My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coinbase First Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. Thank you. Anil Gupta, Vice President, Investor Relations, you may begin your conference.

Thank you. Good afternoon, and welcome to the Coinbase first quarter 2021 earnings call. Joining me on today's call are Brian Armstrong, Co-Founder and CEO, and Alesia Haas, CFO. 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 results to differ from these forward-looking statements is included in our SEC filings and shareholder letter available on our IR website at investor.coinbase.com. Our discussion today will include references to adjusted EBITDA, a non-GAAP financial measure. We believe that certain non-GAAP measures of financial results provide useful information to management and investors regarding trends relating to our financial condition and results of operations. Non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. You can find additional disclosures regarding adjusted EBITDA, including a reconciliation to net income to comparable GAAP measure in our shareholder letter and current report on Form 8-K, which are posted on our IR website. Last week, we announced that we will use Sei technologies to enable all Coinbase shareholders the opportunity to submit and upload questions for our management team. Thank you to everyone who participated in this process. We will start today's call by answering some of the most uploaded questions. We will also take live questions from Wall Street analysts, many of whom have done significant amounts of work to understand our business, for which we are very appreciative. So with that, let's dive into the first question. Jordi asks, when will users be able to trade DOGE?

All right. I'll take that one. Thank you for the question, Jordi. Asset addition is something that's near and dear to my heart. There's more and more assets being created in the crypto economy. I think it's going to be something kind of like apps in the App Store on the iPhone, where there's eventually millions of these assets created over time, and so we're putting a lot of work and thought into how we can accelerate our pace of asset addition. One of those is DOGE, as you mentioned, which has been getting a lot of attention recently. So, to answer your question directly, we plan to list DOGE in the next six to eight weeks. More broadly, we're going to be focused on how we can accelerate asset addition in the future.

Our next question comes from Garrett, who asks, as volatility increases with the crypto market, can we expect to see continuous profit and revenue growth, as with the most recent quarter? In addition, can we look forward to additional ventures to cover the potential feeless future of crypto trading?

Thanks, Anil. I'll take this one. Garrett, thanks, this is a great question, and there's a lot to unpack here. I want to start by saying that we do not believe in a feeless future of crypto trading, at least in the near term. That said, we are definitely focused on building new products and services and to diversify our revenue streams. Many of these new revenue streams are reported as subscription and services revenue, which generated $56 million of revenue in the first quarter. Our goal is to become the primary financial account for the crypto economy for our users, and to achieve that goal, we're focused on introducing our customers to new products and services, adding new assets, as Brian just mentioned. Over time, we believe all of this will drive diversification of our revenue. But going back to the first part of your question as to whether we can expect to see continuous profit and revenue growth when volatility increases, I think it's really important to understand that crypto volatility and crypto asset prices can and have fluctuated meaningfully quarter-to-quarter. Historically, when we're in periods where we see a high bitcoin price and higher crypto asset price volatility, those two factors have driven higher trading volume and therefore higher transaction fee revenue periods for Coinbase. However, those are not assured; we could see periods of increased stability or decrease. In our shareholder letter, we included an outlook for Q2, along with a full year 2021 outlook. Quarter-to-date for the second quarter, we have seen a continuance of the strong crypto price cycle with high levels of volatility, both in retail and institutional. We expect total trading volume to meet or exceed the Q1 levels if our performance continues at the current pace. We have seen growth in MTUs since the end of Q1, driven by the continued strength in the crypto market. To close, I think it's important to remind you all that our revenue and growth can be volatile, and we could see periods of growth, we can see stability, and we could see a decline in our revenue.

Our next question comes from Alan, who asks, as crypto becomes more mainstream, how does Coinbase view competition with decentralized exchanges?

Yes, I'll take that one. So we are very excited about decentralized exchanges. I think this is a really important innovation in the crypto economy, and it's a great example of the kinds of services out there that our customers want to use, even if it happens to be somewhat competitive with one of the products that Coinbase offers, which is a centralized exchange. I think in the future, there's going to be centralized exchanges and also decentralized exchanges. We need to make the full breadth of those products available to our customers. I'm not a fan of trying to force people to use something just because it happens to be our product; we need to give our customers access to everything they want to use in the crypto economy. They can do that today through our sub-custody wallet, Coinbase wallet. They can also access decentralized exchanges directly through that product. We also have something called a smart order router that our institutional customers use, which can route orders to whatever exchange has the best pricing. So, in the future, you may see us integrate that into our retail product as well, where every order that comes through can be routed behind the scenes. The customer doesn't even really need to know if it's going to a centralized exchange, a decentralized exchange, something run by Coinbase, or something out there in the world, as long as they're getting the best pricing; they probably don't really care, and that's a feature that we hope to offer in the future.

So we have several other top questions that have similar themes, so we'll combine them here, one from Shinra, one from Lee, John, and Tim. They asked about longer-term product strategy or new potential new DeFi service offerings, an update on staking, and thoughts on introducing an NFT marketplace?

Yes, so again, I'm happy to jump in here. So, there's a ton of innovation happening in the crypto economy, which is great. We heard a lot of examples here with DeFi and NFTs. There are a lot of third-party applications. Some people call them dApps or decentralized apps. DeFi is another name for that, and as I said in the previous answer, we want to make all of these things available to our customers and just make them easy to use and trusted. We're going to do that in a number of different ways. Again, Coinbase wallet is an example of our sub-custody app, where people are already using a number of these things. We hope to integrate that kind of functionality further into the main Coinbase app as well. In a perfect world, people will be able to just tap and open one of these third-party applications, and it'll already have their wallet connected, because of course, our strategy is to be that primary financial account in the crypto economy. In the future, maybe even their identity, and everything is already connected when they just open one of these third-party applications. I think that's going to be a really important part of how the crypto economy grows. In terms of staking, since there was a question about that as well, this has been going really well. We actually crossed a million customers using our staking products in Q1, and it's become a nice source of revenue for us.

Our next question comes from Yashasvi, who asks, what is Coinbase's strategy to deal with other exchanges with cheaper fees? Apart from pricing, what other levers can you pull to attract more customers?

Why don’t I take that one? To be clear, our biggest focus right now is to keep up with the current demand. We are not focused on competing with fees; we're not trying to even win on fees. We're trying to win on being the most trusted and easiest to use, on providing all the assets that our customers want to transact with, on providing a yield on crypto assets, and the opportunity to engage in DeFi as Brian just talked about. Our customers choose us because they trust us to keep their assets safe. We provide an easy-to-use platform and a growing number of ways to transact and use crypto assets. Our institutions are choosing us for our secure storage offered by our solution, the deep liquidity we offer on our exchange, and our best trading execution where we can route orders across more than 10 liquidity venues, including other exchanges, to find the best price to execute client orders. On the retail side, we're bundling custody and storage services into our trading fee, and our customers really see value in the fees that we provide based on the services. Crypto is so dynamic and is expanding and evolving every single week, which is to say this is not a commodity service, and therefore, fees are not the sole basis that customers select who they engage with. In Q1, we saw our MTUs use grow up to 6.1 million, up over 200% compared to Q4 2020. So, while the crypto economy exploded, more and more users are choosing Coinbase and our services to access the crypto economy.

We have another question from Alan, who asks, what is Coinbase's stance on government regulation over cryptocurrency? Are there any long-term risks associated with this to Coinbase's core business model?

Yes, so our stance on regulation is that we have always decided to embrace regulation, and we've assumed that for this industry to reach a billion people using the crypto economy, which is what we want to do, it's going to have to be a regulated industry. From the earliest days of Coinbase, we actually proactively reached out to regulators and sought to be an educational resource for them to teach them about crypto and tried to be thoughtful and proactive in our steps, doing a reasonable thing even if it wasn't necessarily required yet by law. So, we're going to continue to follow that strategy. In fact, this week I was in DC meeting with a number of policymakers in the United States, and we do that in a variety of countries around the world where we operate. Our goal is really to continue to help educate and create clear regulatory frameworks where the entire crypto economy, not just Coinbase, can thrive, because we need lots of startups and businesses to be built in this space. We generally see a lot of value in regulation. We can see it as a business enabler and an important long-term strategy. A question was also asked about, are there any long-term risks associated with this? I think the risk is that, basically, it causes us to move more slowly; it takes time to operate in that environment. There are certain occasions where there's products that our competitors might offer that we don't feel comfortable offering because of the feedback that we're getting from regulators. And so the risk is really around the speed of execution. But I think the right approach is to not try and cut corners; it’s to work with regulators to create a trusted environment and help the industry grow within that framework.

Our next question comes from Samir, who asks, what is your plan for international growth and which countries outside the U.S. are you most bullish on?

Thanks for the question, Samir. International growth is a top priority, and we are bullish on the global market overall. While I say that, we are moving more slowly than we would like. We would always like to move faster in our approach to growth in international markets. However, this is a multi-step, multi-quarter, and sometimes multi-year process. Just like Brian shared, it's because we take a regulated approach, and sometimes that means it is a little bit slower than we would like. We need to seek licenses to operate in these new countries and new bank partnerships so that we can offer fiat to crypto routes; those things take time to obtain. There's actually no single country outside the U.S. that we are most bullish on, as our goal is to create economic freedom for all, and that has no borders. We do have some current initiatives in process in Asia to begin expanding our offerings in that region, but we are looking globally and hope to expand as much as we can in all international markets.

Our next question comes from Adam, who asks, as cryptocurrency becomes more institutionally accepted and used by the banking industry, how will Coinbase respond? Will there be more of a push to work with these institutions rather than individuals?

So we don't think of it as institutions rather than individuals; both of those customer segments are equally important to us, both retail and institutional. I think there's a lot of fiat money in the world, both in institutions and with retail individuals, and so we need both of them to be served equally to get the crypto economy really off the ground and to have a billion people using it. Now, in terms of banks starting to work with cryptocurrency, I think there's actually an opportunity here for Coinbase to help. Many difficult technology problems we've had to solve in terms of how we integrate with dozens of blockchains, how we securely store cryptocurrency in a geographically distributed way, which is very difficult, and how we do compliance on blockchains and conduct blockchain analytics and transaction monitoring to meet our compliance obligations. What I think we can do is start to expose some of these solutions that we've built that other companies can build upon, and we're doing that through a product called Coinbase Cloud. You can imagine it as kind of like our AWS for crypto where we're starting to offer more APIs and services like this that banks and any other companies can use to integrate with the blockchain. I think that'll be a big opportunity for us over time.

Ed and Nathaniel both asked this question: what parameters are used to qualify various coins or tokens to add to your selection and why aren't there more choices? Additionally, how quickly can you process and add debut coins as new coin prices can escalate quickly such that other exchanges get a new listing advantage?

Yeah, this is a great question, similar to the first one about DOGE in a way. I mentioned that I think there's going to be millions of different crypto assets out there, especially as we see new assets being created for new companies, and there's even NFTs and individuals who are tokenizing their time. In a world where there are going to be millions and millions of these crypto assets out there, we get this question a lot: how are you deciding which ones to add, and how can you accelerate it? Today, we use a number of factors. We look at cybersecurity around the coin to ensure that there's not going to be an issue that would cause customer loss. We also view it from a legal and compliance perspective; there are various concerns about securities, for instance. We've worked with organizations like the Crypto Rating Council to create clear regulatory frameworks for this. These are all things that we look at, but there's no doubt that we need to accelerate the process by which we review assets and add them to the site because we're quickly going to be in a world where there are so many assets that we won't be able to keep up unless we accelerate that process. The last thing I'll mention is that we did launch a product called Coinbase Asset Hub, and the goal of this is to help asset issuers out there get more clarity about the process of how to get listed on Coinbase. Any asset issuers can go there, submit a request, and we'll hopefully get more real-time feedback from our team about making their way through that process so we can demystify it, accelerate it, and we've had hundreds of asset issuers submit through there, and there's a backlog of assets that we need to get through.

Our next question comes from Ryan who asks, I've seen significant Coinbase advertising as of late. What efforts are being put into user base growth? What is the anticipated growth for this year, and does Coinbase expect this growth trajectory to remain constant in the coming years?

Thanks, Ryan. I'm glad that you've seen our advertising. Historically, we spent less than 5% of revenue on sales and marketing in 2019 and 2020. As we shared in our outlook, we're planning to make significant investments to increase our spend here, up to 12% to 15% of our net revenue. We're beginning to see some early signs these investments are having traction, as evidenced by our update in our shareholder letter that our Q2 quarter-to-date MTU trends have been increasing from our Q1 levels. Also, what we've seen in Q2 is that over two weeks, our app has been at the top 10 free apps on iOS and Android. We are seeing these efforts in our sales and marketing paying off. As we've shared earlier, we don't provide specific outlook on the growth; we provide scenarios about what the potential growth of our MTUs could be. The other thing I would note on your question is that we expect this growth trajectory to remain constant in the coming years. Coinbase has shared with you historically that there's a lot of volatility in our revenue, as our revenue is influenced by trading volume on our platform, which in turn reflects the overall crypto economy conditions, the price of Bitcoin, crypto asset price volatility, and the number of coins that are out in the market. Consistency is not a feature of our platform; we do expect volatility, but we believe we can grow long term and over price cycles in MTUs and the engagement of users on our platform.

Great. So, Erika, we'll turn it over to questions from the analysts.

Your first question comes from the line of Lisa Ellis with MoffettNathanson.

Hey, good afternoon. Thanks for taking my question and for doing this call. Great content already covered. I wanted to ask a follow-up on the question about how you're partnering with some traditional digital wallets and retail brokerages that are beginning to offer crypto investing to their consumers. Are you finding you're engaging with these players more as competitors or more as partners? I mean you called out in the shareholder letter that you're seeing interest in like white label versions, sort of a Coinbase inside type of model. What's your overall strategy, as we're seeing this rapid ramp of crypto capabilities at traditional brokerages? Thank you.

Yeah, so I'll take a crack at it, and Alesia, feel free to jump in. As I mentioned previously on the call, there are a lot of really hard technology problems that we had to solve in building Coinbase, and it's probably not clear from the outside what some of those are. Integrating with these blockchains turns out to be really difficult. You need to be constantly in sync with them; they’re upgrading and having various issues, where you need to have alerts and sync. The way we store cryptocurrency turned out to be an incredibly hard problem from a cybersecurity perspective, and we've secured a number of intellectual property components in place and have built a ton of infrastructure. What we're seeing is that as a variety of companies out there begin to integrate crypto, whether they're brokerages or other fintechs or regular companies, or it could be anything at this point, or startups, they are often reaching out to us to say, 'Hey, how can we build on top of this platform that you've built?' I don’t think that's going to necessarily apply to every company out there; some of them will try to build it in-house, some of them will try to use others in the space, but we are seeing inbound interest, and the strategy is essentially to productize the services that we've built and what we offer in this cloud. That's something that we're investing in actively and have a sales team around. Alesia, anything you want to add?

No, I think that's right. I think that we're optimistic that we can help get a billion users into crypto and part by being B2C, where we help get our own customers our product, but also in being B2B, where we can help other existing financial institutions offer crypto to their customers and hope that this creates a very vibrant crypto economy.

Yeah, I mean, just add to that; some of those other companies may even be competitive with Coinbase, right? We're okay with that. We want the entire crypto economy to grow. We think that if other fintechs are offering some of these things but it's powered by Coinbase, that's great; it's bringing more and more people into the crypto economy. At this stage, it's a lot of – it's a little bit like we're just trying to grow the size of the pie, similar to the early days of the internet, where Google wanted to have more websites out there. We need the whole crypto economy to grow, and offering those services can help.

Your next question is from Kyle Voigt with KBW.

Hi, good evening. Maybe just one on the retail transaction fee rate in the quarter; the rate came in closer to 120 basis points versus where you were last year at around 140 basis points. Was that driven by Coinbase Pro users hitting higher volume tiers, or was it simply a shift in the volume towards the Coinbase Pro users versus the Coinbase.com users? Also, was that driven by that volume mix? Just wondering whether you're seeing any migration of customers from Coinbase to Coinbase Pro, or was it just existing Coinbase Pro users trading much more. Thank you.

Thanks. I’ll address that question. You're absolutely right. What we saw in Q1, given the heightened volumes, we saw higher volumes among the Coinbase Pro users. Just for others listening on the call, within our retail suite, we have some of our customers using the Coinbase consumer app and some using the Coinbase Pro app. The Coinbase Pro app offers tiered pricing based on volume, so the more volume trades, the lower the fee rate. As Pro users increase their volume, their weighted average fee rate came down. We did not see any material movement between the two products between the consumer app and the Pro app, so it really was just additional volume coming on the Pro app that drove lower fees in Q1.

Your next question is from Kenneth Hill with Loop Capital.

Great. Hey, good afternoon everyone. I wanted to go back to that question on geographic outlook for Coinbase. Alesia, I think you said you're moving a little more slowly in other regions as you're taking a more regulated approach. I was hoping you could talk about maybe what countries have the most mature regulatory environment? I think about a quarter of your revenues today come from the rest of the world. As you think about expanding outside the US, how do you pitch the sales and marketing effort there? Maybe where your brand loyalty is not as strong, or where regulatory safeguards aren't quite as important to customers in some of those other markets? Thanks.

Thanks. Brian, maybe I'll start and please feel free to jump in. Today, we offer a full suite of products and services in the US, the UK, and Europe. When we've disclosed our rest of world step, most of the 25% that you've mentioned is in the UK and Europe, and that's where we offer to crypto services. We do market in those countries similarly to how we do in the US. We do not have significant efforts in global marketing outside of those regions at this time. When I was addressing the earlier comment, we're looking to do is expand our fiat to crypto services and more and more countries as that's what we can provide the full suite of the Coinbase platform and the benefits that we offer to add more users in more countries. To do that, we have to get licenses and bank partnerships to provide those rails. Once we do that, we would then extend marketing in those countries and introduce the Coinbase brand. Obviously, we would have to deal with proper research and localize the product offering as appropriate. We're in the early days, getting the infrastructure set up for global expansion, and we're not yet at the point of marketing.

Your next question is from Mark Palmer with BTIG.

Yes, thank you for taking my question. I wanted to get your take on the demand you are seeing on the institutional side for your new prime brokerage product from hedge funds and large mutual fund complexes. How would you assess that demand? If you could give some insight as well on the lending aspect of the prime brokerage product and what its prospects are? Thank you.

Great, maybe I'll start here again, and Brian, please jump in. We're seeing great interest from all corners of institutions, whether they're hedge funds, asset managers, corporate, pensions, endowments, insurance; you name it, and people have started to explore interest in Bitcoin, Ethereum, and increasingly even a longer tail of crypto assets. They're coming to us looking for custody services and the liquidity pools we provide on our exchange, and our smart order router enables us to get the best pricing on a number of these transactions. There's incredible interest from all corners. Institutions are right now doing a lot of work on assessing these platforms, performing due diligence, and ensuring that they have trusted service providers in the space. We are proud to say that we are winning many of those mandates and growing our customer base. Today, what we offer, as you see in our financials, is largely trading and custody. We are looking to expand our Borrow and Lend products, and we've been building out the full suite of prime brokerage services that those firms will be accustomed to in traditional financial services prime broker. However, the Borrow and Lend products are nascent at this time, and we expect to see future growth in that area.

The only thing I would add is one other customer segment we're seeing interest from is corporate treasuries as well.

Your next question is from Harshita Rawat with Bernstein.

It’s a front row seat in the development of the crypto ecosystem; you've coined the term crypto economy. I know it's a hard question given the early innings that we are in, but can you talk about some of the most powerful applications of crypto in the next five, ten years in terms of the size and the value? How can Coinbase participate as an on-ramp to the crypto economy? Thank you.

Yes, I mean that's a great question about the future, and in some ways we are in a tough spot trying to predict it here, so we can give you a couple of themes that we're excited about. But I think if we were sitting here in 1999 trying to predict what the internet would be in five or ten years, we probably would have gotten a lot of it wrong. So, I think we’re seeing crypto first being used for investment; people are trading it. That will come at the stage one. Stage two is crypto in financial services; that's where you're starting to see things like decentralized exchanges, DeFi, decentralized borrowing and lending, decentralized insurance. I think that trend will continue, and you'll see greater adoption of DeFi. I guess in the third phase, what we’re going to see in the future is really around crypto as an application platform. That means people using crypto as kind of like the next version of the internet; they’ll build their applications natively on blockchains, even if they have nothing to do with financial services. We're seeing some early signs of that. People are doing things like identity management, creating games, doing things like artwork with NFTs; very creative projects like that. They could be even used in virtual worlds. Social sites like Reddit, for instance, have said they want to use Ethereum in certain ways on their application. Imagine new forms of governance and voting, where people create new types of autonomous organizations where proposals can be voted on not just by a centralized set of folks, but by people all over the world coordinating on various problems and challenges. There's also, I think, a growing number of central banks that will create digital currencies; we’ve seen a lot of activity in China, and I think and hope that the U.S. and other countries will follow. Coinbase is coin agnostic; we want to support every crypto asset that is legal and safe for customers, and so we would include those assets along the way. We're at the very early days of the internet, and I think you're seeing a ton of innovation. Hopefully, that gives you a sense of some of the opportunities in the future as well. Erica, we have time for one more question.

Your final question comes from Owen Lau with Oppenheimer.

Good afternoon, and thank you for taking my question. I think it's still in early days, but I think your cash balance almost doubled to $2 billion in three months, and your second-quarter trading volumes so far seem to be strong. What is the capital management priority regarding reinvesting back to the business, M&A, buybacks, and things like that? If there's a disconnect between the fundamentals of Coinbase as a whole and the stock price, how would you think about even initiating buybacks? Thank you.

Thanks for the question. Our focus is on growth. We aim to invest both organically and inorganically in growth, so expanding our product suite, growing our MTUs, expanding geographically as we spoke about earlier. We'll do that through hiring, investing in technology, and pursuing acquisitions when that makes sense with our product roadmap. We are not focused on deploying that cash for share repurchases at this time, nor for dividends or any other capital actions. There’s a lot of volatility in our earnings, and we’re investing in our growth. We need this cash, built during times of high revenue and high profitability, to prepare for potential crypto winters, where we could see a decline in our revenues. We want to ensure that we have the balance sheet that can support us in all environments because we're building for the long term. We believe there's an amazing future of profitability at some point, but we need to invest in growth and revenue diversification to get there.

Great. Well, thank you, everyone, for joining us today, and we look forward to speaking with you on our next call.

Thank you. This does conclude today's conference call. You may now disconnect.