Robinhood Markets, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Financial statements are unaudited. Robinhood operates a retail investing platform for equities, options and cryptocurrencies, earning primarily transaction-based revenue, net interest revenue and subscription revenue.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total net revenue | $565.3m | $244.2m | $1,087.5m | $371.8m |
| Operating expenses | $500.7m | $186.2m | $964.5m | $366.2m |
| Net income (loss) | $(501.7)m | $57.6m | $(1,946.5)m | $5.1m |
| Adjusted EBITDA (non-GAAP) | $90.2m | $63.2m | $204.9m | $16.3m |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $399.1m | $2,063.2m |
- Q2 revenue grew 131% year over year; transaction-based revenue rose 141% to $451.2m. Cryptocurrency revenue was $233.1m, options $164.6m and equities $52.0m.
- Q2 net interest revenue increased 69% to $67.7m; other revenue increased 177% to $46.5m. Robinhood Gold subscribers rose to 1.6m from 0.7m a year earlier.
- Operating expenses were 90% of revenue in Q2, versus 76% a year earlier. Technology and development expense rose 248% to $156.3m; operations expense rose 232% to $101.1m.
- The Q2 net loss included a $528.1m non-cash fair-value expense on convertible notes and warrants. For the first half, that expense was $2,020.3m, the principal driver of the $1,946.5m net loss.
- Q2 business metrics: 22.5m Net Cumulative Funded Accounts, 21.3m MAUs, $102.0bn Assets Under Custody (AUC), and $111.7 ARPU. Year-over-year changes were +130%, +109%, +205% and -3%, respectively.
Balance sheet, liquidity and financing
- At June 30, 2021, cash and cash equivalents were $5.08bn; cash, segregated cash and restricted cash totaled $10.12bn. Total assets were $18.09bn and total liabilities $17.89bn. Customer-related balances form a substantial part of assets and liabilities.
- Receivables from users, net, were $5.42bn; payables to users were $7.77bn. These balances reflect customer activity and should not be read as ordinary corporate working capital.
- Convertible notes were recorded at a fair value of $5.19bn, with a separate $382.5m warrant liability. The notes bear 6% interest, payable in kind, and had no maturity date. Both converted in connection with the subsequent IPO.
- No borrowings were outstanding at June 30 under the revolving facilities, including a $2.2bn secured facility and a $625m unsecured facility. Broker-dealer subsidiaries reported excess net capital of $2.61bn at RHS and $114.2m at RHF.
- First-half investing cash outflow was $27.9m. Financing cash inflow was $3.56bn, primarily from the February issuance of convertible notes and warrants. Operating cash flow included significant non-cash fair-value add-backs and movements in customer balances.
Changes, outlook and key risks
- Growth was supported by heightened retail trading activity and cryptocurrency demand. Management said trading was particularly high in the first two months of Q2 and returned toward prior levels in the final weeks. Management cautioned that recent growth rates are not expected to be sustainable and may decline significantly.
- Cryptocurrency transactions accounted for 41% of Q2 revenue; Dogecoin represented 62% of cryptocurrency transaction-based revenue. The filing identifies this concentration as a risk if demand falls and is not replaced.
- Five market makers accounted for 72% of Q2 revenue; transaction-based revenue overall represented 79%. The company warns that trading volumes, bid-ask spreads, market-maker relationships and potential regulation or restrictions on payment for order flow (PFOF) could materially affect results.
- Management planned substantial investment in engineering, compliance and customer support, including a target to more than double engineering and regulatory/compliance headcount and more than triple customer-service headcount by year-end 2021 versus 2020. No specific revenue or earnings guidance is provided.
- Management stated that cash, available borrowings and operating cash flow were expected to meet liquidity needs for the next 12 months, while noting that future capital needs depend on growth, market volatility, regulatory requirements and other factors.
- Key legal and regulatory exposures include the Early 2021 Trading Restrictions and related litigation and investigations; a FINRA settlement involving a $57m fine and approximately $12.6m customer restitution; an NYDFS settlement in principle with an expected $30m penalty and monitor; and the Massachusetts Securities Division proceeding, which could threaten the broker-dealer’s state license. The company said potential losses for certain pending matters could not be reasonably estimated.
- Other significant risks include platform outages and customer-service backlogs, cybersecurity and account takeovers, credit losses from fraudulent deposit transactions, market and cryptocurrency volatility, regulatory capital and clearinghouse deposit requirements, and the company’s reliance on PFOF and a limited number of market makers.
Subsequent events and unusual items
- The IPO closed August 2, 2021: 55m Class A shares were offered at $38 per share, including 52.375m sold by Robinhood. The company reported approximately $1.9bn net proceeds. Preferred shares and convertible notes converted into common stock, and warrants became exercisable.
- In connection with the IPO, Robinhood recognized a one-time cumulative $1.0bn share-based compensation expense for certain RSUs. At June 30, unrecognized compensation included $1.8bn for time-based RSUs and $1.42bn for market-based RSUs.
- On August 13, 2021, Robinhood acquired Say for approximately $140m in cash; purchase price allocation was not yet available.
- After the IPO, the company adopted a multi-class share structure: Class A has one vote per share and founder-held Class B has ten votes per share. The filing reports founders collectively held approximately 65% of voting power at the IPO closing, assuming exercise of specified exchange rights.
Important facts for investors to verify
- Whether cryptocurrency trading, particularly Dogecoin, remains a material and diversified source of revenue.
- Trends in trading activity, funded accounts, AUC and ARPU as pandemic-era conditions and market volatility change.
- The ongoing effect of PFOF scrutiny, market-maker concentration and any changes to order-routing economics.
- Outcomes and potential financial or operating effects of the FINRA, NYDFS, Massachusetts and Early 2021 Trading Restrictions matters.
- Post-IPO share-based compensation, dilution from RSUs, options and warrants, and the founders’ voting control.
- Liquidity and regulatory capital needs during periods of market stress, including clearinghouse deposit requirements and customer-balance movements.