Coinbase Global, Inc.

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 second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Anil Gupta, Vice President, Investor Relations. You may begin your conference.

Thank you. Good afternoon and welcome to the Coinbase second quarter 2022 earnings call. Joining me on today's call are Brian Armstrong, co-founder and CEO, Emily Choi, president and COO, and Alicia Haas, CFO. I hope you have all had the opportunity to read our shareholder letter, which was published on our IR site 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 FCC filings. Our discussion today will include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR website. Non-GAAP financial measures should be considered in addition to, not as a substitute for, GAAP measures. We are once again using the SAIT Technologies platform to enable our shareholders to post questions. And in addition, we will take some live questions from our research analysts. Before that, I'll turn it over to Brian and Alicia for some opening comments. Brian. Thanks, Anil. All right. So for the opening comments, I'd like to touch on three topics. The first is looking at crypto asset cycles broadly and where we are in this one. The second topic is going to be about our product momentum and how we're winning in this environment. And the third is about the regulatory landscape. So let's start by talking about these crypto asset price cycles. So there's a phrase that we say often internally at Coinbase. It's never as good as it seems and it's never as bad as it seems. And we say that and we learn the truth of it every crypto cycle that we go through. We've actually this is probably our fourth crypto cycle that we've gone through. And they always seem a little bit scary, especially if people haven't gone through them before. And this is our first one as a public company. There's lots of things like the Terra Luna collapse, and there's contagion with things like Three Arrows and Voyager and Celsius, although none of these things had any impact on Coinbase. But we've seen this all before. And so what do we do in down cycles at Coinbase? Well, first of all, we keep building. And so in up cycles, we're usually growing and we have to focus a lot on scaling. And so in down cycles, it's actually kind of a breath of fresh air. We get to go back and focus on paying down tech debt, doing innovation in our products, growing our existing products. And so it's been kind of nice to get back to that and keep focusing on building great products for customers. The other big thing we do is we focus on managing expenses closely to make sure that we can outlast any kind of down cycle. And we intentionally raised capital in 2021 to ensure that we had a really strong balance sheet going into this downturn, which has been great. We also historically have seen casual competitors take a step back in down markets, and that's been to our benefit over time. Sometimes there's interesting M&A opportunities that arise and things like that. And then every prior cycle has landed higher than the previous one due to the innovations that got built during those downturns. And so I think it's really important to kind of zoom out and look at the performance of Coinbase across these cycles. And so one thing we put in the earnings letter was just looking back over the last two years, If you compare our results to Q2 of 2020, of course, we had COVID in there as well, but I think looking over crypto cycles is important. Our verified users have nearly tripled in that timeframe. Our monthly transacting users have grown 6x. Our total quarterly trading volume has increased 8x. Our assets on platform has increased nearly 4x. More than two thirds of our MTUs are now engaging with multiple of our products. That number was just 20% two years ago. And our subscription and services revenue, which is more predictable, has contributed 18% to our total net revenue, which was only at 4% two years ago. So you have to really remember that crypto is not linear. Any given quarter could be up or down or even any given year. But if you evaluate the business across price cycles, it tells a much different story. So that's a little bit about the price cycles. Let's jump to the second topic around our product momentum. So Coinbase in this period is very focused on five product areas. The first one is our Coinbase retail app. This is the one that accounts for the majority of those 100 million or so verified users. And it's a large revenue generator for us. The second is Coinbase Prime, which is our prime brokerage product serving institutions around the world, which has ended up doing very well. The third one is our staking business, which has also grown into a great source of subscription and services revenue. is growing nicely the fourth one is coinbase cloud our product for developers which we believe will be an awesome business over time uh similar to aws or something like that helping the thousands of startups out there and actually not just startups established companies integrate crypto into their product with our suite of apis and the fifth one the last one we call broadly web3 but this touches on a major future area of growth that we believe will materialize and it in products we have there with Coinbase Wallet, our self-custodial app, various protocols that we're working on, and some things we'll touch on later. So the goal of these products, of course, is to help a billion people access eventually the primary, access the open financial system and be the primary financial account for them. And we generally try to differentiate our products by making them the most trusted out there, the easiest to use, and building one integrated suite of products so that if you sign up for one Coinbase account and verify your identity, connect your information, your payment methods and your crypto. You can then switch over and easily access any of our products. So there's a nice integration there into the suite. We've had a number of really exciting product wins in the last quarter. You may have seen that we were selected by BlackRock and Meta as their partners as they develop their crypto offerings. This is actually a really huge deal for a few reasons. BlackRock in particular is the largest institutional asset manager in the world. It took several years of diligence to go through with them and close this deal. I think it really shows that Coinbase is situated uniquely to be the preferred partner to the largest companies in the world who want to integrate crypto into their offerings, which increasingly will be more and more of the Fortune 500, I believe, over time. And we're really the only reasonable choice for many of these companies as the most trusted platform in the first public company in crypto. So I think it shows that we can build not only a successful retail platform, but also close deals with the largest companies in the world so we can win across multiple customer segments. Our self-custodial wallet also had a number of wins this past quarter. We've been getting rave reviews that people believe it's now the most advanced self-custodial crypto wallet on the market. And I think our pace of product launches has really been accelerating in this period. So lastly, I just want to touch on the regulatory environment and I'll start with the recent SEC headlines, although we've been having great interactions with the CFTC and numerous regulators around the world. So in May, the SEC sent us a voluntary request for information, including for information about our asset listings process. We do not yet know if this inquiry will become a formal investigation. As with all regulators around the world, we're committed to productive discussion with the SEC around digital assets and securities regulation. And if this inquiry is an opportunity for that discussion, we welcome it. Zooming out, we've been pleased to see the progress recently both in the U.S. and in countries around the world toward more clear legislation for crypto. In the U.S., there are several bills making their way through Congress with strong bipartisan support. For instance, the Stabenow-Boseman bill proposes legislation that aims to provide clarity on the regulatory authority of crypto assets between the SEC and the CFTC and others where we frequently seem to get caught in the middle. We look forward to engaging with all relevant parties to develop common sense frameworks for regulation and oversight that help clarify what is a crypto commodity, what is a crypto security, what is a stable coin, and what is something else entirely in the crypto ecosystem, such as NFTs are probably considered artwork. The White House put out an executive order recently asking the various departments of government in the US to work together on a comprehensive crypto legislation that preserved the innovation potential of this technology, and that now seems to be happening. When I was in D.C. two weeks ago, several people told me that crypto is one of the few bipartisan issues in D.C. right now where they can actually get work done. And with some luck, we may see clear stablecoin legislation passed later this year and comprehensive legislation for crypto passed next year in the United States. Of course, Coinbase is a global company, and we're seeing similar moves toward regulatory clarity globally, including in the EU with the recent passage of the Markets and Crypto Assets, or MICA, regulation. We're also seeing positive developments in Australia, the UK, Hong Kong, Brazil, and other markets as well. So it's sort of strange to say, but in some ways, the more regulation there is for crypto, the better it is for Coinbase. We're the most trusted brand in crypto and have leaned into regulation since the early days of the company. We are and will continue to be a champion for this industry, ensuring that any crypto legislation that passes preserves the innovation potential of this technology and that at a minimum treats it on a level playing field with traditional financial services. Therefore, we're more than happy to engage with any regulators around the world who will take the time to meet with us. We don't see this as a bad thing. On the contrary, we believe it's the best way to help the industry move forward. I don't have anything else I can say about the SEC information request in particular, but we plan to keep you updated on developments in the regulatory space broadly as we have more to share. So just to wrap things up before I hand it over to Alicia, hopefully the overarching message here is clear. We've been through many crypto cycles before. They seem scary, but it's never as bad as it seems. It's never as good as it seems. Coinbase has succeeded over the last 10 years by continuing to focus on great product execution during down markets and managing expenses closely. We're the responsible company in the space with plenty of cash on the balance sheet, strong fundamentals if you look over the last two years, and we're winning deals with the largest companies to integrate crypto into their offerings. We're going to be here through the long term, through the ups and downs of this industry. And with that, let me turn it over to Alicia to discuss Q2.

Thanks, Brian. I'm going to briefly recap Q2, share our areas of focus and strengths as we adapt to these new market conditions, and then touch briefly on the outlook for the remainder of the year. First, to recap Q2, down markets create financial headwinds, which are reflected in our Q2 results. Our MTUs totaled 9 million. We're pleased to see that decline was only 2% lower as compared to Q1. And we note 67% or 6 million MTUs were engaging with our non-investing products. And so we'll talk about that later, but we're definitely seeing a shift in behavior as MTUs are trading less, but participating increasingly in staking and other non-investing products. Our total trading volume was $217 billion, and transaction revenue was $655 million, down 30% and 35% respectively. Both metrics were influenced by a shift in consumer behavior and market activity. This is very consistent with what we've seen in prior down markets, that retail customers tend to shift from traders to hodlers. And market volume, in turn, then shifts to concentrate amongst market makers and pro-style traders. Much of that volume, the market makers, the pro-style traders, takes place in offshore exchanges where financing and derivatives products are more prevalent. Over time, we look forward to building products to better compete for this volume, but today we are a heavily retail-concentrated platform. Lastly, there was a spike of trading volume in May as investors traded around the Terra Luna collapse and subsequent credit events surrounding crypto insolvencies. We had not listed LUNA, nor do we have exposure to these insolvencies, and as a result, did not participate in this volume spike. Despite these headwinds, we're really happy to see the growth of our subscription and services revenues, which were 147 million as of Q2, and notably up 44% year over year. We also have shared with you in the shareholder letter a way to look at our subscription and services revenue price adjusted, i.e., if we freeze price as of Q2 and look at that historic trend line, we're pleased to see pretty linear growth quarter over quarter as we continue to roll out breadth and depth of different product experiences on our platform. Combined, our net revenue was at $803 million. Our adjusted EBITDA loss was $151 million. And our net loss was $1.1 billion. But I want to call out here that that was heavily impacted by non-cash impairments. excluding those non-cash impairments, our net loss would have been $647 million. We take impairments when the value of crypto assets or the value of our venture's investments fall below our carrying value of those assets. Importantly, we don't take write-ups if the market recovers above that point. So intra-quarter, as crypto dropped to lows, even if it recovered intra-quarter, we are taking the impairment down to the lowest point it reached during that reporting period and then never writing it up until we sell that asset. And so that's the impact of non-cash impairments on our P&L and on our balance sheet. I want to switch gears now and talk about how Coinbase is adjusting to these market conditions and how we're focused on operating more efficiently as we move forward. On the expense side, we've taken several steps to streamline our cost structure, including the 18% employee reduction that we announced in June. We want to highlight that it will take some time to fully realize the financial impact of all of our actions. But we are lowering our full year expense range for technology and development and general administrative expenses to $4 to $4.25 billion, which is down from our prior outlook of $4.25 to $5.25 billion. On the product side, we've taken the approach of pause, maintain, and prioritize. And we're focusing on the five key areas that Brian outlined earlier. We are working hard to operate within the $500 million adjusted e-bail loss guard rail we communicated for 2022. Clearly, we acknowledge these are stress market conditions. Based on the expense initiatives we took in Q2, we're cautiously optimistic about our ability to operate within this guardrail. That optimism is conditioned on crypto market capitalization not deteriorating meaningfully below the July 2022 levels, and that we don't see another significant change in the behaviors of our customers. In the event of those events that we see further deterioration or the performance approaches the low end of our MTU range that we're providing in our updated outlook, we may not be able to reduce our expenses quickly enough, and we may exceed that guardrail. However, despite short-term, we want to commit to you that we're going to operate more efficiently as we build for the future. Lastly, I want to just close with some comments about our strong capital position and our risk. There are three primary factors that we look at to assess our financial strength and durability. First, at the end of Q2, we had $6.2 billion in total USD resources. We provided enhanced disclosures in our shareholder letter to really help you understand the balance sheet and how we look at it. This includes cash and cash equivalents. It includes our USDC, which we operate with the same as cash. We are treating USD stablecoin as fungible to cash in our daily operations at Coinbase. And so we would like you to look at it in the same way and think about that as a cash asset. Second, We take a prudent approach to risk management. We've had no credit losses from our financing activities, no exposure to client or counterparty insolvencies. We have never blocked a client withdrawal or gated anybody taking assets off our platform, nor have we had any changes in access to the credit products for our clients. We stand apart in this way of how we operate risk within the crypto ecosystem today, and we believe this is a strength that we can continue to broaden our financing activities and be there for more clients going forward. Third, and Brian touched a lot on this, but there's a global wave towards regulation, and we're committed to working alongside policymakers to build a workable regulatory framework for the crypto economy that addresses risk but also enables the development of adoption of digital innovation. We believe we're uniquely positioned here.