Coinbase (COIN) – Earnings Review – February 17, 2024
Coinbase is a dominant, leading crypto exchange. Its results are violently cyclical as retail volume is highly volatile and drives a large portion of their results.
Demand
Coinbase beat revenue estimates by 16.5%. For the full year, revenue fell by 3% Y/Y due to transaction revenue declines. Subscription and services revenue rose by 78% Y/Y.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profitability
- Beat EBITDA estimates by 24%.
- Quadrupled $28 million GAAP EBIT estimates.
- Beat $0.01 GAAP EPS estimates by $1.03. This was helped by $139 million in tax valuation releases and debt repurchases. Without this help, it would have earned $0.51 per share and still obliterated estimates.
For 2023 as a whole, total operating expenses fell by 45% Y/Y. Sales & marketing fell by about 35% Y/Y, R&D fell by almost 50% Y/Y, G&A fell by almost 40% Y/Y and stock comp fell by roughly 50% Y/Y to $864 million. It has 3,416 employees vs. 4,510 Y/Y.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $5.7B in cash & equivalents; $3B in debt.
- Basic shares up 5.6% Y/Y; Diluted shares up 16% Y/Y.
Guidance & Valuation
Coinbase generated $320 million in transaction revenue so far this quarter vs. $120 million Y/Y. It expects $445 million in subscription and services revenue for Q1.
It told us that stock comp will rise in 2024 vs. 2023 mainly due to a higher share price leading to more comp vesting. It changed the timing process of equity grants to reduce timing of vesting volatility, which will also lead to higher comp in 2024. Finally, it continues to commit to positive adjusted EBITDA in any environment.
It trades for 26x 2024 EBITDA, 17x FCF and 123x GAAP EBIT. As of now, EBITDA is expected to grow by 57% Y/Y and EBIT by 291% Y/Y while FCF turns positive.
Call & Letter Highlights
Transaction Revenue, Volume & Expenses:
Transaction revenue was boosted mightily by higher crypto volatility, higher crypto prices, and improving macro leading to enhanced risk appetite and excitement surrounding Bitcoin Spot ETF approval anticipation. As a reminder, Coinbase was named as the primary custodian for 8 of the 10 approved ETFs in January.
User growth was another small tailwind. Within consumer trading volume, Coinbase delivered 164% Q/Q growth to greatly lead the market’s 90% Q/Q growth. On the institutional side, its 92% Q/Q growth was about in line with the market. It now has 33% of the largest 100 hedge funds on the Coinbase platform. Onboarding levels in Q4 were strong as were institutional re-activations.
Coinbase Prime, its prime broker service for institutions, was helped by the Bitcoin spot ETF approval anticipation as well. Prime’s liquidity, ancillary services, secure storage and support are all standing out as Coinbase markets itself to the big boys. That, along with more subscription revenue, should ease volume volatility over time. Volatility is understandably lower for institutions vs. the average retail trader.
Subscription & Services Revenue:
This segment continues to explode as a portion of total revenue. Stablecoin revenue growth was a contributor to this success. In August 2023, Coinbase and Circle changed their agreement. The old contract entailed the creation of the “Centre Consortium” to govern issuance of the USD Coin (USDC). The two firms split stakes in the new entity. In August, Circle was given control of all USDC issuance while Coinbase took a small equity stake in the company. Going forward, Coinbase will enjoy a portion of income collected from USDC reserves.
More balance staking (allocating a portion of balances) helped Coinbase grow delegation and institutional service fees (among others) within that bucket while blockchain rewards rose 28% Q/Q to also positively contribute to the segment’s success. Staked assets came in at $9.4 billion for the quarter with growth helped a lot by crypto price appreciation.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Leadership sees USDC as a “crucial bridge” to more accessible services stemming from crypto.
Coinbase International Exchange and Coinbase Financial Markets:
Coinbase continued to cultivate the Coinbase International Exchange this past year to offer derivatives/futures contracts to more international retail investors. It launched the full service in Canada and Brazil last year while streamlining the customer onboarding process, which “doubled onboarding success rates.” Furthermore, Coinbase secured needed registrations in France and Spain to tee it up for future expansion in Europe. It also continues to slowly localize product market fit in each market to drive adoption. In the USA, Coinbase Financial Markets (CFM) (which is essentially a domestic version of Coinbase International Exchange) was approved to offer futures to U.S. investors by the National Futures Association. Coinbase launched this product in November.
Derivatives represented 75% of total 2023 crypto volume. Most of that volume was transacted via unregulated exchanges. These products provide a highly compelling opportunity for Coinbase to shift black market volume (making up the majority of total volume) to its own exchange.
Base:
Per the firm’s investor materials, Base is Coinbase’s Layer 2 “Ethereum Scaling Solution” to enhance adoption and transaction affordability of Ethereum. Layer 2 simply refers to a transaction scale driver built on top of a blockchain like Ethereum. The layer of separation aims to drive better efficiency, cost and speed by processing the transitions outside of the Ethereum blockchain. As of Q4, Base was among the “largest and fastest growing ecosystems with $600 million in assets on the platform.
Along similar yet separate ease of transaction lines, Coinbase updated its wallet recently to make sending crypto “as easy as sending a text.”
Accounting Change:
In the past, Coinbase has only marked-to-market the fair value of its crypto assets when those assets were sold. Per new regulation, it will mark most of these assets to market on a quarterly basis, regardless of any sales. This is similar to how equity investments or loans within fair value accounting are treated. This quarterly marking to market will directly impact net income and the change will start in Q1.
The Pursuit of “Regulatory Clarity” for Coinbase:
- 83% of G20 members and major financial hubs progressed towards what it calls “regulatory clarity” in 2023.
- In January, Coinbase sought to dismiss an SEC lawsuit claiming it was operating an unregulated securities exchange. The case will likely not be entirely thrown out and could proceed to trial at some point. Coinbase is increasingly confident in receiving a positive ruling. It’s also challenging the SEC’s decision to “not engage in crypto rule making.”
