Yahoo Finance Coinbase Global, Inc. (NASDAQ:COIN) Q1 2024 Earnings Call Transcript
Coinbase Global, Inc. (NASDAQ:COIN) Q1 2024 Earnings Call Transcript May 2, 2024
Coinbase Global, Inc. beats earnings expectations. Reported EPS is $1.04, expectations were $0.02195. Coinbase Global, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coinbase First Quarter 2024 Earnings Call. [Operator Instructions] Anil Gupta, Vice President, Investor Relations, you may begin your conference.
Anil Gupta: Good afternoon, and welcome to the Coinbase first quarter 2024 earnings call. Joining me on today's call are Brian Armstrong, Co-Founder and CEO; Emily 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. Actual results may vary materially from today's statements. Information concerning risks, uncertainties, and other factors that could cause these results to differ is included in our SEC filings. Our discussion today will also include references to certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website. Non-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, and in addition, we will take some live questions from our research analysts. With that, I'll turn it over to Brian for opening comments.
Brian Armstrong: Thanks, Anil. Q1 was a very strong quarter. We generated more adjusted EBITDA than we did all of last year. Keeping our cost structure low while continuing to innovate is really paying off. To kick off today's call, I wanted to provide a progress update on the 2024 priorities that I shared on our Q4 call. As a refresher, they are first, driving revenue. We're doing this through improvements to our core simple trading experience, growth in stablecoins, winning in the derivative space, both in the U.S. and abroad and driving international growth by investing in key markets. Second, we're driving utility in crypto. We're doing this through Base, our low-cost Layer 2 solution and building a better payment experience on crypto rails.
And third, we're driving regulatory clarity. We're doing this through the courts, through collaboration with policymakers around the world to pass sensible rules, and most importantly through activating the crypto voter base to elect pro-crypto candidates in this upcoming election. Let's start with driving revenue. In Q1, we capitalized on strong market conditions and we saw many of our investments through this last downturn begin to pay off. Our institutional business continued to see meaningful growth, in part driven by the excitement around Bitcoin ETFs, which drove new customer adoption across our product suite. Coinbase Prime reached all-time highs in trading volume and active clients and nearly 40% of our clients engaged with three or more products in Q1.
Turning to derivatives. Both Coinbase Financial Markets and Coinbase International Exchange have shown promising growth in their early stages. In Q1, Coinbase International Exchange added 15 new perpetual future listings. We've also increased the position limits across both products. USDC market cap increased over 30% year-to-date and is growing faster than major competitors. We see higher engagement from customers who hold USDC balances on our platform. So, we've been investing in growing those platforms' balances by unifying order books on advanced trading and offering competitive rewards. And while it's still early days, we're also seeing great traction with Coinbase One, our consumer subscription product, which surpassed 400,000 paid subscribers in Q1.
Next, let's move on to utility. First, I'd like to spotlight our Layer 2 solution Base. As a reminder, Layer 2 solutions help blockchains scale, similar to when the internet moved from dial-up to broadband. And we believe this scaling will drive many new use cases in the crypto economy. Base has helped dramatically reduce transaction fees and confirmation times, getting us closer to our goal of having the average crypto transaction take less than one second and cost less than $0.01 anywhere in the world. Developer activity on Base increased eight-fold in Q1. In the last 30 days, Base has processed over two times as many transactions as the entire Ethereum network on Layer 1. Base is now the number-one Layer 2 solution by the number of transactions processed, a huge accomplishment.
We've made Base faster and cheaper to use with fee reduction by about 80% through protocol upgrades, and our fees are now often below $0.01. We're also integrating USDC on Base across Coinbase products, creating nearly free instant global payments and a USD-denominated asset. This is a really, really big deal as we now have direct line-of-sight to update the global financial system by reducing the billions in payment fees paid by consumers and businesses each year. Finally, let's discuss regulatory clarity. Coinbase continues to invest heavily in driving clear rules and regulations around the world in crypto and we're actively contributing to advancing pro-crypto candidates during this major election year. We're a large contributor to pro-crypto organizations like Fairshake Super PAC, which already had a great impact in the market primaries in California, Texas, and Alabama.
We also continued to work with grassroots advocacy organizations like standwithcrypto.org, which now has over 400,000 crypto advocates who've raised their hands indicating they want to elect pro-crypto candidates in November. We're also making steady progress in getting clarity through the courts in our litigation with the SEC. In Q1, the court ruled on our motion to dismiss dismissing the SEC's claim regarding Coinbase wallet, which was a significant win for self-custodial wallets across the industry. This win provided clarity for us and developers to continue to drive our onchain product growth, which we believe is an important element to fulfilling our mission of increasing economic freedom. The court denied the rest of the motion at this very early stage, meaning the rest of our case is proceeding to discovery, but we're fully prepared for an intensive discovery phase through the remainder of the year and remain confident in the strength of our legal arguments.
2024 is shaping up to be an important growth year for our industry and for our mission. Now, I'll pass it over to Alesia, who will provide detailed insights into our financials.
Alesia Haas: Thanks, Brian, and good afternoon, everyone. Today, I'm going to cover three topics. First, comments on our Q1 financial performance; second, a review of a key transaction and an accounting change; and third, I'll touch on our Q2 outlook. You can find more details on all of these topics in our shareholder letter and our 10-Q. Let's start with Q1 financial performance. Q1 total revenue grew 72% quarter-over-quarter to $1.6 billion. We generated $1.2 billion in net income and adjusted EBITDA was $1 billion, as Brian said, more than we generated in all of 2023. We ended Q1 with a strong liquidity position, including $7.1 billion in USD resources and equally, if not more importantly, our customer-safeguarded assets grew to $330 billion.
We are proud to safely store over 12% of the total crypto market cap on our platform. These results reflect our focused execution on product expansion, our ongoing operational discipline, and strong crypto market conditions. Looking at transaction revenue, transaction revenue grew 103% quarter-over-quarter to $1.1 billion. This is driven by higher crypto asset volatility as well as crypto asset prices, which both increased sharply in March. On the consumer side, trading volume growth was strong across both simple and advance, resulting in our consumer blended average fee, being roughly flat quarter-over-quarter. We saw higher engagement from users acquired in 2023 and prior as well as new user growth. We also gained market share in spot trading on both the consumer and institutional trading platforms.
Brian shared earlier in his opening comments that Coinbase Prime trading saw their all-time highs in the first quarter. I want to share that in the first quarter, we broke out other transaction revenue, which consists of revenue from base sequencer fees and payment-related revenue. These revenues were previously included in consumer transaction revenue. Our goal is to drive utility and experiment with payments, and this new revenue transparency helps provide investors insight into that ambition. Our subscription and services revenue grew 36% quarter-over-quarter to $511 million. This growth was driven by higher crypto asset prices and native unit growth. I'd like to call-out that the price of Ethereum was 60% higher, when comparing March 31st to December 31st and was a key driver of the blockchain rewards revenue growth.
On the native unit front, we did see inflows into both custody and staking. USDC market cap grew 32% to close Q1 at over $32 billion. I'd also like to note that in Q1, we renamed interest income to interest and finance fee income, and we reclassified prime financing fees to this line, which was previously recorded in other subscription and services revenue. On the expense side, total expenses increased 5% sequentially to $877 million. And as we shared on our last call, the primary driver of quarter-over-quarter expense increase was higher stock-based compensation. All right. The second topic, there are two items to note today. One, in the first quarter, we issued a convertible note. This was an opportunistic capital raise that raised $1.1 billion in net proceeds and added to our cash balance.
We plan to use proceeds from that capital raise to repay our outstanding debt at or prior to maturity depending on market prices. The second update, a notable accounting change. We early-adopted Accounting Standards 2023-08. As a result, we now account for all crypto assets that we hold on our platform at fair value as compared to historically where we accounted for these assets at cost-less impairments. In Q1, since crypto asset prices were higher on March 31st as compared to December 31st, we recorded $737 million in pre-tax crypto asset mark-to-market gains. The majority of this was unrealized at quarter end, i.e., we had not sold the assets and realized this gain. You can see that in two new financial statement line items. First, $86 million in gains on crypto assets held for operations net and operating expense, which pertains to crypto held and used in our operations.
Second, $650 million is recorded in gains on crypto assets held for investments net, which is below the line and pertains to our long-term investment portfolio. We will be adding back gains or losses on the crypto investments to adjusted EBITDA as we do not consider those assets to be part of our day-to-day operations. Last, I'd like to touch on our outlook. We shared in the letter that the April transaction revenue was over $300 million and that we anticipate subscription and services revenue to be in the range of $525 million to $600 million. This assumes crypto asset prices stay in the range we have seen year-to-date 2024. On the expense side, we expect technology and development and general and administrative expenses to increase sequentially to $660 million to $710 million.
This increase is primarily driven by higher variable expenses, notably customer support and certain infrastructure expenses related to higher trading volumes. I want to point out that on the customer support side, expenses typically lag revenue growth and trading volume growth as it takes us time to ramp up the resources to meet higher volumes. Last item of note on the outlook. We are investing in additional sales and marketing expenses and expect these to increase to $150 million to $180 million. The primary driver in this growth is USDC rewards, due to USDC on platform growth. We ended Q1 with $5.5 billion in USDC on platform, nearly double compared to our Q4 ending balance. And therefore, the reward payouts on these incremental balances will increase in Q2.
We are pleased to see this growth in USDC and our incentive programs driving the broader adoption of our platform products and services. With that, Anil, back to you for questions.
Anil Gupta: Thanks. So let's turn to shareholder questions. We're taking the most upvoted questions as determined by the number of shares. Our first question is, how profitable has the base network been and how this drives value to shareholders? Alesia?
Alesia Haas: Thanks. As Brian shared earlier in his comments, we're seeing some really encouraging traction on Base. And I just mentioned that we have a new revenue line item called other transaction revenue that is a combination of the Base sequencer fees and payment-related revenues. Quarter-over-quarter in Q1, the growth that we saw was primarily driven by growth in Base sequencer fees. It's early days, however, and our primary focus is on growing developer activity, driving adoption, driving those transactions that we noted earlier. I want to point out that base has really strong unit economics. So as we grow transaction volume, which is the key growth metric we are focused on, we believe that base can become a material contributor to our revenue and profits over the long term.
Anil Gupta: Thanks. So our second question is, have you done an analysis to determine the net revenue impact from the spot ETFs? Emilie?
Emilie Choi: Sure. As Brian mentioned, the ETFs unlocked a flywheel of customer engagement across our Coinbase Prime product suite and we were excited to see 40% of institutional clients engaged with three or more products in Q1. We saw both direct and indirect revenue impacts from the ETFs. The direct impact is clear in our financials. We saw native unit inflows as the custodian for eight of eleven issuers. This supported growth in our assets under custody of 69% quarter-over-quarter to $171 billion as well as growth in our custodial fee revenue of 64% quarter-over-quarter to $32 million. We also saw strong growth in prime finance revenue, which contributed to interest and finance fee income being up 36% quarter-over-quarter.
On an indirect basis, in addition to Coinbase Prime reaching all-time highs in trading volume and number of active clients, we saw elevated trading activity across the board in Q1. We saw broad-based consumer growth in advanced and simple with consumer trading volume up 93% quarter-over-quarter, outperforming the U.S. spot market. We've long said that the ETFs would benefit the entire ecosystem and we're thrilled to see that play out on our platform.
Anil Gupta: All right. And the final question we'll take from Say is, does Coinbase plan to offer any other products in the near term like banking or insurance products? Brian?
Brian Armstrong: Yes. So we're not planning to build anything in the banking or insurance space at the moment. We feel like we have plenty to do in the crypto space and we want to really focus on how crypto rails can be used to update the global financial system and make things faster, cheaper, more global. And things in crypto tend to have a 100% reserve ratio. You'd only need a banking license if you wanted to kind of do fractional reserve or something like that, which we don't have any plans to do at the moment. We also try not to pre-announce anything on these calls. I kind of believe in, let's not announce paperware, let's actually go build things. And if once they're live, they -- we kind of announce them to everybody, including on these calls.
But you can imagine that we're always looking at how we can provide more services for retail/insto and also on our developer platform. There's all kinds of things that crypto is really enabling at this point. And with Base coming online, there'll be a lot of opportunities there. We're doing a lot of international expansion. We've got a whole on-chain economy to build. So good ideas can come from anywhere within Coinbase. Even bottoms-up. We've had groups come pitch us on ideas and some of those have turned out to be the products that you see that are live today. So, I suspect we will continue to do that and create a lot of innovative products over time.
Anil Gupta: All right, great. With that, Sarah, let's switch and take live questions from the analysts, please.
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