Robinhood Q2 2022 Earnings Review: getting ready for the next bull market
It is so easy to be negative about Robinhood: the stock is down more than 70% since the IPO, monthly active users and revenues are declining, and the company had to execute two rounds of layoffs to lower its cash burn. Some even go as far as saying that Robinhood has no business model.
However, if you try to be objective, then there is so much to like about the company: Robinhood keeps shipping new products and features (cash card, crypto wallet, extended trading hours, stock lending, etc.), its customers are not leaving, and keep depositing new funds, the rising rates are a tailwind for the company’s net interest revenues, and the management is committed to reaching profitability by the end of the year (on an Adjusted EBITDA basis for now).
It is hard for Robinhood to show growth in a bear market. However, at some point, the market will return to growth, and Robinhood will be ready! Oh, and the company has $6 billion in cash to survive this bear market as an independent company! Let’s review the company’s financials to back my optimism with numbers!
If you are new to Robinhood, I suggest reading my previous reviews:
👉🏻 Robinhood: a brokerage that aimed to "democratize finance for all
👉🏻 Robinhood Q1 2022 Earnings: don't give up on this fintech company just yet
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Funded Accounts and MAUs
Robinhood reported 22.9 million Funded Accounts at the end of Q2 2022, which represents a 0.4 million accounts increase from Q2 2021 and a 0.1 million accounts increase from the previous quarter. During the quarter 0.4 million accounts churned, but the company onboarded 0.4 million customers and “resurrected” 0.1 million accounts. Starting from May 2022, Robinhood reports operating metrics on a monthly basis. Thus, the company reported 22.9 million Net cumulative funded accounts at the end of August 2022.
The company saw a continued decrease in Monthly Active Users, reporting 14.0 million MAUs at the end of the quarter. This represents a 34% decrease from the peak in Q2 2021, and a 12% decrease from the previous quarter. When reporting quarterly data, Robinhood presents MAUs for the last month in the quarter (i.e. June 2022). The company reported 13.3 million Monthly Active Users in August 2022.
As a reminder, Robinhood defines a “Monthly Unique User” as “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.”
Assets Under Custody
The company reported $64.2 billion in Assets Under Custody at the end of Q2 2022, which represents a 37% decrease from Q2 2021, and a 31% decrease sequentially. Equities represented 80% of the AUC ($51.2 billion), cryptocurrencies represented 13% of the AUC ($8.6 billion), options represented 1% of the AUC ($0.5 billion), and the remaining balance was held in cash (6% or $3.9 billion). As per reported monthly data, Assets Under Custody stood at $71.0 billion at the end of August 2022.
The decrease in the Assets Under Custody was the result of the market losses, with Robinhood customers’ portfolios losing $34.1 billion in value during the quarter. It was partially offset by $5.2 net deposits. I will reiterate that net deposit inflows suggest that Robinhood customers are now leaving the platform despite the occurred losses. However, as per monthly operating data, Robinhood customers deposited only $1.5 billion during the first two months of Q3 2022 (July and August).
As part of the monthly disclosures, Robinhood started reporting two metrics related to customer activity: Notional Trading Volumes and Daily Average Revenue Trades (DARTs) with a split by asset class (equities, options, cryptocurrencies).
Robinhood defines "Notional Volume" 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. With respect to options, [Robinhood] measures trading volume as the total number of option contracts bought or sold over a specified period of time.”
As can be seen from the chart below, the average monthly Notional Trading Volume declined in Q2 2022 compared to Q1 2022 across all asset classes. The volumes continued the decline into July 2022, but then saw an uptick in August 2022 in equities and options, as the equities markets experienced a strong run.
Robinhood defines Daily Average Revenue Trades (DARTs) 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. For crypto, the number of trading days is equal to the number of calendar days in the month.”
Similarly to the Notional Trading Volume, DARTs saw a decline in Q2 2022 compared to Q1 2022, which was followed by a further decline in July 2022 and an uptick in August 2022 in equities and options. As we will discuss later in the text, transaction-based revenue is the largest component of Robinhood’s income; thus, Notional Trading Volume and DARTs give an insight into the upcoming quarterly results.
The company reported $318 million in Net revenue for the quarter, which represents a 44% decline from the peak of Q2 2021, and a 6% increase sequentially. Transaction-based revenue represented 64% of the total net revenue ($202 million), net interest revenue represented 23% of the total net revenue ($74 million), and the remaining part ($42 million) fell into the “Other revenue” bucket (primarily the fees related to transferring of customer accounts to other brokers).
Transaction-based revenue declined 55% compared to Q2 2021, and 7% sequentially. Interestingly, the reported Notional Trading Volume experience is a larger sequential decline. Thus, equities trading volume declined 14% QoQ, options volume declined 11% QoQ, and cryptocurrencies trading declined 19% QoQ. Similarly, average DARTs experience a larger decline than revenue. This suggests that Robinhood is improving monetization of the trading volumes (better Payment For Order Flow deals?).
Net interest revenue increased 9% compared to Q2 2021, and 35% sequentially. The sequential growth in net interest revenue resulted from the growth in revenue that the company generates on its corporate cash and investments. As the Fed is expected to continue rising rates, we can expect this revenue component to continue growing. During the earnings call, Jason Warnick, the company’s CFO, commented that “on average, we are realizing about $40 million of annualized run rate revenue per 25 basis points of [Fed] rate hikes.”
Putting it all together: we will probably see sequentially flat transaction-based revenue in Q3 2022 due to the spike in trading volumes in August and ongoing improvement in trading volume monetization, and a further increase in net interest revenue due to rising rates. This should result in minor sequential total net revenue growth.
Robinhood reported $610 million in operating expenses for the quarter, a 22% increase compared to Q2 2021 and a 12% decline sequentially. “Technology and development” expenses represented 40% of the total expenses ($244 million), “General and administration” expenses represented 37% ($226 million), “Operations” expenses represented 14% ($86 million), “Brokerage and transaction” expenses represented 5% ($30 million), and “Marketing” expenses represented 4% ($24 million) of the total expenses.
Excluding share-based compensation, the operating expenses totaled $446 million for the quarter, representing an 11% decline compared to Q2 2021 and a 5% decline sequentially. If you remember, Robinhood announced layoffs impacting 9% of the staff right before the Q1 2022 earnings release. The company announced additional layouts before Q2 2022 earnings release. This time, the company laid off 23% of the remaining staff. The company’s management announced the ambition to reach profitability on an Adjusted EBITDA basis by the end of the year, and given that the revenues are not growing, cutting costs is the only tool they have.
As a result of the additional round of layoffs, the company lowered its guidance on the total operating expenses for the year. Thus, they guided for $1.70-1.76 billion in operating expenses excluding share-based compensation for the full year. This guidance implies an average of $392-422 million in operating expenses (excluding share-based compensation) for each of the remaining quarters.
Net Income and Adjusted EBITDA
Robinhood reported a Net loss of $295 million for the quarter, which was a sequential improvement compared to a Net loss of $502 million in Q2 2021 and a Net loss of $392 million in Q1 2022. Thinking about the net loss one should take into account $164 million in share-based compensation and $17 million in severance related to the first round of layoffs.
The company reported a negative Adjusted EBITDA of $80 million for the quarter, down from a positive Adjusted EBITDA of $90 million in Q2 2021, and up from a negative Adjusted EBITDA of $143 million in Q1 2022. The company calculates Adjusted EBITDA by adjusting Net loss with depreciation and amortization, interest and tax expenses, share-based compensation, as well as one-time expenses, such as legal settlements and restructuring charges.
As I noted earlier, the company’s management reiterated the ambition to reach profitability on an Adjusted EBITDA basis. Let’s try to do some math: we are looking at $310-330 million in quarterly revenue, $392-422 million in quarterly operating expenses excluding share-based compensation for the remainder of the year, and $20-25 million in depreciation, interest and tax adjustments. Somehow I still don’t see the company reaching profitability with these numbers. I guess, the company’s management is more optimistic about revenue projections or is ready to cut more in operating expenses.
The company had $6 billion in corporate cash and $3 billion in lines of credit, enough not only to survive this bear market, but also to make acquisitions.
Things to Watch in 2022
Normalized transaction-based revenue levels. Transaction-based revenue declined sequentially despite the company’s efforts to improve trading volume monetization (revenue declined less than the trading volumes). Net interest revenue will face tailwinds due to rising rates, so if the transaction-based revenues stop declining we will see the “bottom” in total company revenue.
The path towards profitability. I absolutely love the fact that the company is using this bear market to reach profitability. Robinhood continues shipping new functionality, and customers are not leaving the platform (and even depositing additional funds), so improvements in operating efficiency will set a good foundation for profitable growth once the market turns.
Acquisitions. The company has sufficient cash to acquire struggling competitors. The company’s management previously voiced the ambition to expand internationally, but I wouldn’t exclude more surprising acquisitions. For instance, the company might start borrowing best practices from Charles Schwab and acquire a bank (and earn more on cash balances).
Crypto regulation. I will throw in a crazy scenario: what if SEC succeeds in defining cryptocurrencies as securities? Would Robinhood, a regulated and operational brokerage, be better positioned to handle this scenario than Coinbase? Long shot, I know.
In summary, one should not expect Robinhood to return to growth while the bear market lasts. However, the company keeps shipping new products and features and works actively on improving operational efficiency. I don’t know when the stock markets will return to growth, but it feels like Robinhood will be ready.
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Source of the data used above: Investor Relations.
Disclosure & Disclaimer: despite rocky performance in 2021 and the first half of 2022, I own shares in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your own research.