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Coinbase Global (NASDAQ: COIN)
Q4 2023 Earnings Call
Feb 15, 2024, 5:30 p.m. ET
Highlights of the Earnings Call
- Company Achievements
- Financial Performance
- Expansion into Derivatives Trading
- Role in Institutional Trading
- Innovative Initiatives
Opening Remarks
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 fourth quarter and full year 2023 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. [Operator instructions] Anil Gupta, vice president, investor relations, you may begin your conference.
Anil Gupta — Vice President, Investor Relations
Good afternoon, and welcome to the Coinbase fourth quarter and full year 2023 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.
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 metrics. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our investor relations website.
Strong Growth and Resilient Strategy
Brian Armstrong — Co-Founder and Chief Executive Officer
Thanks, Anil. I’m proud to say that in 2023, we cut costs by 45% year over year and managed to ship products faster with a lean team. This led to $95 million of positive net income for 2023, $964 million in positive adjusted EBITDA, and total revenue of $3.1 billion. Coinbase has always taken a long-term approach focusing on building in a compliant manner even when it wasn’t the popular choice.
Many of our competitors cut corners and broke laws to get big fast, and we’ve seen how that strategy played out. By contrast, Coinbase has now established itself as the trusted leader in crypto. I’ve always said that crypto adoption will happen in three phases, and I want to touch on what we did in 2023 to help drive each of those. In Phase 1, crypto is a new asset class that people want to trade.
Crypto trading has been a major revenue driver for the industry, and Coinbase is the leader in spot trading in the US But in 2018, derivatives trading became the majority of crypto trading volume. It took us longer to do it in a compliant way, but I’m happy to report that in 2023, we have now launched derivatives trading globally.
In Q2, we launched Coinbase International Exchange, which offers derivatives trading to non-US customers. And in Q4, we launched Coinbase Financial Markets, which offers regulated futures trading in the US. We also expanded our trading products around the world by getting new licenses. In 2023, we launched operations or received licenses or registrations in Bermuda, Brazil, Canada, France, Singapore, and Spain. Most of the world’s capital is held in institutions.
With Coinbase Prime, we grew our institutional financing products. We launched Coinbase Asset Management. We even played a key role in the approval of the Bitcoin ETF as Coinbase was selected as the custodian in 8 of 11. This will unlock new pools of capital to flow into the crypto space with Coinbase playing a key role here. We’re earning revenue, not just on custody, but also on trading and financing.
We’ve already seen great demand as Bitcoin is now the second largest ETF commodity in the US, surpassing silver. All of these improvements will continue to grow Phase 1, crypto as a new asset class. The second, Coinbase is not just a new asset class, it’s also powering new financial services. And in 2023, stablecoins began to be used in global payments.
We launched the ability to send free instant global payments on USD coin using base. We’re now in the process of integrating this into our products to make payments of a first-class experience. And in August, we entered into an arrangement with Circle to help expand the utility of USD coin, which is now launched on over a dozen blockchains and is the second largest stablecoin with a market cap of $28 billion. In the third phase and final phase, we believe crypto will also be a new application platform for the Internet.
Over time, the Internet has become more and more centralized with big companies. The Internet also didn’t start with a native form of money or payments or value built in. So we got credit cards bolted on as an afterthought. And the number of associated issues like fees, fraud, chargebacks, limited ability to send microtransactions or do cross-border commerce and that led to the rise of ad-based business models. Crypto is decentralizing the Internet with a new set of protocols for money, identity, messaging, social media, content, governance and even voting.
And Coinbase is trying to help accelerate this trend in a number of ways. In 2023, we launched our own Layer 2 solution called Base. This will help blockchain scale to $1 billion or more users, bringing down transaction costs and confirmation
The Evolution of Coinbase Amidst the Crypto Revolution
Coinbase’s Transformation and Evolution
Coinbase has undergone a transformative evolution, akin to the leap from dial-up to broadband, in the sphere of cryptocurrency. The company has taken significant strides in enhancing its Coinbase wallet, making decentralized applications (dApps) more accessible. By simplifying the process through a single tap, users can seamlessly open and utilize dApps without redundant sign-up procedures or repeated credit card input. This streamlining demonstrates Coinbase’s commitment to fostering a compelling customer experience within the decentralized protocols.
Achieving Regulatory Clarity
Amidst the evolving landscape of cryptocurrency, Coinbase has actively pursued the goal of regulatory clarity. The culmination of this effort is evidenced by the majority of G20 countries either enacting or drafting crypto legislation. In the United States, bipartisan support for two bills concerning cryptocurrency within Congress showcases the progress towards legal frameworks in the country. Additionally, Coinbase’s contribution to an $85 million super pack to elect pro-crypto candidates reflects its commitment to shaping a conducive regulatory environment. The launch of standwithcrypto.org, aiming to mobilize 1 million pro-crypto advocates for the 2024 elections, serves as a testament to Coinbase’s engagement in fostering an enabling regulatory landscape. As the company awaits clarity from the court system, it continues to pursue its growth trajectory.
Priorities and Future Outlook
Coinbase’s vision for 2024 encompasses driving revenue growth, particularly through its trading fees and stablecoins. International expansion and deeper integration of USD coin form vital components of this growth strategy. Advancing the utility of cryptocurrency holds paramount importance, with the company venturing into payment experiments. The adoption of USD stablecoins in high-inflation emerging markets signifies a significant milestone. Furthermore, Coinbase remains committed to enhancing the usability of decentralized protocols, envisioning an ‘iPhone moment’ for crypto. The impending priorities also entail sustained efforts to advocate for regulatory clarity and support the development of sensible case law.
Financial Discipline and Operational Excellence
Alesia Haas, Coinbase’s Chief Financial Officer, extolled the company’s focus on financial discipline and operational excellence in 2023. The efforts culminated in robust financial performance, underpinned by significant growth in subscription and services revenue amidst a challenging market environment. Marked reductions in expenses led to a return to profitability, bolstering the company’s balance sheet and product velocity.
Financial Performance: 2023 Overview
Diving into the financial performance, Coinbase reported $95 million of net income and nearly $1 billion in adjusted EBITDA in 2023. While the total revenue witnessed a year-over-year decline, the substantial increase in subscription and services revenue offset the downturn in transaction revenue. Stringent cost management measures translated into a $2.6 billion decline in total operating expenses.
Transaction Revenue and User Engagement in Q4
In Q4, heightened crypto prices and volatility sparked reengagement among both simple and advanced traders on Coinbase’s platform. This resurgence resulted in an 83% surge in transaction revenue. Notably, the growth in subscription and services revenue was buoyed by blockchain rewards, amplified by higher crypto asset prices. The increase in custody inflows and staked balances underscored the sustained user engagement on the platform, culminating in just under $200 billion of assets.
Operational Expenses and Profitability in Q4
While Q4 witnessed an 11% increase in total operating expenses, the net income stood at $273 million, with adjusted EBITDA amounting to $305 million. The robust revenue growth, coupled with prudent financial management, contributed to this positive financial outcome.
Continuous innovation, regulatory advocacy, and financial prudence have positioned Coinbase for sustained growth amidst the dynamic evolution of the cryptocurrency landscape, forging a path toward enhanced utility and customer experience.
Coinbase Provides Promising 2024 Outlook Amid Regulatory Challenges
Strong Start and Future Outlook
Coinbase, the well-known cryptocurrency exchange, is off to a strong start in the first quarter of 2024. The firm reported transaction revenue of approximately $320 million through mid-February, reflecting robust performance across its simple, advanced, and institutional trading segments. Building on its momentum from the previous quarter, Coinbase anticipates subscription and services revenue to range between $410 million and $480 million in Q1, primarily influenced by crypto prices. Despite the expected growth in technology and development and general and administrative expenses, the company foresees a decline in sales and marketing expense.
Regulatory Clarity and Legal Update
Coinbase’s Chief Legal Officer, Paul Grewal, provided an update on the company’s ongoing enforcement litigation with the Securities and Exchange Commission (SEC). Grewal emphasized that regulatory clarity is a top priority for Coinbase and expressed confidence in the firm’s legal position. While acknowledging that the case is in its early stages, Grewal highlighted the progress made during the oral argument on Coinbase’s motion for judgment against the SEC. He outlined the potential outcomes and Coinbase’s readiness to navigate the legal process, emphasizing the company’s confidence in the eventual outcome.
Insider Sales and Equity Compensation
Responding to shareholder questions about insider selling, Coinbase’s Chief Financial Officer, Alesia Haas, addressed the topic with transparency, emphasizing the long-term conviction shared by all insiders in the company. Haas highlighted equity as a significant component of insider and employee compensation, aligning incentives with business performance and stockholder interests. She further explained the regulatory constraints governing insider trading and reiterated the collective commitment to Coinbase’s long-term prospects despite periodic sales of shares.
Expansion and Revenue Drivers
CEO Brian Armstrong discussed the company’s preparations for the launch of ETFs, underscoring Coinbase’s significant custodian position in the market. Armstrong emphasized the positive impact of ETFs on Coinbase’s performance and the broader industry, citing substantial net inflows into spot Bitcoin ETFs. He also highlighted the company’s role in Ethereum ETF applications and its potential to generate revenue through various services related to ETFs.
Unveiling the Venture Portfolio
President and Chief Operating Officer, Emilie Choi, acknowledged the underappreciated value of Coinbase’s venture portfolio, emphasizing the company’s competitive advantage in this domain. She noted that while the portfolio’s value is reported at cost on the balance sheet, its long-term potential remains significant, positioning it as a strategic asset for Coinbase’s future growth.
In conclusion, Coinbase’s positive outlook for 2024, coupled with its strategic initiatives, demonstrates the company’s resilience and adaptability in navigating regulatory challenges while capitalizing on promising opportunities in the cryptocurrency market.
The Crypto Venture Landscape: A Pioneering Journey Ripe with Opportunity
The financial ecosystem is a tantalizing landscape, rich with opportunities just waiting to be discovered. Anil Gupta, Vice President of Investor Relations, recently shed light on his company’s venture into the world of cryptocurrency and the vision behind their pioneering journey. With a flourish of optimism, Gupta delved into the journey of the company and its relentless pursuit of investment opportunities in the crypto frontier.
Seizing the Crypto Opportunity
Gupta highlighted their journey of becoming one of the most active investors in the crypto space with over 400 investments in their portfolio. Drawing parallels to the early days of tech giants like Google and Facebook, the company aims to capitalize on the most exciting emerging internet companies in the crypto ecosystem. This strategic vision has positioned the company as a trailblazer in the world of cryptocurrency investments.
Embracing the Long Game
Unlike the herd mentality, Gupta emphasized the company’s knack for doubling down when others are gripped by fear in the market. This steadfast approach has allowed them to gain a strong foothold in the crypto frontier. With an unwavering commitment to the long game, they have successfully navigated market sell-offs, gaining invaluable insights and connections in the process.
Unveiling the Crypto Landscape
Gupta painted a vivid picture of the burgeoning creator economy, where companies are decentralizing existing social platforms, propelling the crypto frontier into uncharted territory. The company’s investments in on-chain consumer applications such as gaming, social messaging, and media underscore their vision for the future.
Global Footprint and Regulatory Challenges
While the company’s footprint in the global crypto ecosystem continues to expand, Gupta addressed the challenges posed by the lack of clear regulation on crypto in the United States. He lamented the loss of blockchain developer share annually, drawing a parallel to the offshore migration of semiconductors and 5G. This underscores the pressing need for clear legislation in the US, which the company considers a missed opportunity of colossal proportions.
Investing in Innovation Beyond Borders
Gupta accentuated the company’s investment strategy that transcends geographical boundaries, with a keen focus on regional exchange platforms across Latin America, India, Africa, and beyond. This global outlook underscores their resolute commitment to investing in innovation on a global scale.
Insights into the Payment Landscape
Transitioning into the Q&A session, the discussion delved into the intricacies of the company’s foray into payments, with a particular emphasis on partnerships and revenue models. Brian Armstrong, Co-Founder and Chief Executive Officer, provided a comprehensive insight into the company’s approach to payments and its broader impact on the financial system.
A Glimpse into the Future of Payments
Armstrong emphasized the company’s ambitious vision to revolutionize the financial system and amplify crypto’s role within it. With a focus on reducing friction in payments and catering to emerging market use cases, he outlined the potential for crypto to transform cross-border transactions, remittances, and even yield generation. His portrayal of the longer-term vision underscored the company’s commitment to driving a daily use case with crypto, envisioning a future where crypto seamlessly integrates into everyday financial transactions.
Monetization and Market Insights
As the discussion ventured into monetization opportunities, Armstrong offered a candid view, citing the early stage nature of payment monetization and the potential avenues for revenue generation via Base and USD coin. His emphasis on driving daily use cases with crypto and the prospects of monetizing this user base encapsulated the company’s astute long-term strategy. The discussion also broached the topic of opex and market conditions, shedding light on the potential for surging trading volumes and revenues amidst a gathering bull cycle.
As the discussion came to a close, the insights and strategic vision presented by the company underscored the pioneering spirit that permeates the crypto venture landscape. With an unyielding commitment to innovation, global investment, and reshaping the financial system, the company’s journey in the crypto frontier stands as a testament to the enduring allure of this nascent yet burgeoning ecosystem.
The Coinbase CFO Discloses Insights
The Outlook on Expense Management
Alesia Haas, Chief Financial Officer at Coinbase, recently provided insights into the company’s expense management strategy. Acknowledging their variable costs, Haas specified that certain expenses, such as transaction costs and customer support, are expected to track with revenue growth. However, she emphasized that Coinbase aims to keep its expense base in check, even in the event of a prolonged upmarket. Haas assured transparency with investors should there be a decision to increase expenses, while also expressing expectations of modest expenses despite the challenges forecasted for the coming months.
Combatting Misconceptions and Upholding Compliance
Addressing concerns raised during a House hearing questioning the use of digital assets for illicit activities, Coinbase reaffirmed its commitment to anti-money laundering (AML) efforts. Haas highlighted the company’s significant investments in AML and its compliance team, which maintains best-in-class approaches for regulatory adherence. Coinbase’s Chief Legal Officer, Paul Grewal, expressed satisfaction with Congress’s careful attention to the matter, and their validation of Coinbase’s longstanding stance that traditional finance is the preferred choice for bad actors in illicit finance.
Institutional Business Performance and Future Projections
When queried about Coinbase’s institutional business performance, Haas attributed the increased take rate to the growing contribution of Coinbase Prime to the company’s institutional product revenues. Furthermore, in response to questions about the impact of Bitcoin ETFs, Coinbase acknowledged their net positive influence on the industry and the company, resulting in heightened engagement and net inflows for both institutional and retail segments.
Enthusiastic Outlook on Derivatives Market
With the derivatives market gaining momentum, Coinbase’s Co-Founder and CEO, Brian Armstrong, noted the company’s daily all-time highs on the international exchange. Armstrong emphasized the market’s endorsement of a trusted and compliant counterparty, a role that Coinbase aims to fulfill. He also highlighted the company’s expansion efforts and product enhancements, demonstrating significant progress and positive traction in the derivatives segment.
Coinbase Expands Cryptocurrency Offerings Amidst Strong Q4 Performance
The cryptocurrency market is a wild ride that never fails to surprise. Just when analysts thought they had crypto trading and derivatives all figured out, Coinbase, the reputed exchange platform, is smashing expectations and plotting an unprecedented trajectory. The latest earnings call features Coinbase’s top brass dissecting the Q4 performance and shedding light on critical areas such as US futures trading, prime services, and retail take rates.
Derivatives Domination: US Futures Trading Success
Brian Armstrong, the Co-Founder, and Chief Executive Officer at Coinbase, exuded confidence in the company’s performance, citing a remarkable $700 million milestone achieved in a single day, a feat that underscores Coinbase’s escalating dominance in the international exchange arena.
A look back at Coinbase’s journey provides a poignant backstory to the present triumph. When the exchange platform first entered the scene, the cryptocurrency market was a rickety roller coaster, constantly teetering on the edge of legitimacy. But as Coinbase broadened its scope and diligently adhered to regulations, it evolved into a trusted counterparty for clients navigating the digital asset sphere.
Aside from reflecting on the present, it’s crucial to keep an eye on Coinbase’s imminent foray into the derivatives sector, a move that is poised to augment the exchange’s array of services and fortify its standing in the market.
Prime Services: An Institutional One-Stop Shop
The conversation swiftly pivoted to Coinbase Prime, a pivotal domain catering to institutions. The suite of products enveloping custody, trading, and financing has been instrumental in shaping Coinbase’s stature within the institutional transaction revenue domain. This considerably diversified revenue stream has broadened its reach, benefitting from a lucid juxtaposition of distinct services.
Alesia Haas, the Chief Financial Officer, underscored the strategic orchestration of Coinbase Prime to carve a niche in the institutional realm. She emphasized the inherent volatility and nascent nature of the financing business while asserting the vastly untapped potential awaiting exploration.
Retail Take Rates: The Intriguing Enigma
The Q&A session uncovered a deep dive into retail take rates and the evolving dynamics of trading in the wake of the approval of Spot Bitcoin ETFs. Haas displayed a firm stance on Coinbase’s outlook, extinguishing concerns about fee compression impacting the platform. The absence of customer behavior shifts following the advent of ETFs exemplifies Coinbase’s resolute position in the face of market transformations.
Brian Armstrong supplemented Haas’ statement by throwing light on the broader implications of ETFs, emphasizing their cardinal role in catalyzing capital inflows and elevating industry engagement.
Marketing Marvels and Future Optimism
The discourse delved into the intricacies of marketing, with Emilie Choi, the President, and Chief Operating Officer, highlighting the spectacular ROI from marketing investments. Choi espoused a spirit of experimentation and continual expansion into policy marketing, illustrating Coinbase’s resolve to innovate and adapt to the perpetual evolution of the cryptocurrency domain.
The tantalizing prospect of a burgeoning asset class and international business expansion intertwined with the heartening news of marketing efficiencies resonates with Coinbase’s adherence to innovation and adaptability.
Forward Trajectory: A Grand Crypto Odyssey
The earnings call transpired as a culmination of Coinbase’s triumphs and aspirations, marked by a relentless pursuit of growth and establishment of a towering presence in the digital asset landscape. As Brian Armstrong fittingly asserted, the integration of cryptocurrency into the global financial system heralds a new epoch, one where lowering friction and embracing change are the cornerstones of success.
In conclusion, Coinbase’s resounding Q4 performance serves as a testament to its unwavering commitment to evolution, a commitment that resonates through its diverse offerings and unshakable resolve to spearhead the crypto revolution.
Riding the Crypto Wave: Coinbase Earnings Call Highlights
ETFs: A Gateway to New Capital Streams
During the earnings call, Coinbase CEO, Brian Armstrong, expressed confidence in the positive impact of Exchange-Traded Funds (ETFs) on the company’s business. Armstrong described ETFs as a potential gateway for new capital inflows into the crypto market, illustrating the potential to attract investors who may have previously been hesitant to participate in cryptocurrency trading.
Expanding Crypto Adoption Beyond Bitcoin
Alesia Haas, Coinbase’s Chief Financial Officer, emphasized that the expansion of ETFs could lead to increased awareness and adoption of the broader cryptocurrency asset class, moving beyond the dominance of Bitcoin. Haas highlighted that a significant portion of trading volume on the Coinbase platform is attributed to non-Bitcoin crypto assets, indicating a growing interest in diverse digital currencies among investors.
SEC Challenge: Upholding Regulatory Transparency
Paul Grewal, Coinbase’s Chief Legal Officer, addressed the company’s ongoing challenge to the U.S. Securities and Exchange Commission (SEC), emphasizing the importance of regulatory transparency and formal rule-making. Grewal expressed confidence in Coinbase’s appeal to the Third Circuit Court of Appeals, framing the legal endeavor as a critical pursuit to uphold the company’s commitment to regulatory compliance and clarity.
Anil Gupta, Vice President of Investor Relations, reaffirmed the company’s dedication to navigating regulatory challenges and fostering a transparent operational environment.
The call evoked the constructive and optimistic stance of Coinbase’s leadership, signaling the company’s resilience in the face of regulatory hurdles and its strategic positioning to leverage the evolving dynamics of the crypto market.
Looking Ahead: Embracing Diverse Crypto Ecosystem
The emphasis on supporting multi-asset investment strategies and broader crypto adoption reflects Coinbase’s proactive approach to cater to evolving investor preferences and market trends. Emilie Choi, Coinbase’s President and Chief Operating Officer, highlighted the company’s strategic investments in custody solutions and prime services, underpinning its commitment to playing a pivotal role across various segments of the crypto value chain.
Concluding Note
Overall, the earnings call underscored Coinbase’s resilience, adaptability, and strategic clarity in navigating the burgeoning cryptocurrency landscape. The company’s nuanced approach to addressing challenges, embracing regulatory transparency, and keen focus on diversification within the crypto ecosystem offers a compelling narrative for investors, underpinning a future-oriented mindset that aligns with the evolving dynamics of the digital asset market.
The Motley Fool has positions in and recommends Coinbase Global. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
