Coinbase Global, Inc. (NASDAQ:COIN) Q4 2023 Earnings Call Transcript
Coinbase Global, Inc. (NASDAQ:COIN) Q4 2023 Earnings Call Transcript February 15, 2024
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 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: 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. Non-GAAP financial measures should be considered in addition to, not as a substitute for GAAP measures. We are once again using Say Technologies to enable our shareholders to ask questions. In addition, we will take some live questions from our research analysts. And with that, I'll turn it over to Brian for opening comments.
Brian Armstrong: Thanks, Anil. I'm proud to say that in 2023, we cut costs by 45% year-over-year and managed to ship product 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 one, 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 U.S. 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-U.S. customers. And in Q4, we launched Coinbase Financial Markets, which offers regulated futures trading in the U.S. 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. And in 2023, we also meaningfully improved our institutional trading products 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 ETFs as Coinbase was selected as the custodian in eight of 11. This will unlock new pools of capital to flow into the crypto space with Coinbase playing a key role here. We are 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 U.S., surpassing silver. All of these improvements will continue to grow phase one, 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, Stablecoin began to be used in Global Payments. We launched the ability to send free instant global payments on USD Coin using base. We are now in the process of integrating this into our products to make payments of 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 the 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 redecentralizing 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 times similar to the Internet going from dial-up to broadband. We also launched improvements in Coinbase wallet. For instance, we made it easier to find and use decentralized applications or DAPP.
For instance, with one tap, you can now open and adapt and you are already signed in and you have your wallet connected. There is no sign-up process for each app or having to type your credit card details into each app. It's still early days for crypto as an application platform and many of the early applications look like toys, but it has captured the imagination in hearts of developers, and Coinbase is one of the few companies who can bring together all the decentralized protocols into a compelling customer experience, which is what we are attempting to do with Coinbase Wallet. So that's how we see crypto evolving. First, as a new asset class, second as a new set of financial services; and third as a new application platform. In 2023, I also said regulatory clarity was a top priority, and I want to give you a quick update on this.
The majority of G20 countries now have crypto legislation either already passed or being drafted. And this is really great progress. In the U.S., there are even two bills going through Congress now with strong bipartisan support. Coinbase, along with other players in the crypto space, contributed to an $85 million Super PAC designed to elect pro-crypto candidates in this upcoming U.S. election. And we help create stand with crypto.org, a grassroots movement for crypto advocates in the U.S. Their goal is to get to 1 million voters who want to stand for crypto in the 2024 elections. They are at 30% of that goal today with about 300,000 members and it's growing every week. In the U.S., we are still working our way through the court system to get clarity there.
But in the meantime, we are continuing to grow our business. Anecdotally, it's something our customers come up and thank me for the most, leading the charge to get regulatory clarity in the U.S. We remain confident the U.S. will get this right, whether it comes from the courts, creating new case law, Congress passing new legislation or ultimately the 52 million Americans who've used crypto voting in this upcoming election. Looking ahead to 2024 for a moment, I'd like to share a few of our top priorities for the year in closing. Our first priority will be to drive revenue, especially growing our two largest revenue streams, trading fees and Stablecoins. We'll do this with international expansion, growing derivatives and spot trading and more deeply integrating USD Coin into the crypto economy.
By continuing to drive revenue growth, it allows us to fund some of our other priorities and the utility aspects of crypto. Our second priority is going to be to keep driving utility in crypto. This year, we'll be experimenting with payments as a use case. We are starting to see adoption of USD Stablecoins in emerging markets, especially those with high inflation and customers can now send USD Coin for free instantly anywhere in the world on Base. This has the potential to make global payments much lower friction, reducing fees. We will also keep supporting developers building on Base. For instance, just recently, we've seen a surge of activity on the decentralized social media protocol, Farcaster, and the majority of developers are now building what are called Frames on Farcaster using Base.
We will also be investing in Coinbase Wallet, our self custodial app, where many of the early utility applications like decentralized social, identity or messaging are starting to take shape. Crypto still needs to have its iPhone moment where these decentralized protocols become easy to use for the average person, and we are hoping we can help make that happen. Lastly, we will continue to drive regulatory clarity for the industry. We are supporting stand with crypto.org and its goal to activate 1 million advocates for crypto in this upcoming election and we'll continue to engage with Congress to work towards new crypto legislation in the U.S. Finally, we'll continue to fight in the court room to get sensible case law passed. I'm very pleased with our financial position, operating efficiency and the competitive landscape, and I think we are incredibly well positioned for long-term growth.
With that, I'll hand it over to Alesia.
Alesia Haas: Thanks, Brian, and good afternoon, everyone. In 2023, we focus on financial discipline and operational excellence. As a result, we are in a much stronger position today than we were one year ago. I want to share some highlights. So highlights from 2023 include significant growth in our subscription and services revenue through a down market, materially lower expenses, a return to profitability, a stronger balance sheet, we have more U.S. dollar resources and less debt as we enter 2024, and we did this all while accelerating our product velocity. Let's dive deeper and start in the details of full-year 2023. We generated $95 million of net income and nearly $1 billion in adjusted EBITDA. Our total revenue was $3.1 billion, down $86 million year-over-year.
We saw a decline in transaction revenue, but this was largely offset by a 78% increase in subscription and services revenue. Our full-year total operating expense declined $2.6 billion. Within this, sales and marketing, technology and development and general and administrative expenses declined $1.7 billion on a year-over-year basis. Turning to our Q4 results. All the comparisons I'm going to share on a quarter-over-quarter basis, unless I otherwise noted. Q4 began with lower levels of crypto prices and volatility, but we saw those increase by roughly 40% and 60%, respectively, by the end of the quarter. These increases were largely driven by excitement around Bitcoin ETF approvals and broader market expectations for an improved macroeconomic condition in 2024.
The increase in volatility had a meaningful impact on our transaction revenue. We saw strong growth and reengagement from both simple and advanced traders. Notably, average trading volumes materially increased amongst our advanced traders. This resulted in Q4 transaction revenue of $529 million, up 83%. Both volatility and the mix of advanced and simple trading volume was similar to Q1 of 2023. And as a result, our Q4 blended average fee rate was similar to the Q1 levels. As a reminder, we continue to experiment with our pricing models for both consumer and institutional and price changes may impact future quarters. However, to be clear, we did not make any material change to our fee structure in Q4. And the blended average fee rate that you see reported is simply due to mix shift on our platform.
Now turning to subscription and services revenue. Q4 was $375 million, up 12%. The primary driver of the growth was blockchain rewards, which was influenced by higher crypto asset prices. In the fourth quarter, we experienced another quarter of native unit growth. We saw inflows in custody and increase in staked balances. We saw growth in USDC on our platform. We closed the year with just under $200 billion of assets on platform. On to expenses. Q4 total operating expenses were $838 million, up 11%. Expenses were primarily driven by seasonal and performance marketing spend, increased legal spend and our decision to increase bonuses in 2023 as a result of our strong full-year financial performance. Q4 net income was $273 million, and adjusted EBITDA was $305 million.
Q4 net income benefited from strong revenue growth and two items. First, we released a non-cash tax valuation allowance of $121 million. Second, we repurchased $100 million of our 2026 convertible debt, which had a favorable P&L impact of $18 million. Now turning to our outlook for the first quarter of 2024. Overall, Q1 is off to a strong start. Through February 13, transaction revenue was approximately $320 million. This is about six weeks of the 12-week quarter. We are seeing strong trends across simple, advanced and institutional trading. Thematically, it looks similar to Q4. We expect Q1 subscription and services revenue to range between $410 million and $480 million, with crypto prices being the largest driver of where we perform within that range.
In terms of expenses, we expect technology and development and general and administrative expense to grow modestly to $600 million to $650 million, driven primarily by higher stock-based compensation. We provide additional context in the letter. We expect sales and marketing expense to decline modestly to $85 million to $100 million, driven by seasonally lower NBA spend. In closing, Q4 capped a strong year to our business, and we are excited for what 2024 brings. Before we turn to questions, I'd like to hand it over to our Chief Legal Officer, Paul Grewal, to share an update on the status of our SEC case.
Paul Grewal: Thank you, Alesia. As Brian mentioned at the outset, regulatory clarity is one of our top priorities in one venue through which we are seeking that clarity is through the courts. We continue to see progress in the early stages of our enforcement litigation with the SEC. Just last month, on January 17, the judge in our case held oral argument on our motion for judgment against the SEC. This is still a very early stage of the case. It's always very hard for defendants to entirely dismiss any case at this stage, something that court statistics make clear. But we strongly believe that we are right as a matter of law, and we were grateful to see the court's careful attention to this matter and deep understanding of the issues at the oral argument.
So what is next? The motion is under submission and the court did not specify any time line for decision. There are multiple potential outcomes, but we are ready for any of them. The court could dismiss the complaint in its entirety, dismiss some of the claims, but not others or dismiss none of the claims at this early stage. Any claim that is not dismissed will then be the subject of discovery, which is a process that can take time. We are ready for discovery, if that is the next step, which would include discovery for both sides. After discovery and before trial, we'll have the opportunity to file a motion for summary judgment, which is similar to our pending motion in that it can end the case before trial. That is the type of motion that disposed of much of the ripple case.
Whether the case goes to trial or is dismissed, we will get the clarity we have long sought. We are confident in the outcome, whether it comes later or it comes sooner because we are right on the facts and right on the wall.
A - Anil Gupta: Thank you all. With that, let's turn to shareholder questions. We are taking the most upvoted questions as determined by the number of shares. The first question, why do insiders continue to sell their shares daily? Alesia?
Alesia Haas: Thanks for the opportunity to share some context around this topic. First, all of our insiders, myself, Brian, Emilie, Paul, those on the phone and all of our insiders, we all have shared long-term conviction in Coinbase. Second point I want to make. Equity is a significant component of the compensation that we offered insiders and employees alike. We believe this most closely aligns our incentives to business performance and the interest of our stockholders. Third, it's important to note that these sales account for a small portion of insiders total holdings in Coinbase. Last, executives and the Board can only trade via trading plans that are governed by SEC rules. And we maintain corporate policies governing these plans that are commonplace amongst public companies.
Nobody is trading based on real-time stock price movements, company news. All of our trading plans are required to be set up well in advance. Further, they're disclosed in our public financial filings, and they allow insiders the ability to sell at a predetermined number of shares at a predetermined time or price. Our stock was up nearly 400% in 2023. And as a result, some of those thresholds were met and sales were executed. But I just want to close, we are all holding long-term conviction in the opportunities at Coinbase.
Anil Gupta: Let's go to our next question. What is the plan to expand revenue drivers outside of the ETF custodian plans? The market shifts quickly and Coinbase needs to be nimble both within the U.S. and abroad. We've seen your shift into the European markets. How will this evolve going forward? Brian?
Brian Armstrong: Yes. So I'll focus on the ETF question since there's been a lot of buzz around it. And we've always said that ETFs would be a win-win for Coinbase, and we're starting to see that play out on our platform. So in preparation for this launch, we won eight of 11 Spot Bitcoin custody mandates from issuers. And today, Coinbase custody is about 90% of the 36 billion in Bitcoin ETF assets as a result. So across the entire industry, we've seen over $4 billion of net inflows into Spot Bitcoin ETFs. The Bitcoin ETFs are breaking records. And when gold launched in November 2004, it took one year to get to $3 billion. These ETFs did that in a few weeks. And so this is a really an incredible start. This is really just the beginning.
We're now starting to see some of these issuers file for Ethereum ETFs, for example. We've been named as the custodian in five of the eight ETH ETF applications. And custody isn't really the only way that we're monetizing this. We're also helping with trading via Prime. We're helping with financing for trade settlement. So there's other opportunities to generate revenue here. For anybody worried about cannibalization, ETFs have been positive for the industry, which has been additive for Coinbase. We're seeing elevated engagement and net inflows across both retail and institutional Q1 to date. What's even more important is that every institution is now starting to hold crypto, the asset class will be a standard part of every diversified portfolio.
The financial system is officially adopting crypto. This is really good, and Coinbase is the most trusted partner here.
Anil Gupta: Our next question. Coinbase's venture portfolio is a hidden gem that Wall Street doesn't seem to be taking into consideration in their valuation of Coinbase as a company. During the earnings call and potentially in your materials, can you highlight this portfolio and its long-term opportunity? Emilie?
Emilie Choi: Yes. Well, I definitely agree, it's an undervalued long-term opportunity, and I think we have a strong disproportionate advantage in the market. By the way, I should mention that the value of our portfolio is held on our balance sheet at cost is not reported at fair value. So we booted up ventures six years ago when I first joined and one of the things that Brian and I talked about was what is in the early days of companies such as Google and Facebook and others. Those companies have been able to make investments in the most exciting emerging Internet companies at the time like a Stripe or a Shopify. So that is what we view our opportunity in the crypto ecosystem. We started it very scrappily with no dedicated team or resources.
We just started investing in great startups, and we are now one of the most active investors in the space with more than 400 investments in our portfolio. I view our competitive advantages as having great relationships with Coinbase [alumns] and the ecosystem. One example is Farcaster that Brian mentioned before. That's one of the Coinbase alumns who founded that. We also take a very long-term view. We don't panic when the market sells off. It's kind of the opposite of a herd mentality who doubled down when others are fearful. And we love it because it helps us get connected to the crypto frontier and to invest in the ecosystem. One area we're seeing tremendous energy around right now is the creator economy. So companies such as Paragraph, XMTP, Farcaster, all of these are looking to decentralize existing social platforms.
And then looking ahead, we're really excited about on-chain consumer applications such as gaming, social messaging and media, and then there's a lot of new protocol developments like restaking that we're excited about. We're also seeing a huge growing opportunity outside the U.S., and our portfolio has a strong footprint in the global crypto ecosystem. One other thing I should mention is that because of the U.S.' lack of clear regulation on crypto, we are pushing a lot of innovation outside of the U.S. The U.S. has been losing 2% of blockchain developer share annually since 2017. And this is following the same pattern as semiconductors and 5G moving offshore. It really just reinforces the need for us to have clear legislation, and we think it's a huge opportunity that the U.S. is currently squandering.
It's also why on the venture side, we are investing globally. There's a lot of interesting regional exchange platforms across Latin America, India, Africa and other regions.
Anil Gupta: Great. So with that, Sarah, let's switch and take questions from the analysts.
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