Robinhood Markets, Inc. — Q3 2022 Form 10-Q
Unaudited results for the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless noted. Dollar amounts are in millions except per-share and operating metrics.
Business context and reporting period
Robinhood operates an online financial-services platform for equities, options, and cryptocurrency trading, alongside cash and card products. Results are sensitive to customer activity, trading volumes, market conditions, interest rates, and regulation. Management attributed subdued activity to the weaker market environment and described cost reductions and a reorganization into business general-manager teams.
Financial and operating results
| Metric | Q3 2021 | Q3 2022 | Change |
|---|---|---|---|
| Total net revenue | $365 | $361 | Down 1% |
| Transaction-based revenue | $267 | $208 | Down 22% |
| Net interest revenue | $63 | $128 | Up 103% |
| Operating expenses | $1,708 | $535 | Down 69% |
| Net loss | $1,317 | $175 | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $(84) | $47 | Improved by $131 |
| Basic and diluted loss per share | $(2.06) | $(0.20) |
Lower transaction revenue reflected reduced trading activity across asset classes. Options revenue was $124 (down 24%), cryptocurrency revenue $51 (flat), and equities revenue $31 (down 38%). Higher interest rates lifted margin, corporate-cash, and segregated-cash interest income; lower securities-lending revenue partly offset the increase. Other revenue declined 29% to $25, partly due to fewer Robinhood Gold subscribers (1.1 million versus 1.4 million).
The much smaller year-over-year net loss was substantially influenced by Q3 share-based compensation of $110, versus $1,244 in Q3 2021, when IPO-related compensation was unusually high. Q3 2022 results also included $90 of restructuring-related expenses: $47 of impairments, $9 of accelerated depreciation, and $34 of cash employee-related charges. The August restructuring generated a $53 net reversal of previously recognized share-based compensation expense. Adjusted EBITDA is a non-GAAP measure and excludes specified items, including share-based compensation and restructuring charges.
For the nine months ended September 30, revenue was $978 (versus $1,452), transaction-based revenue was $628 (versus $1,138), net interest revenue was $257 (versus $193), operating expenses were $1,835 (versus $2,673), and net loss was $862 (versus $3,264). Adjusted EBITDA was $(176), versus $120 for the 2021 period.
Cash flow, balance sheet, and liquidity
- Cash and cash equivalents were $6.187 billion at September 30, 2022; cash, segregated cash, and restricted cash totaled $9.164 billion. The latter measure was down $1.106 billion over the first nine months.
- Nine-month operating cash used was $1.033 billion, compared with $610 million in 2021; investing cash used was $71 million, compared with $180 million. Financing cash flow was zero, versus $5.210 billion provided in 2021, which included IPO and convertible-note proceeds.
- Total assets were $24.601 billion and total liabilities $17.647 billion; stockholders’ equity was $6.954 billion. The balance sheet includes a $9.361 billion asset and matching liability for cryptocurrency held in custody, recognized following adoption of SEC Staff Accounting Bulletin 121 (SAB 121); these amounts do not represent corporate-owned crypto or equivalent free liquidity.
- There were no borrowings outstanding under the revolving credit facilities at September 30. The company reported $2.91 billion of committed revolving credit availability and said it was in compliance with facility covenants and broker-dealer capital requirements. Management believed available cash, credit lines, and operating cash would meet liquidity needs for the next 12 months.
- Material cash commitments included $1.101 billion of non-cancelable purchase commitments and $209 million of undiscounted operating lease payments. These totaled $1.310 billion.
Business trends and material changes
- Monthly Active Users fell 35% year over year to 12.2 million; Assets Under Custody fell 32% to $64.6 billion. Net Cumulative Funded Accounts increased 2% to 22.9 million, while annualized Average Revenue Per User declined 3% to $63.
- Q3 net deposits were $2.7 billion, compared with $2.2 billion a year earlier; net market losses were $2.3 billion, compared with $8.8 billion. Lower asset values contributed to the decline in AUC.
- Transaction-based revenue represented 57% of Q3 net revenue, versus 74% a year earlier. Net interest revenue rose to 35% of revenue, versus 17%.
- In April and August, Robinhood announced workforce reductions of approximately 330 employees (9%) and 780 employees (23%), respectively. It also planned office closures and continued to reduce its cost base. Headcount was approximately 2,400 at September 30, down from approximately 3,900 at the end of Q1.
Outlook, risks, contingencies, and unusual items
The filing provides no specific revenue, earnings, or operating-metric guidance. Management’s stated 12-month liquidity expectation is based on its current level of operations and is subject to the risks described in the filing.
- Key business risks include weak or volatile markets, declining trading activity, dependence on transaction-based revenue and market makers, and possible changes to or restrictions on payment for order flow (PFOF). PFOF and best execution remain subject to regulatory scrutiny.
- Regulatory and litigation matters include investigations involving trading restrictions, order reporting, options practices, account takeovers, cryptocurrency compliance, and other matters. The company reported $82 million of accrued contingencies at September 30; it could not reasonably estimate potential losses for many early-stage matters.
- The pending Ziglu acquisition has amended consideration of approximately $73 million, subject to customary adjustments. Robinhood had advanced $12 million for working and regulatory capital. Closing remains subject to regulatory approval; management said it would occur, if at all, no sooner than Q1 2023.
- Cryptocurrency-specific risks include volatile prices and volumes, evolving regulation and accounting, custody and cybersecurity risks, and uncertainty around the treatment of customer assets in a platform bankruptcy. Robinhood stated its view that safeguarded crypto should remain users’ property in bankruptcy, while noting no court had finally determined the issue.
- The company cited operational, technology, cybersecurity, customer-support, credit, clearing, and regulatory-capital risks. Its multi-class share structure also concentrates voting control with the founders.
Investor verification priorities
- Assess whether trading activity, MAU, AUC, and transaction revenue are stabilizing, and how much higher interest income can offset weaker trading-related revenue.
- Separate recurring cost improvements from IPO-related comparison effects, restructuring reversals, impairment charges, and other items excluded from Adjusted EBITDA.
- Track operating cash use, customer-balance movements, available credit, required regulatory and clearinghouse capital, and the company’s 12-month liquidity assumptions.
- Review developments in PFOF, best-execution rulemaking, regulatory investigations, and material litigation, including any changes to accruals or estimated exposures.
- Confirm Ziglu’s regulatory approval, closing timing, final purchase consideration, and treatment of the $12 million in advances.
- Understand the SAB 121 safeguarding asset and liability, customer-asset custody protections, potential dilution from equity awards and warrants, and the founders’ voting control.