Coinbase Global, Inc. Q2 FY2022 Earnings Call

Good afternoon. My name is Sarah, and I will be your conference operator today. I would like to welcome everyone to the Coinbase Second Quarter 2022 Earnings Call. All lines have been muted to avoid background noise. Anil Gupta, Vice President of Investor Relations, you may begin your conference.

Thank you. Good afternoon, and welcome to the Coinbase second quarter 2022 earnings call. Joining me on today's call are Brian Armstrong, Co-Founder and CEO; Emilie Choi, President and COO; and Alesia Haas, CFO. I hope you've all had the opportunity to read our shareholder letter, which was published on our IR site 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 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 IR website. Non-GAAP 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 post questions. And in addition, we will take some live questions from our research analysts. Before that, I'll turn it over to Brian and Alesia for some opening comments. Brian?

Thank you, Anil. I want to discuss three main topics today: the current state of crypto asset cycles, our product momentum and success in this environment, and the regulatory landscape. First, regarding crypto asset price cycles, we often remind ourselves at Coinbase that outcomes are rarely as extreme as they seem. This is our fourth crypto cycle, and they can appear daunting, especially for newcomers. Despite significant events like the collapse of Luna and contagion in firms like Three Arrows and Voyager, none of these have impacted Coinbase. In downturns, we remain committed to building. While up cycles demand scaling, down cycles provide a chance to address technical debt, innovate, and enhance existing products. We are also focused on carefully managing expenses to ensure we can endure these challenging times. Raising capital in 2021 has allowed us to enter this downturn with a robust balance sheet. Typically, we see less serious competitors retreat during down markets, which benefits us. Previous cycles have always ended higher than before due to innovations born from downturns, so it's vital to step back and evaluate Coinbase's performance over these cycles. Reflecting on the last two years, our verified users have almost tripled, monthly transacting users have increased sixfold, our quarterly trading volume has risen eight times, and our asset platform has expanded nearly fourfold. Additionally, over two-thirds of our monthly transacting users are now utilizing multiple products, up from just 20% two years ago. Our subscription and services revenue, which is more stable, now accounts for 18% of total net revenue, an increase from 4% two years ago. It’s crucial to recognize that crypto performance is not linear; evaluations across price cycles reveal a different narrative. Next, let’s discuss our product momentum. In this period, we are focused on five key product areas. First, our Coinbase retail app caters to the majority of our verified users and is a major revenue source. Second is Coinbase Prime, our prime brokerage service for institutions globally, which has performed exceptionally well. Third is our staking business, which has successfully grown into a significant revenue source. Fourth is Coinbase Cloud, our developer products, which we believe will thrive similarly to AWS, enabling both startups and established companies to integrate crypto. The fifth focuses on Web3, a promising growth area encompassing our self-custodial wallet and various protocols we’re developing. Our aim is to help one billion people access the open financial system, positioning ourselves as their primary financial account. We distinguish our products by trustworthiness, ease of use, and offering an integrated suite. A major development last quarter was being selected by BlackRock and Meta as partners for their crypto initiatives, showcasing that Coinbase is a trusted platform for the largest companies seeking crypto integration. We are establishing a successful retail platform while also securing partnerships with notable companies across various customer segments. Our self-custodial wallet has received positive feedback, with claims that it is now leading the market in advanced features. Finally, regarding the regulatory environment, we have had constructive interactions with the CFTC and regulators globally. In May, the SEC made a voluntary request for information about our asset listings, and we await further clarity on whether this will escalate to a formal investigation. We're committed to a productive dialogue with the SEC regarding digital assets and securities. On a broader scale, we are encouraged by recent progress toward clearer regulations in both the U.S. and internationally. Several bipartisan bills are advancing in Congress, such as the Stabenow-Boozman bill, which aims for clarity regarding the regulatory jurisdiction of crypto assets. We look forward to working with all stakeholders to develop sensible regulatory frameworks that define crypto commodities, securities, stablecoins, and NFTs. The White House's recent executive order instructing government departments to collaborate on comprehensive crypto legislation indicates a positive shift, with many viewing crypto as a rare bipartisan issue. With luck, we may see stablecoin legislation passed this year, followed by comprehensive crypto legislation next year. As a global company, we are also witnessing similar movements towards regulatory clarity outside the U.S., including the EU's new Markets in Crypto Assets regulation. Strangely enough, increased regulation may benefit Coinbase, as we maintain our status as the most trusted brand in crypto while advocating for the industry. We strive to ensure that any legislation supports innovation and establishes a level playing field with traditional financial services. We welcome interactions with regulators and view this as a chance to advance the industry. I do not have any additional comments regarding the SEC inquiry at this time, but we will keep you informed about regulatory developments as they arise. In conclusion, although we have experienced many crypto cycles, and they can feel intimidating, we recognize that the reality is often less severe than it appears. Coinbase has thrived over the past decade by executing strong product strategies during down markets and maintaining prudent expense management. We are a responsible player in this space with a solid cash position and strong fundamentals. We are winning partnerships with the largest companies looking to integrate crypto and are committed to being a long-term entity in this industry. Now, I will hand it over to Alesia to discuss Q2.

Thanks, Brian. I'm going to briefly recap Q2, share our areas of focus and strength as we adapt to these new market conditions and then touch briefly on the outlook for the remainder of the year. First, to recap Q2. Down markets create financial headwinds, which are reflected in our Q2 results. Our MTUs totaled 9 million. We're pleased to see that the decline was only 2% lower compared to Q1. Note that 67% or 6 million MTUs were engaging with our non-investing products. We’re definitely seeing a shift in behavior as MTUs are trading less but participating increasingly in staking and other non-investing products. Our total trading volume was $217 billion, and transaction revenue was $655 million, down 30% and 35%, respectively. These metrics were influenced by a shift in consumer behavior and market activity. This is consistent with what we've seen in prior down markets, where retail customers tend to shift from being traders to holders. Market volume, in turn, shifts to concentrate among market makers and pro-style traders. Much of that volume takes place in offshore exchanges where financing and derivative products are more prevalent. Over time, we look forward to building products to better compete for this volume, but today, we are a heavily retail-concentrated platform. There was a spike in trading volume in May as investors reacted to the Terra Luna collapse and subsequent credit events surrounding crypto insolvencies. We have not listed Luna and do not have exposure to these insolvencies, and as a result, did not participate in this volume spike. Despite these headwinds, we're very happy to see the growth of our subscription and services revenues, which were $147 million as of Q2 and notably up 44% year-over-year. We have shared with you in the shareholder letter a way to look at our subscription and services revenue price adjusted, i.e., if you freeze the price as of Q2 and look at that historic trend line, we're pleased to see pretty linear growth quarter-over-quarter as we continue to roll out breadth and depth of different product experiences on our platform. Combined, our net revenue was at $803 million. Our adjusted EBITDA loss was $151 million. Our net loss was $1.1 billion, but I want to call out that this was heavily impacted by non-cash impairments. Excluding those non-cash impairments, our net loss would have been $647 million. We only take impairments when the value of crypto assets or our ventures investments fall below our carrying value of those assets. Importantly, we don't take write-ups if the market recovers above that point. So intra-quarter, as crypto dropped to lows, even if it recovered intra-quarter, we take the impairment down to the lowest point it reached during that reporting period and never write it up until we sell that asset. And that's the impact of non-cash impairments on our P&L and our balance sheet. I want to switch gears now and talk about how Coinbase is adjusting to these market conditions and how we're focused on operating more efficiently as we move forward. On the expense side, we've taken several steps to streamline our cost structure, including the 18% employee reduction we announced in June. We want to highlight that it will take some time to fully realize the financial impact of all of our actions, but we are lowering our full-year expense range for technology, development, and general administrative expenses to $4 billion to $4.25 billion, which is down from our prior outlook of $4.25 billion to $5.25 billion. On the product side, we've taken the approach of pause, maintain, and prioritize, and we're focusing on the five key areas that Brian outlined earlier. We're working hard to operate within the $500 million adjusted EBITDA loss guardrail we communicated for 2022. Clearly, we acknowledge these are stressed market conditions. But based on the expense initiatives we took in Q2, we're cautiously optimistic about our ability to operate within this guardrail. That optimism is conditional on crypto market capitalization not deteriorating meaningfully below July 2022 levels, and that we don't see another significant change in customer behavior. In the event we see further deterioration or performance approaches the low end of our MTU range that we're providing in our updated outlook, we may not be able to reduce our expenses quickly enough, and may exceed that guardrail. However, despite the short-term challenges, we want to commit to you that we're going to operate more efficiently as we build for the future. Lastly, I want to close with some comments about our strong capital position and our risk. There are three primary factors that we look at to assess our financial strength and durability. First, at the end of Q2, we had $6.2 billion in total USD resources. We provided enhanced disclosures in our shareholder letter to help you understand the balance sheet and how we look at it. This includes cash and cash equivalents. It includes our USDC, which we operate with the same as cash. We treat USD stablecoin as fungible with cash in our daily operations at Coinbase, and we would like you to see it in the same way. Second, we take a prudent approach to risk management. We've had no credit losses from our financing activities, and no exposure to client or counterparty insolvencies. We have never blocked a client withdrawal or restricted access to assets on our platform. We have had no changes in access to the credit products for our clients. We stand apart in how we operate risk within the crypto ecosystem today, and we believe this is a strength that will allow us to broaden our financing activities and support our clients going forward. Third, and Brian touched on this, but there's a global wave towards regulation, and we're committed to working alongside policymakers to build a workable regulatory framework for the crypto economy that addresses risks while also enabling the development and adoption of digital innovation. We believe we're uniquely positioned here. So with that, let's turn to questions.

Thank you. Your first question comes from Owen Lau with Oppenheimer. Please go ahead.

So in terms of expense control, what does it take for Coinbase to trigger maybe another run of resource allocation if this crypto winter continues to last? And also based on current trading volume, if the current net would last. I understand that if this winter lasts for quite some time, and unfortunately, some other crypto companies may also be in trouble, and Coinbase can benefit long-term. But how confident are you in managing the adjusted EBITDA loss to be around $500 million this year and maybe next year?

Thanks for the question, Owen. I'll take this one. It's Alesia. So we share some of our philosophy in our shareholder letter. But the way that we approach our business is that we're operating across the cycle. Going back to our S-1 from last April, we shared in our opening founders letter that we're really looking to breakeven across the cycle. We think it's important in these early days in the nascent days of crypto that we're building for growth, expanding the breadth and depth of products on our platform, and bringing new users into this ecosystem. Historically, we've been able to generate profit, and we're taking those profits and reinvesting them into the business. We look at stress scenarios, forecast out multiple different revenue scenarios. We make sure that we can plan for expenses over a multi-year winter. Historically, crypto winters have lasted two to four years. We do look at all those historic scenarios to see if we can operate through those. This year, we set a guardrail that if we went into a winter, we would operate to a $500 million loss. It’s never clear where we are in a crypto cycle. We are constantly updating scenarios, contingency plans, and ensuring that we can take a long-term view. We'll balance expense management with prudent investment while ensuring that we can manage through a multi-period downturn. We have not yet given an outlook for 2023, but we continue to invest for the future. We're not looking to make a profit every quarter or every year, but we want to continue to show growth in the adoption of our products and services, seen in green shoots and right progress, believing that when we have the right expense against that opportunity.

This is Anil Gupta. I'll jump back in. I think we reordered the call by accident. So I'll go back and state some ground rules for our shareholder Q&A. Before we dive into Q&A, I wanted to quickly reiterate our principles. First, we'll answer the most uploaded questions determined by the number of shares, and we might group questions together that touch on the same themes. Second, we do not plan to answer questions related to the potential listing of new assets, and third, we will avoid questions we've answered in the past if there are no updates. For example, we still don't plan to issue a dividend. So with that, I'll start the Q&A from our shareholders with Brian, Emilie, and Alesia. The first question we have that's top of mind for many shareholders, especially in light of recent industry events, is the safety and security of their assets, as well as exposure to leverage products and counterparties at the center of recent market turbulence. Alesia?

Thanks for this question. As I said in my opening remarks, we have seen some credit events in the second quarter that shocked the crypto credit market. We think these are going to be a major inflection point for the industry. I want to first note that the solvency concerns surrounding entities like Celsius, 3AC, Voyager, and others, in our view, are a reflection of insufficient risk controls at those entities. To us, these issues were foreseeable and actually credit-specific, rather than crypto-specific in nature. Many of these firms were overleveraged with short-term liabilities mismatched against longer-duration or illiquid assets. Those are common flaws we've seen across TradFi and crypto alike, but these are credit-specific issues. Coinbase had no financial exposure to these entities I just spoke about. Further, we have not engaged in these risky lending practices, focusing instead on building a more sustainable financing business with prudent and deliberate lessons from TradFi. As I mentioned in my remarks, we have not blocked any client withdrawals. We have not had any access to credit changes for our clients. Risk management is a first principle in our product design. We're holding customer assets one-to-one. We’re not rehypothecating. We're not lending any assets without customer consent. What our customers choose to do with their assets is their choice; Coinbase is not making independent decisions without customer approval. I want to switch gears and talk about safety and security beyond credit risk for a minute because this was a big topic coming out of our prior call. Customer assets are segregated and protected on Coinbase. We've recently clarified in our retail user agreement to expressly highlight the applicability of UCC Article 8, which provides the same legal protection for our institutional customers as well as our retail customers. It is the strongest known legal protection available to crypto assets. Our Chief Legal Officer, Paul Graywell, recently penned a blog post outlining the mechanisms we have put in place to safeguard customer assets, and I encourage you to read it. We feel very good that we have industry-leading protection for crypto assets.

Great. Our next question is that a number of shareholders have expressed disappointment with our share price performance since going public. What's the plan to get the stock price back on track? Brian?

So I think it's important when looking at this to distinguish between what is in our control and what's not in our control. We don't control the macroeconomic factors or the downturn. We don't even control the crypto market more broadly. So what do we control? We can focus on building great products for our customers. We can focus on staying on the forefront of crypto technology to create compelling use cases and make those available to our customers. We can focus on managing our expenses closely in down markets, and we can ensure we don't get distracted or disillusioned by short-term thinking. I believe that the work we're doing today to develop and innovate new products and tools will position us really well to capture disproportionate share in the next up cycle.

Our next question centers on competition. Several shareholders have asked how Coinbase intends to differentiate and compete, particularly as other exchanges seem to be gaining share, lowering their fees, and perceived to be moving faster and innovating faster. Emilie?

Yes. Thanks for the question. Let's unpack that a bit. It is true that some of our core U.S. retail customers are trading less. We've found that our core users tend to hibernate and transact less during periods of uncertainty. We observed similar behavior during 2018 and 2019. Yet we're happy because for those who are still choosing to transact, the average revenue per investing MTU is comfortably above the lows we saw during the last crypto downturn that began in 2018. It's also important to note that customers are engaging with crypto in new passive ways, notably staking. There's another explanation for Q2, and that is that there was a lot of episodic activity that we didn't participate in. Much of this was driven by events in Q2 relating to assets we didn't support such as Luna and counterparties like 3AC, Celsius, and Voyager, where we had no exposure thanks to our robust risk management and asset listing process. There's a larger amount of trading volume moving offshore as high-volume traders and market makers seek diversification overseas with derivatives and other products not currently available in the U.S. Although Coin is live in 100-plus countries, we are overweight in the U.S. Our focus is on compliance and moving the innovation conversation forward in the U.S. Brian was discussing the trip we made to D.C. and the cycles we're spending on that. Longer term, the way we move market share is by focusing on our customers, and we are committed to regaining share over time in a compliant and safe way for them, including through our new derivatives offering and continued international expansion.

Can I just jump in here, Emilie? I think we should also talk about the fee aspect of that question. The way I've been thinking about it is in terms of customer cohorts. We see very different behavior between our retail customers, market makers, high-frequency traders, and institutional customers engaging in crypto through Coinbase Prime. Today, as many of our listeners know, Coinbase generates most of our revenue from retail customers. They trust our products because they're safe and easy to use, and we provide an integrated platform to trade with various Coinbase assets in crypto activities like staking and spending on your card, and accessing the DApp wallet and NFTs, giving a breadth of services on our platform. We are comfortable being a premium product. Customers are willing to pay a premium for that service. We have not seen fee compression on the retail side and have not felt the need to change this fee model. In fact, we're experimenting with pricing, like with Coinbase One, offering a subscription product that bundles these services together, allowing our users to trade with no fees while still paying a spread for a better product experience. Yet, we believe that fee compression will occur over time, so we are building diversifying products that monetize in other ways. We are happy to see subscription and services become an increasing percentage of our net revenue, reaching 18% in Q2. When looking at market makers, there will likely be fee compression in the short term. This client segment is trading the highest volumes on our platform, and they are already receiving the lowest fee tiers based on volume-based pricing. But this group faces increasing competition with lower fees as we compete for this volume. We discuss this extensively in our shareholder letter. While it is an important segment, we are more focused on retail and institutional customers engaging through Coinbase Prime, offering them the breadth of products and services. We will be building products over time to compete for the market maker platform.

Yes. I think the only detail I would add in terms of differentiating versus competitors is based on three main pillars. The first is our brand, which is the most trusted option for customers in the industry. That comes down to cybersecurity, preventing hacks, compliance, and great customer support, doing what we say we're going to do, and not being sketchy. The second thing concerns ease of use, as we strive to make crypto accessible to everyone worldwide. Ultimately, we want 1 billion people accessing this new economy through our products. Crypto is still often too difficult to use. We are continuously leading the industry by simplifying our product. Lastly, we are building an integrated product suite to serve as a one-stop shop. If someone already has a Coinbase account, they will find it easier to switch over and try any of our products or services instead of setting up a new account elsewhere, which may require KYC and other configurations. We enable any crypto activity in one place, including trading, staking, paying, borrowing, or creating an NFT.

All right. Our next question is: What are the tangible steps we're taking to diversify our revenue from trading and other revenues linked to crypto asset prices? Alesia?

Sure. First, we are a crypto company; therefore, all our revenues will likely always have some correlation with broad crypto markets. However, we're working hard to diversify our product mix to reduce revenue volatility. A couple of years ago, we began investing in these products, and as shared in our shareholder letter, now 18% of our net revenues come from subscription and services, up from 4% in Q2 2020. This is also up 44% year-over-year, even in this down market, so staking is a significant growth driver for us. We're also starting to see significant growth from interest income generated by activities related to USDC on our platform and the adoption of that stablecoin. This is an area we continue to invest in. Looking at our product areas mentioned in our shareholder letter, the developer products with Coinbase Cloud or actions we take within Web3, we believe will continue to add diversified revenue streams over time.

Our next question is looking for clarity on our wallet strategy, especially if we plan to integrate it into the core Coinbase platform. Brian?

I'm happy to talk about Coinbase Wallet. For those who don't know, Wallet is our self-custodial app, allowing users to store their own crypto assets instead of having us store them on their behalf. We've seen strong customer demand for both our custodial and self-custodial apps. It's essential for us to obtain broad coverage across the different user segments demanding these functions. Coinbase Wallet is vital for several strategic reasons. It allows us to onboard customers in many countries worldwide. It's treated more like a software product in this regard since customers are storing their own funds. It enables our customers to access the latest developments in crypto, whether interacting with DeFi, smart contracts, NFTs, or broadly what is being called Web3, which we believe will grow significantly. Our strategy aims to be the primary financial account for people in the crypto economy, while Web3 is crucial. We've made various improvements to the Wallet app over the last few quarters. We now support more than seven different blockchains in Coinbase Wallet and various Layer 2 solutions, enabling users to utilize apps across these chains without needing bridges or multiple wallets. We redesigned the Wallet on a new tech stack in Q2, receiving rave reviews and great customer feedback. We now believe it’s the best self-custodial wallet on the market. We see much positive chatter. The second part of this question asked how we will integrate Wallet into our core Coinbase platform. The core retail app has extensive distribution, and many people prefer not to have two apps installed. We’ve worked hard to bring that same functionality we have in Wallet into our main Coinbase app. We developed a new wallet-type meeting all stringent cybersecurity requirements. It utilizes a technology called MPC, multiparty computation, which took time to invest in to enable this functionality. The customer experience is significant, and we are thrilled to empower new functionalities that help attract and retain customers.

Okay. Great. Thanks, Brian. Now with that, Sarah, let's switch gears and go back to the live questions from our analysts, please.

Thank you. Your question comes from Lisa Ellis with MoffettNathanson. Please go ahead.

Good afternoon, and thanks for taking my question. Thanks for the additional disclosures. I thought the bridge on Page 18 of the shareholder letter was super helpful. That was actually the direction of where I wanted to go with my question. Maybe that's one, Alesia, for you on how you think about cash burn at Coinbase? This bridge shows down $423 million in the quarter, and that's kind of the decrease in cash available. Looking back at Q1, I'm not certain of the exact number because I need to do that math, but it's sort of similar or slightly higher than that. Should we think about cash burn this way? Are you considering solving for the cash burn rate in the same way as you are for an adjusted EBITDA figure?

Thanks for the question, Lisa. We think about EBITDA and cash burn a little separately because EBITDA is a closer proxy for what we're spending on operations, while we continue to make investments that we think are vital. Our venture investments are crucial for developing the ecosystem and offering us insight into the future. We also view our financing activities to the products for our institutional and retail customers as integral to our business. You will see cash fluctuating within our investing and financing activities, which we think adds good revenue and strategic value to the company, separate from the operating cash. Our operating cash is the metric I would focus on that we are managing closely to ensure we are prudent with how much we are burning vis-à-vis our balance sheet resources.

Your next question comes from the line of Ken Worthington with JPMorgan. Please go ahead.

Good afternoon. Thank you for taking my question. Crypto markets have been under pressure. During the last call, you mentioned that in the past, Coinbase was able to accelerate its growth by investing and acquiring. Alesia mentioned the repurchase of your debt in the past. We've seen a couple of your peers acquire distressed assets in high-profile ways. So I don't think we've seen, at least in an obvious way, Coinbase leveraging the downturn to acquire its way into building the business. First, has Coinbase taken advantage of the sell-off and stress in the market to build through M&A or debt pay down? If not, why not yet? Second, there are many bears that point out that Coinbase debt is trading at distressed levels, and Coinbase is burning some cash. Therefore, can you talk about the pricing of the debt and any misperceptions you're hearing about your balance sheet?

Sure. Why don't I address the debt? Then Emilie can talk about our M&A philosophy and where we see opportunities in this market. We strategically raised capital in 2021, and we have very long-dated liabilities. The convert comes due in 2026, and we also raised 7- and 10-year high-yield notes. We believe this gives us the resources to operate for many years. Those were priced with interest rates that we frankly couldn't get today. We don’t anticipate being able to find in the market for the next two to three years. This allows us the flexibility to invest through a winter, offer financing products to our customers off our balance sheet, and gives us the resources to make longer-term decisions. We are not looking to take advantage of the price dislocation merely to buy back debt, as we see that as a financial engineering move rather than a sustainable business focus. Emilie, do you want to share how we approach M&A?

Sure. We are continuing to be active in both ventures and M&A. It's an area that has helped us access the innovation occurring in the crypto ecosystem. It helps strengthen our competitive position. Crypto winters are viewed as builders' markets, and it’s often the best time for us to be greedy when others are fearful. You mentioned the Xapo acquisition, which underpins our custody offering. We made this acquisition during the last crypto winter, as well as the acquisition of DOGAMÍ, which laid the foundation for our Prime brokerage platform. Expect us to continue targeted M&A that meets high ROI hurdles. In this type of market, we’ll likely have higher hurdles, focusing on seed-stage investments as desirable because it's a builder's market, and we often see a lot of innovation at ground level. We take a prudent approach to capital allocation while being mindful of our unique vantage point in the crypto space.

Your next question comes from the line of Richard Repetto with Piper Sandler. Please go ahead.

My question is more general, but it's for Brian. In July, in mid-July, you wrote a blog post, very thoughtful and well-researched, about operating efficiently at scale. One paragraph mentioned, and I think this was to your employees, that you talked about avoiding spending too much time on what's going well and really share what's not going well. In the spirit of that blog, Brian, what things—again, I know you're invested for the future and making progress in expanding crypto to all—but what things aren't going very well? What areas could you improve?

Thanks for the question. That’s certainly been an interesting cultural change for us. We always attempt to celebrate what’s going well, but we also think about areas for improvement. A lot is going well, but if you look back, we probably could have grew slower over the past couple of years. That’s something we probably could have improved. I think we’re still iterating on our communication methods. Our expenses are quite predictable. However, as you can see, our revenue—and of course, that ties into EBITDA—is less predictable. We're still working on how we want to communicate ranges publicly and ensuring we explain this new industry to public markets. It’s the first crypto company to go out, so we’re a bit like a bellwether for the whole industry. We’re trying to write the playbook for understanding this industry if it continues cycling through ups and downs. I guess those cycles may become more muted over time as we increase the adoption of crypto. Today, there might be hundreds of millions of people wanting to try crypto. As that figure rises to billions, I believe these cycles will be less pronounced. Therefore, we are iterating on various aspects to achieve that.

Your next question comes from the line of Stephen Glagola with Cowen. Please go ahead.

Thanks for the question. Can you further explain the puts and takes around the Q2 retail take rate coming in slightly higher versus Q1 and year-over-year? Include the mix of pro users and the main consumer app, and discuss your outlook on the retail take rate for the second half. Any early reads on the effect of consolidating advanced trading with the main consumer app?

Thanks for the question. There’s little update compared to past comments, that the retail fee take rate is mathematically the output of the mix of volume on our platform. We have two pricing models: the simple trading pricing model and tier pricing for more advanced traders. As mix shifts occur, the blended rate will adjust. We didn’t change pricing in Q2, but we observed less trading at higher volume tiers, leading to higher fee tiers. As we think about the second half, we expect volumes to be lower or in line with what we’ve seen in July thus far, which reflects a higher side of fees, probably similar to Q2. However, it’s all mathematical and mix. We haven’t seen cannibalization or behavioral changes affecting how our customers trade on our platform. It’s early since we just announced retail advanced trading within the main app, but we are closely watching this aspect.

Your next question comes from the line of Devin Ryan with JMP Securities. Please go ahead.

As we see crypto prices up slightly over the past months, indicating stabilization post-drop, we recognize it's a short time frame. The trading volumes on your platform are still declining significantly from Q2, while you're expecting drops in ARPU for the second half of the year. Can you provide clarity on the interplay between crypto market cap, price, and activity? Additionally, address the scaling of Coinbase One, as we're receiving questions on its impact on ARPU and overall outlook?

Sure. While we've seen prices climb, I would suggest that crypto is volatile, and we will only know if there's a true trend with hindsight. Broad headwinds in the macro environment are keeping many investors on the sidelines. We observe continued fallout in the crypto credit environment; another exchange in Germany has unfortunately filed for insolvency. Stability in this environment would be welcomed as well as regulatory market improvements that influence what we expect for the second half. These markets move swiftly, and we may witness shifts quickly from what we cannot currently see. We're determined to roll out our products and services outlined in our roadmap despite these conditions, driven by the positive customer feedback on new features like retail advanced trading in the main app and new Wallet app.

Sarah, we have time for one more question, please.

Your final question comes from the line of Will Nance with Goldman Sachs. Please go ahead.

Good evening. Thanks for taking the question. Regarding stock-based comp, I appreciate all the comments on trying to manage the business more efficiently. Stock-based comp has been running over half of revenue. What are your thoughts on any nuances surrounding founder grants or similar high exercise price matters? Broadly, how are you thinking about limiting non-cash dilution that shareholders experience from stock-based comp over time?

Thanks for the question. Our Board and management team genuinely understand investor concerns regarding stock-based comp, and we are very aligned with investors. Our aim is to grow profits, share price, and manage dilution effectively. Given crypto's inherent volatility, we approach these metrics with a longer-term view. The metric of gross dilution we look at is a trailing three-year average. When reviewing it in that light, in 2021, our gross dilution from new awards was 2.4%. Year-to-date, it’s been about 3%. We’re assessing how this performs against peers and feel reasonably confident in this evaluation. Looking ahead, if we maintain the same employee base in 2023, we expect our stock-based comp to decline on a year-over-year basis, as we have some M&A earnouts and multiyear grants from previous years being amortized this year. While we’re not offering a specific 2023 outlook right now, we anticipate a year-over-year decline in stock-based compensation.

Great. Thank you for joining us, and we look forward to speaking with you on our call again next quarter.

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