Robinhood Reported Huge Q2 Losses But its Massive 23% Headcount Reduction Cheered Investors

Mark Hake

Robinhood Markets (HOOD) stock rose 2.1% to $9.23 on Aug. 2 after the online brokerage reported huge losses for Q2, but also said it would lay off 23% of its workforce.

The company's revenue fell 6% in the quarter and its adj. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), a non-GAAP measure of cash flow, was negative $80 million.

Many other metrics for the company were also negative or in decline. For example, its transaction-based revenues fell 7%. In addition, its Monthly Active Users (MAU) decreased by 1.9 million sequentially to 14.0 million.

The bottom line was that Robinhood's net loss was negative $295 million for the quarter.

The CEO and Co-founder Vlad Tenev sent a blog to its employees indicating that he was going to lay off 23% of the workforce with immediate effect.

The blog said that this was in addition to a 9% reduction in force that the company had previously instituted earlier in the year. The CEO blamed the new 23% reduction on inflation at 40-year highs, and a "broad crypto market crash." He said this further reduced customer trading activity and assets under custody.

Moreover, the CEO said it was on him that the company had overstaffed. He had assumed the "heightened retail engagement in the stock and crypto markets" last year would continue into this year.

The Cost of the Restructuring

Employees immediately received a Slack email telling them if they were part of the new 23% reduction. They can continue to work through Oct. 1 and also receive a severance package.

The company reported that it expects the Aug. 2 restructuring to cost between $45 million and $60 million.

However, there will also be between $40 million and $50 million reversal of share-based compensation expenses. The company did not say if this was from prior periods or in Q3. The financial footnotes indicate that this will be for the year ending Dec. 31, 2022.

Nevertheless, it will entail a cash outflow for at least Q3.

Set For a Turnaround

But the market sees this as a positive. It right sizes the company, puts it on a closer path to profitability and changes the narrative going forward. From that standpoint, the monetary cost is not relevant, since if profits ensue, that is all that counts in the future.

In fact, if this wasn't the case, companies like Robinhood that are in trouble, would not take this type of "bathroom and kitchen sink" write-off. Management throws every type of cost or writedown they can into the restructuring, in order to rid the company of all bad news going forward.

So, with a leaner staff, if market activities pick up, the company's profit leverage could be substantial. The market sees this as setting the company up for a turnaround.

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Mark R. Hake, CFA writes articles at InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as a Beehiiv free newsletter on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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