Robinhood Markets, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; unaudited. Comparisons are primarily with Q3 2020. The company completed its IPO in August 2021.
Financial and operating results
| Metric | Q3 2021 | Comparable period / change |
|---|---|---|
| Net revenue | $364.9 million | Up 35% year over year; down 35% from Q2 2021 |
| Transaction-based revenue | $266.8 million | Up 32% year over year; 73% of net revenue |
| Net interest revenue | $63.4 million | Up 26% year over year |
| Other revenue | $34.7 million | Up 101% year over year |
| Operating expenses | $1.71 billion | Up from $280.5 million in Q3 2020 |
| Net loss | $1.32 billion | Compared with $10.7 million in Q3 2020; basic and diluted loss per share was $2.06 |
| Adjusted EBITDA | $(84.0) million | Compared with $59.1 million in Q3 2020; non-GAAP |
| Operating cash flow | Not presented for the quarter | $(609.1) million for the nine months ended September 30, 2021, versus $1.53 billion provided in the prior-year period |
| Cash and cash equivalents | $6.17 billion at September 30 | Up from $1.40 billion at December 31, 2020; excludes segregated and restricted cash |
| Borrowings | No outstanding borrowings under disclosed revolving credit facilities at September 30 | $625 million unsecured and $2.18 billion secured facilities were available, subject to terms and borrowing limits |
Q3 revenue mix reflected sharply different trading trends: options revenue was $163.8 million, cryptocurrency revenue $50.7 million, and equities revenue $50.5 million. Cryptocurrency revenue rose substantially year over year but declined sequentially from Q2 record levels. The filing reports 22.4 million Net Cumulative Funded Accounts, 18.9 million monthly active users, and $95.4 billion of assets under custody. Average revenue per user fell 36% year over year to $65.
Material changes and unusual items
- Q3 operating expenses included $1.24 billion of share-based compensation, largely recognized as IPO-related vesting conditions were met. This was a major driver of the reported loss.
- For the nine-month period, Robinhood recorded $2.05 billion of expense from changes in the fair value of convertible notes and warrants. These instruments converted or were reclassified to equity in connection with the IPO; the related charge was largely non-cash.
- The IPO generated approximately $2.05 billion of net proceeds to the company. The IPO also converted preferred stock and convertible notes into common shares and substantially increased shares outstanding.
- Say Technologies was acquired in August for approximately $132.8 million; its results were not material to the reported period. Preliminary purchase accounting included $93.1 million of goodwill.
- Q3 net deposits were $2.27 billion, while net market losses were $8.91 billion, reducing assets under custody from $102.0 billion at Q2-end to $95.4 billion at Q3-end.
Liquidity, outlook, and risks
Management stated that cash, available borrowings, and operating cash flows were expected to meet current liquidity needs for the next 12 months. Cash from operations was negative for the first nine months of 2021, and the company cited growth, hiring, marketing, product development, capital requirements, and market volatility as factors that could affect future capital needs. Regulatory capital requirements and clearinghouse collateral demands can fluctuate; the filing notes that such demands contributed to trading restrictions in early 2021.
No numerical revenue or earnings guidance is provided. Management expected continued investment in product, technology, customer support, and regulatory and compliance capabilities, and anticipated further headcount growth in 2021. It cautioned that customer and revenue growth may slow or decline as pandemic-related conditions and elevated trading activity change. Net funded accounts were slightly lower sequentially, and new funded accounts slowed in Q3.
Principal risks include dependence on transaction-based revenue and payment for order flow (PFOF), which faced heightened regulatory scrutiny; cryptocurrency price and trading-volume volatility; reliance on a small group of market makers; operational outages, cybersecurity and customer-data risks; customer-support capacity; and extensive litigation and regulatory investigations. Four market makers accounted for 59% of total revenue in the first nine months of 2021. The company reported $33.1 million accrued for legal and regulatory contingencies at September 30; the potential losses for certain pending matters were not clearly estimable. A Massachusetts proceeding sought, among other remedies, possible revocation of the broker-dealer’s state license.
Important facts for investors to verify
- Whether trading activity, especially cryptocurrency trading, and funded-account growth recover or continue to weaken; monitor revenue and assets under custody sequentially.
- How much future reported expense and dilution will result from outstanding and unrecognized equity awards; the filing reported $2.17 billion of unrecognized share-based compensation expense.
- Whether PFOF or cryptocurrency regulation changes the company’s revenue model, and whether it can diversify revenue and market-maker relationships.
- Developments and financial exposure from the Massachusetts matter, early-2021 trading-restriction litigation and investigations, outage claims, account-takeover inquiries, and NYDFS proceedings.
- Whether operating cash flow, liquidity, and regulatory capital remain adequate amid changing customer balances, margin lending, and clearinghouse deposit requirements.
- Potential share supply and voting-control implications: founders’ Class B shares carry 10 votes per share, and substantial equity awards and warrants may add dilution.