Coinbase Global, Inc.

good afternoon my name is abby and i will be your conference operator today at this time i would like to welcome everyone to the coinbase third quarter 2022 earnings call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session 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 recall your question, again, press star 1 on your telephone keypad. Thank you. And Neil Gupta, Vice President, Investor Relations, you may begin your conference.

Good afternoon and welcome to the Coinbase Third 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'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 measures. Reconciliations to the most directly comparable GAAP financial measure are provided in our 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 state technologies to enable our shareholders to post questions, and in addition, we'll take some questions from our research analysts. With that, I'll turn it over to Brian and Alicia for opening comments. Thanks, Anil. All right. So as I look back at the quarter, obviously there were some macro headwinds, just the macro environment being down and that ties directly into our trading revenue. But I was really excited to see the growth in our subscription and services revenue. This is something where, you know, three plus years ago, we started planting the seeds of building some of these different product lines with different revenue streams. And we've really started to see that come to fruition, which means the portfolio of products that Coinbase has and works on Has started to provide less volatility for the parent company revenue overall We still have a long ways to go on that but it's it's a great trend and it's moving in the right direction So I just wanted to touch on a few topics one is I want to touch on our move to a product group structure in the company that I think will help us move even faster and Then I'm going to touch on the regulatory environment and I'll end by sharing a few thoughts about how we're going to continue to lead in this environment All right, so you may have read the news that our chief product officer is going to be leaving the company. And this kind of accelerated a change that we had been thinking about for a little while, which was the idea of elevating our product group leaders in the org. And so we decided to make that change, and they're now going to be reporting directly to me. They'll be on the executive team. And we really have three different customer segments that Coinbase serves. And so the product groups cleanly break down across those three customer segments. We've got consumers, institutions, and developers. Now we're going to have a fourth product group, which we're calling platform. And this product group is there to build the shared components across the different product groups that all of our products use. For instance, connecting into the different blockchains out there, generating transactions, storing crypto, things like that. So I'm really excited about this change for a few reasons, I think. that we're a big enough company now where we want to have more autonomy and P&L ownership for each of the different product group leaders. We want to give them the ability to move quickly and nimbly, pushing down decision-making in the org, having them operate a little bit like three different startups within our larger company. And I'm really excited to see what the leaders of each of those product groups can do. And we have some really incredible talents and rising stars in the company. And we're giving them more ownership here, which I think will drive our efficiency at scale. By the way, I put out a blog post earlier this year, how we're going to operate efficiently at scale. It's probably good to go back and look at that too. So let me just touch on the regulatory environment as well because, of course, the regulatory environment I think is one of the biggest unlocks that we're going to have in terms of growing this industry and perhaps even getting the prices to go back up in the right direction. By the way, there's an opportunity at some point for the crypto prices to potentially decouple, I think, from the broader macro environment. And we don't know if that'll happen, but I think it's one of the possibilities. And regulatory clarity is one of the things that could help kick that off. So just generally, if I look at the whole world, because, of course, we're engaging with policymakers all over the world, the G20, with the exception of China, has actually been generally positive moving towards regulatory clarity, whether it's in Europe or in Hong Kong or in Australia or Brazil. We're seeing regulatory clarity emerge around the globe, and that's really exciting and positive. The U.S., I would say, is a little bit behind, but it's also moving in a positive direction. There's a bill going through Congress called the Stabenow-Boseman Bill, or simultaneously it's being referred to as the DCCPA, the Digital Currency Consumer Protection Act. And this is a really positive development overall. It gives spot market authority to the CFTC. It helps clarify the regulatory environment for centralized exchanges and custodians, which of course is the primary thing that we do. And it clarifies some of the regulation around stablecoins, which is also good. Now, there's also part of the language in the bill that we're going back and forth with policymakers helping, you know, provide input and draft some of this is around DeFi. And, you know, look, I think that DeFi and self-custodial wallets are a super important part of where crypto is going. You know, when you hear about Web3 and decentralized apps or dApps, And DeFi itself, these are really essential to have the ability for new companies and participants to go build these protocols and really give access to these tools to people all over the world, including the 1.7 billion people in the world who don't have access to any bank counter financial services today. So we'd like to see DeFi preserved and the innovation potential of that preserved. In this Stab Now Bozeman bill, everybody can basically agree that centralized exchanges and custodians should be regulated. And in my ideal world, I think we would really just focus the bill on that plus stablecoins and just take the win. There's a lot of good work to do for the industry and regulation. We can come back to DeFi later. But if DeFi needs to be included in somehow, maybe there's a way to sort of create further study and not necessarily opine on something so early in that bill. So anyway, we're very excited to see that bill make its way through Congress. It has bipartisan support. I think it would be a great change, actually, to the current environment in the U.S. where, unfortunately, we're seeing this kind of regulation by enforcement from the SEC, and I do think that's creating a chilling effect on the U.S. market. It's harming U.S. investors in the sense that it's encouraging them to go to offshore exchanges that are less regulated or not regulated, and we'd like to see that change in the U.S. and for there to be regulatory clarity so that the U.S. can continue to be a leader in this space. As we're working on all these policy efforts, we're also not just sitting back idly. We're going to continue to build and innovate across all of our product suites, and it's going to continue to make us think about how we're making investments internationally because, of course, our mission is to increase economic freedom for the world, and there's various jurisdictions around the world that are a little further ahead on the regulatory clarity, or they're even trying to attract crypto businesses there. building something where people can serve the rest of the world. And so we have to think about all of that at the same time as we help these policy efforts come to fruition in countries around the world. So yeah, just in this down environment, the down market I should say, I'm actually really excited and energized. We've been through 4 crypto cycles in the last 10 years at Coinbase. And it's kind of funny, I actually enjoy the down cycles a little bit more. In upcycles, there's tons of scaling effort that has to happen, and a lot of people rush into crypto for sometimes the wrong reasons. In the down markets, you get to focus on building, and everyone's there who's a true believer and a true builder. And that's no different in this case. There's a ton of innovation happening. There's still a ton of institutions signing up, kind of getting ready to take advantage when this market, we find the bottom of the macro environment. And Coinbase is going to continue to lead in this environment, doing what we've always done in the sense that We're taking a very trusted and compliant approach globally. We're not trying to cut any corners or move too fast. We're trying to do the right thing for the long term, even if it's more difficult in the short term. I think that'll pay off for us. We're also leaning into all the variety of different use cases that are emerging in the crypto economy. We're leaning into Web3 usage, building a lot of this functionality natively into our app. Trading is great, and it's been a big source of revenue for us. It'll continue to be in the future. But we also want to support all of the use cases in crypto, not just trading, so that the crypto economy can really come to fruition. And that'll be a diversity of different revenue streams that come into our platform. We're trying to make crypto easier to use, and that's how we're going to get a billion people and eventually half the world onto using crypto and benefiting from it. So I think Coinbase has been a leader in terms of ease of use and design. And of course, we're one of the companies that has a portfolio of different products. This is great. Our customers love it. They can just sign up once, but anything they want to do with crypto, it's easy. They already have their crypto stored with us. It's just one more click to buy an NFT or stake and earn yield on their crypto. So the portfolio of products that we've created, I think, is unmatched in the industry, and we'll continue to build that out. So with that, let me turn it over to Alicia, who's going to go through our Q3 numbers.

Thanks, Brian. I'm just going to quickly recap a few key financial highlights in the quarter. Our results are covered in great detail and at length in our shareholder letter. So while our net revenue did decline sequentially to $576 million, our net loss and adjusted EBITDA both improved sequentially to negative $545 million and negative $116 million respectively. And we think this really speaks to the cost management efforts that we took in Q3. Our trading volume declined 44% sequentially driven by ongoing headwinds that we discussed in our letter. Our empty use decline 6% to 8.5 million as user behaviors continue to shift from trading and non trading transactions and our users are increasingly engaging and staking and reward generating products. Amid this massive reduction in prices and lower crypto passive price volatility. We are so pleased and Brian alluded to this earlier that our subscription services revenue grew 43% sequentially to $211 million. And importantly, if we hold price constant, so if Q3 prices were the same price they were in Q2, that would have grown 82%. The biggest contributor within this line item is interest income, which is benefiting from the rising interest rate environment. We took very decisive action on cost, and we were able to reduce our operating expenses by 38% sequentially, or 22% when you back out the impact of non-cash impairment charges on our crypto assets. We are actively updating and evaluating our scenario plans and prepared to reduce operating census further if market conditions worsen. We ended the quarter with $5.6 billion in total US dollar resources. In addition, we held a portfolio of $483 million in crypto assets. And combined, we believe this puts us in a strong position to manage through these market headwinds we face. So just in closing, I want to touch on our outlook. For 2022, for full year 2022, we remain cautiously optimistic that we will be able to operate within the $500 million adjusted EBITDA loss guardrail that we previously communicated. This is assuming that market cap doesn't go down and deteriorate meaningfully below October and that we don't see any changes in the customer behaviors. As we approach 2023 planning, we're currently preparing with a conservative bias and assuming the current macroeconomic headwinds will persist and potentially intensify. We are not providing a quantitative outlook yet this time. So to conclude, we feel confident that we're in a good position to manage through the stress market, and we'll emerge stronger on the other side. So with that, let's go to questions, Emil.