ROBINHOOD MARKETS, INC. This section presents management's perspective on our financial condition and results of operations. The following discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this Quarterly Report on Form 10-Q, and should be read in conjunction with our interim unaudited condensed consolidated financial statements and notes elsewhere in this Quarterly Report on Form 10-Q 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" for the year endedDecember 31, 2020 included in the final prospectus datedJuly 28, 2021 and filed with theSEC pursuant to Rule 424(b)(4) onJuly 30, 2021 (the "Final Prospectus"). 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 may 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 endedJune 30, 2020 and 2021 has been derived from our unaudited condensed consolidated financial statements appearing at the beginning of this Quarterly Report on Form 10-Q. 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 on Form 10-Q to refer to individuals who hold accounts on our platform. However, because we do not have contracts, as defined in ASC 606, Revenue from Contracts with Customers, with our users, 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 the Final Prospectus. 38 --------------------------------------------------------------------------------
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. We build relationships with our customers by introducing new products with compelling value propositions that further expand access to the financial system. Our mission to democratize finance for all drives our revenue model. We pioneered commission-free trading with no account minimums, giving smaller investors access to the financial markets. Many of our customers are getting started with less, which often means they're trading a smaller number of shares. Rather than earning revenue from fixed trading commissions which, before Robinhood introduced commission free trading, had often ranged from$8 to$10 per trade, the majority of our revenue is transaction-based revenues earned from routing option, cryptocurrency and equity orders to market makers. We also earn net interest revenues, primarily from our securities lending program and interest earned on margin lending and cash deposits, net of borrowing costs related to our revolving lines of credit. We also earn subscription revenue from our Robinhood Gold product. With respect to certain of our financial and operating results as of or for the three months endedJune 30, 2021 and 2020: •we generated total net revenues of$565 million compared to$244 million , for year-over-year growth of 131%; •we had net loss of$502 million , which included a$528 million fair value adjustment to our convertible notes and warrant liability, compared to net income of$58 million ; •our Adjusted EBITDA was$90 million compared to$63 million , for year-over-year growth of 43%; •we had Net Cumulative Funded Accounts of 22.5 million and 9.8 million, for year-over-year growth of 130%; •we had Monthly Active Users (MAU) of 21.3 million and 10.2 million, for year-over-year growth of 109%; •we had Assets Under Custody (AUC) of$102,035 million and$33,422 million , for year-over-year growth of 205%; and •we had Average Revenues Per User (ARPU) of$111.7 compared to$115.2 , for year-over-year decrease of 3%. For definitions of "Net Cumulative Funded Accounts", "MAU", "AUC" and "ARPU" please see "-Key Performance Metrics." Adjusted EBITDA is a non-GAAP financial measure. For more information about Adjusted EBITDA, including the definition and limitations of such measure, and a reconciliation of net income (loss) to Adjusted EBITDA, please see "-Non-GAAP Financial Measures." 39 -------------------------------------------------------------------------------- Key Performance Metrics In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following key business metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions: Three Months or Month Ended June 30, (in millions except ARPU) 2020 2021 Net Cumulative Funded Accounts(1) 9.8 22.5 Monthly Active Users (MAU)(2) 10.2 21.3 Assets Under Custody (AUC)(3)$ 33,421.5 $ 102,034.8 Average Revenues Per User (ARPU)(4)$115.2
________________
(1)We define Net Cumulative Funded Accounts as the total of Net Funded Accounts
from inception to a stated date or period end. "Net Funded Accounts" is the
total number of Funded Accounts for a stated period, excluding "churned users"
and including "resurrected users" as of the end of that period. A "Funded
Account" is a Robinhood account into which the account user makes an initial
deposit or money transfer, of any amount, during the relevant period, which
account is designed to provide a customer with access to any and all of the
products offered on our platform. Users are considered "churned" if their
accounts were previously Funded Accounts and their account balance (which is
measured as the fair value of assets in the user's account less the amount due
from the user) drops to or below zero dollars (which negative balances typically
result from Fraudulent Deposit Transactions and, less often, from margin loans)
for 45 consecutive calendar days. Users are considered "resurrected" if they
were considered churned users during and as of the end of the immediately
preceding period, and had their account balance increase above zero (and are not
considered churned users) in the current period. For more information about
Fraudulent Deposit Transactions, see "-Key Components of our Results of
Operations-Operating Expenses-Operations" below.
Three Months Ended June 30,
(in millions) 2020 2021
Beginning balance 7.2 18.0
New funded accounts 2.7 5.1
Resurrected accounts 0.1 0.3
Churned accounts (0.2) (0.9)
Ending balance 9.8 22.5
(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, 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 monthly
or recurring 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 customer margin
balances, 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:
June 30,
(in millions) 2020 2021
Equities $ 26,394.8 $ 72,568.3
Options 930.7 2,384.2
Cryptocurrencies 780.8 22,693.3
Cash held by users 6,712.6 9,924.7
Customer margin balances (1,397.4) (5,535.7)
Assets Under Custody (AUC) $ 33,421.5 $ 102,034.8
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Net Deposits and net market gains drive the change in AUC in any given period.
We define "Net Deposits" as all cash deposits received from customers net of
reversals, customer cash withdrawals and other equity and cash amounts
transferred out of our platform (including in connection with debit card
transactions and account transfers out of our platform through the Automated
Customer Account Transfer Service ("ACATS")) for a stated period.
Three Months Ended
June 30,
(in millions) 2020 2021
Beginning balance $ 19,220.1 $ 80,932.4
Net Deposits 8,812.0 9,951.7
Net market gains 5,389.4 11,150.7
Ending balance $ 33,421.5 $ 102,034.8
(4)We define ARPU as total revenue for a given period (or, in the case of ARPU
for a given cohort, total revenue generated by that cohort during a given year
or period) divided by the average of Net Cumulative Funded Accounts (or, in the
case of ARPU for a given cohort, the Net Cumulative Funded Accounts included in
that cohort) as of the last day of that period and as of the last day of the
immediately preceding period. In the case of ARPU for a three-month period, this
figure is multiplied by four to annualize the figure for comparability.
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 revenue, 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 expenses, (v) change in fair value of convertible
notes and warrant liability and (vi) certain legal and tax settlements, reserves
and expenses.
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 is
unpredictable, is not driven by core results of operations and renders
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, we have included Adjusted EBITDA in this Quarterly Report on Form 10-Q
because it 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. However, 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 following
table presents a reconciliation of net income (loss), the most directly
comparable GAAP measure, to Adjusted EBITDA:
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Six Months Ended
Three Months Ended June 30, June 30,
(in thousands) 2020 2021 2020 2021
Net income (loss) $ 57,584
1,555 5,268 3,059 8,067
Provision for income taxes 534 37,507 448 49,286
Depreciation and amortization 2,185 4,873 3,913 8,694
EBITDA (non-GAAP) 61,858 (454,017) 12,502 (1,880,421)
Share-based compensation 1,365 1,138 3,777 10,134
Change in fair value of convertible notes and
warrant liability(1) - 528,052 - 2,020,321
Certain legal and tax settlements, reserves and
expenses(2) - 15,000 - 54,910
Adjusted EBITDA (non-GAAP) $ 63,223 $ 90,173 $ 16,279 $ 204,944
_________________
(1)Change in fair value of convertible notes and warrant liability is the
adjustment necessary to mark our convertible notes and warrants to fair market
value. Please see Note 5 to our unaudited condensed consolidated financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Change in Fair Value of Convertible Notes and Warrant
Liability" for more information.
(2)Certain legal and tax settlements, reserves and expenses for the three months
ended June 30, 2021 includes a charge of $15 million in connection with the
settlement-in-principle RHC reached with NYDFS with respect to an NYDFS matter
focused primarily on anti-money laundering and cybersecurity-related issues (the
"NYDFS Matter"). As of June 30, 2021 we have accrued a total of $30.0 million
for the NYDFS Matter.
Certain legal and tax settlements, reserves and expenses for the six months
ended June 30, 2021 includes charges of (i) $34.9 million in connection with the
agreement RHF reached with FINRA to resolve, on an no admit, no deny basis,
certain of FINRA's investigations and examinations, including investigations
into systems outages, RHF's options product offering, and margin-related
communications with customers, among others (the "FINRA Matters"), and (ii)
$20.0 million in connection with the NYDFS Matter described above. As of June
30, 2021 we have accrued a total of $61.5 million for the FINRA Matters,
including a $57.0 million fine as well as $4.5 million of customer restitution
to be paid. For more information about these matters, see Note 14 to our
unaudited condensed consolidated financial statements.
Key Factors Driving Our Performance
Growing our Customer Base
Sustaining our growth requires continued adoption of our platform by new
customers. We will continue to introduce products and features to attract new
customers and we will seek to increase brand awareness and customer adoption of
our platform through the Robinhood Referral Program (defined below) and digital
and broad-scale advertising. However, the circumstances that have accelerated
the growth of our customer base in recent periods may not continue in the
future, and we do not expect the growth rates in our Net Cumulative Funded
Accounts to be sustainable in future periods as we achieve higher market
adoption rates.
Expanding Our Relationship with Existing Customers
Our revenue has continued to grow as we have introduced new products and
features to our customers and as our customers have increased their usage of our
platform. As discussed in "-Overview" and "-Key Performance Metrics" above, we
have experienced significant increases in revenue, MAU, AUC and Net Cumulative
Funded Accounts over the past year. However, certain circumstances that have
accelerated the growth of our business may not continue in the future. We aim to
grow with our customers over time and to grow our relationship with our
customers as they build and manage their wealth. Our ability to expand our
relationship with our customers will be an important contributor to our
long-term growth.
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Investing in Our Platform
We intend to continue to invest in our platform capabilities and regulatory and
compliance functions to support new and existing customers and products that we
believe will drive our growth. As our customer base and platform functionalities
expand, areas of investment priority include product innovation, educational
content, technology and infrastructure improvements and customer support. We
believe these investments will contribute to our long-term growth. Additionally,
we strive to strengthen our relationships with our customers by responding to
customer feedback not only through the introduction of new products, but also
through improvements to our existing products and services.
We expect to increase the headcount number for our engineering and regulatory
and compliance teams by more than double and customer service by more than
triple by the end of fiscal year 2021, compared to fiscal year 2020. These
additional employees will be staffed on projects to enhance platform
capabilities, drive product innovation and improve customer support, as well as
to undertake regulatory and compliance functions. As of June 30, 2021 , we had
added approximately 30% of the expected additional headcount of our engineering
and more than 40% of the expected additional headcount of our customer service
and regulatory and compliance professionals.
Customer Interest in Investing and Saving
Our results of operations are impacted by the overall health of the economy and
retail investing and saving behaviors, which include the following key drivers:
•Seasonality. We believe investment activity will vary throughout a calendar
year. Given traditional consumer behavior, we expect to see more new customers
in the first calendar quarter.
•Consumer Behavior. Consumer behavior varies over time and is affected by
numerous conditions. For example, behavior may be impacted by social or economic
factors such as changes in disposable income levels, general interest in
investing and stock market volatility. There may also be high profile initial
public offerings, or idiosyncratic events impacting single companies, that
impact consumer behavior. These shifts in consumer behavior may influence
interest in our products over time.
•Market Trends. As financial markets grow and contract, our customers'
investing, saving, and spending behaviors are affected. Although our operating
history has coincided with a period of general macroeconomic growth in the
United States , particularly in the U.S. equity markets, which has previously
stimulated growth in overall investment activity on our platform, we may be
impacted by any slowdowns in growth or downturns in the U.S. equity markets.
•Macroeconomic Events. Customer behavior is impacted by the overall
macroeconomic environment, which is influenced by events such as the ongoing
COVID-19 pandemic (including the COVID-19 vaccine development and responsive
measures taken by the U.S. government) as well as its effects on both global
business and individuals' behavior. Since the onset of the COVID-19 pandemic in
March 2020 , we have seen substantial growth in our customer base, retention,
engagement and trading activity metrics. It is uncertain whether these trends
and behavioral shifts will continue as reopening measures continue, and we may
not be able to maintain the customer base we gained, or the rate of growth in
our customer base that we experienced, throughout the COVID-19 pandemic. Other
macroeconomic conditions that could impact customer behavior include employment
rates, natural disasters and other political or economic events.
For more information about how market trends and macroeconomic events can
adversely impact our results of operations, see "Risk Factors-Risks Related to
Our Business."
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Key Components of our Results of Operations
Revenues
Transaction-based revenues
Transaction-based revenues consist of amounts earned from routing customer
orders for options, equities and cryptocurrencies to market makers. When
customers place orders for equities, options or cryptocurrencies on our
platform, we route these orders to market makers and we receive consideration
from those brokers. With respect to equities and options trading, such fees are
known as PFOF. With respect to cryptocurrency trading, we receive "Transaction
Rebates." In the case of equities, the fees we receive are typically based on
the size of the publicly quoted bid-ask spread for the security being traded;
that is, we receive a fixed percentage of the difference between the publicly
quoted bid and ask at the time the trade is executed. For options, our fee is on
a per contract basis based on the underlying security. In the case of
cryptocurrencies, our rebate is a fixed percentage of the notional order value.
Within each asset class, whether equities, options or cryptocurrencies, the
transaction-based revenue we earn is calculated in an identical manner among all
participating market makers. We route equity and option orders in priority to
participating market makers that we believe are most likely to give our
customers the best execution, based on historical performance (according to
order price, trading symbol, availability of the market maker and, if
statistically significant, order size), and, in the case of options, the
likelihood of the order being filled is a factor as well. For cryptocurrency
orders, we route to market makers based on price and availability of the market
maker.
Net interest revenues
Net interest revenues consist of interest revenues less interest expenses.
We earn interest revenues and incur interest expenses on securities lending
transactions. We also earn interest revenues on margin loans to users, as well
as on our segregated cash, cash and cash equivalents, and deposits with clearing
organizations. We also incur interest expenses in connection with our revolving
credit facilities.
Other revenues
Other revenues primarily consist of Robinhood Gold, a monthly paid subscription
service that provides users with premium features such as enhanced instant
deposits, professional research, Nasdaq Level II market data and, upon approval,
access to margin investing. Other revenues also include proxy rebate revenues
and miscellaneous fees charged to users.
Operating Expenses
Brokerage and transaction
Brokerage and transaction costs primarily consist of fees paid to centralized
clearinghouses, bank and regulatory fees, market data expenses, compensation and
benefits, including share-based compensation, for employees engaged in clearing
and brokerage functions and allocated overhead. A large portion of our brokerage
and transaction costs are variable and tied to trading and transaction volumes
on our platform.
Technology and development
Technology and development costs primarily consist of costs incurred to support
and improve our platform and develop new products, costs associated with
computer hardware and software, including amortization of internally developed
software, compensation and benefits, including share-based compensation, for
engineering, data science and design personnel and allocated overhead. We intend
to
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continue to invest in technology and development for the foreseeable future as
we focus on developing new features and enhancements on our platform, while also
developing new products to serve the needs of our customers.
Operations
Operations costs primarily consist of customer service related expenses,
including compensation and benefits, which includes share-based compensation,
for employees engaged in customer support, third-party customer service vendors,
customer onboarding and account verification as well as allocated overhead. We
plan to continue to invest in customer service related expenses, including the
costs associated with expanding our customer support functions, such as
phone-based voice support, to adequately support the significant growth in our
user base. Additionally, operations costs include chargebacks for unauthorized
debit card use.
Operations costs also include our provision for credit losses in connection with
unrecoverable receivables due to Fraudulent Deposit Transactions. "Fraudulent
Deposit Transactions" occur when users initiate deposits into their accounts,
make unsuccessful trades on our platform using a short-term extension of credit
from us, and then repatriate or reverse the deposits, resulting in a loss to us
of the credited amount. The provision for credit loss is equal to the unsecured
receivable balance owed by users, i.e., the difference between the amount due
from users and the fair value of the assets in the users account, and we
write-off the receivable balance when it has become outstanding for over 180
days. We seek to reduce Fraudulent Deposit Transactions by deploying and
iterating on machine learning models that identify high risk users and
transactions on our platform. In addition, upon identifying high risk users and
transactions, we seek to prevent further losses by introducing friction into the
user experience (for example, by not offering the identified customer access to
instant funds) or implementing restrictions to mitigate the risk of these
transactions (such as temporarily restricting withdrawals). Due to the
fraudulent nature of these transactions, recourse and collection of the funds is
limited. The provision for credit losses also includes an immaterial amount of
losses related to our margin lending and proxy rebate activities.
Marketing
Marketing costs primarily consist of expenses associated with the Robinhood
Referral Program, production and placement of advertisements in various media
outlets, including online and on television, and customer goodwill, which
primarily relates to costs to remediate losses experienced by our customers due
to service interruptions on our platform and reimbursement of direct losses that
happen due to unauthorized activity that is not the fault of our customer.
Marketing costs also include compensation and benefits, including share-based
compensation, for employees engaged in the marketing function and allocated
overhead. We plan to continue to invest in marketing efforts through the
Robinhood Referral Program and other media outlets to support growing our user
base.
Under our referral program (the "Robinhood Referral Program"), RHF credits
referring and referred customers with a stock reward, with the potential value
of each share ranging from $2.50 to $225 . Each stock reward is selected randomly
from RHF's previously purchased inventory of settled shares held exclusively for
this program. This inventory is comprised of shares of stock of issuers that are
widely held among our customers' accounts (i.e., held by at least 5,000
customers). Approximately 98% of customers receive a stock reward having a value
ranging from $2.50 to $10 . Referring customers can earn more than one reward
through the Robinhood Referral Program by making multiple referrals, subject to
a maximum of $500 in total rewards earned annually per customer. From time to
time, we offer multiple stock rewards per referral. Stock rewards are also
available to customers who sign up through paid marketing channels. In order for
rewards to be earned by the referring and referred customer, the referred
customer must fulfill certain conditions stated in their promotion, such as
linking their bank account to our platform. After the referred Robinhood account
is approved, each customer must claim his or her stock reward in the Robinhood
app within 60 days of notification thereof, at which point the stock is
deposited to such customer's Robinhood account. Customers do not need to provide
any cash consideration for the stock reward.
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General and administrative
General and administrative costs primarily consist of compensation and benefits,
including share-based compensation, for certain executives as well as employees
engaged in legal, finance, human resources, risk, and compliance. General and
administrative costs also include legal settlements and professional fees, such
as, but not limited to, legal, audit and accounting fees, as well as allocated
overhead.
Results of Operations
The following table summarizes our unaudited condensed consolidated statements
of operations data:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2021 2020 2021
Revenues:
Transaction-based revenues $ 187,413 $ 451,167 $ 283,044 $ 871,606
Net interest revenues 39,998 67,709 64,014 130,206
Other revenues 16,800 46,457 24,703 85,695
Total net revenues 244,211 565,333 371,761 1,087,507
Operating expenses:(1)
Brokerage and transaction 28,612 37,812 49,016 78,816
Technology and development 44,971 156,347 78,176 273,205
Operations 30,464 101,065 52,277 167,629
Marketing 43,510 94,159 113,432 196,407
General and administrative 38,636 111,346 73,287 248,460
Total operating expenses 186,193 500,729 366,188 964,517
Change in fair value of convertible notes and
warrant liability - 528,052 - 2,020,321
Other expense (income), net (100) 710 43 (149)
Income (loss) before income tax 58,118 (464,158) 5,530 (1,897,182)
Provision for income taxes 534 37,507 448 49,286
Net income (loss) $ 57,584 $ (501,665) $ 5,082 $ (1,946,468)
_______________(1)Includes share-based compensation expense as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2021 2020 2021
Brokerage and transaction $ 6 $ 6 $ 12 $ 12
Technology and development 824 717 2,540 2,025
Operations 8 3 18 6
Marketing 7 41 15 78
General and administrative 520 371 1,192 8,013
Total share-based compensation expense $ 1,365 $ 1,138
We have not recognized share-based compensation for awards with
performance-based conditions because the qualifying event, such as our IPO, had
not occurred and, therefore, could not be considered probable. For more
information, see Share-based compensation disclosed in Note 1 to our audited
consolidated financial statements included in the Final Prospectus.
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Comparison of the Three and Six Months Ended June 30, 2020 and 2021
Revenues
Transaction-based revenues
Six Months Ended
Three Months Ended June 30, June 30,
(in thousands, except for
percentages) 2020 2021 % Change 2020 2021 % Change
Transaction-based revenues
Options $ 111,148 $ 164,604 48 % $ 170,908 $ 362,464 112 %
Cryptocurrencies 5,320 233,103 4,282 % 9,558 320,690 3,255 %
Equities 70,606 52,012 (26) % 102,195 185,313 81 %
Other 339 1,448 327 % 383 3,139 720 %
Total transaction-based revenues $ 187,413 $ 451,167 141 % $ 283,044 $ 871,606 208 %
Transaction-based revenues as a %
of total net revenues:
Options 46% 29% 46% 33%
Cryptocurrencies 2% 41% 3% 30%
Equities 29% 9% 27% 17%
Other -% -% -% -%
Total transaction-based revenues 77% 79% 76% 80%
Transaction-based revenues increased by $263.8 million , or 141%, and $588.6
million , or 208%, for the three and six months ended June 30, 2021 , compared to
the same periods in the prior year. The increases were driven by a 130% increase
in Net Cumulative Funded Accounts which primarily resulted in higher daily
average revenue trades in options and cryptocurrencies. For the three and six
months ended June 30, 2021 , our daily average revenue trades increased for
cryptocurrencies significantly, from 0.1 million to 2.6 million and 0.1 million
to 2.0 million. For the same periods, options increased by 28% and 88% from
0.6 million to 0.8 million and 0.5 million to 0.9 million. Our daily average
revenue trades for equities were relatively flat for the three months ended June
30, 2021 and increased by 93% from 2.1 million to 4.0 million for the six months
ended June 30, 2021 . We define "daily average revenue trades" as the total
number of revenue generating trades executed during a given period divided by
the number of trading days in that period. Trading activity was particularly
high during the first two months of the three months ended June 30, 2021 period,
returning to levels more in line with prior periods during the last few weeks of
the three months ended June 30, 2021 . Increased interest in personal finance and
investing, and several high-profile securities and cryptocurrencies, contributed
to a large increase in the number of retail investors to become our users and
begin trading on our platform.
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Net interest revenues
Six Months Ended
Three Months Ended June 30, June 30,
(in thousands, except for
percentages) 2020 2021 % Change 2020 2021 % Change
Net interest revenues:
Securities lending $ 28,633 $ 39,448 38 % $ 35,138 $ 75,074 114 %
Margin interest 10,958 31,230 185 % 18,787 58,961 214 %
Interest on segregated cash and
securities 1,436 931 (35) % 10,632 2,041 (81) %
Other interest revenue 526 1,368 160 % 2,516 2,197 (13) %
Interest expenses related to
credit facilities (1,555) (5,268) 239 % (3,059) (8,067) 164 %
Total net interest revenues $ 39,998 $ 67,709 69 % $ 64,014 $ 130,206 103 %
Net interest revenues as a % of
total net revenues:
Securities lending 12% 7% 9% 7%
Margin interest 4% 6% 5% 5%
Interest on segregated cash and
securities 1% -% 3% 1%
Other interest revenue -% -% 1% -%
Interest expenses related to
credit facilities (1)% (1)% (1)% (1)%
Total net interest revenues 16% 12% 17% 12%
Net interest revenues increased by $27.7 million , or 69%, and $66.2 million , or
103%, for the three and six months ended June 30, 2021 , compared to the same
periods in the prior year. The increase was primarily due to higher interest
revenues earned through securities lending activities and on margin loans to
users, offset by lower interest revenue earned on segregated cash and
securities, and increased interest expense related to our revolving credit
facilities.
Net interest revenues earned from securities lending transactions increased
$10.8 million and $39.9 million for the three and six months ended June 30, 2021
as we grew our securities lending program, which benefited from growth in our
margin book. Securities loaned increased 245% to $2.6 billion . Interest revenue
earned on margin borrowings increased by $20.3 million and $40.2 million for the
three and six months ended June 30, 2021 due to an increase in both the number
of margin borrowers and average per-user margin balance. Margin receivables
outstanding, net of allowance for credit losses, increased from $1,378.8 million
due from 0.4 million users to $5,414.8 million due from 0.7 million users. The
first $1,000 in margin borrowed by each user is included in their monthly
Robinhood Gold subscription fee. Additional margin borrowed was charged at 5%
annual percentage rate until December 2020 when we lowered this rate to 2.5%.
Interest revenue earned on segregated cash and securities balances decreased
$0.5 million and $8.6 million for the three and six months ended June 30, 2021 ,
due to the decrease in the Federal Reserve's benchmark target rate to near zero.
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Other revenues
Three Months Ended Six Months Ended
June 30 , June 30 ,(in thousands, except for percentages) 2020 2021 % Change 2020 2021 % Change Other revenues$ 16,800 $ 46,457 177 %$ 24,703 $ 85,695 247 % Other revenues as a % of total net revenues 7% 8% 7% 8% Other revenues increased by$29.7 million , or 177%, and$61.0 million , or 247%, for the three and six months endedJune 30, 2021 , compared to same periods in the prior year. These increases were due to increases in subscription revenue of$12.7 million and$26.6 million driven by an increase in paid subscribers to Robinhood Gold from 0.7 million to 1.6 million and increases of$7.6 million and$21.9 million relating to ACATS fees charged to users for facilitating the transfer of their account to another broker-dealer. Additionally, proxy rebate revenue increased by$11.6 million and$16.5 million as a result of the growth in our user base. Operating Expenses Three Months Ended Six Months Ended June 30, June 30, (in thousands, except for percentages) 2020 2021 % Change 2020 2021 % Change Operating expenses: Brokerage and transaction$ 28,612 $ 37,812 32 %$ 49,016 $ 78,816 61 % Technology and development 44,971 156,347 248 % 78,176 273,205 249 % Operations 30,464 101,065 232 % 52,277 167,629 221 % Marketing 43,510 94,159 116 % 113,432 196,407 73 % General and administrative 38,636 111,346 188 % 73,287 248,460 239 % Total operating expenses$ 186,193 $ 500,729 $ 366,188 $ 964,517 Percent of net revenues: Brokerage and transaction 12 % 7 % 13 % 7 % Technology and development 18 % 28 % 21 % 25 % Operations 12 % 18 % 14 % 15 % Marketing 18 % 17 % 31 % 18 % General and administrative 16 % 20 % 20 % 23 % Total operating expenses 76 % 90 % 99 % 88 % 49
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Brokerage and transaction
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2021 $ Change 2020 2021 $ Change
Clearing fees $ 12,494 $12,116 $ (378) $ 20,713 $ 21,448 $ 735
Market data fees 5,217 7,217 2,000 10,313 17,238 6,925
Bank charges 2,042 5,570 3,528 3,510 11,231 7,721
Fractional share transactions 76 1,104 1,028 125 6,881 6,756
Employee compensation, benefits
and overhead 1,593 3,556 1,963 3,043 6,538 3,495
Regulatory fees 4,084 3,563 (521) 6,163 6,493 330
Other 3,106 4,686 1,580 5,149 8,987 3,838
Total $ 28,612 $ 37,812 $ 9,200 $ 49,016 $ 78,816 $ 29,800
Brokerage and transaction costs increased by $9.2 million , or 32%, and $29.8
million , or 61%, for the three and six months ended June 30, 2021 , compared to
the same periods in the prior year, primarily due to increases of $3.5 million
and $7.7 million in bank charges, increases of $2.0 million and $6.9 million in
market data fees, and increases of $1.0 million and $6.8 million in losses
attributable to the market price fluctuations that impacted fractional share
transactions. These increases were driven by the growth in our user base.
Additionally, employee compensation and benefits, including share-based
compensation, increased $2.0 million and $3.5 million as we continued to grow
our brokerage teams to support the growth of our user base and platform.
Clearing and regulatory fees did not increase in line with the increased trading
activity on the platform as a result of a reduction of certain of these fees.
Technology and development
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2021 $ Change 2020 2021 $ Change
Cloud infrastructure and other
software services $ 17,807 $ 79,267 $ 61,460 $ 29,639 $ 139,251 $ 109,612
Employee compensation, benefits and overhead 25,229 72,101 46,872 44,960 124,989 80,029 Other 1,935 4,979 3,044 3,577 8,965 5,388 Total$ 44,971 $ 156,347 $ 111,376 $ 78,176$ 273,205 $ 195,029 Technology and development costs increased by$111.4 million , or 248%, and$195.0 million , or 249%, for the three and six months endedJune 30, 2021 , compared to the same periods in prior year, primarily due to increases of$61.5 million and$109.6 million in costs for cloud infrastructure due to increased capacity requirements for our platform and other software services utilized in delivering our products. Additionally, we experienced an increase of$46.9 million and$80.0 million in employee compensation and benefits, including share-based compensation, net of capitalized costs for internally developed software, as we continued to grow our engineering, data science, and design teams to support the growth of our user base and develop new products. 50 --------------------------------------------------------------------------------
Operations
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2021 $ Change 2020 2021 $ Change
Employee compensation, benefits
and overhead $ 7,171 $ 29,965 $ 22,794 $ 12,941 $ 52,342 $ 39,401
Third-party customer support 6,870 25,945 19,075 10,409 41,659
31,250
Provision for credit losses 13,046 20,342 7,296 22,994 36,745 13,751 Debit card chargebacks 903 19,354 18,451 903 20,830 19,927 Customer onboarding 2,754 4,433 1,679 4,864 9,273 4,409 Other (280) 1,026 1,306 166 6,780 6,614 Total$ 30,464 $ 101,065 $ 70,601 $ 52,277$ 167,629 $ 115,352 Operations costs increased by$70.6 million , or 232%, and$115.4 million , or 221%, for the three and six months endedJune 30, 2021 , compared to the same periods in the prior year, primarily due to increases of$22.8 million and$39.4 million in employee compensation and benefits, including share-based compensation, for customer support and other operations employees as we increased the number of our dedicated customer support professionals by 359% from the same period in the prior year. Costs related to third-party customer support vendors increased$19.1 million and$31.3 million and customer onboarding increased$1.7 million and$4.4 million as we continued to make investments to support our growing user base. Additionally, debit card chargebacks increased$18.5 million and$19.9 million as a result of increased unauthorized debit card use and our provision for credit losses increased$7.3 million and$13.8 million mainly driven by Fraudulent Deposit Transactions as the number of accounts making Fraudulent Deposit Transactions stayed relatively consistent period over period while loss incurred per account increased. Marketing Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2020 2021 $ Change 2020 2021 $ Change
Robinhood Referral Program$ 26,015 $ 49,121 $ 23,106 $ 52,009$ 107,026 $ 55,017 Digital and paid marketing efforts 14,665 31,483 16,818 53,461 64,411 10,950 Employee compensation, benefits and overhead 908 9,058 8,150 1,706 15,628 13,922 Other 1,922 4,497 2,575 6,256 9,342 3,086 Total$ 43,510 $ 94,159 $ 50,649 $ 113,432$ 196,407 $ 82,975 Marketing costs increased by$50.6 million , or 116%, and$83.0 million , or 73%, for the three and six months endedJune 30, 2021 , compared to the same periods in the prior year, primarily due to increases of$23.1 million and$55.0 million in costs associated with our 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: 51 --------------------------------------------------------------------------------
June 30,
(in thousands) 2020 2021
Beginning balance, January 1 $ 303 $ 695
Fair value of current period awards 57,541 114,029
Changes in estimate of unclaimed awards for current and prior periods
(39) (1,173)
Reversals related to unclaimed, expired awards (5,493) (7,805)
Claimed awards (51,825) (105,357)
Ending balance, June 30 $ 487 $ 389
Additionally, there were increases of $8.2 million and $13.9 million in employee
compensation and benefits, including share-based compensation, for employees
engaged in our marketing function and increases in digital advertising costs of
$16.8 million and $11.0 million due to our digital and paid marketing efforts to
drive higher brand awareness, particularly for our cryptocurrency trading
product.
General and administrative
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2021 $ Change 2020 2021 $ Change
Employee compensation, benefits
and overhead $ 18,564 $ 45,636 $
27,072 $ 36,253
18,657 38,016 19,359 $ 33,591 76,457 42,866
Legal settlements or reserves 7 20,890 20,883 7 63,050 63,043
Other 1,408 6,804 5,396 3,436 15,255 11,819
Total $ 38,636 $ 111,346 $ 72,710 $ 73,287 $ 248,460 $ 175,173
General and administrative costs increased by $72.7 million , or 188%, and $175.2
million , or 239%, for the three and six months ended June 30, 2021 , compared to
the year prior, primarily due to increases of $20.9 million and $63.0 million in
costs associated with legal settlements and reserves as discussed in Note 14 to
our unaudited condensed consolidated financial statements, increases of $27.1
million and $57.4 million in employee compensation and benefits, including
share-based compensation, for general and administrative personnel, and
increases of $19.4 million and $42.9 million in professional fees, primarily
related to legal services.
Change in Fair Value of Convertible Notes and Warrant Liability
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2021 $ Change 2020 2021 $ Change
Change in fair value of
convertible notes and warrant
liability $ - $ 528,052 $ 528,052 $ - $ 2,020,321 $ 2,020,321
Change in fair value convertible notes and warrant liability was due to the
mark-to-market adjustment of the convertible notes issued and warrant granted in
February 2021 , as discussed in Note 5 to our unaudited condensed consolidated
financial statements.
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Provision for Income Taxes
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2021 $ Change 2020 2021 $ Change
Provision for income taxes $ 534 37,507 $ 36,973 $ 448 49,286 $ 48,838
For the three and six months ended June 30, 2020 and 2021, provision for income
taxes increased by $37.0 million and $48.8 million . The increases were primarily
due to the growth of the business, the non-deductible change in fair value of
the convertible notes and warrant liability and the change in valuation
allowance on our remaining U.S. federal and state deferred tax assets offset by
our current federal and state taxes payable.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through issuances of
preferred stock, borrowings from credit facilities and cash flow from operating
activities.
As of June 30, 2021 , our primary sources of liquidity were our cash and cash
equivalents of $5.08 billion , our revolving credit facilities and our
convertible notes issued in February 2021 . On July 28, 2021 , we closed our IPO
of our Class A common stock with cash proceeds approximately $1.9 billion after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
Based on our current level of operations, we believe our available cash,
available borrowings, and cash provided by operations will be adequate to meet
our current liquidity needs for the next 12 months. Our future capital
requirements will depend on many factors, including but not limited to, our
growth rate, headcount, sales and marketing activities, research and development
efforts, capital expenditures, the introduction of new products and offerings,
and potential merger and acquisition activity, other strategic initiatives,
volatility in the market or in certain securities and trading volume of our
customers. We may be required to seek additional equity or debt financing. In
the event that we require additional financing, we may not be able to raise such
financing on terms acceptable to us or at all. If we are unable to raise
additional capital or generate cash flows necessary to expand our operations and
invest in continued innovation, we may not be able to compete successfully,
which would harm our business, results of operations, and financial condition.
Cash Flows
The following table summarizes our cash flow activities:
Six Months Ended June 30,
(in thousands) 2020 2021
Cash provided by (used in):
Operating activities $ 2,063,163 $ 399,121
Investing activities (16,262) (27,862)
Financing activities 572,881 3,558,665
Cash provided by operating activities consisted of net income (loss) adjusted
for certain non-cash items including change in fair value of convertible notes
and warrant liability, provision for credit losses, depreciation and
amortization and share-based compensation expense, as well as the effect of
changes
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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, 2020 , cash provided by operating activities
was $2,063.2 million partially due to a net income of $5.1 million , adjusted for
the add back of non-cash expenses of $31.6 million , consisting primarily of
provision for credit losses of $23.9 million , depreciation and amortization of
$3.9 million , and share-based compensation expense of $3.8 million .
Additionally, the cash generated from operating activities increased due to a
net inflow from changes in operating assets and liabilities of $2,026.5 million ,
primarily due to an increase in payables to users of $2,913.3 million , driven by
an increase in customer cash held in line with the growth in our user base.
For the six months ended June 30, 2021 , cash provided by operating activities
was $399.1 million , primarily due to a net loss of $1,946.5 million , adjusted
for the add back of non-cash expenses of $2,075.9 million , consisting primarily
of change in fair value of convertible notes and warrant liability of $2,020.3
million , provision for credit losses of $36.7 million , share-based compensation
expense of $10.1 million , and depreciation and amortization of $8.7 million .
Additionally, there was a cash inflow due to changes in operating assets and
liabilities of $269.7 million , primarily due to an increase in payables to users
of $1,870.9 million driven by an increase in customer cash held in line with the
growth in our user base and an increase in securities loaned of $721.8 million ,
offset by an increase in receivables from users, net, of $2,104.4 million ,
driven by an increase in margin receivables due to growth in our user base and a
decrease in our margin interest rate.
For the six months ended June 30, 2020 and 2021, cash flows used in investing
activities were $16.3 million and $27.9 million , which primarily consisted of
$11.7 million and $22.1 million in purchases of property, software and equipment
and $4.6 million and $5.8 million in capitalization of internally developed
software.
For the six months ended June 30, 2020 , cash flows provided by financing
activities were $572.9 million , which primarily consisted of the proceeds from
issuance of redeemable convertible preferred stock, net of issuance costs of
$557.3 million and borrowings on our credit facilities of $15.0 million . For the
six months ended June 30, 2021 , cash flows provided by financing activities were
$3,558.7 million , which primarily consisted of proceeds from issuance of
convertible notes and warrants of $3,552.0 million .
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Regulatory Capital Requirements
Our broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule
(Rule 15c3-1 under the Exchange Act ("Rule 15c3-1")), administered by the SEC
and the 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 SEC Rule 15c3-1.
The tables below summarize the net capital, capital requirements and excess net
capital of RHS and RHF as of periods presented:
June 30, 2021
Net Capital in
Required Net Excess of Required
(in thousands) Net Capital Capital Net Capital
RHS $ 2,722,364 $ 110,009 $ 2,612,355
RHF 114,438 250 114,188
In January and February 2021 , we received gross proceeds of $3.55 billion from
the issuance of two tranches of convertible notes and related warrants, of which
an aggregate of $2.0 billion was contributed to RHS in the first quarter of
2021. Pursuant to Rule 15c3-1 of the Exchange Act, capital contributed to RHS
and included in RHS's net capital calculation may generally not be withdrawn
from RHS for one year from the time of contribution.
Contractual Obligations
The following table summarizes our contractual obligations as of the dates
indicated below. The amount of the obligations presented in the table summarizes
our commitments to settle contractual obligations in cash as of the dates
presented.
Payments Due by Period
Remainder of
Total 2021 2022-2023 2024-2025 Thereafter
As of June 30, 2021 (in thousands)
Operating lease commitments $ 114,766 $ 8,975
28,741 70,823 5,741 -
Total contractual obligations $ 220,071 $ 37,716
(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 and tenant improvements.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have any
off-balance sheet financing arrangements, as defined in Regulation S-K, that
have or are reasonably likely to have a current or future material effect on our
financial condition, changes in our financial condition, revenue, or expenses,
results of operations, liquidity, capital expenditures, or capital resources.
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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
disclosure of contingent assets and liabilities in our unaudited 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, 2021 , as compared to those
disclosed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies and Estimates" in the Final
Prospectus.
Recent Accounting Pronouncements
See Item 1 of Part I, "Unaudited Financial Statements - Note 2 - Recent
Accounting Pronouncements."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest rates and market prices. Information relating to
quantitative and qualitative disclosures about these market risks is described
below.
Interest Rate Risk
Our exposure to changes in interest rates relates to interest earned on our cash
and cash equivalents and segregated cash under federal and other regulations and
interest incurred in relation to our credit facilities. We use a net interest
sensitivity analysis to evaluate the effect that changes in interest rates might
have on pre-tax income. The analysis assumes that the asset and liability
structure of our unaudited condensed consolidated balance sheets would not be
changed as a result of a simulated change in interest rates. The results of the
analysis based on our financial position as of December 31, 2020 and June 30,
2021 , indicate that a hypothetical 100 basis point increase or decrease in
interest rates would not have a material effect on our financial results. We
also have exposure to change in interest rates related to our variable-rate
credit facilities, which are described under "-Liquidity and Capital Resources"
above. However, as there were no outstanding borrowings under our credit
facilities as of June 30, 2021 , we had limited financial exposure associated
with changes in interest rates as of such date.
Our convertible notes bear interest at a fixed rate of 6% per annum that
compounds semi-annually in arrears and is payable in-kind. As the interest rate
is fixed, we have limited financial exposure associated with changes in interest
rates. Fluctuation in the risk-free rate impacts the fair value of the warrant
liability. The results of the analysis based on our financial position as of
June 30, 2021 , indicate that a hypothetical 100 basis point increase or decrease
in risk-free rates would not have a material effect on our financial results.
Our measurement of interest rate risk involves assumptions that are inherently
uncertain and, as a result, cannot precisely estimate the impact of changes in
interest rates on net interest revenues. Actual results may differ from
simulated results due to balance growth or decline and the timing, magnitude,
and frequency of interest rate changes, as well as changes in market conditions
and management strategies, including changes in asset and liability mix.
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Market-related Credit Risk
We are indirectly exposed to equity securities risk in connection with
securities collateralizing margin receivables, as well as risk related to our
securities lending activities. We manage risk on margin and securities-based
lending by requiring customers to maintain collateral in compliance with
internal and, as applicable, regulatory guidelines. We monitor required margin
levels daily and require our customers to deposit additional collateral, or to
reduce positions, when necessary. We continuously monitor customer accounts to
detect excessive concentration, large orders or positions, and other activities
that indicate increased risk to us. We manage risks associated with our
securities lending activities by requiring credit approvals for counterparties,
by monitoring the market value of securities loaned and collateral values for
securities borrowed on a daily basis and requiring additional cash as collateral
for securities loaned or return of collateral for securities borrowed when
necessary, and by participating in a risk-sharing program offered through the
OCC.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. The term "disclosure controls and procedures," as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of such date, our disclosure controls and
procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three
months ended June 30, 2021 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
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