Coinbase Q1, 2023 Earnings: What a Difference 90 Days Makes

What a difference 90 days makes.

On May 4, Coinbase (COIN) announced their Q1 2023 earnings results, with results showing significant improvement quarter over quarter.

When we reported on Coinbase’s earnings for last quarter, we described it as “another mixed bag,” stating that:

This quarter however, the company and its executives seemed to have changed their tune. CEO Brian Armstrong seemed to be telling the truth when he tweeted in late March that there was a “noticeable boost in morale” amongst Coinbase employees.

Now, as we do every quarter, let’s cover Coinbase’s quarterly earnings.

Financial Performance Looking Positive

First, looking at the financials, the company’s net revenue was up 22% quarter over quarter to $736 million. Although this is a very positive improvement, it is worth noting that it is still 27% lower than where it was a year ago at $1.2 billion. Of course, that was also a time of heightened crypto volatility.

Furthermore, the company showed a 37% decrease in recurring operating expenses quarter over quarter. Combined, this led to Coinbase posting a loss of $79 million in the first quarter, down from a $430 million loss a year ago.

Because analysts were expecting the company to report a loss of $316 million for the quarter, the stock, of course, skyrocketed more than 15% at the opening bell.

The company was also quick to point out it has “return to positive Adjusted EBITDA of $284 million,” the first time since Q1, 2022. Honestly, although great, this is really just an impact from reduced stock based compensation which we called out last quarter as embarrassing.

Trading Volume Is Flat, Take Rate Is Up

While on face value this may seem like a negative, the quarters’ flat trading volume actually represents the first quarter of this crypto bear market where volumes weren’t down.

In fact, monthly transacting users increased from 8.3 million to 8.4 million

Interestingly though, most of this increase was not in BTC and ETH:

Yet, somehow, BTC represented an increase in transaction revenue on a percent of total… how could that be?

It turns out that during the first quarter, Coinbase increased their pricing for retail traders using the company’s “simple” platform.

One could look at this from two different perspective, both good and bad:

The good: Coinbase has pricing power. The company is by far the leading fiat-to-crypto exchange. This is important to note as it means that new customers trust Coinbase as an exchange when first entering crypto and they are willing to pay for that security.

The bad: No customer likes increased prices and relying on this strategy for returns can only go so far.

Subscriptions and Services Continues To Grow

The company’s revenue from subscriptions and services increased by 28% quarter over quarter to $362 million.

The company defines these as blockchain rewards, custodial fee revenue, interest income, and “other” (mostly the Coinbase One product).

Although each segment was up on the quarter, interest income continues to be the major factor at more than $240 million in revenue. Almost $200 million of this was from USDC interest as the company now has ~$1.2 billion of USDC on their platform. The rest comes from customer fiat on the platform which is now at $5.4 billion.

With interest rates continuing to increase, we expect interest income to continue to provide needed income to Coinbase in Q2.

The Company is Walking the Talk When It Comes to Reducing Expenses

Last quarter we noted that:

This is exactly what happened.

The Q1 earnings report shows headcount at Coinbase now at 3,535, a reduction of nearly 1,000 employees.

Beyond just employee expenses, the company had a reduction in expenses in every category across the board.

Even Stock-based compensation was down 54% to $199 million, which was one of our major call outs last quarter.

Some Major Launches

During a time in which regulators are scratching at the company’s ankles, we have to give props to the team at Coinbase for continuing to ship interesting products and provide new offerings:

1. The launch of the company’s own Layer-2 (L2) blockchain Base

2. The acquisition of One River Digital Asset Management (ORDAM)

3. The launch of a new international exchange that will offer derivatives

Regulation Looms As Always

We could probably sum up the bad aspects of Coinbase’s business in one word: regulation

The company continues to deal with regulation by enforcement, with the company receiving a Well’s notice from the SEC during the quarter.

Much of the Q&A also revolved around regulatory questions including a question around whether or not the company would leave the US. Brian Armstrong responded by stating:

Furthermore, in the shareholder letter, the company noted that:

As we have seen over and over again, we just don’t know what is going to happen in regards to regulation. It could have a negative impact on Coinbase, or it could absolutely be a boon to the business.

Concerns

Although there was significant progress quarter over quarter for Coinbase, with even the executives sounding more upbeat on the earnings call, we still have to point out our concerns.

Revenue last quarter was dependent on potentially lower quality tokens

As shown above, trading volumes were down significantly in BTC and ETH – the two tokens that Coinbase accountants break out on their own.

This means that a large percentage of the increase of revenue was attributed to potentially lower quality tokens. Now we don’t know for sure where most of the volume is coming from, but if it is from the likes of PEPE or other meme coins, it's not a sustainable revenue stream.

Fed Chair Jerome Powell’s impact on the business

With interest revenue coming in at such a high percentage of Coinbase’s revenue, the company is becoming more and more dependent on what the Fed does with interest rate policy. Although the recent .25 rate hike should help the company over the next quarter, it also isn't a sustainable revenue stream.

Reliance on USDC in a rocky period

Coinbase has spent a lot of time and energy promoting the use of USDC with its partner Circle.

But during the Silicon Valley Bank fiasco, USDC temporarily lost its peg on news that Circle had $3.3 billion stuck at the ruined bank. The news caused USDC to drop to 87 cents on the dollar and users to begin transferring money out of USDC.

As Coinbase noted in their shareholder letter: “in Q2, we expect lower subscription and services revenue Q/Q driven by lower USDC market capitalization.”

Furthermore, as Ryan Selkis eloquently pointed out, Europe leading in crypto regulation while the United States tip toes has lead to billions of dollars leaving USDC for USDT.

Coinbase executives are being sued

While this will most likely account for very little, it is worth noting that executives at Coinbase are being sued for selling nearly $3 billion in stock in connection with the company’s direct listing based on non-public information.

While the stock sale, in combination with Brian Armstrong’s immediate purchase of a $133 million home, isn’t a good look, we just aren’t sure if it is illegal.

Overall, the company had a good quarter. With that being said, it is still dependent on the same ol’ revenue streams.

Now that they are primarily done in cutting costs, it’s time for the company to begin diversifying revenue more.