Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management’s perspective on our financial condition and results of operations, including performance metrics that management uses to assess company performance. The following discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this Annual Report, and should be read in conjunction with our consolidated financial statements and notes elsewhere in this Annual Report. 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 might 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.”
We refer to our “users” and our “customers” interchangeably throughout this Annual Report to refer to individuals who hold accounts on our platform.
Key Performance Metrics
In addition to the measures presented in our consolidated financial statements, we use the following key performance metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Before the fourth quarter of 2023, we referred to Funded Customers as Net Cumulative Funded Accounts. As our business has grown and we have added additional account types (such as retirement accounts), we have relabeled this metric (and made conforming changes throughout other definitions) to clarify that it measures unique individuals (rather than accounts), although the calculation remains the same and does not affect amounts reported in prior periods. Additionally, beginning in the fourth quarter of 2023, Robinhood Credit users are included in our calculation of MAU, although we are not restating amounts in prior periods as the impact to those figures was immaterial.
• Funded Customers: We define a Funded Customer as a unique person who has at least one account with a Robinhood entity and, within the past 45 calendar days (a) had an account balance that was greater than zero (excluding amounts that are deposited into a Funded Customer account by the Company with no action taken by the unique person) or (b) completed a transaction using any such account.
• Assets Under Custody (“AUC”) : 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 receivables from users, as of a stated date or period end on a trade date basis. Net Deposits and net market gains (losses) drive the change in AUC in any given period.
• Net Deposits: We define Net Deposits as all cash deposits and asset transfers received from customers, net of reversals, customer cash withdrawals, and other assets transferred out of our platform (assets transferred in or out include debit card transactions, ACATS transfers, and custodial crypto wallet transfers) for a stated period. Starting in January 2024, Net Deposits include dividend and interest inflows and Robinhood Gold subscription fees and margin interest
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outflows, although we will not restate amounts in prior periods as the impact to those figures was immaterial.
• Growth Rate with respect to Net Deposits: When used with respect to Net Deposits, “growth rate” provides information about Net Deposits relative to total AUC. “Growth rate” is calculated as aggregate Net Deposits over a specified 12 month period, divided by AUC for the fiscal quarter that immediately precedes such 12 month period.
• Average Revenue Per User (“ARPU”) : We define ARPU as total revenue for a given period divided by the average number of Funded Customers on the last day of that period and the last day of the immediately preceding period.
• Monthly Active Users (“MAU”) : We define MAUs as the number of unique persons who, using one or more accounts with a Robinhood entity, meet one of the following criteria at any point during a specified calendar month: a) executes a debit card or credit card transaction, b) transitions between two different screens on a mobile device while logged into their account or c) loads a page in a web browser while logged into their account. A person need not satisfy these conditions on a recurring monthly basis or be a Funded Customer to be included in MAU. MAU figures in this Annual Report reflect MAU for the last month of the relevant 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.
Glossary Terms
• Automated Customer Account Transfer Service (“ACATS”) : A system that automates and standardizes procedures for the transfer of assets in a customer account from one brokerage firm and/or bank to another.
• Churned Customer: A Funded Customer is considered “Churned” if it was ever a New Funded Customer whose account balance (measured as the fair value of assets in the account less any amount due from the user and excluding amounts that are deposited into a Funded Customer account by the Company with no action taken by the unique person) drops to or below zero and has not completed a transaction using any account with a Robinhood entity for at least 45 consecutive calendar days. Negative balances typically result from Fraudulent Deposit Transactions (which occur when users initiate deposits into their accounts, make 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) and unauthorized debit card use, and less often, from margin loans.
• Margin Book: We define Margin Book as our period-end aggregate outstanding margin loan balances receivable (i.e., the period-end total amount we are owed by customers on loans made for the purchase of securities, supported by a pledge of assets in their margin-enabled brokerage accounts).
• New Funded Customer: We define a New Funded Customer as a unique person who became a Funded Customer for the first time during the relevant period.
• Notional Trading Volume: We define Notional Trading Volume for any specified asset class 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.
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• Options Contracts Traded: We define Options Contracts Traded as the total number of options contracts bought or sold over a specified period of time. Each contract generally entitles the holder to trade 100 shares of the underlying stock.
• Resurrected Customer: A Funded Customer is considered “Resurrected” in a stated period if it was a Churned Customer as of the end of the immediately preceding period and its balance (excluding amounts that are deposited into a Funded Customer account by the Company with no action taken by the unique person) rises above zero or it completes a transaction using its account.
Overview
With respect to the year ended December 31, 2023, as compared to the year ended December 31, 2022:
• we generated total net revenues of $1.87 billion compared to $1.36 billion, an increase of 37%;
• we incurred a net loss of $0.54 billion, or -$0.61 per share, compared to net loss of $1.03 billion, or -$1.17 per share;
• operating expenses were $2.40 billion compared to $2.37 billion, an increase of 1%;
◦ SBC expense totaled $871 million compared to $654 million, an increase of 33% .
◦ SBC expense for the year ended December 31, 2023 included a $485 million charge related to cancellation of the 2021 Market-Based RSUs (the “2021 Founders Award Cancellation”).
◦ SBC expense for the year ended December 31, 2022 included $77 million net reversals of previously recognized expense in connection with both the April 2022 Restructuring and August 2022 Restructuring;
• our Adjusted EBITDA (non-GAAP) was positive $536 million compared to negative $94 million ;
• we had 23.4 million Funded Customers compared to 23.0 million, an increase of 2% ;
• we had AUC of $102.6 billion compared to $62.2 billion , an increase of 65%;
• Net Deposits were $17.1 billion, which translates to a growth rate of 27% relative to AUC at the end of the fourth quarter of 2022, compared to $18.4 billion, which translates to a growth rate of 19% relative to AUC at the end of the fourth quarter of 2021;
• we had ARPU of $80 compared to $60 , an increase of 33%;
• we had MAU of 10.9 million in December 2023 compared to 11.4 million in December 2022, a decrease of 4% .
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.”
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Key Performance Metrics
Key performance metrics for the relevant periods were as follows:
Year Ended December 31,
2021 2022 2023
Funded Customers (1) (in millions)
22.7 23.0 23.4
AUC (2) (in billions)
$ 98.0 $ 62.2 $ 102.6
Net Deposits (in billions)
$ 27.1 $ 18.4 $ 17.1
Growth Rate with respect to Net Deposits
43 % 19 % 27 %
ARPU (in dollars)
$ 103 $ 60 $ 80
MAU (in millions)
17.3 11.4 10.9
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(1) The following table describes the annual changes within Funded Customers:
Year Ended December 31,
(in millions) 2021 2022 2023
Beginning Funded Customers 12.5 22.7 23.0
New Funded Customers 12.2 1.3 1.1
Resurrected Customers 0.5 0.2 0.2
Churned Customers (2.5) (1.2) (0.9)
Ending Funded Customers 22.7 23.0 23.4
(2) The following table sets out the components of AUC by type of asset:
Year Ended December 31,
(in billions) 2021 2022 2023
Equities $ 72.1 $ 45.8 $ 69.4
Cryptocurrencies 22.1 8.4 14.7
Options 1.5 0.3 0.6
Cash held by Customers 8.8 10.8 21.3
Receivables from Customers (6.5) (3.1) (3.4)
AUC $ 98.0 $ 62.2 $ 102.6
The following table describes the changes within AUC:
Year Ended December 31,
(in billions) 2021 2022 2023
Beginning AUC $ 63.0 $ 98.0 $ 62.2
Net Deposits 27.1 18.4 17.1
Net market gains (losses) 7.9 (54.2) 23.3
Ending AUC $ 98.0 $ 62.2 $ 102.6
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 revenues, 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)
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depreciation and amortization, (iv) SBC, (v) change in fair value of convertible notes and warrant liability, (vi) significant legal and tax settlements and reserves, and (vii) other significant gains, losses, and expenses (such as impairments, restructuring charges, and business acquisition- or disposition-related expenses) that we believe are not indicative of our ongoing results. 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 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 are unpredictable, are not driven by core results of operations, and render 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, Adjusted EBITDA 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. The following table presents a reconciliation of Adjusted EBITDA, to the most directly comparable GAAP measure, net loss:
Year Ended December 31,
(in millions) 2021 2022 2023
Net loss $ (3,687) $ (1,028) $ (541)
Add:
Interest expenses related to credit facilities 20 24 23
Provision for income taxes 2 1 8
Depreciation and amortization 26 61 71
EBITDA (non-GAAP) (3,639) (942) (439)
2021 Founders Award Cancellation — — 485
SBC excluding 2021 Founders Award Cancellation (1)
1,572 654 386
Significant legal and tax settlements and reserves
55 20 104
Restructuring charges (2)
— 105 —
Q4 2022 Processing Error (3)
— 57 —
Impairment of Ziglu equity securities (4)
— 12 —
Change in fair value of convertible notes and warrant liability
2,045 — —
Adjusted EBITDA (non-GAAP) $ 33 $ (94) $ 536
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(1) For the year ended December 31, 2022, SBC excluding 2021 Founders Award Cancellation benefited from restructuring-related net reversals of previously recognized expense of $77 million in connection with both the April 2022 Restructuring and August 2022 Restructuring (see Note 14 - Common Stock and Stockholders' (Deficit) Equity, to our consolidated financial statements in this Annual Report for further information).
(2) Restructuring charges for the year ended December 31, 2022 related to both the April 2022 Restructuring and August 2022 Restructuring, consisting of $45 million of impairment and $9 million of accelerated depreciation, in each case relating to office closures, and $51 million of cash charges for employee-related wages, benefits and severance. See Note 6 - Restructuring Activities, to our consolidated financial statements in this Annual Report for further information.
(3) $57 million for the year ended December 31, 2022 due to delays in notification from third parties and process failures within Robinhood’s brokerage systems and operations in connection with the handling of a 1-for-25 reverse stock split transaction of Cosmos Health, Inc.
(4) Partially as a result of the termination of the stock purchase agreement, the advances made to Ziglu accounted for as non-marketable equity securities were impaired to a carrying value of zero.
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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, cryptocurrencies, and equities to market makers. When customers place orders for options, cryptocurrencies, or equities on our platform, we route these orders to market makers and we receive consideration from those market makers. With respect to options and equities trading, such fees are known as PFOF. With respect to cryptocurrencies trading, we receive “Transaction Rebates.” In the case of options, our fee is on a per contract basis based on the underlying security. For 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. In the case of cryptocurrencies, our rebate is a fixed percentage of the notional order value.
Within each asset class, whether options, cryptocurrencies, or equities, the transaction-based revenue we earn is calculated in an identical manner among all participating market makers. We route option and equity 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 cryptocurrency from the market maker.
Net Interest Revenues
Net interest revenues consist of interest revenues less interest expenses. We earn interest revenues on corporate cash and investments, margin loans to users, segregated cash and cash equivalents, deposits with clearing organizations, Cash Sweep, and carried customer credit card balances. We also earn and incur interest revenues and expenses on securities lending transactions. We incur interest expenses in connection with our revolving credit facilities.
Other Revenues
Other revenues primarily consist of Robinhood Gold subscription fees, proxy revenues, and ACATS fees charged to users for facilitating the transfer of part or all of assets in their accounts to another broker-dealer.
Operating Expenses
Brokerage and Transaction
Brokerage and transaction costs primarily consist of broker-dealer transaction expenses (such as fees paid to centralized clearinghouses and regulatory fees), market data expenses, customer statements, cash compensation, SBC and employee benefits as well as allocated overhead for employees engaged in clearing and brokerage functions. 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 cash compensation, SBC and employee benefits as well as allocated overhead for engineering, data science, and design personnel who support and improve our platform and develop new products, costs for cloud infrastructure services, and costs associated with computer hardware and software, including amortization of internally developed software.
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Operations
Operations costs consist of customer service related expenses, including cash compensation, SBC and employee benefits as well as allocated overhead for employees engaged in customer support, and costs incurred to support and improve customer experience (such as third-party customer service vendors). Operations costs also include our provision for credit losses and fraud primarily in connection with unrecoverable receivables due to Fraudulent Deposit Transactions and credit card expected losses.
Marketing
Marketing costs primarily consist of paid marketing channels such as digital marketing and brand marketing, as well as cash compensation, SBC, and employee benefits as well as allocated overhead for employees engaged in the marketing function. Marketing costs also include incentive expenses associated with the Robinhood Referral Program.
General and Administrative
General and administrative costs primarily consist of cash compensation, SBC, and employee benefits as well as allocated overhead for certain executives and employees engaged in legal, finance, human resources, risk, and compliance. General and administrative costs also include settlements and penalties, legal expenses, other professional fees, and real estate charges including impairments on our operating leases or lease improvements and lease terminations.
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Results of Operations
The following table summarizes our consolidated statements of operations data:
(in millions) Year Ended December 31,
2021 2022 2023
Revenues:
Transaction-based revenues $ 1,402 $ 814 $ 785
Net interest revenues 256 424 929
Other revenues 157 120 151
Total net revenues 1,815 1,358 1,865
Operating expenses: (1)
Brokerage and transaction 158 179 146
Technology and development 1,234 878 805
Operations 368 285 159
Marketing 325 103 122
General and administrative 1,371 924 1,169
Total operating expenses 3,456 2,369 2,401
Change in fair value of convertible notes and warrant liability 2,045 — —
Other (income) expense, net (1) 16 (3)
Loss before income taxes (3,685) (1,027) (533)
Provision for income taxes 2 1 8
Net loss $ (3,687) $ (1,028) $ (541)
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(1) Includes SBC expense as follows:
Year Ended December 31,
(in millions) 2021 2022 2023
Brokerage and transaction $ 7 $ 5 $ 7
Technology and development 610 212 211
Operations 20 8 8
Marketing 50 4 5
General and administrative 885 425 640
Total SBC expense
$ 1,572 $ 654 $ 871
Upon our IPO in 2021, we recognized $1.01 billion of SBC expense. In 2023, we recognized $485 million of SBC expense related to the 2021 Founders Award Cancellation. For more information, see “Share-based Compensation” in Note 1 - Description of Business and Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report.
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Comparison of the Years Ended December 31, 2023 and 2022
A discussion of our results for fiscal year 2022 compared to fiscal year 2021 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations — Comparison of the Years Ended December 31, 2022 and 2021” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 27, 2023.
Revenues
Transaction-Based Revenues
Year Ended December 31,
(in millions, except for percentages) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Transaction-based revenues
Options $ 690 $ 488 $ 505 (29) % 3 %
Cryptocurrencies 420 202 135 (52) % (33) %
Equities 287 117 104 (59) % (11) %
Other 5 7 41 40 % 486 %
Total transaction-based revenues $ 1,402 $ 814 $ 785 (42) % (4) %
Transaction-based revenues as a % of total net revenues:
Options 38% 36% 27%
Cryptocurrencies 23% 15% 7%
Equities 16% 9% 6%
Other —% —% 2%
Total transaction-based revenues 77 % 60 % 42 %
Transaction-based revenues decreased by $29 million primarily driven by a $67 million decrease in Crypto and a $13 million decrease in Equities, offset by a $17 million increase in Options. In addition, other revenue increased by $34 million primarily driven by increasing user activities in Instant Withdrawals.
Crypto revenues decreased primarily driven by a 29% decrease of number of users placing cryptocurrency trades and a 15% decrease in the average Notional Trading Volume traded per trader. The decrease was partially offset by a higher rebate rate from crypto market makers.
Equities revenues decreased primarily driven by lower equity rebate rates due to reduced spreads in securities pricing. In addition, the number of users placing equity trades decreased 16% while the average Notional Trading Volume traded per trader increased 12%
O ptions revenues increased primarily driven by a 26% increase in Option Contracts Traded . However, we experienced lower option rebate rates due to reduced market volatility and the mix of ticker symbols traded as different ticker symbols pay different rebate rates. The number of users placing option trades also decreased 18%.
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Net Interest Revenues
Year Ended December 31,
(in millions, except for percentages) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Net interest revenues:
Interest on corporate cash and investments $ 1 $ 103 $ 288 NM 180 %
Margin interest 132 177 243 34 % 37 %
Interest on segregated cash and cash equivalents and deposits 4 57 210 NM 268 %
Cash Sweep 3 22 123 633 % 459 %
Securities lending, net 136 89 79 (35) % (11) %
Credit card, net — — 9 NM NM
Interest expenses related to credit facilities (20) (24) (23) 20 % (4) %
Total net interest revenues $ 256 $ 424 $ 929 66 % 119 %
Net interest revenues as a % of total net revenues:
Interest on corporate cash and investments —% 7% 16%
Margin interest 7% 13% 13%
Interest on segregated cash and cash equivalents and deposits 1% 4% 11%
Cash Sweep —% 2% 7%
Securities lending, net 7% 7% 4%
Credit card, net —% —% —%
Interest expenses related to credit facilities (1)% (2)% (1)%
Total net interest revenues 14% 31% 50%
Net interest revenues increased by $505 million. The increase was primarily driven by growth in interest-earning assets balances and the higher short-term interest rate environment due to the rise in the federal funds rate, which positively impacted the interest rate we receive on these assets.
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The following table summarizes interest-earning assets, the revenue generated by these assets, and their respective annual yields:
(in millions, except for annual yield) Margin Book Cash and deposits (1)
Cash Sweep
(off-balance sheet) (2)
Credit card, net
(off-balance sheet) (3)
Total interest-earning assets Securities lending, net Interest expenses related to credit facilities Total net interest revenues
Year ended December 31, 2023
December 31, 2023 $ 3,458 $ 10,107 $ 16,352 $ 205 $ 30,122
December 31, 2022 3,089 9,530 5,837 N/A 18,456
Average (4)
3,302 9,979 11,348 197 24,826
Revenue (expense) 243 498 123 9 $ 873 $ 79 $ (23) $ 929
Annual yield (5)
7.36 % 4.99 % 1.08 % N/A 3.52 % 3.74 %
Year ended December 31, 2022
December 31, 2022 $ 3,089 $ 9,530 $ 5,837 N/A $ 18,456
December 31, 2021 6,467 10,600 2,095 N/A 19,162
Average (4)
4,519 9,931 2,920 N/A 17,370
Revenue (expense) 177 160 22 N/A $ 359 $ 89 $ (24) $ 424
Annual yield (5)
3.92 % 1.61 % 0.75 % N/A 2.07 % 2.44 %
Year ended December 31, 2021
December 31, 2021 $ 6,467 $ 10,600 $ 2,095 N/A $ 19,162
December 31, 2020 3,351 6,544 1,827 N/A 11,722
Average (4)
5,432 10,137 2,109 N/A 17,678
Revenue (expense) 132 5 3 N/A $ 140 $ 136 $ (20) $ 256
Annual yield (5)
2.43 % 0.05 % 0.14 % N/A 0.79 % 1.45 %
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(1) Includes cash and cash equivalents, cash segregated under federal and other regulations, deposits with clearing organizations, and investments.
(2 ) Cash Sweep is an off-balance sheet amount. Robinhood earns a net interest spread on Cash Sweep balances based on the interest rate offered by the partner banks less the interest rate given to users as stated in our program terms.
(3) Credit card, net is an off-balance sheet amount, which represents customer principal amounts funded by Coastal Bank under the Program Agreement. Under the Program Agreement, Robinhood Credit collects interest from customers that carry a balance and pays interest on the amount funded by Coastal Bank, with the difference between those amounts resulting in net intere st revenue. Refer to Note 3 - Business Combinations to our consolidated financial statements in this Annual Report for more information.
(4) Average balance rows represent the simple average of month-end balances in a given period. For the year ended December 31, 2023 the average balance for Credit card, net is calculated using the period from June 30, 2023 to December 31, 2023 based on Robinhood Credit’s acquisition date of July 3, 2023.
(5) Annual yield is calculated by dividing revenue for the given period by the applicable average asset balance.
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Other Revenues
Year Ended December 31,
(in millions, except for percentages) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Other revenues $ 157 $ 120 $ 151 (24) % 26 %
Other revenues as a % of total net revenues 9 % 9 % 8 %
Other revenues increased by $31 million, primarily due to increases in proxy revenues of $17 million mainly driven by transitioning proxy services and investor communications to Say Technologies, our wholly-owned subsidiary, from a third-party proxy service company who shared in the revenues. Additionally subscription revenues increased $7 million due to an increase in Robinhood Gold subscribers from 1.14 million to 1.42 million.
Operating Expenses
Year Ended December 31,
(in millions, except for percentages) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Operating expenses:
Brokerage and transaction $ 158 $ 179 $ 146 13 % (18) %
Technology and development 1,234 878 805 (29) % (8) %
Operations 368 285 159 (23) % (44) %
Marketing 325 103 122 (68) % 18 %
General and administrative 1,371 924 1,169 (33) % 27 %
Total operating expenses $ 3,456 $ 2,369 $ 2,401
Percent of total net revenues:
Brokerage and transaction 9 % 13 % 8 %
Technology and development 68 % 65 % 43 %
Operations 20 % 21 % 9 %
Marketing 18 % 8 % 7 %
General and administrative 76 % 68 % 63 %
Total operating expenses 191 % 175 % 130 %
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Brokerage and Transaction
Year Ended December 31,
(in millions) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Broker-dealer transaction expenses $ 48 $ 31 $ 32 (35)% 3 %
Employee compensation, benefits, and overhead, excluding SBC 14 20 31 43% 55 %
Market data expenses 33 26 23 (21)% (12) %
Customer statements 11 8 15 (27)% 88 %
SBC 7 5 7 (29)% 40 %
Q4 2022 Processing Error — 57 — NM NM
Other 45 32 38 (29)% 19 %
Total $ 158 $ 179 $ 146 13% (18) %
Brokerage and transaction costs decreased by $33 million as a result of the one time $57 million Q4 2022 Processing Error in the prior period. The decrease was partially offset by an $7 million increase in customer statement costs in response to our efforts to continuously modify, enhance, and improve our process of providing timely and accurate customer information and notifications regarding their account activities. In addition, employee compensation, benefits, and overhead also increased by $11 million due to increases in headcount which continue to support our business and new initiatives. Starting in the fourth quarter of 2023, we began to pass option trading fees onto users, which will reduce broker-dealer transaction expenses in future periods.
Technology and Development
Year Ended December 31,
(in millions) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Employee compensation, benefits, and overhead, excluding SBC $ 284 $ 367 $ 308 29% (16) %
SBC 610 212 211 (65)% — %
Cloud infrastructure services 267 175 149 (34)% (15) %
Software and tools 63 105 114 67% 9 %
Other 10 19 23 90% 21 %
Total $ 1,234 $ 878 $ 805 (29)% (8) %
Technology and development costs decreased by $73 million primarily due to a decrease of $59 million in employee compensation, benefits, and overhead driven by reduced average headcount as part of our efforts to improve efficiency and operating costs. In addition, cloud infrastructure services decreased $26 million due to decreases in user transactions and cost optimization efforts focusing on improvements in utilization of cloud infrastructure. These decreases were partially offset by a $9 million increase in software and tools primarily driven by amortization of internally developed software and other software services utilized in delivering our products.
SBC expense remained flat primarily due to SBC expense in the period ended December 31, 2022 containing net reductions of $18 million related to both the April 2022 Restructuring and August 2022 Restructuring.
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Operations
Year Ended December 31,
(in millions) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Employee compensation, benefits, and overhead, excluding SBC $ 125 $ 144 $ 75 15% (48) %
Provision for credit losses and fraud 108 42 49 (61)% 17 %
Customer experience 98 78 19 (20)% (76) %
SBC 20 8 8 (60)% — %
Other 17 13 8 (24)% (38) %
Total $ 368 $ 285 $ 159 (23)% (44) %
Operations costs decreased by $126 million primarily due to a decrease of $69 million in employee compensation, benefits, and overhead driven by reduced average headcount as part of our efforts to improve efficiency. For the year ended December 31, 2022, other employee costs included $12 million in severance expenses related to the April 2022 Restructuring and the August 2022 Restructuring. Additionally, expenses associated with customer experience decreased by $59 million as we consolidated our third-party customer support centers due to overall decreases in user transactions. Further, provision for credit losses and fraud losses increased by $7 million primarily due to a $19 million provision for credit losses related to Robinhood Credit (Refer to Note 7 - Allowance for Credit Losses and Credit Card Expected Loss Liability to our consolidated financial statements in this Annual Report for more information), partially offset by a $13 million decrease in expenses related to Fraudulent Deposit Transactions as we continued to strengthen our process to identify high risk users and prevent these transactions on our platform.
Marketing
Year Ended December 31,
(in millions) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Digital marketing $ 49 $ 21 $ 39 (57)% 86 %
Employee compensation, benefits, and overhead, excluding SBC 37 26 22 (30)% (15) %
Brand marketing 24 14 21 (42)% 50 %
Marketing incentives 121 11 7 (91)% (36) %
SBC 50 4 5 (92)% 25 %
Other marketing 44 27 28 (39)% 4 %
Total $ 325 $ 103 $ 122 (68)% 18 %
Marketing costs increased by $19 million primarily due to higher expenses in digital marketing of $18 million and brand marketing of $7 million mainly due to increased advertising campaigns. These increases were partially offset by decreases in employee compensation, benefits, and overhead of $4 million due to reduced average headcount as part of our efforts to improve efficiency and operating costs and marketing incentives of $4 million substantially all of which was due to lower costs associated with the Robinhood Referral Program as we increased our investments in paid marketing channels such as digital marketing and brand marketing. Next year, we plan to increase our marketing investments in 2024 to promote our brand, products, and service.
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General and Administrative
Year Ended December 31,
(in millions) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
SBC related to 2021 Founders Award Cancellation $ — $ — $ 485 NM NM
Employee compensation, benefits, and overhead, excluding SBC 196 239 216 22% (10) %
SBC excluding 2021 Founders Award Cancellation 885 425 155 (52)% (64) %
Settlements and penalties 70 24 126 (66)% 425 %
Legal expenses 101 76 96 (25)% 26 %
Other professional fees 54 53 41 (2)% (23) %
Real estate related charges — 45 5 NM (89) %
Other 65 62 45 (5)% (27) %
Total $ 1,371 $ 924 $ 1,169 (33)% 27 %
General and administrative costs increased by $245 million primarily due to the SBC related to the 2021 Founders Award Cancellation of $485 million, a $102 million increase in settlements and penalties and a $20 million increase in legal expense related to certain historical regulatory matters (See Note 17 - Commitments & Contingencies t o our consolidated financial statements in this Annual Report for further information) . These increases were partially offset by decreases of $270 million in other SBC and $23 million in employee compensation, benefits, and overhead driven by reduced average headcount as part of our efforts to improve efficiency and operating costs. For the year ended December 31, 2022, other SBC expense included net reductions of $34 million related to the April 2022 Restructuring and August 2022 Restructuring, and other employee compensation expense included a $15 million separation related expenses due to the April 2022 Restructuring and August 2022 Restructuring. Further, real estate related charges decreased $40 million due to a prior-year impairment of $45 million related to the August 2022 Restructuring.
Change in Fair Value of Convertible Notes and Warrant Liability
Year Ended December 31,
(in millions) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Change in fair value of convertible notes and warrant liability $ 2,045 $ — $ — NM NM
Change in fair value of convertible notes and warrant liability was due to the mark-to-market adjustment of the convertible notes and warrants we issued in February 2021. Upon completion of our IPO, the aggregate outstanding principal and accrued interest of the convertible notes converted into Class A common stock and the warrants became equity-classified, which resulted in the warrant liability being reclassified to additional paid-in capital . There will be no additional mark-to-market adjustments related to the convertible notes or warrant liability.
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Provision for Income Taxes
Year Ended December 31,
(in millions) 2021 2022 2023 2021 to 2022
% Change
2022 to 2023
% Change
Provision for income taxes $ 2 $ 1 $ 8 (50)% 700%
Provision for income taxes increased by $7 million primarily due to the nondeductible 2021 Founders Award Cancellation, non-deductible regulatory matters and our current taxes payable offset by the change in valuation allowance on our remaining U.S. federal and state deferred tax assets.
Liquidity and Capital Resources
Sources and Uses of Funds
Our principal sources of liquidity are cash flows generated from operations, and our cash, cash equivalents, and investments. Other sources of future funds may include potential borrowing capacity under our revolving lines of credit and potential issuance of new debt or equity. Our liquidity needs are primarily to support and invest in our core business, including investing in new ways to serve our customers, potentially seeking strategic acquisitions to leverage existing capabilities and further build our business, and for general capital needs (including capital requirements imposed by regulators and SROs and cash deposit and collateral requirements under the rules of the DTC, NSCC, and OCC). Based on our current level of operations, we believe our primary sources of liquidity will be adequate to meet our current liquidity needs for the next 12 months.
Liquid Assets
Our cash and cash equivalents were $6.34 billion and $4.84 billion as of December 31, 2022 and 2023. Our liquid investment portfolio comprised of available-for-sale securities of $10 million as of December 31, 2022. We had $500 million available-for-sale securities classified as cash and cash equivalents as of December 31, 2023. Held-to-maturity investments maturing within one year, which can also be a source of liquidity, were $413 million as of December 31, 2023. S ee Note 8 - Investments and Fair Value Measurement, to our consolidated financial statements in this Annual Report for further information.
Revolving Lines of Credit
As of December 31, 2023, we had a total of $2.80 billion in committed revolving lines of credit. See Note 13 - Financing Activities and Off-Balance Sheet Risk, to our consolidated financial statements in this Annual Report for further information.
Commitments
The following table summarizes our short- and long-term material cash requirements for contractual obligations as of December 31, 2023:
Payments Due by Period
(in millions) Total 2024 2025-2026
2027-2028
Thereafter
Operating lease commitments $ 145 $ 28 $ 46 $ 30 $ 41
Purchase commitments (1)
899 335 555 8 1
Total $ 1,044 $ 363 $ 601 $ 38 $ 42
_______________
(1) Purchase commitments are determined based on the non-cancelable quantities or termination amounts to which we are contractually obligated. They primarily relate to commitments for cloud infrastructure service and business insurance.
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In addition to lease and purchase commitments, we have a committed financing agreement with a contractual term of 30 days and a daily minimum commitment of $25 million and another with a contractual term of 21 days with a daily minimum commitment of $35 million. See “Securities Borrowing and Lending” in Note 1 - Description of Business and Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report for further information.
Regulatory Capital Requirements
Our broker-dealer subsidiaries (RHF and RHS) are subject to the SEC Uniform Net Capital Rule, administered by the SEC and 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 the SEC Uniform Net Capital Rule.
The tables below summarize the net capital, capital requirements and excess net capital of RHS and RHF as of periods presented:
December 31, 2023
(in millions) Net Capital Required Net Capital Net Capital in Excess of Required Net Capital
RHS $ 2,277 $ 75 $ 2,202
RHF 196 0.25 196
As of December 31, 2023, our broker-dealer subsidiaries were in compliance with their respective regulatory capital requirements.
Cash Flows
The following table summarizes our cash flow activities:
Year Ended December 31,
(in millions) 2021 2022 2023
Cash provided by (used in):
Operating activities $ (885) $ (852) $ 1,181
Investing activities (238) (60) (582)
Financing activities 5,203 — (610)
Cash provided by operating activities increased $2.03 billion. The increase consisted of net loss adjusted for certain non-cash items and the effect of changes in operating assets and liabilities. Cash provided by operating activities resulting from net loss adjusted for certain non-cash items increased by $649 million. This was primarily due to lower net loss and higher SBC expense during 2023 as a result of the 2021 Founders Award Cancellation. Cash provided by operating activities resulting from changes in operating assets and liabilities increased $1.38 billion. The increase in cash provided by operating activities was primarily driven by increases of $3.53 billion for securities loaned and $2.17 billion in payables to users, partially offset by decreases of $3.68 billion related to receivables from users, net and $568 million for securities borrowed.
Cash used in investing activities increased $522 million compared to the prior period. The change was primarily driven by an increase in cash used in investing activities of $759 million from purchases of held-to-maturity investments and $93 million primarily related to the acquisition of Robinhood Credit, net of cash and cash equivalents acquired. These were partially offset by $282 million in cash provided by investing activities related to proceeds from maturities of held-to-maturity investments.
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Cash used in financing activities increased $610 million compared to the prior period which was primarily driven by using cash of $608 million to repurchase Robinhood Class A common stock.
Critical Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting estimates addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Note 1 - Description of Business and Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results might differ significantly from these estimates under different assumptions, judgments, or conditions.
Allowance for Credit Losses and Credit Card Expected Loss Liability
The amount of the allowance for credit losses represents management’s estimate of expected credit losses over the remaining expected life of our financial assets measured at amortized cost considering available information from internal and external sources. The allowance for credit losses provides for unsecured balances of receivables from users due to Fraudulent Deposit Transactions, losses on margin lending, and reserves on proxy revenue receivables. The allowance for credit losses takes into account relevant available information including the nature of the collateral, potential future changes in collateral values, and historical credit loss information.
The amount of the credit card expected loss liability represents management’s estimate of expected credit losses from off-balance sheet credit exposure over the remaining expected life of credit card receivables originated under an arrangement with Coastal Bank where Coastal Bank is the legal lender and originator, the party to which the customer has a credit-borrower relationship, and the legal owner of the credit card receivables. We are responsible to pay Coastal Bank customer balances that are ultimately charged off or deemed uncollectible, generally when balances become outstanding for over 180 days. The credit card expected loss liability takes into account information from internal and external sources, including historical collection data, charge off trends by FICO cohort, and market data. For additional information, see Note 13 - Financing Activities and Off-Balance Sheet Risk, to our consolidated financial statements in this Annual Report.
Business Combinations
We allocate the fair value of purchase price to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer contracts, acquired technology, and trade names, based on expected future growth rates and margins, attrition rates, future changes in technology and royalty for similar brand licenses, useful lives, and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results might differ from estimates.
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Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination and is allocated to reporting units expected to benefit from the business combination. We operate and report financial information in one operating segment. We test goodwill for impairment at least annually, in the fourth quarter, or whenever events or changes in circumstances indicate that goodwill might be impaired. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach. In testing for goodwill impairment, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if we conclude otherwise, we proceed to a quantitative assessment.
The quantitative assessment compares the estimated fair value of a reporting unit to its book value, including goodwill. If the fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. However, if the book value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
Income Tax
We make significant judgments and estimates to determine any valuation allowance recorded against deferred tax assets. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe that they will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets including, but not limited to, historical cumulative loss experience and expectations of future earnings, tax planning strategies, and the carry-forward periods available for tax reporting purposes. Our judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, our tax provision would increase or decrease in the period in which the assessment is changed.
We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized. We account for uncertain tax positions, including net interest and penalties, as a component of income tax expense or benefit. We make adjustments to these uncertain tax positions in accordance with applicable income tax guidance and based on changes in facts and circumstances. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact to our consolidated financial statements and operating results.
Share-based Compensation
Time-Based RSUs
We have granted RSUs that vest upon the satisfaction of a time-based service condition (“Time-Based RSUs”). Prior to our IPO, our Time-Based RSUs vested based upon the satisfaction of both a time-based service condition and a performance-based condition, namely the occurrence of a liquidity event such as the IPO. The fair value of our RSUs is estimated based on the fair value of our common stock on the date of grant. The time-based service condition for our awards is generally satisfied over one or four
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years. For Time-Based RSUs granted pre-IPO, we record SBC expense on an accelerated attribution method over the requisite service period, as these awards include a performance-based vesting condition. The performance-based condition for our pre-IPO grants was satisfied upon the occurrence of the IPO in 2021, at which point we recorded a cumulative one-time SBC expense determined using the awards’ grant-date fair value. No performance-based conditions exist for our post-IPO grants, and therefore for grants of Time-Based RSUs issued post-IPO, we record SBC expense on a straight line basis over the requisite service period.
Market-Based RSUs
We have granted RSUs that vest upon the satisfaction of all the following conditions: time-based service conditions, performance-based conditions, and market-based conditions. The time-based service condition for these awards is generally satisfied over six years. The performance-based conditions were satisfied upon the occurrence of an IPO. The market-based conditions are satisfied upon our achievement of specified share prices.
For market-based awards, we determine the grant-date fair value utilizing a Monte Carlo valuation model, which incorporates various assumptions including expected stock price volatility, expected term, risk-free interest rates, expected date of an IPO, and expected capital raise percentage. We estimate the expected term based on various vesting scenarios, as these awards are not considered “plain vanilla.” We estimate the expected date of an IPO based on our expectation at the time of measurement of the award’s value.
We record SBC expense for market-based equity awards on an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable to be satisfied. We determine the requisite service period by comparing the derived service period to achieve the market-based condition and the explicit time-based service period, using the longer of the two service periods as the requisite service period. Upon the occurrence of our IPO in 2021, we recorded a cumulative one-time SBC expense determined using the grant-date fair values. SBC related to remaining time-based service and market-based conditions to be met will be recorded over the remaining derived requisite service period.
Common Stock Valuations
Prior to our IPO, the absence of an active market for our common stock required the board of directors, the members of which we believe had extensive business, finance and venture capital experience, to determine the fair value of our common stock for purposes of granting stock-based awards and for calculating stock-based compensation expense. We obtained contemporaneous third-party valuations to assist the board of directors in determining fair value. These contemporaneous third-party valuations used the methodologies, approaches, and considerations that were consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Following the completion of our IPO, there is an active market for our Class A common stock, so we no longer apply these valuation approaches.
Recent Accounting Pronouncements
See Note 2 - Recent Accounting Pronouncements, to our consolidated financial statements in this Annual Report.
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