Good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coinbase Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Anil Gupta, Vice President, Investor Relations, you may begin your conference.

Good afternoon and welcome to the Coinbase third 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 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 our 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 questions from our research analysts. With that, I'll turn it over to Brian and Alesia for some opening comments.

Thanks, Anil. All right. So as I look back at the quarter, obviously there were some macro headwinds just the macro environment being down and that ties directly into our trading revenue, but I was really excited to see the growth in our subscription and services revenue. This is something where three plus years ago we started planting the seeds of building some of these different product lines with different revenue streams. And we've really started to see that come to fruition, which means the portfolio of products that Coinbase has and works on has started to provide less volatility for the parent company revenue overall. We still have a long way to go on that, but it's a great trend and it's moving in the right direction. So I just wanted to touch on a few topics. One is I want to touch on our move to a product group structure in the company that I think will help us move even faster. And then I'm going to touch on the regulatory environment and I'll end by sharing a few thoughts about how we're going to continue to lead in this environment. All right, so you may have read the news that our Chief Product Officer is going to be leaving the company. And this kind of accelerated a change that we had been thinking about for a little while, which was the idea of elevating our product group leaders in the organization. And so we decided to make that change and they're now going to be reporting directly to me. They'll be on the executive team. And we really have three different customer segments that Coinbase serves. So we want to have more autonomy and P&L ownership for each of the different product group leaders. We want to give them the ability to move quickly and nimbly, pushing down decision-making in the organization, having them operate a little bit like three different startups within our larger company. I'm really excited about this change for a few reasons. I think that we're a big enough company now where we want to have more autonomy and P&L ownership for each of the different product group leaders. We're giving them more ownership here, which I think will drive our efficiency at scale. By the way, I put out a blog post earlier this year about how we're going to operate efficiently at scale, and it's probably good to go back and look at that too. So let me just touch on the regulatory environment as well, because of course, the regulatory environment I think is one of the biggest unlocks that we're going to have in terms of growing this industry and perhaps even getting the prices to go back up in the right direction. By the way, there's an opportunity at some point for the crypto prices to potentially decouple from the broader macro environment. We're engaging with policymakers all over the world. The G20, with the exception of China, has actually been generally positive moving towards regulatory clarity, whether it's in Europe or in Hong Kong or in Australia or Brazil. We're seeing regulatory clarity emerge around the globe, and that's really exciting and positive. The U.S., I would say, is a little bit behind, but it's also moving in a positive direction. There's a bill going through Congress called the Stabenow Boozman Bill or simultaneously it's being referred to as the DCCPA, the Digital Currency Consumer Protection Act. This is a really positive development. Overall it gives spot market authority to the CFTC. It helps clarify the regulatory environment for centralized exchanges and custodians, which is, of course, a primary thing that we do. Now there's also part of the language in the bill that we're going back and forth with policymakers helping provide input and draft some of this, which is around DeFi. And look, I think that DeFi and self-custodial wallets are a super important part of where crypto is going. When you hear about Web3 and decentralized apps or DApps and DeFi itself, these are really essential to have the ability for new companies and participants to build these protocols and really give access to these tools to people all over the world, including the 1.7 billion people in the world who don’t have access to any bank account or financial services today. We'd like to see DeFi preserved and the innovation potential preserved. So, in the Stabenow-Boozman Bill, I think everybody can basically agree that centralized exchanges and custodians should be regulated. In an ideal world, we would really just focus the Bill on that plus stablecoins and just take the win. There’s a lot of good work to do for the industry and regulation. We can come back to DeFi later. But if DeFi needs to be included, maybe we can create further study and not necessarily opine on something so early in that Bill. Anyway, we’re very excited to see that Bill make its way through Congress. It has bipartisan support. I think it would be a great change actually to the current environment in the U.S., where unfortunately, we’re seeing this kind of regulation by enforcement from the SEC. That’s creating a chilling effect on the U.S. market. It’s harming U.S. investors by encouraging them to go to offshore exchanges that are less regulated. We’d like to see that change in the U.S. and for regulatory clarity so that the U.S. can continue to be a leader in this space. As we work on all these policy efforts, we’re also not just sitting back idly, we’re going to continue to build and innovate across all of our product suites. That’s going to continue to make us think about how we’re making investments internationally, because of course our mission is increasing economic freedom for the world. There are various jurisdictions around the world that are a little further ahead on regulatory clarity or that are even trying to attract crypto businesses. In this down environment, I’m actually really excited and energized. We’ve been through four crypto cycles in the last 10 years at Coinbase, and I actually enjoyed the down cycles a little bit more. In up cycles, there’s tons of scaling effort that has to happen and a lot of people rush into crypto for sometimes the wrong reasons. In down markets, you get to focus on building, and everyone there is a true believer and a true builder, and that’s no different in this case. There’s a ton of innovation happening. There’s still a ton of institutions signing up, kind of getting ready to take advantage when this market finds the bottom of the macro environment. Coinbase is going to continue to lead in this environment, taking a very trusted and compliant approach globally. We’re not trying to cut corners or move too fast. We’re trying to do the right thing for the long term, even if it’s more difficult in the short term. I think that will pay off for us. We’re leaning into all the variety of different use cases that are emerging in the crypto economy, leaning into Web3 usage and building a lot of this functionality natively into our app. Trading remains a big source of revenue for us, but we also want to support all use cases in crypto, not just trading, so that the crypto economy can really come to fruition. We aim to get 1 billion people and eventually half the world using crypto and benefiting from it. So I think Coinbase has been a leader in terms of ease of use and design. Our customers love it; it's easy for them to do anything they want with crypto. So with that, let me turn it over to Alesia, who’s going to go through our Q3 numbers.

Thanks, Brian. I’m just going to quickly recap a few key financial highlights in the quarter. Our results are covered in great detail in our shareholder letter. While our net revenue did decline sequentially to $576 million, our net loss and adjusted EBITDA both improved sequentially to negative $545 million and negative $116 million respectively. We think this really speaks to the cost management efforts that we took in Q3. Our trading volume declined 44% sequentially driven by ongoing headwinds that we discussed in our letter. Our MTUs declined 6% to 8.5 million as user behaviors continue to shift from trading to non-trading transactions. Our users are increasingly engaging in staking and reward-generating products amid this massive reduction in prices and lower crypto asset price volatility. We are so pleased, as Brian alluded to earlier, that our subscription services revenue grew 43% sequentially to $211 million. If we hold price constant, so Q3 prices being the same as Q2, that would’ve grown 82%. The biggest contributor within this line item is interest income, benefiting from the rising interest rate environment. We took decisive action on cost and reduced our operating expenses by 38% sequentially, or 22% when you back out the impact of non-cash impairment charges on our crypto assets. We are actively updating and evaluating our scenario plans and prepared to reduce operating expenses further as market conditions worsen. We ended the quarter with $5.6 billion in total U.S. dollar resources. In addition, we held a portfolio of $483 million in crypto assets, and combined, we believe this puts us in a strong position to manage through these market headwinds we face. For full year 2022, we remain cautiously optimistic that we will operate within the $500 million adjusted EBITDA loss guardrail that we previously communicated. This is assuming the market cap doesn't go down and deteriorate meaningfully below October, and we don't see any changes in customer behaviors. As we approach 2023 planning, we're preparing with a conservative bias, assuming the current macroeconomic headwinds will persist and potentially intensify. We are not providing a quantitative outlook yet this time. In closing, we feel confident that we're in a good position to manage through the stress market and will emerge stronger on the other side. With that, let's go to questions, Anil.

Great. Thank you both. Before we get into Q&A, I'll quickly reiterate our call 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 don't plan to answer questions related to the potential listing of new assets. And third, we'll avoid questions we've answered in the past or issued blog posts about in the past if there are no material updates. With that, the first question is from Manuel O. who asked what's the prediction for the next five years. Brian?

Yes. Thanks, Anil. So, of course, we always have to say we can't actually predict the future. I don't want to make the lawyers too nervous here on forward-looking statements, but I kind of like this quote: The best way to predict the future is to invent it. We can certainly do our best to build some of the things that we think have potential, and that's a great way that people can have an impact on the world. So, what's going to be different in crypto in five years? Well, as I addressed earlier, I think there's going to be more clear regulatory environments across the G20 and really around the world. That's going to unlock a lot more institutional capital. We're seeing that under the surface, even in this challenging market, we're seeing adoption from institutions signing up to our Coinbase Prime platform. I like the language that we used in the shareholder letter around the spring being coiled. I think there's a lot of people preparing for when the next upswings happen. I think the scalability of the blockchain will continue to improve. We saw this a little bit with Ethereum's merge this year, but they have a lot more updates. Other blockchains will continue to scale with Lightning Network and various Layer 2 solutions, which is really exciting. That will unlock a whole bunch of new use cases similar to how the Internet moved from dial-up to broadband. Decentralized trading with DEXes will continue to grow as a percentage of all global trading, and we're excited about that. I think you'll see more countries adopt cryptocurrency as legal tender, similar to El Salvador did with Bitcoin. I would be surprised if we didn't see other countries continue to adopt cryptocurrency as their legal tender, similar to how some countries peg their currency to the U.S. dollar. I think a lot of countries will pursue central bank digital currencies as well. In the U.S., I think USD Coin will end up being like a de facto central bank digital currency for the U.S. It will give policymakers frameworks to follow, but the private market will create the solutions, and USD Coin has been rising rapidly. I think it will probably be the largest in the world, ahead of Tether, if I had to guess. Crypto will have a big impact on economic freedom—that's our mission at Coinbase. The market will recognize us for the long-term and thoughtful approach we've made around compliance, trust, security, and ease of use. Hopefully, by that time, we will have a billion people using crypto. Today, I think there are probably 200 million to 300 million people in the world who have used crypto, and I think we could easily reach a billion people using crypto within five years. That said, we can't tell for sure, and this will require a lot of hard work.

Great. Our next question comes from Cordaro S. who asked how does Coinbase plan on surviving the current economic downturn? Brian?

Yes. One kind of language knit I'll mention is that I don't like the word just surviving in the current economic downturn. I think there are opportunities to thrive in this environment. Whether the market is up, there are opportunities, obviously we could raise money at higher valuations, but in down markets, there’s also opportunities all around us. We have opportunities for good M&A deals, and we're looking at a lot of those. We've got dry powder to take advantage of when prices come down. There are opportunities to build; if we don't have to focus on scaling in a hyper-growth environment, that allows us to help build the future and pay down tech debt. We're seeing lots of improvements across our technical infrastructure. There's good revenue growth opportunities in these different areas. We're going to keep operating efficiently and making changes around our product groups.

If I could, I'd just like to add on a couple of numbers behind your comments. So just to add on to this question, we did end Q3 with $5.6 billion in total USD resources and $480 million in crypto, so over $6 billion in combined resources. On the operating expense side, we reduced our operating expense by 22%, excluding impairments. We’re continuing to manage expenses closely given the macro conditions. And just a final thought, it’s important to share how our team thinks about operating through these volatile crypto markets. As a team, we spend a lot of time thinking through various scenarios and developing contingency plans. We believe we have the balance sheet to weather a multi-year downturn, and we have action plans ready to manage our expenses if needed.

We had several questions about competition. I'll summarize them by saying how do you plan to compete with companies that offer zero-fee trades or other companies that are starting to get into the U.S. market. Emilie?

Thanks for the question. We're seeing a lot of headlines about zero fees, and I want to unpack that a little bit. There are two ways that companies generate revenue through trading: spread and fee. Companies that say zero fee are still generating a spread or charging a partner. Right now, we are roughly in line with other companies in terms of our total costs. Customers are willing to pay for our premium product. We are not going to compete on price because of the quality of the product. Our goal is to grow the share of users and wallets across our three customer segments: consumer, institutional, and developer. We have three major differentiators for value props: we are the most trusted, the easiest to use, and offer an integrated product suite. There will be many winners in crypto, and there are plenty of opportunities for everyone to extract great TAM. Coinbase has one of the only places to have one crypto account and do every sort of crypto activity. We started investing in USDC in 2018 and in staking in 2019. We're seeing great results as demonstrated by the growth of our subscription and services revenue. We continue to plant seeds for future growth through partnerships like the ones we've announced.

Thanks for the question, Ezra. It's important to start with, we're a crypto company, and we are all in on crypto. Our revenue and profits will be intrinsically tied to the overall crypto market. Today, our largest revenue stream, trading revenues, is directly correlated with crypto prices and volatility. Years ago, we started investing in new revenue streams, specifically our subscription and services revenues. We planted the seeds back in 2018 with USDC, and we’re proud that subscription and services revenue went from $45 million in 2020 to over $700 million this year, despite headwinds we’ve talked about in the crypto market. We need to continue to invest here to create our multiproduct strategy and diversify our drivers of revenue to dampen volatility we see. All right. Different question, same flavor. We talked about diversifying our revenues to reduce P&L volatility from crypto prices. There will always be some element of correlation between our stock and Bitcoin. But I think it's important to note this has not been a consistent relationship. There are periods of 80-90% correlation between Coin and Bitcoin, and in Q3, it was approximately 30%. Not all asset managers or large investors can directly invest in spot Bitcoin. Some investors are gaining access to Bitcoin via Coin. As ETFs get approved and more crypto companies go public, we could see less correlation between Coin and Bitcoin. Additionally, we can create multiproduct strategies with different revenue drivers, which I think will lead to less correlation overall.

I can take that one. First of all, I don't want to preannounce anything that's coming down the pipe here, but I can talk generally about technology updates we have in the process or already live that are powerful for us. One of them is underappreciated and involves our multiparty computation tech stack. Without getting into technical details, what it allows us to do is store crypto securely using different keys in different secure environments. It allows us to store crypto more securely in our hot wallet. It also enables functionality in our app called the Adapt Wallet, which allows customers to access Web3 apps and decentralized apps. This was developed in-house. We have strong talent, including some from Unbound. It's going to be a core differentiator for us over time. Other core technology updates include our acquisition of FairX, our derivatives exchange, which gave us best-in-class IP. We're also working on a service-oriented architecture and our scalability, especially during this down market. We want to make sure we can support over a billion users over time, which requires investments in our tech stack.

Thanks for the question, Michael. We've invested over the history of the company in being the most trusted player in the space and take responsibility for securing customer funds very seriously. We're proud that we've never had an event where the systems were materially compromised. We have an industry-leading insurance policy for the hot wallet. We have a $1 million account protection for our Coinbase One subscribers. We've invested in AI and machine learning for fraud detection. We have a 200-plus person security team and live phone support and in-app chat, and we'll continue to invest in these initiatives. It’s important to know that crypto is a nascent technology, so scammers will always seek to take advantage of users, which is why we heavily invest in educating our users on account safety.

Great. So with that, Abby, why don't we turn it over to the analysts for questions?

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

Hi, good afternoon. Thanks for taking my questions and good stuff here. I wanted to follow up, Brian, on the international strategy. You had highlighted it in the shareholder letter that crypto trading volumes have been moving offshore this year. I noticed you recently added Singapore and the Netherlands, and you also added zero commission trading for fiat to USDC Coin. Can you just kind of tie all of that together for us and holistically talk about how Coinbase is thinking about capturing some of that offshore volume and continuing to expand outside of the U.S.? Thank you.

Yes, sure. International expansion is core to our mission of increasing economic freedom worldwide. We have seen good progress on the regulatory front, acquiring licenses in various locations. I’m in Singapore right now and just got our in-principal approval to hopefully end up with a license from the Monetary Authority of Singapore, which is a great step. We’ve seen the percentage of U.S. spot trading shrink from the beginning of this year, and while I don’t know the exact reason for that, I think the chilling effect from the regulatory environment may not have helped. We need to ensure we have international markets served fully and are serving customers from the best jurisdictions. Emilie, Alesia, anything you want to add?

No, that covers it.

The next question comes from the line of Owen Lau from Oppenheimer.

Thank you for taking my question. Based on my math, Coinbase has a loss of about $247 million in adjusted EBITDA year-to-date. If trading volume or revenue stayed at October level and you continue to benefit from rising rates, is there any reason why you would have a loss of over $250 million in EBITDA in the fourth quarter? Could you please talk about any aspirational goal of achieving positive adjusted EBITDA in the near term? Thank you.

Thanks for the questions Owen. As we articulated in our outlook, we’re focused on operating to the guardrail metric we set forth and being prudent in managing expenses. We’re thinking about growth in subscription services, but facing headwinds on trading. Nothing specifically to highlight as a loss in Q4, but we’re managing to $500 million adjusted EBITDA guidance. We’re investing as much as we can for growth, but we’re not focused on getting to positive EBITDA in the near term. Our immediate goal focuses on profitability across cycles.

Yes, similar to what Alesia said, it’s important to reiterate this point about managing through cycles, right? In 2021, we did roughly $7 billion in revenue and $4 billion in positive EBITDA. This year we're targeting a negative $500 million EBITDA as our guardrail. In up markets, we see a lot of positive EBITDA, and in down markets, we want to manage the negative our EBITDA. It’s reasonable to have a moderate amount of negative EBITDA and burn to continue investing through cycles, especially given our strong balance sheet.

The next question comes from Kenneth Worthington from JPMorgan Securities.

Good afternoon, thanks for taking my questions. I have two on the competitive environment. First, does the pricing seem to be having a persistent or sustainable impact on retail behavior that you see, and does it impact the type of customer on the Coinbase platform? Second, how effective is Coinbase One as a response to free trading offerings elsewhere?

Yes, I think this from a couple of directions. Yes, go ahead, Emilie.

Sure. To your first question, we do clearly see some competitors driving market share with zero fees in certain parts of the market. When we benchmark, we’re roughly in line with other companies, and we aren’t going to compete on price because of the premium nature of our offering. I can’t say what percentage of users might choose zero fees, but what we do see is our retail investors are sticky during these crypto winters. They tend to be holders, engaging in staking and finding yield, rather than converting to fiat when prices go down.

I want to add that we shared in our shareholder letter that even though our retail investors are trading less, we do not see them leaving our platform. When we look at retention rates, it’s very high. What we see is our retail investors go into huddle mode, seeking yield rather than converting to fiat and leaving the platform. Coinbase One is a product for all of our users. We think it provides benefits, including $1 million of account protection and premium customer service. It offers a low monthly fee for unlimited trading and other perks on our platform. We're seeing good growth in both paid and total subscribers quarter-over-quarter. We have not made these numbers public, but we’re seeing strong behavior from these customers with higher ARPU than other non-subscription users.

I wanted to ask about USDC. Can you talk about your near to medium-term outlook and expectations for Coinbase generated issuance of USDC? Where do you see the biggest opportunities?

We believe our announcements to drive adoption will be pivotal. We've removed fees for clients globally buying USDC. We've begun paying yield on USDC holdings, and we're partnering with MakerDAO to bring USDC to our platform. Making USDC faster, 24/7/365, and rewarding users is key to growth. Both trading and businesses are utilizing USDC for payments, and retail clients use it for yield. The more we grow USDC, the more revenue we generate. Interest rates and market cap are drivers as well.

USDC is applicable in many customer segments. It’s used in trading pairs, allows businesses to make quicker payments, and offers a method for individuals to hold U.S. dollar exposure easily. So, we believe it has a wide range of use cases and will be an essential part of our growth moving forward.

How important do you think it is for Coinbase to be a U.S. domicile company? Do you think you need to be more active in international markets?

It’s a good question. I think it’s the right long-term choice to be based in the U.S., and we have entities in various countries. We can serve customers globally and our hands are not tied. Founding the company in the U.S. was a big decision; I felt it was the right long-term bet. While it may be difficult and we face headwinds, I believe this will allow us to prevail as a company over time.

When we see the data that trading volumes are moving offshore, we’re optimistic that U.S. lawmakers and regulators understand it's time to act on sensible regulation for innovation and technology.

By pushing so hard on local companies, we’re not protecting investors; we’re encouraging them to move to less regulated options. It’s a message we deliver a lot in meetings with policymakers. There’s a lot of potential innovation that can happen if we can ensure a more competitive environment. We have time for one final question.

I want to understand your headcount has decreased 5% quarter-over-quarter, but it's still up 25% from year-end, and you’re seeing expenses increase in Q4. How do you feel about right-sizing given potential for loss and the current environment?

As Alesia mentioned, we targeted a negative $500 million for the year, and we seem to be on track. It’s reasonable to have some moderate negative EBITDA for investment opportunities. We are monitoring market conditions and will react if we are not on track to meet our goals in terms of EBITDA. We are taking a conservative bias for 2023 given potential headwinds.

Thank you all for joining us today, and we look forward to speaking to you again in our next call.

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