Q1 2024 Earnings Summary
- Coinbase is experiencing strong growth in user engagement, with increased trading volumes driven by both existing and new users, as well as higher trading volumes per user. This indicates a healthy and growing user base contributing to revenue growth.
- The excitement around Bitcoin ETFs has significantly boosted institutional client engagement, with 40% of institutional clients engaging with three or more products in Q1. Coinbase saw direct benefits such as 69% quarter-over-quarter growth in assets under custody to $171 billion and a 64% increase in custodial fee revenue, demonstrating the company's ability to capitalize on market developments.
- Coinbase is maintaining strong operating leverage and profitability focus, generating positive adjusted EBITDA even as it invests prudently for growth. In Q1 2024, total revenue increased by 72%, while total expenses increased by only 5%, showcasing the company's scalable business model and operational discipline.
- Coinbase expects expenses to increase in Q2 due to higher variable expenses, including customer support and infrastructure costs, which may impact profit margins.
- Regulatory uncertainties, such as the SEC's attempts to classify Ether as a security, could negatively impact Coinbase's trading and staking business if Ether is deemed a security.
- Coinbase's strong Q1 adjusted EBITDA margin of 60% may not be sustainable, as it is dependent on favorable crypto market conditions, which can be volatile and unpredictable.
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Regulatory Environment
Q: Views on Uniswap Wells notice and Ether as a security?
A: Coinbase's Paul Grewal addressed concerns about the Uniswap Wells notice, noting Uniswap's public and transparent response asserting the claims lack merit. He highlighted a trend of companies openly disagreeing with the SEC while maintaining respectful dialogue. Regarding Ether's classification, Grewal emphasized that the SEC has previously stated Ether is not a security, and Coinbase supports Uniswap and ConsenSys in seeking clarity. -
Investment Plans
Q: How are you balancing investments with profitability?
A: CFO Alesia Haas stated that Coinbase aims for positive adjusted EBITDA in all market conditions. In strong crypto markets, they delivered 60% adjusted EBITDA margins in Q1. They plan prudent and modest investments, learning from 2021 when they grew too quickly. The Q2 expense increase is mainly due to variable spend lagging trading volume spikes and infrastructure scaling. -
Capital Allocation
Q: What's your approach to capital needs and M&A?
A: Coinbase is investing capital into its prime financing business, ending the quarter with over $700 million in loans. They have a capital-efficient business with positive unit economics and use their balance sheet to bootstrap products and pursue opportunistic M&A. They've closed ORDAM in 2023 (now Coinbase Asset Management) and are acquiring a MiFID license to unlock derivatives in 20+ EU markets. -
USDC Growth
Q: What drives USDC's rebound and thoughts on legislation?
A: Coinbase saw USDC's market cap grow by over $8 billion since the start of the year. Emilie Choi attributed this to USDC being a highly trusted stablecoin, leading to broader adoption. Paul Grewal noted that Congress is proposing stablecoin legislation, which Coinbase welcomes, expecting standards for transparency and reserves that will keep the U.S. market attractive. -
Bitcoin ETFs Impact
Q: Did Bitcoin ETFs drive more trading volume?
A: CEO Brian Armstrong acknowledged that excitement around Bitcoin ETFs boosted new customer adoption across their products. Coinbase saw all-time highs in trading volume and active clients in their institutional business due to this increased interest. -
Institutional Fee Rates
Q: What's driving higher institutional fee rates?
A: CFO Alesia Haas explained that the fee rate increase is due to a mix shift toward Coinbase Prime, which has higher fees than the exchange. Growth in Coinbase Prime led to higher engagement, trading volume, and active clients, driving the fee improvement over the last two quarters. -
User Growth
Q: How much did new users contribute to growth?
A: Alesia Haas stated that growth came from re-engaging existing users acquired before 2023, attracting new users, and higher trading volume per user. However, detailed attribution was not provided. -
Crypto Cycle Outlook
Q: Where are we in the crypto cycle?
A: Brian Armstrong observed that crypto market cap is up about 60% in Q1, with volatility still below 2021 levels. He mentioned events like Bitcoin ETFs and the Bitcoin halving, noting historically Bitcoin peaks 12 to 18 months post-halving. He highlighted Layer 2 solutions as a significant upcoming development. -
Institutional Adoption
Q: What's driving institutional clients' multi-product engagement?
A: Alesia Haas noted that Coinbase has built out a full Prime suite offering custody, trading, financing, and staking. Customers are engaging across this spectrum, with custody and trading going hand-in-hand. Adoption varies by client needs, but strong uptake across these products has contributed to growth. -
Lightning Network
Q: What's your strategy with Lightning Network and payments?
A: Brian Armstrong discussed integrating the Lightning Network to reduce transaction times by over 99%, making them instant compared to Bitcoin's 10-minute block time. Fees were lowered to less than 0.1% of previous fees. Partnering with Lightspark, Coinbase aims to make Layer 2 solutions default to achieve sub-one-second, one-cent transactions, fulfilling crypto's goal of updating the global financial system. -
Payment Revenues
Q: Details on payment-related revenues and sequencer fees?
A: Alesia Haas described payment revenues as including instant withdrawal fees, debit card fees, commerce fees, and venture-type payment products. She noted that Base has been the biggest contributor to quarter-over-quarter growth and is the largest revenue stream in this category. -
Smart Wallets
Q: Expectations for smart wallets on Base platform?
A: Brian Armstrong highlighted the rollout of smart wallets utilizing passkeys and biometrics to simplify onboarding. Currently in developer preview on testnet, they've seen incredible developer interest. This innovation aims to make crypto accessible to 1 billion people by easing technical challenges. -
State-Issued Stablecoins
Q: Thoughts on state-issued stablecoins and their impact?
A: Paul Grewal acknowledged the importance of state governments and state-chartered institutions in supporting stablecoins and crypto generally. He expressed that the dual banking system serves consumer and investor interests well, and hopes any legislation will continue to recognize that role.