filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management’s perspective on our financial condition and results of operations, including performance metrics that management uses to assess company performance. The following discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”), and should be read in conjunction with our interim unaudited condensed consolidated financial statements and notes elsewhere in this Quarterly Report and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2021 Form 10-K. It is also intended to provide you with information that will assist you in understanding our consolidated financial statements, the changes in key items in those consolidated financial statements from year to year, and the primary factors that accounted for those changes. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which might not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”
Data as of and for the three and six months ended June 30, 2021 and 2022 has been derived from our unaudited condensed consolidated financial statements appearing at the beginning of this Quarterly Report. Results for any interim period should not be construed as an inference of what our results would be for any full fiscal year or future period.
We refer to our “users” and our “customers” interchangeably throughout this Quarterly Report to refer to individuals who hold accounts on our platform. The definition of “customer” under Exchange Act Rule 15c3-3 means any person from whom or on whose behalf a broker or dealer has received or acquired or holds funds or securities for the account of that person. However, because we do not earn consideration from users (other than Robinhood Gold Subscribers and debit card users), users are not “customers” as defined in ASC 606, Revenue from Contracts with Customers. Accordingly, our users do not meet the definition of “customer” for purposes of the accounting rules. See “—Revenue Recognition” in Note 1 to our audited consolidated financial statements included in our 2021 Form 10-K.
Overview
Robinhood was founded on the belief that everyone should be welcome to participate in our financial system. We are creating a modern financial services platform for everyone, regardless of their wealth, income, or background.
Our mission is to democratize finance for all. We use mobile phone technology to provide access to the financial system in a way that is simple and convenient for our customers. We believe investing should be familiar and welcoming, with a simple design and an intuitive interface, so that customers are empowered to achieve their goals. We started with a revolutionary, bold brand and design, and the Robinhood app now makes investing approachable for millions. We pioneered commission-free stock trading with no account minimums, which the rest of the industry emulated, and we have continued to build relationships with our customers by introducing new products that further expand access to the financial system. Through these efforts, we believe we have made investing culturally relevant and understandable, and that our platform is enabling our customers to become long-term investors and take greater control of their finances.
Financial Results and Performance
With respect to the three months ended June 30, 2022, as compared to the three months ended June 30, 2021:
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we generated total net revenues of $318 million compared to $565 million, for a year-over-year decrease of 44%;
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we incurred a net loss of $295 million, which included $164 million of share-based compensation expense, compared to a net loss of $502 million, which included expense of $528 million associated with the change in fair value of convertible notes and warrants issued in February 2021;
*•*our Adjusted EBITDA was negative $80 million compared to positive $90 million;
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we had Net Cumulative Funded Accounts of 22.9 million compared to 22.5 million, for year-over-year growth of 2%;
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we had Monthly Active Users (MAU) of 14.0 million compared to 21.3 million, for a year-over-year decrease of 34%, as our customers navigated the volatile market environment;
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we had Assets Under Custody (AUC) of $64.2 billion compared to $102.0 billion, for year-over-year decrease of 37%, primarily due to decreasing asset values in the current market environment;
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we had Average Revenues Per User (ARPU) of $56 compared to $112, for a year-over-year decrease of 50%. The decreases were primarily related to lower transaction-based revenue driven by the current market environment, which had a negative impact on the number of traders and notional trading volumes in all asset classes.
For definitions of “Net Cumulative Funded Accounts”, “MAU”, “AUC” and “ARPU” please see “—Key Performance Metrics.” Adjusted EBITDA is a non-GAAP financial measure. For more information about Adjusted EBITDA, including the definition and limitations of such measure, and a reconciliation of net income (loss) to Adjusted EBITDA, please see “—Non-GAAP Financial Measures.”
Recent Developments
Pending Acquisition of Ziglu
On April 16, 2022, we entered into a definitive agreement to acquire all outstanding equity of Ziglu, a U.K.-based electronic money institution and crypto-asset firm that allows customers to buy and sell eligible cryptocurrencies, earn yield via its ‘Boost’ products, pay using a debit card, and move and spend money without fees for approximately $170 million. See Note 3 to our unaudited consolidated financial statements in this Quarterly Report for further information.
Restructurings
Through 2020 and the first half of 2021, we went through a period of hyper growth accelerated by several factors including pandemic lockdowns, low interest rates, and fiscal stimulus. From the beginning of 2020 to the end of 2021, we grew net funded accounts from 5.1 million to 22.7 million and revenue from $278 million in 2019 to $1.8 billion in 2021. To meet customer and market demands, we grew our headcount from 700 at the end of 2019 to nearly 3,900 at the end of the first quarter of 2022. This rapid headcount growth led to some duplicate roles and job functions with more layers and complexity than were optimal. As a result, we have undertaken two restructurings, detailed below, and significantly reduced our hiring plans for 2022.
April 2022 Restructuring. As part of our efforts to improve efficiency and operating costs, increase our velocity, and ensure that we are responsive to the changing needs of our customers, we announced the April 2022 Restructuring. This reduction in force involved approximately 330 employees, representing approximately 9% of our full-time employees at the time. In connection with the April 2022 Restructuring, we recognized a net reversal of share-based compensation of $24 million (refer to Note 10 to our unaudited consolidated financial statements in this Quarterly Report for further information) and restructuring charges of $17 million, which primarily consisted of employee-related wages and benefits and severance expenses.
August 2022 Restructuring. On August 2, 2022 we announced an additional reduction in force involving approximately 780 employees, representing approximately 23% of our full-time employees, the planned closure of two offices, and related matters. These actions are part of a Company reorganization into a general manager (GM) structure under which GMs will assume broad responsibility for our individual businesses.
In connection with the August 2022 Restructuring, we estimate that we will incur approximately $30 million to $40 million of cash restructuring and related charges primarily related to employee severance and benefits costs (excluding the impact of share-based compensation) and approximately $15 million to $20 million of charges related to the office closures and contract termination fees, substantially all of which we expect to incur in the third quarter of 2022.
With respect to share-based compensation, as part of this reduction in force we are allowing impacted employees' awards to continue vesting over a transitional period (generally two months during which they remain employed but are not expected to provide active service), which we will generally account for as a modification allowing a portion of the awards to vest that otherwise would have been forfeited. However, as a result of the reversal of share-based compensation expense that had been previously recognized (under the accelerated attribution method, generally) for the forfeited portions of such employees’ stock awards, we expect the August 2022 Restructuring will result in a net reduction to share-based compensation of approximately $40 million to $50 million in the third quarter of 2022. This estimate may change due to future changes in our stock price.
COVID-19 Update
In the fourth quarter of 2021, we elected to become a “Remote First” company and we fully implemented this program in April 2022. Under this approach, a large segment of our employees has no assigned location or regular in-office requirement, some teams need to live within a commutable distance to an office location for regulatory and business reasons, and a small segment of our workforce will still need to come into the office. All employees currently have access to our offices throughout the country. Starting in July 2022, we no longer require proof of vaccination or a negative test for entry into our offices. We continue to monitor developments related to the pandemic, such as the severity and transmission rate of the virus and its variants, and we may adjust our workplace strategy as necessary.
Following the March 2020 onset of the COVID-19 pandemic, we saw substantial growth in our user base, retention, engagement, and trading activity metrics, and over the course of the pandemic we saw periodic all-time highs achieved by the equity markets generally. During this period, market volatility, stay-at-home orders, and increased interest in investing and personal finance, coupled with low interest rates and a positive market environment, especially in the U.S. equity and cryptocurrency markets, helped foster an environment that encouraged an unprecedented number of first-time retail investors to become our users and begin trading on our platform. However, we have seen the growth of our user base in recent periods slow compared to the accelerated growth we experienced in 2020 and the first half of 2021. Additionally, to the extent that government stimulus measures enacted in response to the pandemic contributed to an increase in customer engagement, that benefit might not have continued as those stimulus measures have expired.
The COVID-19 pandemic has resulted, in part, in inefficiencies and delays in our business, operational challenges, additional costs related to business continuity initiatives as our workforce continues to work remotely, and increased vulnerability to cybersecurity attacks or other privacy or data security incidents. The extent of the continuing impact of COVID-19 on our business, financial condition, and results of operations will depend largely on future developments, including the duration of the pandemic, actions taken to contain COVID-19 or address its impact, our ability to adapt to the long-term distributed Remote First workforce model we have adopted, the impact on capital and financial markets, and the related impact on the financial circumstances of our customers, all of which are highly uncertain and difficult to predict.
Key Performance Metrics
In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following key performance metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions:
| Three Months Ended June 30, | ||||||||||||||
| 2021 | 2022 | |||||||||||||
| Net Cumulative Funded Accounts(1) (in millions) | 22.5 | 22.9 | ||||||||||||
| Monthly Active Users (MAU)(2) (in millions) | 21.3 | 14.0 | ||||||||||||
| Assets Under Custody (AUC)(3) (in billions) | $ | 102.0 | $ | 64.2 | ||||||||||
| Average Revenues Per User (ARPU)(4) | $ | 112 | $ | 56 |
(1)A Robinhood account is designed to provide a user with access to any and all of the products offered on our platform. We define “Net Cumulative Funded Accounts” as New Funded Accounts less Churned Accounts plus Resurrected Accounts (each as defined below). A “New Funded Account” is a Robinhood account into which the account user makes an initial deposit or
money or asset transfer, of any amount, during the relevant period. An account is considered “Churned” if it was ever a New Funded Account and its balance (measured as the fair value of assets in the account less any amount due from the user and excluding certain Company-initiated credits) drops to or below zero for at least 45 consecutive calendar days. Negative balances typically result from Fraudulent Deposit Transactions (as defined in Note 5 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information) and, less often, from margin loans. An account is considered “Resurrected” in a stated period if it was a Churned Account as of the end of the immediately preceding period and its balance (excluding certain Company-initiated credits) rises above zero. Examples of credits excluded for purposes of identifying Churned Accounts and Resurrected Accounts are price correction credits, related interest adjustments, and fee adjustments.
| Three Months Ended June 30, | ||||||||||||||
| (in millions) | 2021 | 2022 | ||||||||||||
| Beginning Net Cumulative Funded Accounts | 18.0 | 22.8 | ||||||||||||
| New funded accounts | 5.1 | 0.4 | ||||||||||||
| Resurrected accounts | 0.3 | 0.1 | ||||||||||||
| Churned accounts | (0.9) | (0.4) | ||||||||||||
| Ending Net Cumulative Funded Accounts | 22.5 | 22.9 |
(2)We define MAU as the number of Monthly Active Users during a specified calendar month. A “Monthly Active User” is a unique user who makes a debit card transaction, or who transitions between two different screens on a mobile device or loads a page in a web browser while logged into their account, at any point during the relevant month. A user need not satisfy these conditions on a recurring monthly basis or have a Funded Account to be included in MAU. Figures in the table reflect MAU for the last month of each period presented. We utilize MAU to measure how many customers interact with our products and services during a given month. MAU does not measure the frequency or duration of the interaction, but we consider it a useful indicator for engagement. Additionally, MAUs are positively correlated with, but are not indicative of, the performance of revenue and other key performance indicators.
(3)We define AUC as the sum of the fair value of all equities, options, cryptocurrency and cash held by users in their accounts, net of receivables from users, as of a stated date or period end on a trade date basis. The following table sets out the components of AUC by type of asset:
| Three Months Ended June 30, | ||||||||||||||
| (in billions) | 2021 | 2022 | ||||||||||||
| Equities | $ | 72.5 | $ | 51.2 | ||||||||||
| Options | 2.4 | 0.5 | ||||||||||||
| Cryptocurrencies | 22.7 | 8.6 | ||||||||||||
| Cash held by users | 9.9 | 8.1 | ||||||||||||
| Receivables from users | (5.5) | (4.2) | ||||||||||||
| Assets Under Custody (AUC) | $ | 102.0 | $ | 64.2 |
Net Deposits and net market gains drive the change in AUC in any given period. We define “Net Deposits” as all cash deposits and asset transfers received from customers, net of reversals, customer cash withdrawals, and other assets transferred out of our platform (assets transferred in or out include debit card transactions, ACATS transfers, and custodial crypto wallet transfers) for a stated period. The following table describes the changes within Assets Under Custody:
| Three Months Ended June 30, | ||||||||||||||
| (in billions) | 2021 | 2022 | ||||||||||||
| Beginning AUC | $ | 80.9 | $ | 93.1 | ||||||||||
| Net Deposits | 9.9 | 5.2 | ||||||||||||
| Net market gains (losses) | 11.2 | (34.1) | ||||||||||||
| Ending AUC | $ | 102.0 | $ | 64.2 |
(4)We define ARPU as total revenue for a given period divided by the average of Net Cumulative Funded Accounts on the last day of that period and the last day of the immediately preceding period. Figures presented above represent annualized ARPU for each three-month period presented.
Non-GAAP Financial Measures
Adjusted EBITDA
We collect and analyze operating and financial data to evaluate the health of our business, allocate our resources and assess our performance. In addition to total net revenues, net income (loss), and other results under GAAP, we utilize non-GAAP calculations of adjusted earnings before interest, taxes, depreciation, and amortization (“Adjusted EBITDA”). Adjusted EBITDA is defined as net income (loss), excluding (i) interest expenses related to credit facilities, (ii) provision for (benefit from) income taxes, (iii) depreciation and amortization, (iv) share-based compensation, (v) change in fair value of convertible notes and warrant liability, (vi) significant legal and tax settlements and reserves, and (vii) other significant gains, losses, and expenses (such as impairments, restructuring charges, and business acquisition- or disposition-related expenses) that we believe are not indicative of our ongoing results. This non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for or superior to financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies.
The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature, or because the amount and timing of these items are unpredictable, are not driven by core results of operations, and render comparisons with prior periods and competitors less meaningful. We believe Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations, as well as providing a useful measure for period-to-period comparisons of our business performance. Moreover, Adjusted EBITDA is a key measurement used by our management internally to make operating decisions, including those related to operating expenses, evaluate performance, and perform strategic planning and annual budgeting. The following table presents a reconciliation of net income (loss), which is the most directly comparable GAAP measure, to Adjusted EBITDA:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||||
| Net loss | $ | (502) | $ | (295) | $ | (1,947) | $ | (687) | ||||||||||||||||||
| Add: | ||||||||||||||||||||||||||
| Interest expenses related to credit facilities | 5 | 6 | 8 | 12 | ||||||||||||||||||||||
| Provision for income taxes | 38 | 1 | 50 | 2 | ||||||||||||||||||||||
| Depreciation and amortization | 5 | 17 | 9 | 29 | ||||||||||||||||||||||
| EBITDA (non-GAAP) | (454) | (271) | (1,880) | (644) | ||||||||||||||||||||||
| Share-based compensation(1) | 1 | 164 | 10 | 384 | ||||||||||||||||||||||
| Change in fair value of convertible notes and warrant liability | 528 | — | 2,020 | — | ||||||||||||||||||||||
| Restructuring charges(2) | — | 17 | — | 17 | ||||||||||||||||||||||
| Significant legal and tax settlements and reserves | 15 | 10 | 55 | 20 | ||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 90 | $ | (80) | $ | 205 | $ | (223) |
(1)Share-based compensation included a net reduction of $24 million as a result of the reversal of previously recognized expense for stock awards that were forfeited in connection with the April 2022 Restructuring.
(2)Restructuring charges related to the April 2022 Restructuring and primarily consisted of employee-related wages and benefits and severance expenses.
Results of Operations
The following table summarizes our unaudited condensed consolidated statements of operations data:
| (in millions) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Transaction-based revenues | $ | 451 | $ | 202 | $ | 871 | $ | 420 | ||||||||||||||||||
| Net interest revenues | 68 | 74 | 130 | 129 | ||||||||||||||||||||||
| Other revenues | 46 | 42 | 86 | 68 | ||||||||||||||||||||||
| Total net revenues | 565 | 318 | 1,087 | 617 | ||||||||||||||||||||||
| Operating expenses:(1) | ||||||||||||||||||||||||||
| Brokerage and transaction | 38 | 30 | 79 | 61 | ||||||||||||||||||||||
| Technology and development | 156 | 244 | 273 | 510 | ||||||||||||||||||||||
| Operations | 101 | 86 | 168 | 177 | ||||||||||||||||||||||
| Marketing | 94 | 24 | 196 | 58 | ||||||||||||||||||||||
| General and administrative | 112 | 226 | 249 | 494 | ||||||||||||||||||||||
| Total operating expenses | 501 | 610 | 965 | 1,300 | ||||||||||||||||||||||
| Change in fair value of convertible notes and warrant liability | 528 | — | 2,020 | — | ||||||||||||||||||||||
| Other income (expense), net | — | 2 | (1) | 2 | ||||||||||||||||||||||
| Loss before income taxes | (464) | (294) | (1,897) | (685) | ||||||||||||||||||||||
| Provision for income taxes | 38 | 1 | 50 | 2 | ||||||||||||||||||||||
| Net loss | $ | (502) | $ | (295) | $ | (1,947) | $ | (687) |
(1)Includes share-based compensation expense as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||||
| Brokerage and transaction | $ | — | $ | 1 | $ | — | $ | 2 | ||||||||||||||||||
| Technology and development | 1 | 59 | 2 | 141 | ||||||||||||||||||||||
| Operations | — | 1 | — | 5 | ||||||||||||||||||||||
| Marketing | — | (2) | — | 3 | ||||||||||||||||||||||
| General and administrative | — | 105 | 8 | 233 | ||||||||||||||||||||||
| Total share-based compensation expense | $ | 1 | $ | 164 | $ | 10 | $ | 384 |
Comparison of the Three and Six Months Ended June 30, 2021 and 2022
Revenues
Transaction-Based Revenues
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions, except for percentages) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Transaction-based revenues | |||||||||||||||||||||||||||||||||||
| Options | $ | 165 | $ | 113 | (32) | % | $ | 363 | $ | 240 | (34) | % | |||||||||||||||||||||||
| Cryptocurrencies | 233 | 58 | (75) | % | 321 | 112 | (65) | % | |||||||||||||||||||||||||||
| Equities | 52 | 29 | (44) | % | 185 | 65 | (65) | % | |||||||||||||||||||||||||||
| Other | 1 | 2 | 100 | % | 2 | 3 | 50 | % | |||||||||||||||||||||||||||
| Total transaction-based revenues | $ | 451 | $ | 202 | (55) | % | $ | 871 | $ | 420 | (52) | % | |||||||||||||||||||||||
| Transaction-based revenues as a % of total net revenues: | |||||||||||||||||||||||||||||||||||
| Options | 29% | 36% | 33% | 39% | |||||||||||||||||||||||||||||||
| Cryptocurrencies | 41% | 18% | 30% | 18% | |||||||||||||||||||||||||||||||
| Equities | 9% | 9% | 17% | 11% | |||||||||||||||||||||||||||||||
| Other | —% | 1% | —% | —% | |||||||||||||||||||||||||||||||
| Total transaction-based revenues | 79% | 64% | 80% | 68% |
Transaction-based revenues decreased by $249 million and $451 million for the three and six months ended June 30, 2022, compared to the same periods in the prior year. The decreases were primarily driven by the market environment which had a negative impact on the number of traders and notional trading volumes in all asset classes. We define "notional trading volume" for any specified asset class as the aggregate dollar value (purchase price or sale price as applicable) of trades executed in that asset class over a specified period of time. We define “daily average revenue trades” for any asset class as the total number of revenue generating trades for such asset class executed during a given period divided by the number of trading days for such asset class in that period.
While cryptocurrencies revenue benefited from a higher rebate rate from crypto market makers (initial increase was effective in late December 2021 and a further increase was effective in May 2022), this benefit was offset by lower trading volumes. Our daily average revenue trades for cryptocurrencies decreased for the three and six months ended June 30, 2022, from 2.6 million to 0.4 million and from 2.0 million to 0.4 million, compared to the same periods in the prior year. The number of users placing cryptocurrency trades decreased 75% and 67% while the average notional volume traded per trader was down 60% and 46%, for the three and six months ended June 30, 2022, compared to the same periods in the prior year.
Our daily average revenue trades for equities decreased for the three and six months ended June 30, 2022, from 2.8 million to 1.6 million and from 4.0 million to 1.7 million, compared to the same periods in the prior year. The number of users placing equity trades decreased 50%, for both of the three and six months ended June 30, 2022, compared to the same periods in the prior year, while the average notional volume traded per trader increased 21% and decreased 7%.
Our daily average revenue trades for options decreased for the three and six months ended June 30, 2022, from 0.8 million to 0.5 million and from 0.9 million to 0.6 million, compared to the same periods in the prior year. The number of users placing option trades decreased 41% and 44% while the average number of contracts traded per trader went up 30% and 31%, for the three and six months ended June 30, 2022, compared to the same periods in the prior year.
Net Interest Revenues
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions, except for percentages) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Net interest revenues: | |||||||||||||||||||||||||||||||||||
| Margin interest | $ | 31 | $ | 39 | 26 | % | $ | 59 | $ | 74 | 25 | % | |||||||||||||||||||||||
| Securities lending | 40 | 23 | (43) | % | 75 | 47 | (37) | % | |||||||||||||||||||||||||||
| Interest on investments and corporate cash | 1 | 10 | 900 | % | 1 | 11 | NM | ||||||||||||||||||||||||||||
| Interest on segregated cash and securities | 1 | 6 | 500 | % | 2 | 7 | 250 | % | |||||||||||||||||||||||||||
| Other interest revenue | — | 2 | NM | 1 | 2 | 100 | % | ||||||||||||||||||||||||||||
| Interest expenses related to credit facilities | (5) | (6) | 20 | % | (8) | (12) | 50 | % | |||||||||||||||||||||||||||
| Total net interest revenues | $ | 68 | $ | 74 | 9 | % | $ | 130 | $ | 129 | (1) | % | |||||||||||||||||||||||
| Net interest revenues as a % of total net revenues: | |||||||||||||||||||||||||||||||||||
| Margin interest | 5% | 12% | 5% | 12% | |||||||||||||||||||||||||||||||
| Securities lending | 7% | 7% | 7% | 8% | |||||||||||||||||||||||||||||||
| Interest on corporate cash and investments | —% | 3% | —% | 2% | |||||||||||||||||||||||||||||||
| Interest on segregated cash and securities | —% | 2% | 1% | 1% | |||||||||||||||||||||||||||||||
| Other interest revenue | —% | 1% | —% | —% | |||||||||||||||||||||||||||||||
| Interest expenses related to credit facilities | (1)% | (2)% | (1)% | (2)% | |||||||||||||||||||||||||||||||
| Total net interest revenues | 11% | 23% | 12% | 21% |
Net interest revenues increased by $6 million and decreased by $1 million for the three and six months ended June 30, 2022, compared to the same periods in the prior year, primarily driven by higher interest revenues earned from margin borrowings, investments and corporate cash, and segregated cash and securities, partially offset by lower interest revenues earned through securities lending activities.
Increased net interest revenues were driven by the higher interest rate environment due to the rise in the federal funds rate, which is an input to our floating margin rate calculation and impacts the interest rate we receive on investable assets. Interest revenues earned on margin borrowings increased by $8 million and $15 million for the three and six months ended June 30, 2022, compared to the same periods in the prior year. The first $1,000 in margin borrowed by each user is not charged interest. Net interest revenues earned from investments and corporate cash increased by $9 million and $10 million for both the three and six months ended June 30, 2022 and net interest revenues earned from segregated cash and securities also increased by $5 million for both the three and six months ended June 30, 2022. These increases were partially offset by the $17 million and $28 million decrease in net interest revenues earned from securities lending transactions for the three and six months ended June 30, 2022 due to lower demand in hard-to-borrow securities.
Other Revenues
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions, except for percentages) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Other revenues | $ | 46 | $ | 42 | (9) | % | $ | 86 | $ | 68 | (21) | % | |||||||||||||||||||||||
| Other revenues as a % of total net revenues | 8% | 13% | 8% | 11% |
Other revenues decreased by $4 million and $18 million, for the three and six months ended June 30, 2022, compared to the same periods in the prior year, which was substantially due to decreases relating to fees charged to users for facilitating the transfer of their account to another broker-dealer.
Operating Expenses
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions, except for percentages) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Brokerage and transaction | $ | 38 | $ | 30 | (21) | % | $ | 79 | $ | 61 | (23) | % | |||||||||||||||||||||||
| Technology and development | 156 | 244 | 56 | % | 273 | 510 | 87 | % | |||||||||||||||||||||||||||
| Operations | 101 | 86 | (15) | % | 168 | 177 | 5 | % | |||||||||||||||||||||||||||
| Marketing | 94 | 24 | (74) | % | 196 | 58 | (70) | % | |||||||||||||||||||||||||||
| General and administrative | 112 | 226 | 102 | % | 249 | 494 | 98 | % | |||||||||||||||||||||||||||
| Total operating expenses | $ | 501 | $ | 610 | $ | 965 | $ | 1,300 | 35 | % | |||||||||||||||||||||||||
| Percent of net revenues: | |||||||||||||||||||||||||||||||||||
| Brokerage and transaction | 7 | % | 9 | % | 7 | % | 10 | % | |||||||||||||||||||||||||||
| Technology and development | 28 | % | 77 | % | 25 | % | 83 | % | |||||||||||||||||||||||||||
| Operations | 18 | % | 27 | % | 15 | % | 29 | % | |||||||||||||||||||||||||||
| Marketing | 17 | % | 8 | % | 18 | % | 9 | % | |||||||||||||||||||||||||||
| General and administrative | 20 | % | 71 | % | 23 | % | 80 | % | |||||||||||||||||||||||||||
| Total operating expenses | 90 | % | 192 | % | 88 | % | 211 | % |
Brokerage and Transaction
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Broker-dealer transaction expenses | $ | 13 | $ | 5 | (62)% | $ | 29 | $ | 14 | (52)% | |||||||||||||||||||||||||
| Market data expenses | 7 | 7 | —% | 15 | 14 | (7)% | |||||||||||||||||||||||||||||
| Employee compensation, benefits, and overhead, excluding share-based compensation | 4 | 5 | 25% | 7 | 10 | 43% | |||||||||||||||||||||||||||||
| Cash management transaction expenses | 3 | 2 | (33)% | 5 | 4 | (20)% | |||||||||||||||||||||||||||||
| Share-based compensation | — | 1 | NM | — | 2 | NM | |||||||||||||||||||||||||||||
| Other | 11 | 10 | (9)% | 23 | 17 | (26)% | |||||||||||||||||||||||||||||
| Total | $ | 38 | $ | 30 | (21)% | $ | 79 | $ | 61 | (23)% |
Brokerage and transaction costs decreased by $8 million and $18 million, for the three and six months ended June 30, 2022, compared to the same periods in the prior year, primarily due to decreases in broker-dealer transaction expenses of $8 million and $15 million, driven by lower trading volume and a reduction of certain of these expenses effective in June 2021, as well as decreases in bank charges, included in other brokerage and transaction costs, of $5 million and $10 million as a result of more favorable pricing from our banking counterparties. These decreases were partially offset by increases in other employee compensation, benefits, and overhead of $1 million and $3 million as our brokerage teams have grown to support the growth of our user base and platform, and increases in share-based compensation expense of $1 million and $2 million as vesting conditions were met upon our IPO in July 2021.
Technology and Development
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Employee compensation, benefits, and overhead, excluding share-based compensation | $ | 70 | $ | 105 | 50 | % | $ | 121 | $ | 207 | 71 | % | |||||||||||||||||||||||
| Share-based compensation | — | 59 | NM | 1 | 141 | NM | |||||||||||||||||||||||||||||
| Cloud infrastructure services | 71 | $ | 48 | (32) | % | 125 | 104 | (17) | % | ||||||||||||||||||||||||||
| Software and tools | 13 | 27 | 108 | % | 23 | 48 | 109 | % | |||||||||||||||||||||||||||
| Other | 2 | 5 | 150 | % | 3 | 10 | 233 | % | |||||||||||||||||||||||||||
| Total | $ | 156 | $ | 244 | 56 | % | $ | 273 | $ | 510 | 87 | % |
Technology and development costs increased by $88 million and $237 million for the three and six months ended June 30, 2022, compared to the same periods in the prior year, primarily due to increases in share-based compensation expense of $59 million and $140 million as vesting conditions were met upon our IPO in July 2021 and increases in other employee compensation, benefits, and overhead of $35 million and $86 million as our engineering, data science, and design teams have grown to support the growth of our user base and develop new products. For the three and six months ended June 30, 2022, share-based compensation expense included a net reduction of $16 million and other employee compensation expense included approximately $6 million of separation related expenses due to the April 2022 Restructuring. Additionally, we experienced increases of $14 million and $25 million in costs for
other software services utilized in delivering our products. These increases were offset by $23 million and $21 million decreases in cloud infrastructure services primarily due to cost optimization efforts focusing on improvements in utilization of cloud infrastructure.
Operations
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Employee compensation, benefits, and overhead, excluding share-based compensation | $ | 30 | $ | 42 | 40% | $ | 52 | $ | 85 | 63% | |||||||||||||||||||||||||
| Customer experience | 25 | 27 | 8% | 41 | 57 | 39% | |||||||||||||||||||||||||||||
| Provision for credit losses and fraud | 40 | 12 | (70)% | 58 | 23 | (60)% | |||||||||||||||||||||||||||||
| Share-based compensation | — | 1 | NM | — | 5 | NM | |||||||||||||||||||||||||||||
| Other | 6 | 4 | (33)% | 17 | 7 | (59)% | |||||||||||||||||||||||||||||
| Total | $ | 101 | $ | 86 | (15)% | $ | 168 | $ | 177 | 5% |
Operations costs decreased by $15 million and increased by $9 million for the three and six months ended June 30, 2022, compared to the same periods in the prior year, primarily due to decreases in provision for credit losses and fraud of $28 million and $35 million primarily related to Fraudulent Deposit Transactions as we continue to strengthen our process to identify high risk users and transactions on our platform and prevent Fraudulent Deposit Transactions. Additionally, we experienced decreases of $2 million and $10 million in other operations expense primarily related to costs associated with new customer onboarding and account verification as the growth of our user base in recent periods had been slow compared to the accelerated growth we experienced in the first half of 2021. For example, our new funded accounts decreased by 91% from 5.1 million for the quarter ended June 30, 2021 to 0.4 million for the quarter ended June 30, 2022. These decreases were offset by increases in other employee compensation, benefits, and overhead for customer support and other operations employees of $12 million and $33 million as we increased the number of our dedicated customer support professionals. Other employee compensation expense for the three and six months ended June 30, 2022 included approximately $3 million of separation related expenses due to the April 2022 Restructuring. Finally, we experienced an increase in costs related to third-party customer support vendors of $2 million and $16 million as we continued to make investments to support our users, and an increase in share-based compensation expense of $1 million and $5 million as vesting conditions were met upon our IPO in July 2021.
Marketing
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Employee compensation, benefits, and overhead, excluding share-based compensation | $ | 9 | $ | 8 | (11) | % | $ | 16 | $ | 19 | 19 | % | |||||||||||||||||||||||
| Digital marketing | 17 | 5 | (71) | % | 33 | 11 | (67) | % | |||||||||||||||||||||||||||
| Share-based compensation | — | (2) | NM | — | 3 | NM | |||||||||||||||||||||||||||||
| Marketing incentives | 53 | 3 | (94) | % | 107 | 7 | (93) | % | |||||||||||||||||||||||||||
| Creative services | 7 | 4 | (43) | % | 10 | 7 | (30) | % | |||||||||||||||||||||||||||
| Brand marketing | 7 | 1 | (86) | % | 18 | 2 | (89) | % | |||||||||||||||||||||||||||
| Other | 1 | 5 | 400 | % | 12 | 9 | (25) | % | |||||||||||||||||||||||||||
| Total | $ | 94 | $ | 24 | (74) | % | $ | 196 | $ | 58 | (70) | % |
Included in marketing incentives are costs associated with the Robinhood Referral Program, which are comprised of the fair value of awards earned in the current period, changes in estimate of unclaimed awards earned in the current and prior periods, fair value adjustments of shares held to support the program, and reversals related to awards that expire unclaimed. The fair value adjustments of shares held to support the program were immaterial for the periods presented. The following table summarizes the Robinhood Referral Program liability activity for the periods indicated:
| June 30, | |||||||||||
| (in millions) | 2021 | 2022 | |||||||||
| Beginning balance, January 1 | $ | 1 | $ | — | |||||||
| Fair value of current period awards | 114 | 7 | |||||||||
| Changes in estimate of unclaimed awards for current and prior periods | (1) | — | |||||||||
| Reversals related to unclaimed, expired awards | (8) | (1) | |||||||||
| Claimed awards | (106) | (6) | |||||||||
| Ending balance, June 30 | $ | — | $ | — |
Marketing costs decreased by $70 million and $138 million for the three and six months ended June 30, 2022, compared to the same periods in the prior year, primarily due to decreases in marketing incentives of $50 million and $100 million, substantially all of which was due to lower costs associated with the Robinhood Referral Program, which was in line with the slow growth in our user base in recent periods.
Additionally, digital marketing and brand marketing decreased by $12 million and $22 million, and $6 million and $16 million. During the first half of 2021, we invested significantly in marketing costs to raise brand awareness. As we established our brand, we switched to a more disciplined strategy in our marketing spending.
General and Administrative
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Share-based compensation | $ | — | $ | 105 | NM | $ | 8 | $ | 233 | NM | |||||||||||||||||||||||||
| Employee compensation, benefits, and overhead, excluding share-based compensation | 44 | 64 | 45 | % | 78 | 128 | 64 | % | |||||||||||||||||||||||||||
| Legal expenses | 23 | 17 | (26) | % | 53 | 44 | (17) | % | |||||||||||||||||||||||||||
| Other professional fees | 13 | 17 | 31 | % | 25 | 33 | 32 | % | |||||||||||||||||||||||||||
| Settlements and penalties | 21 | 11 | (48) | % | 63 | 23 | (63) | % | |||||||||||||||||||||||||||
| Business insurance | 3 | 10 | 233 | % | 5 | 21 | 320 | % | |||||||||||||||||||||||||||
| Other | 8 | 2 | (75) | % | 17 | 12 | (29) | % | |||||||||||||||||||||||||||
| Total | $ | 112 | $ | 226 | 102 | % | $ | 249 | $ | 494 | 98 | % |
General and administrative costs increased by $114 million and $245 million for the three and six months ended June 30, 2022, compared to the same periods in the prior year, primarily due to increases in share-based compensation recognized of $105 million and $225 million as vesting conditions were met upon our IPO in July 2021, including $82 million related to executive compensation arrangements (see Note 10 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information). The share-based compensation expense for the three and six months ended June 30, 2022 included a net reduction of $6 million due to the April 2022 Restructuring. Additionally, to support the growth of our business, other employee compensation, benefits, and overhead also increased by $20 million and $50 million as we continued to increase our general and administrative personnel. Other employee compensation expense for the three and six months ended June 30, 2022 included approximately $7 million of separation related expenses due to the April 2022 Restructuring. Business insurance increased by $7 million and $16 million, which was primarily attributable to additional costs of being a public company. These increases were partially offset by decreases of $10 million and $40 million in costs associated with legal settlements. Refer to Note 14 of our unaudited condensed consolidated financial statements in this Quarterly Report for further information.
Change in Fair Value of Convertible Notes and Warrant Liability
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Change in fair value of convertible notes and warrant liability | $ | 528 | $ | — | NM | $ | 2,020 | $ | — | NM |
Change in fair value of convertible notes and warrant liability was due to the mark-to-market adjustment of the convertible notes and warrants we issued in February 2021. Upon completion of our IPO, the aggregate outstanding principal and accrued interest of the convertible notes converted into Class A common stock and the warrants became equity-classified, which resulted in the warrant liability being reclassified to additional paid-in capital. There will be no additional mark-to-market adjustments related to the convertible notes or warrant liability. See Note 6 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information.
Provision for (Benefit from) Income Taxes
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2022 | % Change | 2021 | 2022 | % Change | |||||||||||||||||||||||||||||
| Provision for income taxes | $ | 38 | 1 | (97) | % | $ | 50 | $ | 2 | (96) | % |
Provision for income taxes decreased by $37 million and $48 million, for the three and six months ended June 30, 2022, compared to the same periods in the prior year, primarily due to the increase in total business operating expenses, and offset by the change in valuation allowance on our remaining U.S. federal and state deferred tax assets and by our current state taxes payable.
Liquidity and Capital Resources
Source and Uses of Funds
We expect to use our available cash, cash equivalents, and investments, including potential future borrowings under our revolving lines of credit and potential issuance of new debt or equity, to support and invest in our core business, including investing in new ways to serve our customers, potentially seeking strategic acquisitions to leverage existing capabilities and further build our business, and for general capital needs (including capital requirements imposed by regulators and SROs and cash deposit and collateral requirements under the rules of the Depository Trust Company (“DTC”), NSCC, and the Options Clearing Corporation (“OCC”)). Based on our current level of operations, we believe our available cash, available lines of credit, and cash provided by operations will be adequate to meet our liquidity needs for the next 12 months.
Cash, Cash Equivalents, and Investments
Our cash, cash equivalents, and investments were $6.3 billion and $6.0 billion as of December 31, 2021 and June 30, 2022. Our investment portfolio comprises highly liquid available-for-sale securities, including asset-backed securities, commercial paper, corporate bonds, and government bonds.
Revolving Lines of Credit
As of June 30, 2022, we had a total of $2.91 billion in committed revolving lines of credit. See Note 9 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information.
Lease and Purchase Commitments
The following table summarizes our short- and long-term material cash requirements as of June 30, 2022:
| Payments Due by Period | |||||||||||||||||||||||||||||
| (in millions) | Total | Remainder of 2022 | 2023-2024 | 2025-2026 | Thereafter | ||||||||||||||||||||||||
| Operating lease commitments | $ | 217 | $ | 16 | $ | 64 | $ | 52 | $ | 85 | |||||||||||||||||||
| Non-cancelable purchase commitments(1) | 1,203 | 124 | 572 | 506 | 1 | ||||||||||||||||||||||||
| Total | $ | 1,420 | $ | 140 | $ | 636 | $ | 558 | $ | 86 |
(1)Non-cancelable purchase commitments are determined based on the non-cancelable quantities or termination amounts to which we are contractually obligated. They are primarily commitments for cloud infrastructure and data services, business insurance and tenant improvements.
In addition to lease and purchase commitments, we have two committed financing agreements: one with a contractual term of 30 days and a daily minimum commitment of $25 million and another with a contractual term of 21 days with a daily minimum commitment of $35 million. See "Securities Borrowing and Lending" in Note 1 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information.
Cash Flows
The following table summarizes our cash flow activities:
| Six Months Ended June 30, | ||||||||||||||
| (in millions) | 2021 | 2022 | ||||||||||||
| Cash provided by (used in): | ||||||||||||||
| Operating activities | $ | 399 | $ | (826) | ||||||||||
| Investing activities | (28) | (60) | ||||||||||||
| Financing activities | 3,559 | 1 |
Cash provided by and used in operating activities consisted of net loss adjusted for certain non-cash items including change in fair value of convertible notes and warrant liability, share-based compensation expense, depreciation and amortization, and provision for credit losses, as well as the effect of changes in operating assets and liabilities. Net operating assets and liabilities at any specific point in time are subject to many variables, including variability in user activity, the timing of cash receipts and payments, and vendor payment terms.
For the six months ended June 30, 2022, cash used in operating activities was $826 million, primarily due to a net loss of $687 million, adjusted for the add back of non-cash expenses of $432 million, consisting primarily of share-based compensation expense of $384 million, depreciation and amortization of $29 million, and provision for credit losses of $19 million. Additionally, there was a cash outflow due to changes in operating assets and liabilities of $571 million, primarily due to a decrease of $2.3 billion in securities loaned and a decrease in payables to users of $680 million driven by an decrease in customer cash held, offset by a decrease in receivables from users, net, of $2.5 billion, driven by an decrease in margin borrowing from users.
For the six months ended June 30, 2021, cash provided by operating activities was $399 million, partially due to a net loss of $1.9 billion, adjusted for the add back of non-cash expenses of $2.1 billion consisting primarily of changes in fair value of convertible notes and warrant liability of $2.0 billion, provision for credit losses of $37 million, share-based compensation expense of $10 million, and depreciation and amortization of $9 million. Additionally, there was a cash inflow due to changes in operating assets and liabilities of $270 million, primarily due to an increase in payables to users of $1.9 billion driven by an increase in customer cash held in line with the growth in our user base and an increase in securities loaned of $722 million, offset by an increase in receivables from users, net of $2.1 billion, driven by an increase in margin receivables due to the growth in our user base and a decrease in our margin interest rate.
For the six months ended June 30, 2022, cash used in investing activities was $60 million, which primarily consisted of $27 million used for the purchase of investments, $19 million in purchases of property, software, and equipment, and $14 million in capitalization of internally developed software. For the six months ended June 30, 2021, cash used in investing activities was $28 million, which primarily consisted of $22 million in purchases of property, software and equipment and $6 million in capitalization of internally developed software.
For the six months ended June 30, 2021, cash provided by financing activities was $3.6 billion, which primarily consisted of the proceeds from issuance of convertible notes and warrants of $3.6 billion.
Regulatory Capital Requirements
Our broker-dealer subsidiaries (RHF and RHS) are subject to the SEC Uniform Net Capital Rule, administered by the SEC and FINRA, which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirements may fluctuate on a daily basis. RHS and RHF compute net capital under the alternative method as permitted by the SEC Uniform Net Capital Rule.
The tables below summarize the net capital, capital requirements and excess net capital of RHS and RHF as of periods presented:
| June 30, 2022 | ||||||||||||||||||||
| (in millions) | Net Capital | Required Net Capital | Net Capital in Excess of Required Net Capital | |||||||||||||||||
| RHS | $ | 2,922 | $ | 85 | $ | 2,837 | ||||||||||||||
| RHF | $ | 146 | $ | 0.25 | $ | 145 |
As of June 30, 2022, our broker-dealer subsidiaries were in compliance with their respective regulatory capital requirements.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and the disclosure of contingent assets and liabilities on our unaudited condensed consolidated financial statements. We base our estimates on historical experience and other assumptions we believe to be reasonable under the circumstances, which together form the basis for making judgments about the carrying values of assets and liabilities. We regularly assess these estimates; however, actual amounts could differ from those estimates.
There have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2022, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our 2021 Form 10-K.
Recent Accounting Pronouncements
See Item 1 of Part I, “Unaudited Financial Statements — Note 2 — Recent Accounting Pronouncements.”
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