I'm very excited about. Robinhood has really been about modernizing stock trading and bringing it into the 21st century from the time we got started. We were the first to introduce the 0 commission model; we made it seamless to use on mobile. One of the things that are particularly archaic right now is the fact that stock trading in U.S. equities, which is such a large and vibrant market, is structured around East Coast working hours. Our goal is to modernize that and deliver 24/7 round-the-clock stock trading, making investing accessible whenever people want. At Robinhood today, and this is as of earlier this year, people can trade for over half of the day from 7:00 a.m. to 8:00 p.m. Eastern. We're now beta testing even longer trading hours, which include 4 a.m. to 7 a.m. Eastern, extending it by three hours in the early mornings. Once that's launched, customers will be able to trade for 16 hours a day. You're continuing to see us make progress, and the goal is to get to 24/7 trading as soon as possible. So plenty of exciting work is happening there.

Awesome. Thanks, Vlad. Okay. Next question, Marcus G. asks, the media has been dunking on Robinhood through various docs, podcasts, Reddit, etc. How do you plan on countering the negative opinions out there and bringing these people back into the fold?

Yes. Thank you for that, Marcus. If you look back, a lot of the negative sentiment goes back to the meme stock rally around January of 2021, nearly two years ago. At that point, we had to make a very difficult decision to take away the buy button on some stocks, and we didn't earn too many fans through that, to put it mildly. It's been hard work to regain trust. We've made a lot of progress. I think it starts from improving the quality of the service, listening to customers, showing that we are a reputable, reliable, and solid platform for them. We've been measuring this, and we've seen strides in customer Net Promoter Score. Every time we improve the service offering and support, particularly when we added 24/7 live phone support and follow that up with chat, these measures pick up. So we made a lot of progress. Trust takes a while to build and rebuild, but we're focused on the long term. We believe that the work we are doing to make our service better is starting to pay significant dividends for us. I know it's a long answer, but we believe that as we continue to do the right thing and build exceptional products, the media and social media recognition will follow.

All right. Thank you, Vlad. One more question from Sajan P who asks, Robinhood has always spoken about being a safety-first company. With wallets set to launch in 2023 and the addition of new coins, can you talk about how Robinhood will keep its investors safe from similar phases of licensed like Celsius?

Sure, Sajan, and thank you. The goal of Robinhood crypto, as we've stated, is to be the safest, most trusted, and lowest cost on-ramp to the decentralized web. This is a great example of building the trust we were just talking about. We're very selective about the coins that we list on the platform. We have a rigorous coin listing framework, which we believe is best in class. We're also not engaged in crypto lending. We custody coins. With the Robinhood wallet that we just introduced to the 10,000 beta customers, we give customers the option to self-custody as well. We're also in regular contact with the SEC about the crypto offering. You'll see us continue to take a deliberate approach, and we hope that customers understand and appreciate that we're moving carefully. Sometimes, that means moving a little bit slower than other crypto companies, but again, we want to be extremely deliberate to help protect customers and their money.

Okay. Let's do one last question. So Kala asks, where do you see Robinhood in five years?

Yes. This is a great question. The mission of Robinhood is to democratize finance for all. Building exceptional products gives ordinary people control over their financial lives and providing open access to tools that were previously available only to the wealthy. If you look out five years, we'd like Robinhood to serve our customers' entire portfolios and wallets. We want you to find value in direct depositing your paycheck into Robinhood and using Robinhood for all your spending, saving, and investing, including long-term retirement and passive options. We want Robinhood to be the highest value and best user experience tool for managing all your money. We also want Robinhood to be the default choice for your first financial account, focusing on every generation of customers. We want to be top of mind for opening their first investing account, depositing their paycheck, and their first spending account. We're going to be a global company. We see crypto as a big part of that, and we're excited to continue to invest there. We believe there's a significant opportunity, and serving those customers overseas is a big part of our mission. A lot of work will be done to innovate in crypto and expand internationally.

All right. I think that's good for today's questions from say. Thank you, everyone, for your questions. We appreciate all the thoughtful engagement from our shareholders and customers. Now it's time to open up the line for analyst questions. I'll now ask Kelly to please open up the line.

[Operator Instructions]. Our first question comes from Josh Beck from KBCM.

Thank you for the question. I guess I really wanted to kind of just dig into the expense side of the equation. Obviously, you've made real strides and hit that EBITDA target ahead of schedule. As we look forward into next year, not really expecting guidance, but just qualitatively, how should we think about the baseline of Q4 as we kind of move forward?

Yes. Thanks, Josh. So it's Jason. I'll take that one. We provided guidance in my remarks that in Q4, we'll take our OpEx excluding share-based compensation to the range of $350 million to $370 million. I think we don't have guidance yet. We're busy planning for next year. Qualitatively, I can tell you that we like where we're at in terms of our cost structure. We think it's much leaner and scrappier than how we started 2022. You should expect that we'll continue to manage our cost base carefully as we grow. We'll make investments that we think are prudent for growth, but we'll do it with a lean and scrappy mindset.

Okay. Very helpful. And then for a follow-up, maybe just a little bit of a product question. Certainly, the money product and the cash card updates were encouraging, I believe, 500,000 customers already since the launch earlier in Q1. How do you think about a ceiling for where that could go? It's encouraging to see that out of the gate, but I don't know if the survey work that you've done or pace of adoption can quantify how that could progress moving forward?

Yes. I'll take that one. As I mentioned earlier, we're excited about serving our customers' needs more broadly than investing. We see the opportunity to evolve the cash card to be people's primary spending account. We'd like our customers to direct deposit their paychecks with us, and we're building things to make that process easier, like two-day early pay and the ability to auto-invest your paycheck. It's starting to see good adoption among our existing customers to the point where we have over six million customers on legacy cash management, and we feel good about starting to move those customers over. Earning the right to be someone's paycheck direct deposit institution of choice is going to take time. We know this is a new product for us, but we're excited about the team and strategy ahead for 2023. I think you'll like what you see from the cash part.

Our next question comes from the line of Devin Ryan from JMP Securities.

So first question, nice to see cash building again on the balance sheet. I think with all the hard work you've done on expenses. Jason, I know mentioned interest in M&A just given the pretty harsh reset we've seen valuations. I'd love to get an update on how you're thinking about the M&A market today, where opportunities may be emerging? I know a number of companies are much further away from getting to profitability? And then just remind us on some of the priorities, whether that be deals that scale customers or add new adjacent capabilities?

Sure. I'll start, and we'll see if Vlad has anything to add. We love our strong balance sheet position, $6 billion in cash. I think we're in a really good position to look at growth, not just through investments in new products organically but also through M&A transactions. It's a variety of types of companies that we might look at, whether acquisitions that are focused on rounding out our portfolio of licenses or technology. We have the vision of democratizing finance for all, and that is much broader than trading. I think there are a number of ways that we could extend the product offerings that Robinhood offers customers through M&A. We've got a solid team, and we're paying close attention to the opportunities out there, but we're going to be diligent in the way we deploy our capital.

I would just say we feel really good about our position. We've been very patient. That patience has been positive in this environment as we're seeing more opportunities out there of, in some cases, high-quality companies trading at fractions of what they were earlier this year.

Yes. Okay, great. Just a quick follow-up here, another kind of product-centric, but you talked about some of the enhancements to the gold offering and good to hear about some of the momentum there. The higher interest rates seem like you can add tangible value to that offering. I guess, is the cash that you're seeing coming into that from just existing customers seeing the value? Or is that actually driving new customer growth there? And then bigger picture around gold, what are some of the other areas that you're maybe seeing opportunities where you could enhance the gold value add?

I'll take the first part for sure. We're seeing a nice uptick in deposits in the gold sweep accounts. We're finding that the majority is from new deposits with the rest largely coming from upgrades to gold. It’s exciting for us; it's encouraging to see the overall balance of interest-earning assets increasing, even with some offsets from strong net buying into the market by our customers. In terms of gold enhancements, I'll comment, but glad you could weigh in. I think there are many opportunities across the products we offer today to make gold really appealing. Essentially, we'd like to have gold be the best deal in financial services. Whether you look at the Cash Card or crypto and other areas of our business, there's an opportunity for us to invest here. Gold was a product that we added a number of features to a few years ago, seeing a lot of interest from customers at that time. But frankly, over the past couple of years, we’ve had other priorities as we dealt with the rapid growth our business was experiencing. We're changing that. We increased the sweep balance rate for gold members to 3% and plan to take it even higher, and we're eager to find more ways to add to that value proposition.

The only thing I would add is that gold started as a product intended for active customers primarily with value propositions like margin trading, higher instant deposits, and Level 2 market data, including more advanced data. The competitive interest rate on uninvested cash is our first foray into making the product useful for people that aren't active investors. As we continue to diversify our product suite and enter into other products, we're asking our teams to keep in mind the value we can add so that gold customers get the best deal in financial services.

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

So my question is on the stock-based compensation. I guess it's mainly for Jason, but you significantly outperformed in -- I guess, in 3Q, you lowered your target by, I think, almost 20% by -- if you look at the midpoint of stock-based compensation by $135 million. So I'm just trying to understand if the reversal was bigger than expected? Has there been any change in strategy or culture in regards to the stock-based compensation? What sort of drove this whole performance, I guess?

Yes. A few things go into share-based compensation. First, is the effect of awards that have been historically granted. I made comments last quarter that about half our share-based compensation last quarter was from the pre-IPO awards granted to founders that are significantly out of the money. You mentioned the workforce reduction, which had an impact, along with a lower rate of hiring. Historically, we've given share-based awards to new employees. Those are four-year awards, which can be expensive as you're ramping up your workforce. Slowing that way down has had a positive effect. Given what's happened in the stock market, we are also looking to ensure we retain our top talent. Additional awards were necessary in the back part of the year, explaining why it’s going up on a net basis.

Got it. That's very helpful. And then, Vlad, I guess I'm trying to tie a lot of things together here. Revenue looks like let's just assume trading is at a sort of trough level or a level that shouldn't change too much. You get NII come up, so you got more revenue coming; you brought your expenses down. Now you're positive adjusted EBITDA. The question is, what's the new adjusted EBITDA? You passed the breakeven point a quarter early, but what's the target going forward? Do you try to build cash? Or do you get back into the investment mode a bit more to grow expenses? How are you viewing your adjusted EBITDA targets going forward?

Yes, maybe Jason can take this one, Rich, and I can add some color if needed.

Yes, sounds good. Rich, we like our OpEx position now. As I mentioned earlier to Josh's question, we'll have a mindset of being lean and scrappy as we grow from here. That's not to say we're not going to make thoughtful and deliberate investments to drive growth. We're in the middle of our 2023 planning. I just can't talk about expense guidance for next year. But there is a lot of opportunity ahead of us. We'll invest appropriately from this point forward.

Yes. I would say the balance we aim to strike at the beginning of the year when we set the adjusted EBITDA positive goal was to get our cost structure in a good place, demonstrating we can be a sustainable business in tough economic times. We know we can do quite well when economic times and monetary policy are a bit looser. We're proud of the progress there, and we're focusing on investing to drive customer growth, revenues, and shareholder value moving forward.

Our next question comes from the line of Steven Chubak from Wolfe Research.

So, Jason, you're going to have to bear with me. This is going to be a mouthful, but I really do want to spend some time unpacking the NII guidance that you offered up. Recognizing the revenue upside from higher rates really shined through this quarter. It just makes the NII guidance a little tough to reconcile. I’d love to understand the component pieces, recognizing earning assets are actually trending higher in Q4, even with the more competitive sweep offering; only a small proportion, less than 25% of your earning assets have any sort of deposit beta attached. Additionally, the average Fed funds are going to be up north of 125 bps in Q4 just based on the hikes that have transpired so far. I'm just trying to reconcile all those component pieces with the $25 million sequential increase, which just feels quite light?

Yes, I appreciate the question. What I can tell you is that you start with roughly $16 billion, $17 billion of interest-earning assets. Included in there is our margin book, and we've seen that come down a bit in October to below $4 billion. We're factoring in that variability as we think about guidance for the rest of this quarter. Additionally, in October, securities lending has been pretty soft. We're cautious regarding that as we think about how the rest of the quarter will play out. Also, while we'll enjoy increased rates on a large portion of our interest-earning assets, we intend to pass some value back to gold customers in the sweep product. Those are the moving parts, so we think $25 million incremental is really pleasing.

That's great. And just for my follow-up on the sec lending piece. You saw a nice uptick in tech lending revenues. I was hoping you could provide an update on how you're thinking about sizing that future revenue opportunity and confidence in your ability to deepen penetration with your existing client base?

Yes. We continue to be optimistic about the fully paid securities offering. We had $4 million of revenue in Q3 from fully paid securities lending. This is after just a handful of months of launching that product. We're already at 15% of the revenue we're generating from margin sec lending, which has been around for several years. It's still early. It's a difficult market out there and it's evolving. We have optimism that this could be a meaningful portion of our securities lending revenue over time.

Our next question comes from Michael Cyprys from Morgan Stanley.

Just a question on the adjusted EBITDA margin in the quarter, 13%. Just curious how you think about that going forward from here. Is this low-teens margin profile sustainable? What do you think is the right margin profile for Robinhood longer term?

Yes. It's Jason. I'll take that one. Looking over the long term, I don't see any structural reason why we wouldn't have margins in line with what you see at others in the industry. It's going to vary depending on the period and as we roll new products out, how that affects our business mix. We’ll build for the future with new products and over the long term, we think we will drive pretty attractive margins for shareholders.

And then can you talk a little about customer acquisition costs, how your approach has been evolving? Maybe you can quantify how much it's been costing and how you're thinking about allocating your budget?

Yes. We're increasing our spending in marketing in Q4. You might have seen us with some television ads that have started; we signaled that last quarter when we began doing that. Historically, the vast majority of our customers have come to us through referrals and word of mouth, driving really attractive tax returns. Digital paid ads have also been an area that we focused on for marketing. We've found it pays to lean into paid advertising during periods of high interest in investing. In periods like we're in right now of lower interest in investing, we haven’t found it to make economic sense to lean into spending more for growth. We’ve been cautious, and it's something we will watch carefully. What we’re doing near-term is really focusing on some brand-building advertising. If you haven't seen our advertisements, we really like them.

Our next question comes from Craig Siegenthaler from Bank of America.

My first one is on the Web 3 digital wallet launch. Sorry if I missed it, but when are you going to open up to more than the initial 10,000 on the waitlist? Also, I believe you characterized the waitlist as 1 million plus. Is it significantly larger than 1 million?

I think the number is actually public. If you go to robinhood3.com, you should be able to get the real-time waitlist figure. As I mentioned, we've rolled it out to 10,000. We're watching the feedback closely. We'll roll out more in the coming months. We're getting really good feedback from customers. They love the no gas fees, the user interface and the experience, and they're giving us useful feedback on multi-chain and other things. We're not in a hurry. We could roll it out faster if we want, but we want to ensure that the product improves and is really good when it's generally available. We expect that to happen early next year.

Just as my follow-up, I'm curious about what capabilities you're going to offer for NFTs, both in terms of viewing NFTs and connecting to NFT marketplaces? Do you see this as a potential big differentiator for your crypto offer?

We've been hearing from some of our crypto enthusiasts that they want at least to view their NFTs in the wallet. Trading NFTs in the app is complicated with the recent Apple guidance, so we're keeping an eye on that. It's highly likely we'll add the ability to view NFTs and for people to custody them.

Finally, I would like to thank everyone for joining today. We've reached the end of our question-and-answer session.

Before we end the call, I just want to finish by saying that we've made the decision to take our gold sweep interest rate to 3.75%. We think that's tremendous for customers, and we're excited to deliver that to them.

Yes. I think that's a great value in this environment. That's a hard rate to beat.

Perfect. Well, I would like to thank you, everyone, for your questions. I would like to turn it back now to Vlad for closing remarks.

Thank you, everyone, for joining. As always, we've appreciated the questions. Congrats to the team again for a strong quarter and delivering adjusted EBITDA profitability a quarter ahead of schedule, and we're getting back to work. There's a lot more to do to deliver on democratizing finance for all. So thank you.

Thank you all for participating in today's conference. This does conclude our program. You may now disconnect from the call.