Coinbase Global, Inc. Q3 FY2024 Earnings Call

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coinbase Third Quarter 2024 Earnings Call.

Good afternoon, and welcome to the Coinbase Third Quarter 2024 Earnings Call. Joining me on today's call are Brian Armstrong, Co-Founder and CEO; Emilie Choi, President and COO; Alesia Haas, CFO; and Paul Grewal, Chief Legal Officer. I hope you've all had the opportunity to read our shareholder letter, which was published on our Investor Relations website earlier today. Before we get started, I'd like to remind you that during today's call, we may make forward-looking statements, which may vary materially from actual results. 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 certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website. Non-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 ask questions. In addition, we'll take live questions from our research analysts. And with that, I'll turn it over to Brian for opening comments.

Thanks, Anil. I'm excited to share our progress on our 2024 priorities. Just a reminder, our priorities for 2024 are, number one, driving revenue; number two, driving utility, which is really going beyond just trading as a use case for crypto and how do we make it a part of people's ordinary lives; and then number three, driving regulatory clarity. So we'll touch on each of these in turn. Starting with driving revenue. We had some softer market conditions in Q3, but overall, it was a really solid quarter for Coinbase. It was our seventh consecutive quarter of positive adjusted EBITDA. It was our fourth consecutive quarter of positive net income. As you've heard from us many times, we've made a big effort to diversify our revenue over the years away from transaction fee revenue, which is more volatile, not as predictable, and is market dependent. We've shifted more of that to subscription and services revenue over time and made incredible progress this year. We're now on pace to surpass $2 billion in subscription and services revenue in 2024, up from just $1.4 billion in 2023. This has given us the resources to invest in some of those next steps around utility and regulatory clarity. Just a quick update on some of our international expansion efforts, which also helps drive our revenue. We invested in 4 new markets, and over the last 2 years, their revenues exceeded their direct operating costs. This shows that we have a repeatable playbook and can continue to do that in more countries. This has resulted in a stronger balance sheet, which is now at $8.2 billion, giving us a lot of financial flexibility. Our Board has also authorized a $1 billion stock buyback, which we can use at our discretion as well. Moving on to the second priority, which is driving utility. This is really important because crypto started off as an asset class that people wanted to trade. We actually want to increase economic freedom in the world. To benefit from it, not everyone in the world has disposable income to do trading every day; they need to be doing things that are more frequent for regular people. Some of these building blocks are just starting to come together this quarter and the last few quarters, allowing us to bring on 1 billion or more people into the crypto space. One of them is stablecoins, useful for people in high inflation markets and for making fast, cheap payments globally. Smart wallets reduce friction for onboarding crypto-based apps and can eliminate network fees, and have benefits that I'll discuss. Finally, Base, a Layer 2 solution that allows blockchains to scale, enabling transactions in under a second for less than $0.01 anywhere in the world. I think crypto is likely the only payment rail that can claim that. Payments are crucial right now in crypto, and I’d say it's an important underappreciated trend. Last year, stablecoin payments saw about $10 trillion of volume, and we've already 2x that in 2024, surpassing $20 trillion. The key here is having a trusted stablecoin like USDC. We’ve made significant efforts to integrate stablecoins into all our products. The market cap of USDC is up 45% year-to-date to $36 billion in Q3, up from $25 billion at the beginning of the year. USDC has become the fastest growing U.S. dollar-backed stablecoin. We also launched EURC, a Euro-backed stablecoin on Base, and helped double its market cap in Q3. This is no longer just a dollar phenomenon; we're seeing stablecoins across various fiat currencies. Regarding smart wallets, we launched support last quarter, revolutionizing the user interface, especially with self-custodial wallets. Users no longer have to remember recovery phrases; they can create wallets using biometrics in seconds. This not only simplifies the onboarding process but also helps eliminate network fees. We track time-to-first transaction, which has decreased to about 8 minutes compared to 2.5 hours with traditional wallets. The Layer 2 solutions, especially Base, are becoming more significant. Base is now the #1 Layer 2 solution by transactions processed and total value on the platform. Base added features like Base names for easier use and cbBTC, a coin-based wrapped version of Bitcoin. All these building blocks are coming together, allowing us to see consumer utility in crypto. To give you an analogy, in 2000, only about half of 1% of global GDP was through e-commerce, and today it's about 20%. We estimate around 0.5% of global GDP is on crypto rails right now, and we aim to reach 20% over time as payments will flow to the path of least resistance. This foundation allows us to see global GDP increasingly run on crypto rails. Lastly, driving regulatory clarity is our final pillar. I'm proud of what we've achieved as an industry over recent years. Just a few years ago, crypto felt under siege with anti-crypto sentiments. Today, both presidential candidates are courting the crypto voter, and over 350 politicians have adopted pro-crypto stances. We passed pro-crypto legislation with bipartisan support. We’re now a strong community with a powerful voice in policy matters. At Coinbase, we are committed to supporting our customers, as shown by our significant investment in groups advocating for crypto. We know this election is critical, and the results could reinforce a pro-crypto environment. Regardless, we aim to maintain our momentum with initiatives like our commitment of $25 million to Fairshake, ensuring continued advocacy for pro-crypto legislation. This environment of clarity can unleash new innovation in the industry, leading to a major inflow of capital. Our focus is to ensure we have proper legal frameworks to support our growth. So, to summarize, we are focused on driving revenue, utility, and regulatory clarity. We believe we are well-positioned for the future, meeting our financial objectives and aiming to grow our user base significantly. I'll turn it over to Alesia.

Thanks, Brian. Just as Brian shared that we have 3 goals for the company this year, we also have 3 financial goals, and we made progress on each of these in the third quarter. The first is to continue to diversify our revenue; second, maintaining expense discipline; and third, generating positive adjusted EBITDA in all market conditions. Our Q3 total revenue was $1.2 billion, our expenses were within the outlook ranges we provided last quarter, and adjusted EBITDA was $449 million. Our balance sheet strengthened and our total USD resources grew 5% quarter-over-quarter to end at $8.2 billion. Starting with transaction revenue. Our total trading volume was $185 billion, down 18% quarter-over-quarter due to lower crypto asset volatility and average asset prices during the quarter. Our total transaction revenue was $573 million, down 27% quarter-over-quarter. We've observed our share of fiat to crypto trading volume in the U.S. was steady quarter-over-quarter, but we saw significant growth in consumer stablecoin pair trading volume. This increase was partly driven by a product update that allowed advanced traders to trade stablecoins easily on our platform. While we generate little-to-no fees on stablecoin pair trades, the adoption of stablecoins and USDC specifically is core to our strategy. On the institutional side, we saw a decline in institutional spot revenue quarter-over-quarter, but we experienced relative outperformance in our prime brokerage and derivatives business. Although not yet material, we are pleased to see early growth in derivatives revenue as we continue to diversify our revenue sources. Our subscription and services revenue was $556 million, down 7% quarter-over-quarter. We did grow some native units in staking and custody, but lower average crypto asset prices impacted these revenues during the quarter. Stablecoin revenue grew by 3%, driven by USDC market cap growth surpassing the impact of lower interest rates. The number of Coinbase One paid subscribers reached all-time highs in Q3. Our total Q3 operating expenses were $1 billion, down 6% quarter-over-quarter. Our adjusted EBITDA was $449 million, and net income stood at $75 million. Net income decreased due to $121 million in pretax losses on our crypto asset investment portfolio, mostly unrealized losses. We ended Q3 with $8.2 billion in USD resources, up 5% quarter-over-quarter. Our Board of Directors has authorized our first stock repurchase program of up to $1 billion with no expiration. As we’ve achieved seven consecutive quarters of positive adjusted EBITDA, we are looking to be strategic with our capital allocation, and this buyback program is one tool we'll use opportunistically. For our Q4 outlook, we are pleased to see our long-term revenue diversification efforts paying off as subscription and services revenue is on pace to exceed $2 billion this year. However, our Q4 outlook reflects headwinds, including a 10% price decline in Ethereum compared to Q3 and lower interest rates. We will continue to work on growing product adoption to help offset these headwinds. We expect Q4 technology and development expenses to be between $690 million and $730 million. Additionally, for sales and marketing, we expect expenses to be between $170 million and $220 million, driven by higher USDC balances and brand spending. With that, let's go to questions.

Okay. Great. Thanks. So we'll take the top 3 questions voted on from Say, and then we'll turn it over to some live questions from the analysts. So the first one, we had 2 questions asked by shareholders: would Coinbase consider a Bitcoin, Ethereum or other reserve strategy like MicroStrategy? Alesia?

Good news. We do invest in crypto, and we have an investment portfolio on the balance sheet. The fair market value of our crypto investments was about $1.3 billion at the end of Q3. We hold Bitcoin and Ethereum, among other crypto assets, as long-term investments. Our crypto investment portfolio of $1.3 billion is about 25% of our net cash balance. We need to keep cash on hand for various purposes, including capital requirements for our regulated entities, M&A opportunities, and to hedge our operational activities. To clarify, we are an operating company, not an investment company. However, we want to grow our operations so that we hold and transact a more significant amount of crypto transactions over time.

Alright. Second question, how are Base, Smart Wallet and cbBTC driving revenue for Coinbase? How is Base performance relative to other L2s or L1s? What are Coinbase's plans to onboard more users and drive adoption? Also, how do you see CDP evolving? Could it become the AWS of crypto? Brian?

Yes. I'll address these one by one. Base is earning revenue via sequencer fees, which could become meaningful over time. Smart Wallet simplifies onboarding for self-custodial wallets. cbBTC drives usage of Base and brings assets onto the platform. Although they're still early in growth, these building blocks will enable us to drive utility in crypto. Regarding Base, it’s currently the #1 Layer 2 solution by transactions processed. Transactions increased 55% on Base quarter-over-quarter while median transaction fees remained under $0.01. You asked about CDP, the Coinbase Developer Platform. This could become the AWS of crypto by addressing technical challenges we've faced. We've seen a surge of developers building AI agents with embedded crypto wallets, which is an exciting trend. When we can help 1 billion people achieve economic freedom with good financial infrastructure, there are numerous monetization opportunities. I hope that answers your question.

And our final question from Say, are there any plans to provide dividends to shareholders in the future? Alesia?

Thanks for the question. While not a dividend, we announced today that we have authorization to repurchase up to $1 billion in shares, which is a way of returning capital to shareholders. As we strengthen our balance sheet, our primary goal is to invest in our business. We want to fund new products, expand internationally, and support product development. We also focus on M&A opportunities. Today’s buyback authorization reflects our intent to return capital strategically but will not include dividends.

Thank you. Sarah, with that, let's take our first question, please.

Your first question comes from the line of Pete Christiansen with Citi.

Brian, Alesia, I'm curious about Coinbase's share of other crypto assets, especially altcoins. Earlier this year, Q4 and Q1 had a much higher percentage of your overall volume. It's decreased quite a bit recently, maybe 10 points. Are you seeing shifts in Coinbase's ability to drive share in lesser-traded tokens?

Let me start with that one, Pete, and then Brian or Emilie can add their thoughts. We've observed that trading in the long tail is correlated to volatility. With lower crypto asset volatility in Q3 compared to Q2, we saw a volume shift. The post-ETF approvals have also drawn attention to Bitcoin and Ethereum, resulting in higher volume on those assets.

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

Could you provide more color on the driver of the retail fee rate? Alesia, you mentioned three key points. The sequential decline was primarily driven by the mix shift towards stablecoin pair trades generating little-to-no fees. What about the core fee trending for other pairs?

Thanks, Owen. Yes, it's important to clarify this. We made no material changes to our fee rate structure in the consumer app. The average change you see quarter-over-quarter is due to two drivers: first, the mix shift to more stable pair trading, and second, reduced revenue from nontrading transaction types.

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

Congratulations on your leadership position and the success you've had making crypto an issue for elections this year. In a more crypto-friendly White House, how can Coinbase leverage this environment in practical ways that you aren’t doing now?

Thanks for the question, Ken. What we seek is not accommodation but clarity and fair treatment rather than regulation by enforcement, which has stifled innovation. With a new administration, we're likely to see an improved regulatory environment which will foster innovation. A clear federal approach would positively influence states as they look to federal regulators for direction. This clarity can enable us to serve all market segments better, leading to increased revenue. It can also enhance asset listing capabilities and stimulate stablecoins and payments, which are waiting for this clarity. We believe the creator platforms would be more inclined to integrate crypto once clarity is achieved.

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

I wanted to address the stablecoin topic more. Tether volume increased to 15%, while USDC isn't broken out the same way. Are we seeing a shift toward Tether away from USDC?

What’s reported regarding Tether is only trading volume. We’ve seen stablecoin trading pairs increase, which has raised Tether volume. However, there is no indication of a shift toward Tether away from USDC. USDC remains the fastest-growing major stablecoin in Q3, reaching new heights post the financial crisis.

Your next question comes from the line of Devin Ryan with Citizens JMP.

Could you provide insight into expenses as we approach 2025? What spending areas do you expect to increase focus on, and how will you manage the relationship between expense growth and revenue growth?

While we're not giving specific guidance on 2025, we're focused on exercising expense discipline. We’ll continue selectively increasing headcount and investing in growth opportunities. Our variable spending will adjust based on volumes to support our customers effectively.

Your next question comes from the line of Ben Budish with Barclays.

Curious about capital allocation; we've seen another crypto firm benefit from holding Bitcoin on their balance sheet. Could you share your thoughts on this approach?

We do have crypto on our balance sheet; it represents about 25% of our net cash. We still need substantial cash to support our operations and growth opportunities. Our focus is on building our transaction activity in crypto while also maintaining operational effectiveness.

Your next question comes from the line of Mike Colonnese with H.C. Wainwright.

Given your product portfolio, where do you perceive gaps based on current and future market opportunities? Would you rather build these products in-house or acquire to fill that void? And do you see acceleration in crypto M&A once we achieve greater regulatory clarity?

We've been.active on the M&A front and have a good record in this space. Recently, we closed the acquisition of a MiFID license to enable derivatives in 20-plus EU markets. We focus on opportunities that align with our product roadmap. The Base platform allows us to enhance our position internationally, while on the utility front, we're always looking to expand payment use cases. We are selective but actively pursuing M&A.

Internally, we say we build, buy, and invest for innovation. We will pursue all avenues for growth, whether it’s through internal development or acquisitions, and we have a strong portfolio through Coinbase Ventures. While M&A can be risky, we take a careful and strategic approach.

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

Can you hear me okay?

Yes.

Regarding Base, you’re the most capitalized player in the Layer 2 space. How do you plan to leverage that positioning to drive dominance in the crypto space in the next couple of years?

Base has been successful due to its quality as a tool for builders. While other Layer 2s have attempted aggressive economic sharing, we prioritize meaningful integrations focused on utility. Base is built on Optimism's stack, which has brought in new partners for interoperability. We're not against sharing economics to drive integrations, but it’s essential for developers to choose Base for the right reasons for sustainable growth.

Coinbase uniquely positions itself with our suite of products; we connect developers to our retail platform, enhancing product integration. This unified approach sets us apart from others in the Layer 2 space.

Your next question comes from the line of Bo Pei with U.S. Tiger Securities.

Can you share the volume contribution from stablecoins specifically for retail trading? Is this shift to stablecoin structural?

Thanks, Bo. We see different mixes every quarter in trading. Traders seeking ARPU opportunities can result in variance, so it’s not guaranteed that these opportunities will exist every quarter. We can’t provide specific stablecoin volume metrics, but advanced trading volume was slightly higher in Q3 than Q2, and our fiat to crypto trading volume remained steady, with stablecoin impacts being the most significant contributor.

Our final question comes from the line of Mark McLaughlin with Bank of America Merrill Lynch.

You’ve expanded your derivatives offerings abroad and domestically. What additional steps will you take to drive adoption and scale in this competitive market?

We launched our derivatives platform in 2024, and while we have a strong start, there’s more work ahead. We obtained a MiFID license in Europe, unlocking derivatives in over 20 EU countries, which positions us as a trusted compliant player in the market. We've added more order books and asset types, and our unified margin access is drawing attention. We have over 100,000 retail advanced traders active on our platform. As we execute our go-to-market strategy, we believe 2025 will be pivotal for us. Our regulatory compliance is a significant competitive advantage, and we strive to provide the trust our customers seek.

Alright. That does it for today. Thanks, everyone, for joining us, and we look forward to speaking to you again next quarter.

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