🔴WATCH LIVE: Coinbase Q2 2024 Earnings Call | $COIN

Good afternoon, my name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Coinbase first quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star one on your telephone keypad. If you wish to withdraw your question, simply press star one again.

Good afternoon and welcome to the Coinbase first quarter 2024 earnings call. Joining me on today's call are Brian Armstrong, co-founder and CEO, Emily Choy, president and COO, Alicia Haas, CFO, and Paul Grewal, Chief Legal Officer. I hope you've all had the opportunity to read our shareholder letter, which was published on our investor relations website earlier today. Before we get started, I'd like to remind you that during today's call we may make forward-looking statements. Actual results may vary materially from today's statements. Information concerning risks, uncertainties, and other factors that could cause these results to differ is included in our SEC filings. Our discussion today will also include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our investor relations website. Non-financial measures should be considered in addition to, not as a substitute for, GAAP measures. We are once again using the Say Technologies platform to enable our shareholders to ask questions, and in addition, we will take some live questions from our research analysts. With that, I'll turn it over to Brian for opening comments.

Thanks, Brian, and good afternoon everyone. Today I'm going to cover three topics: first, comments on our Q1 financial performance; second, a review of a key transaction and an accounting change; and third, I'll touch on our Q2 outlook. You can find more details on all of these topics in our shareholder letter and our 10-Q. Let's start with Q1 financial performance. Q1 total revenue grew 72% quarter over quarter to $1.6 billion. We generated $1.2 billion in net income and adjusted EBITDA was $1 billion, as Brian said, more than we generated in all of 2023. We ended Q1 with a strong liquidity position, including $7.1 billion in USD resources, and equally if not more importantly, our customer safeguarded assets grew to $330 billion. We are proud to say we store over 12% of total crypto market cap on our platform. These results reflect our focused execution on product expansion, our ongoing operational discipline, and strong crypto market conditions. Looking at transaction revenue, transaction revenue grew 103% quarter over quarter to $1.1 billion. This is driven by higher crypto asset volatility as well as crypto asset prices, which both increased sharply in March. On the consumer side, trading volume growth was strong across both Simple and Advanced, resulting in our consumer blended average fee being roughly flat quarter over quarter. We saw higher engagement from users acquired in 2023 and prior, as well as new user growth. We also gained market share in spot trading on both the consumer and institutional trading platforms. Brian shared earlier in his opening comments, but Coinbase Prime trading saw their all-time highs in the first quarter. I want to share that in the first quarter, we broke out other transaction revenue, which consists of revenue from Base sequencer fees and payment-related revenue. These revenues were previously included in consumer transaction revenue. Our goal is to drive utility and experiment with payments, and this new revenue transparency helps provide investors insight into that. In addition, our subscription and services revenue grew 36% quarter over quarter to $511 million. This growth was driven by higher crypto asset prices and native unit growth. I'd like to call out that the price of Ethereum was 60% higher when comparing March 31st to December 31st, which was a key driver of the blockchain rewards revenue growth. On the native unit front, we did see inflows into both custody and staking. USDC market cap grew 32% to close at over $32 billion. I'd also like to note that in Q1, we renamed interest income to interest and finance fee income, and we reclassified Prime financing fees to this line, which was previously recorded in other subscription and services revenue. On the expense side, total expenses increased 5% sequentially to $877 million, and as we shared on our last call, the primary driver of quarter over quarter expense increase was higher stock-based compensation. All right, second topic. There are two items to note today. One, in the first quarter, we issued a convertible note. This was an opportunistic capital raise that raised $1.1 billion in net proceeds and added to our cash balance. We plan to use proceeds from that capital raise to repay our outstanding debt at or prior to maturity, depending on market prices. Second update, a notable accounting change. We early adopted accounting standard 2023-08. As a result, we now account for all crypto assets that we hold on our platform at fair value, as compared to historically where we accounted for these assets at cost less impairments. In Q1, since crypto asset prices were higher on March 31st as compared to December 31st, we recorded $737 million in pre-tax crypto asset mark-to-market gains. The majority of this was unrealized at quarter end, i.e., we had not sold the assets and realized this gain. You can see that in new financial statement line items: first, $86 million in gains on crypto assets held for operations, net, in operating expense, which pertains to crypto held and used in our operations; second, $650 million recorded in gains on crypto assets held for investments, net, which is below the line and pertains to our long-term investment portfolio. We will be adding back gains or losses on the crypto investments to adjusted EBITDA, as we do not consider those assets to be part of our day-to-day operations. Last, I'd like to touch on our outlook. We shared in the letter that April transaction revenue was over $300 million and that we anticipate subscription and services revenue to be in the range of $525 million to $600 million. This assumes crypto asset prices stay in the range we have seen year-to-date 2024. On the expense side, we expect technology and development and general and administrative expenses to increase sequentially to $660 to $710 million. This increase is primarily driven by higher variable expenses, notably customer support and certain infrastructure expenses related to higher trading volumes. I want to point out that on the customer support side, expenses typically lag revenue growth and trading volume growth, as it takes us time to ramp up their resources to meet higher volumes. Last item of note on the outlook: we are investing in additional sales and marketing expense and expect these to increase to $150 to $180 million. The primary driver in this growth is USDC rewards due to USDC on-platform growth. We ended Q1 with $5.5 billion in USDC on platform, nearly double compared to our Q4 ending balance, and therefore the reward payouts on these incremental balances will increase in Q2. We are pleased to see this growth in USDC and our incentive programs driving the broader adoption of our platform products and services. With that, I'll back to you for questions.

Thanks. So let's turn to shareholder questions. We're taking the most upvoted questions as determined by the number of shares. Our first question is: how profitable has the Base Network been and how will this drive value to shareholders?

Thanks. As Brian shared earlier in his comments, we're seeing some really encouraging traction on Base, and I just mentioned that we have a new revenue line item called other transaction revenue that is a combination of the Base sequencer fees and payment-related revenues. Quarter over quarter in Q1, the growth that we saw was primarily driven by growth in Base sequencer fees. It's early days, however, and our primary focus is on growing developer activity, driving adoption, driving those transactions that we noted earlier. I want to point out that Base has really strong unit economics, so as we grow transaction volume, which is the key growth metric we're focused on, we believe that Base can become a material contributor to our revenue and profits over the long term.

Thanks. So our second question is: have you done an analysis to determine the net revenue impact from the spot ETFs?

Sure. As Brian mentioned, the ETFs unlocked a flywheel of customer engagement across our Coinbase Prime product suite, and we were excited to see 40% of institutional clients engage with three or more products in Q1. We saw both direct and indirect revenue impacts from the ETFs. The direct impact is clear on our financials. We saw native unit inflows as a custodian for eight of 11 issuers. This supported growth in our assets under custody of 69% quarter over quarter to $171 billion, as well as growth in our custodial fee revenue of 64% quarter over quarter to $32 million. We also saw strong growth in Prime Finance revenue, which contributed to interest and finance fee income being up 36% quarter over quarter. On an indirect basis, in addition to Coinbase Prime reaching all-time highs in trading volume and number of active clients, we saw elevated trading activity across the board in Q1. We saw broad-based consumer growth in Advanced and Simple, with consumer trading volume up 93% quarter over quarter, outperforming the US spot market. We've long said that the ETFs would benefit the entire ecosystem, and we're thrilled to see that play out on our platform.

All right, and the final question we'll take from Say is: does Coinbase plan to offer any other products in the near term, like banking or insurance products?

All right, great. With that, Sarah, let's switch and take live questions from the analyst, please.

Thank you. Your first question comes from the line of Devin Ryan with Citizens JMP. Your line is open.

Great, thank you everyone. First question, just want to follow up here on Base. Appreciate the growth there is not going to be linear, but as we think about the rollout of the smart wallets later this quarter, which I believe are on testnet now, it would seem that could represent a pretty material catalyst for both a step function of activity on Base and also USDC growth and adoption. So I'd love to maybe get your expectations there, just based on the interest you're seeing around integration with smart wallets, and particularly as you're thinking about taking it a step deeper into connectivity with Web3. Thanks.

Okay, terrific color. Thank you. Just a follow-up. Obviously a big step up in USDC resources from $5.5 billion to $7 billion. I know you benefited from the convert as you guys mentioned, but also strong cash generation in the business. So if we think about the level of growth you're seeing right now and all the areas that you're focusing on, and the areas that need capital to grow and support their businesses versus ones that don't, how are you thinking about the capital needs of the business now? And where does that leave you with what I would think is just building capital for capacity to do other things like more aggressive M&A or even potentially return capital to shareholders? Just love an update there as well. Thanks.

Thanks, I'll take this one. So we are plowing a fair amount of capital into our Prime financing business. We ended the quarter with just over $700 million in loans, the majority of which came from assets on our own balance sheet, whether that was fiat or USDC. We have a new footnote that discloses a lot of detail around that lending portfolio. That business is using liquidity. I wouldn't say that it's using a lot of our capital today, but we are bridging that product as we grow and develop a two-sided marketplace for institutional lending. We also use capital for international expansion as we set up new licensed legal entities around the world. But overall, I would say we have a very capital-efficient business where we have positive unit economics in our products and we don't require significant capital either in the form of CapEx or balance sheet to support them. So our balance sheet is intended to be bridge capital for a lot of these bootstrapping the products, as well as opportunistic so that we can pursue M&A. I'll pass it over to Emily to share what we're looking at on that front.

Sure. Well, we always look at a spectrum of buy, build, partner, invest activities. For example, sometimes we'll see really interesting opportunities that are kind of further out for us that would be well suited for venture, whereas if we have something on the product roadmap that we think is incredibly important to the future of Coinbase, we're going to probably build or buy that. We have done historically very well with M&A to bolster the product portfolio. You can think of things like Tagomi and Zabo, for example, that helped us build our institutional product platform. Right now, we happen to be shipping very well organically. We launched in Canada, Brazil, Singapore, we have the International Exchange, and so we're leaning a little bit more into our Ventures arm, but we're watching M&A opportunities all the time. We closed One River in 2023, that's now Coinbase Asset Management. We are acquiring a MiFID license for the EU, we announced that in Q1, that should unlock derivatives in 20 plus EU markets. We're just going to continue to use the strong balance sheet to drive growth where we see high quality opportunities.

Your next question comes from the line of Ken Worthington with JP Morgan. Your line is open.

Hi, good afternoon and thanks for taking the question. So Q1 total revenue up 72%, Q1 total expenses up 5%. That's amazing operating leverage. Your Q2 guidance suggests some higher costs but still a very high level of profitability. How are you thinking about the right level of investment in the context of what is a good cryptocurrency environment, but acknowledging you can't sort of turn on and turn off investment as quickly as revenue might move around? Is there a logical margin range that in these better cryptocurrency conditions you feel is right over a longer time frame, balancing the need for future growth and current profitability? Thanks.

Thanks, Ken, for your question. So I think it's important to note that our focus is on adjusted EBITDA positive, and our overarching goal is to generate positive adjusted EBITDA in all market conditions. You saw that in 2023, those adjusted EBITDA margins were in the 30% range. Obviously, when we see strong crypto market conditions, we were able to deliver the Q1 performance that you see today in the 60% range. But the focus here is on learning the lessons from the past, and we learned in 2021 that we grew too quickly. So as we look at 2024, we are going to be making investments, we plan to be prudent and modest to support the strong performance we've seen here to date, and especially some of the early traction that we're seeing, for example, in Base, in USDC, and some of these other products that are not as correlated with crypto market prices and volatility. For the outlook we provided for Q2, the majority of the increase though is coming from variable spend, as I noted in my comments. We see CX, customer support, and compliance operations typically lag trading volume, and so the spike that we saw in March, the expenses are really hitting in Q2. And then we also have some infrastructure-related spend associated with scaling our infrastructure to meet demand. So we are going to be prudent. We expect to see some modest headcount growth in Q2, but we plan to be able in strong marketing conditions to deliver to the bottom line.

Your next question comes from the line of Benjamin Budish with Barclays. Your line is open.

Hi, good evening, thanks for taking the questions. Maybe just a couple of model-related questions. First, on the payment-related revenues and the sequencer fees. On the payment side, could you talk a little bit more about what those are exactly, how should we think about modeling them, what are the key drivers?

Sure. So it's a broad category for everything on the platform that is payments related. It includes instant withdrawal fees, debit card fees, commerce fees, and some of the more venture-type products that we have in the portfolio that are payments related. So I would say that Base, as I mentioned earlier, has been the biggest contributor to growth quarter over quarter, and that is the largest of these revenue streams at this time, but the payment-related ones are the ones that I named.

Got it, helpful. And then just on the institutional client engagement you talked about, I think 40% of institutions seeing engagement with three plus products. Can you talk about where that is? Is it sort of you've got a client who started with trading and they add Prime and borrowing and they're doing stuff with the ETFs? Can you maybe unpack that a little bit? Anywhere you're seeing particularly strong traction, any particular types of products?

Sure, happy to. So I think it's really important to zoom back and look at the last cycle run where our institutional offering in 2021 was really limited to like the custom platform. Over the last few years, we've built out a full Prime suite. The Prime suite offers custody, trading, the prime brokerage product, it offers financing, now we have staking. And so we're seeing customers engage across that product spectrum. I would say custody and trading go hand in hand, and then you see depending on the type of client, whether they use financing business or whether they're in staking, it's a mix depending on the types of clients. But we're seeing good adoption across each of those, which has led to the growth that you saw in the quarter.

Your next question comes from the line of Owen Lau with Oppenheimer. Your line is open.

Yeah, thank you for taking my question. Could you please add more color on the strategy for Lightning Network and payment? What is the traction on encouraging more merchants to use Lightning Network and what are the major pushbacks from that? Thank you.

Your next question comes from the line of Kyle Voit with KBW. Your line is open.

Hi, thanks for taking my question. Maybe just going back to the institutional business, just on the trading side. The fee rate came in better than expected and increased the last two quarters despite volumes growing significantly over that time. What's been driving that? And then I'm also just wondering whether the strong market share on the ETF custody side and more broadly the competitive positioning across the US institutional crypto ecosystem has given you some pricing power in the institutional business more broadly, so not just on trading. Should we think about pricing or fee capture to increase over the medium term in that institutional business because of that? Thanks.

Thanks, Kyle. So I want to start and just remind you that there's two products underneath the hood of the institutional transaction fee revenue. The first is the exchange, where we have market makers trading directly on the exchange, and the second is our Coinbase Prime, which is the trading through the prime brokerage platform. Fees on Coinbase Prime are higher than the fees on the exchange, largely due to the exchange just being very high volume where our tiered pricing enables most of the clients participating in that to achieve very low fee levels. So when you see the fee go up, it's really driven by a mix shift, and we're seeing more growth on Coinbase Prime than we saw on the exchange. As we grow Coinbase Prime, which I mentioned in my previous remarks or Brian did, that we saw all-time highs in engagement on Coinbase Prime both in trading volume as well as number of active clients, and that is what drove that fee for the last two quarters. It's just continued engagement with the Coinbase Prime products.

Your next question comes from the line of Joseph Vafi with Canaccord Genuity. Your line is open.

Hey guys, nice results this afternoon. Maybe we could just drill down into some of the user base metrics. Obviously, I'm sure you saw a lot more trading from existing users, but just wondering how much perhaps new users contributed to the strong quarter. And then a quick follow-up.

We haven't broken it out, but we saw growth yes from existing users, users that were acquired prior to 2023 that re-engaged this quarter. We saw new users, and we also saw higher trading volume per user. So all three of these metrics really contributed to the growth, but we have not attributed and provided that level of detail.

Got it. And then just secondly, I mean the ETFs got a ton of press attention in the quarter, and I think perhaps maybe underlying Bitcoin spot trading was not mentioned as much in the press. I'm just wondering if you've got a feel for if there was like a multiplier effect in the ETFs driving more Bitcoin trading, or any other color you'd have there as a guiding metric relative to ETF activity. Thank you.

Your next question comes from the line of B. with Tiger Securities. Your line is open.

Hi, management, thanks for picking my questions and congrats on the strong results. I have two questions if I may. So what is your view on the recent Wells notice received by Uniswap Labs? Do you think this will potentially impact the US crypto industry and ultimately make crypto less accessible to US users? And second question, also on regulatory front, it seems that the SEC wants to classify Ether as a security. If Ether is classified as a security in the US, how does that impact Coinbase's trading services and staking business? Does that mean Coinbase had to stop offering trading for Ether and other cryptocurrencies classified as securities? Thank you.

This is Paul Grewal. I'm happy to address each of those questions. On the Uniswap Wells notice, I think it's noteworthy that Uniswap responded publicly, transparently, and made very clear their view that none of the claims that have been suggested or presented to them have any merit whatsoever. I do think that is reflective of a growing trend, not just in this industry but more generally, of companies taking their disagreements with the SEC publicly, always in a respectful tone, always in a constructive manner, but sharing with the wider public and certainly the wider market why they believe their products and services are consistent with federal securities laws and why they ultimately will prevail in the action that the SEC may bring. As for the ETH issue that has been presented in the Consensys declaratory judgment action that was recently filed, what I think Consensys has done in that particular case is again in a very transparent, productive, constructive manner laid bare an issue that has been somewhat confused. If you look at SEC statements and the positions of the commission over the last several years, the SEC has made very clear in the past that ETH is not a security. In fact, not only was that the position of senior officials at the SEC, the current chair of the SEC said that same exact thing prior to his appointment in the years that followed. So we're fully supportive of both Uniswap and Consensys in their view. The court process of course will have to play out, but we're confident that as Brian has always emphasized, one way or the other through these court processes, we're going to get clarity for the market and certainly for Coinbase that unfortunately the SEC has not been willing to provide in its own right.

Your next question comes from the line of Mike Colon with HCW. Your line is open.

Hi, good afternoon guys, thank you for taking my questions and really great quarter here. So my question is around USDC. The market cap has grown by over $8 billion since the start of the year. What do you consider the primary driver supporting this rebound and how are you thinking about growth over the coming quarters? And then as a quick follow-up to that, I saw that you mentioned in your shareholder letter that you've seen a step change from legislators in recent months. So I know these things are difficult at times, but when can we reasonably expect to see stablecoin legislation passed in the US and what would be the potential impacts for USDC? Thanks.

Why don't I take the first part and then Paul, I'll hand it over to you for the second part. So we're really pleased to see the broader USDC growth. As we mentioned, we saw USDC growth on our platform where our own on-platform balance nearly doubled in the quarter, and we also saw growth in the overall ecosystem. I think there's been recognition that USDC is a highly trusted, transparent stablecoin by many market participants, and that has been leading to broader adoption largely through efforts of ourselves and other market participants. So we'll continue to offer incentives, we'll continue to work with the global ecosystem to make it an adopted product. Paul, maybe you can offer comments on the legislation.

Sure. On the legislation, look, we're pleased and encouraged that Congress is paying attention to this important issue, and there are now a number of proposals for legislation that are working their way through Congress. While certain proposals I think could and ultimately will be improved, the fact that we're seeing Congress engage I think is the important thing. Coinbase has been pushing for sensible legislation as to stablecoins for some time. We think it is an important complement to regulation that we've been pushing for before the SEC and elsewhere. So regardless of when any such legislation might pass, it's always difficult to predict how quickly Congress can engage and muster the necessary support in order to move this from legislation that's proposed to legislation that's enacted. We're encouraged by the fact that it does seem to be a priority, and we do expect to see legislation ultimately enacted that will enshrine standards for transparency, standards for reserves, and other important requirements around stablecoins that we think will continue to make the US an attractive market.

Your next question comes from the line of John Todaro with Needham & Company. Your line is open.

Great, thanks for taking my question. Congrats on the quarter, good results here. I guess I have two here. One, on the $300 million outlook for the April transaction revenue, does that include the other transaction revenue, Base, and if so how much is that? And then second, management has talked a lot about managing through the cycle here. You guys spent a lot of time thinking about that, so just kind of curious your thoughts on where we are in the crypto cycle or any kind of thoughts you put around that.

So I'll answer the first part. The answer is yes, $300 million is the April total transaction revenue, which includes both consumer, institutional, and other, and we haven't broken out the detail at this time to share with you. With regards to where we are in the cycle, it's one of our favorite questions. Brian, do you want to take the first shot at that?

We have one more question in the queue. It comes from the line of Pete Christensen with Citi. Your line is open.

Good evening, thanks for the question and congrats on the great results here. I'm curious, press reports are indicating potentially that Lummis-Gillibrand could hit the floor at some point next week, and part of that bill as you likely probably know is the dual banking system debate and whether or not states can issue their own stablecoins independently of the federal government. I'm just curious how you see state-issued stablecoins playing in the market. Is that potentially an opportunity for Coinbase? Just curious your thoughts around that dynamic. Thank you so much.

I'm happy to take that one. I think the point that you're raising around the role of state governments and in particular state-chartered institutions in supporting the crypto ecosystem and in particular stablecoins is an important one. Whether that ultimately comes to pass in any final legislation that's enacted remains to be seen, but we do think it's very important that states continue to have an important role in supporting stablecoins and supporting crypto more generally. We do think the dual system serves consumer and investor interest reasonably well, and we're hopeful and confident that in any legislation that's finally passed, that will continue to be recognized.

Great, thank you Paul. All right, well that does it for today. Thank you all for your questions and we look forward to talking to you next quarter.

This concludes today's call. You may now disconnect.