Coinbase Global, Inc. (NASDAQ:COIN) Oppenheimer’s 27th Annual Technology, Internet & Communications Conference August 13, 2024 1:15 PM ET
Company Participants
Alesia Haas – Chief Financial Officer
Conference Call Participants
Owen Lau – Oppenheimer
Owen Lau
All right, our next section is with Coinbase. So, first of all, thank you, everyone, for joining this section. For those of you who don’t know me, my name is Owen Lau. I cover information services, exchanges and digital assets at Oppenheimer.
So before we get started, I have a safe harbor statement for Coinbase. I would like to remind you that during today’s call, the company 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 Coinbase SEC filings. Our discussion today will also include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on the company’s Investment Relations website. Non-GAAP financial measures should be considered in addition to, but not as a substitute for GAAP measures.
All right, so Coinbase, it’s well known to be a crypto exchange, but over the past few years, it has diversified away from U.S. spot trading to stablecoin, staking and international and some other aspects. Today, we are very excited to have CFO, Alesia Haas, joining us to talk about her journey for Coinbase. So thank you for your time, Alesia.
Alesia Haas
Thank you for having me, Owen.
Owen Lau
For the people who are listening to the webcast, please feel free to submit your questions online and we will do our best, try our best to address your questions. So, first of all, Alesia, on the most recent earnings call, Brian said Coinbase is now an all-weather company. Can you talk about the journey to get here?
Alesia Haas
Thanks for the question. So, as you know, when we went public, we had a posture of breaking even through a cycle. And we had recognized that crypto had gone through bull runs and crypto winters over the last ten years since Brian founded the company, and that we had always seen the next peak greater than the prior peak, the next trough was greater than the prior trough. And so at the time we went public, we said, okay, we’re going to navigate these peaks and valleys and just kind of cut across, and we may make revenue when we’re in a peak. We may lose a little bit of adjusted EBITDA when we’re in a valley. We got really clear feedback from the market in 2022, when crypto prices were falling and we started to have negative adjusted EBITDA that the market wasn’t prepared for that level of volatility in our financials.
And so starting in January of 2023, with our first quarter earnings call, we made a commitment that we would generate positive adjusted EBITDA in all market conditions, and that we would not subject the market to the volatility of crypto, that we would neutralize that through our expense management and the discipline of our execution. And we’ve now largely delivered on that goal. We’ve delivered positive adjusted EBITDA for six straight quarters through various crypto asset volatility and crypto market price conditions.
And that success has been due to our focus on expenses and making sure we’re really prudent in managing our fixed expenses and also due to our focus on increasing revenue diversification. So in Q2, you’ve noticed that our subscription and services revenue reached almost $600 million of total revenue in the quarter. That was the all time high of this total combined revenue. And that provides some insulation from crypto asset price and volatility, which drives variability in our transaction revenues. We believe both of these can grow over time, but that diversification of revenue that comes from different drivers is helping us build this all-weather company.
Owen Lau
Got it. So, in terms of adoption, how would you characterize where we are in the digital asset adoption cycle? What are the potential catalysts that can drive increased adoption from here?
Alesia Haas
Well, broadly, we continue to see global adoption. You’ve heard us say about 52 million Americans have transacted in crypto and we’ve seen estimates that broadly across the world, about 5% of the population globally has adopted crypto.
In 2024 versus prior years, we’ve seen greater institutional participation driven by Bitcoin and now Ethereum ETFs. We’re seeing more – Layer 2 activity. We’re making progress towards regulatory clarity. So, I think the diversification of crypto that we see today versus the early days as a bitcoin-only market are bringing in more and more market participants. And just as crypto becomes more mainstream, it is getting adopted in more spaces.
The catalyst that we see today in the market are we just had the bitcoin halving event, and we’ve seen prices historically peak 12 to 18 months after those events. We believe regulatory clarity would be a massive unlock, just like we saw when we got the Bitcoin ETF approvals we saw a massive inflow of new market participation, it’s about regulatory clarity around a Bitcoin ETF brought adoption and participation.
We think that entering the phase where now Layer 2 solutions offer fast and cheap transactions will bring more utility. And this may unlock the power of crypto powering financial services. And so, the future of money begins to take off. And we see that with stable coins, with base, with wallet growth. And then longer term, we think that crypto will become a new app platform and provide infrastructure to enable a new on-chain Internet. And this will then create opportunities to build all of the familiar Web2 applications that we engage with today in a Web3 way, in an on-chain way. And you’re seeing the early innovators begin to adapt and build these applications, but it is early, early days here.
So, I think that we’ll see generations of adoption to come, and we are just in the early phases. But I am excited about the technical progress that we’ve made, and we have the building blocks in place now that, I think, we’ll start to see applications built upon.
Owen Lau
Got it. So, the market sentiment has changed quite – quite substantially over the past few weeks. And the market is expecting, I think, more interest rate – and maybe more interest rate cut sooner rather than later. Can you please talk about where you have the largest interest rate exposure and how you’re thinking about second half of 2024 and maybe potentially going into 2025?
Alesia Haas
Absolutely, the market has been rapidly evolving. So, just as a reminder to everybody, our largest exposure to interest rates is our stablecoin revenue. Just as a reminder, stablecoin revenue is generated based on the total USDC, which is the stablecoin we have in partnership with Circle’s. So, it’s based on that market cap. The amount of USDC we hold on our own platform and the overall interest rate environment.
So, we’ve been benefiting for the past few years due to this high interest rate environment, but we’re monitoring forecasts and expectations closely. In our outlook we provided for the third quarter, we did factor in a September rate cut.
What I would share with you is a 25 basis point reduction is about $2 billion of USDC market cap that we need to grow to ensure revenue neutrality from that 25 basis points. And so, if it’s a 50 basis point rate cut, that’s about $4 billion in market cap. Our overall goal with USDC is to grow adoption. And so that is what we’ve talked about on our earnings call that the combination of the USDC on base now, which can offer low cost, fast transactions, our Smart Wallet, which like reduces onboarding friction. We’re trying to build the Lego pieces to put together amazing customer journeys that drive utility in crypto. And so, our goal is to then grow native units in USDC, grow that market cap over time to reduce the impacts of the headwinds that we expect to see from interest rate cuts.
Owen Lau
Got it. So I think that’s a good bridge to the product type questions. Maybe let’s start with USDC. So you talked about you have to grow the USDC market cap. What does it take for USDC kind of to, to take over USDT to become like we’re the number one stablecoin in the world in terms of market cap? And how can Coinbase help with this journey and to drive the growth and expansion of USDC use cases as well on top of market cap?
Alesia Haas
So we are excited about the progress we’ve made year-to-date with USDC. Going forward, what I would note to you is that USDC is the first stablecoin to achieve MiCA compliance. So just to assume out MiCA is the new regulation that’s going into effect in Europe that is a fundamental crypto regulatory framework. And USDC now has achieved that compliance and can be then offered throughout Europe on a compliant basis. Would USDC not have achieved that, we would have had to delist USDC, so this is an important achievement that we can continue to offer USDC to European customers. That is not the case of any other stablecoin. Nobody else has achieved this compliance yet in Europe. So we have an opportunity now to take advantage of our regulatory compliance status with USDC and grow that market share and provide that to the European customer set.
What I would note is that USDC market cap, while it was flat in Q2, while the broader crypto market cap was down 11%, it shows that people are continuing to adopt USDC, and USDC is starting to become a differentiated asset against the broader crypto asset class. As we talked just a minute ago to help offset the interest rate headwinds, we are working to grow it. And so one of the things we’ve done is made it the trading pair on our international exchange, instead of having Bitcoin against U.S. dollars, we have Bitcoin against USDC, as an example. So it is the base trading payer for the international exchange. We’re offering rewards to USDC holders on our platform.
And what we see is that people who hold USDC on our platform are more engaged with our other products and services. They tend to trade more, they tend to explore staking, they tend to look at quests. And so it does feel like it’s a foundational product in which we can build a relationship and grow engagement broadly within the crypto asset class.
And as I mentioned just before, we do think it’s a critical building block combined with Base, combined with smart wallets and that this foundation that we’re setting will drive the next phase of our strategy, which is driving crypto utility, and that is just beginning to unlock and we can talk about that in future quarters.
Owen Lau
Got it. So you mentioned Base a couple of times already. Why don’t we step back and talk about how do you view the long-term potential of Base? I mean, I would note that revenue was quite volatile quarter-over-quarter, but could you please talk about the projects and user trends you have seen so far?
Alesia Haas
Thanks for that. So we are really excited about the progress on Base. This quarter what we achieved was that the median daily Base fees per transaction dropped below $0.01, making it one of the cheapest Layer 2 solutions. So just think about that, sending USDC on Base anywhere in the world. You now have the ability to send USDC globally for less than $0.01 and oftentimes at about a second per transaction.
This creates a new global payment rail unlike anything that we’ve ever seen before in terms of speed and cost. What we then saw in the second quarter is that Base was the number one Layer 2 solution in contracts deployed, i.e. people are building on Base and it was the number one in total transactions processed. So it grew 300% quarter-over-quarter.
So yes, the revenue was down, but it was because we made technical improvements to bring that total fee per transaction down below $0.01. And so we do believe that by lowering the cost per transaction, we’re going to see more developers build on Base, choose it as a platform of choice, and we’re going to grow that transaction process as evidenced by those other two stats I gave you.
So it’s an intentional strategic move to drive down that revenue potential in Q2, because we believe that our goal right now is to engage and delight developers. And that is the sole focus that we have, engaging developers, making Base the platform of choice for that developer community. And in turn, we believe developers will then build engaging, exciting, decentralized applications. Those applications will generate transactions and that’s how we’re going to grow on chain adoption, grow the potential long-term revenue.
So going just digging into that builder then comment, we’re seeing a ton of builder energy on Base. We’re building with our own Coinbase Wallet and we’re seeing other developers build things like DIMO and other apps that are enabling USDC payments on a global basis.
I mentioned this on the earnings call, but – or Brian mentioned this I think, that we saw about $20 billion per week in USDC transaction volume on Base. We announced that we have a partnership with Stripe that will add support for Base across their crypto product suite to offer their users faster and cheaper money transfers.
So we’re really excited about, just as I mentioned before, the building blocks are coming together to offer the foundation for this payments opportunity. But beyond payments, beyond financial services, we’re seeing people build like on chain versions of major Web2 apps, like a Web3 version of Spotify, Web3 version of Instagram, YouTube, X.
And what the value proposition here, Owen is that by building these new experiences on chain, it gives the creators ways to own and monetize their own digital content. So we have lots of people who create digital content every single day, but very few people get to monetize that digital content they create, doing that on chain is a native way that they can then own that content. We have immutable ownership of that content that they can then monetize and create value for themselves.
So that is our vision. That is how we think that Base will enable bringing a billion people on chain. It will be a foundational element to global transaction flows on crypto rails and it enables like an open ecosystem where anyone, anywhere can build these on chain apps accelerate progress to our making on chain the new online.
Owen Lau
Got it. So another expansion area for Coinbase is international. So you reported results two weeks ago, you plan to make additional investments to support product and international expansion. Could you please unpack a little bit more on the limitation you have today in Europe versus what you can do after you get all the approval, like, you just talked about MiCA, but how should investors think about incremental opportunity in Europe when you have all the registration or so called license approved?
Alesia Haas
Okay, happy to do that. So I want to just start with what we have today. So today, Coinbase offer spot products, and that is the largest revenue stream that we have on our platform. The ability to buy a variety of crypto assets using underlying fiat currency. So we can buy Bitcoin with euros, buy Bitcoin with pounds. Focusing on Europe specifically for a moment, that is the product. We, last year, announced that we had received certain registrations in certain countries. So we have a license in Germany, we have a license in Spain.
That gives us the ability to then continue to market proactively market to customers in those countries. What’s been happening is that countries are starting to drive crypto specific regulations, and what you then need is then not these regulations. And these licenses don’t enable you to do something new necessarily. It enables you to continue the business that we were already doing in country. So our products preceded the regulatory regimes. And so getting these licenses enable us to continue.
That is very similar to MiCA. So MiCA now is a comprehensive crypto framework that will enable us to then offer the same products across Europe compliant with the MiCA framework from then one country. What’s also happening, though, in Europe, as we announced earlier this year that we had acquired a company that would provide us a MiFID license, and we expect that to close in the coming months.
The MiFID license enables us to then offer derivatives in Europe. So we will have spot products and then derivative products, and similarly here, then we can market those proactively to customers across the EU. Both of those regulatory environments require us to establish broader foundations, be prepared for more growth in those countries. And so that is why we’re driving more resources into Europe. But broadly, my comment on international was we are looking to continue to grow internationally. So beyond Europe and those two new regulatory regimes that will acquire resources to kind of grow our platform to meet the market and the opportunity we have.
Last year we announced that we went into Canada, we went into Brazil, Singapore, Australia, and we’re seeing good growth. And so we need to continue to invest against the growth that we’re seeing in those countries and continue to plant flags in new countries to broaden out our platform of international expansion.
Owen Lau
Got it. So maybe let’s go back to the U.S. market. When I track your volume, your U.S. derivative volume has been increasing quite a lot since your launch. What are the potential next steps Coinbase can do to drive higher usage and adoption within your platform?
Alesia Haas
So as you noted, derivative is a key area focus for us. And just to remind everybody, globally derivatives represent about 75% of global crypto trading activity. And these were products that we didn’t have any exposure to up until about a year ago when we launched our international exchange and then the platform in the U.S. that we offer derivatives to retail customers in the U.S. So it’s still very early.
Our primary goal today is to gain market share. So we’re focused on building liquidity within our exchanges. We’re adding users, we’re adding trading pairs to really build that foundation upon which we can then grow volume and grow revenue. So we saw some good wins in the second quarter.
In the U.S., Coinbase Advanced, which is our platform for advanced traders on the retail side, we expanded to include more contracts. We became the first platform to offer margin crypto futures for Dogecoin, Bitcoin Cash and Litecoin. So again, more trading pairs broadens the platform on which people can trade and brings more liquidity.
We’re also responding to customer demand and so Coinbase Financial Markets added real world assets like gold and oil, commodities, futures. On the international exchange, we also expanded asset coverage and we added 25 additional perpetual future contracts. So the way that I think about this simplistically right now, Owen, is we’re continuing to build out the product in these markets. We’re adding leverage, we’re adding product pairs, we’re adding customers and we’re adding key licenses so that we can offer this product compliantly to customers in more and more countries.
So this is the kind of steps to be able to grow. But it is early days that we need to add those building blocks to really be able to build and gain market share in that 75% of the world trading activity.
Owen Lau
Got it. So another common question we got was about capital allocation. You have a pretty strong balance sheet, lots of cash, some debt. Could you please talk about your appetite for like using this cash to expand your Prime Financing business? Is there a kind of a limit in place? It looks like some other companies have started to come into this space. How do you see the value proposition for Coinbase going forward?
Alesia Haas
Sure, we’re very proud of our balance sheet. At the end of the second quarter, we had about $7.8 billion of U.S. dollar resources. We also had over a $1 billion in our crypto investment portfolio. And against those assets, we had about $4.3 billion of long term debt. We shared when we did the convert raise in the first quarter that we plan to use the proceeds of that convert to pay off the convert that’s maturing in 2026. So some of that cash on the balance sheet is going and reserved for that purpose.
But beyond that, our primary use case is to invest in our business. We are leveraging our balance sheet for Prime Financing. As you noted, Prime Financing is key to our institutional customers in a number of ways. One way that we use that is through a product called trade finance. So if you think about the ETF’s, with the ETF’s, the underlying asset issuers need to purchase spot Bitcoin and spot Ethereum and settle that into the ETF, which is a 24/7 instantly traded market in crypto immediately.
And so we advance cash from our own balance sheet to be able to buy the Bitcoin or the Ethereum and then settle out with those asset issuers over hours or two days later. We also offer margin to institutions for them to trade on leverage. And this is a critical asset to institutions to be able to affect the trading strategies that they have. So, we are using our balance sheet in that way. Over time, we expect to move into a product set where institutions could choose to also re-hypothecate their own balances and build by a two sided marketplace. But that will take time to build the depth of liquidity in that market. And so we are stepping in while we develop that market.
Beyond focusing on the institutional financing business, we also think of building up our cash to be a strategic asset for M&A or strategic investments. We have also seen over time, opportunities to acquire companies come in different market environments, and so we want to be prepared to be able to use cash or stock, whatever makes the most sense to close a deal and have the balance sheet to do so.
There’s nothing that we are prepared to announce necessarily, but we are always actively looking at everything in the market and evaluating opportunities to expand our product suite, to expand globally, to add talent, to add assets to our platform. And we like to have the opportunity to do so and not be balance sheet constrained if that opportunity arose.
Owen Lau
Couple M&A any appetite, any gap you want to fill, any comments on that?
Alesia Haas
There’s not a specific gap to fill that I would call out. But as I we’ve always looked at M&A to expand our existing product suite. And so when you look historically, we’ve done bolt-on acquisitions to expand the institutional product suite. And now if we look at our strategic goals, we are always interested in things that would expand our reach globally and to fill in gaps in terms of assets or product capabilities within our existing products.
Owen Lau
Got it. So let’s turn to – our attention to the regulatory front, which is a big thing and a big theme for crypto for a long time. Coinbase has an ongoing lawsuit with the SEC. Could you please unpack for us where you are in the process and the next steps and the timing of it?
Alesia Haas
So in the litigation brought by the SEC, as we shared in our shareholder letter, we will be in discovery for the rest of 2024. We do not expect to have any material movement in that case until 2025. And so that is where we are. We will continue to be transparent and update investors as that case proceeds through the courts. In the meantime, we are working closely with Congress on a legislative path forward. We are advocating, we are working closely with StandWithCrypto and donating to policy efforts to ensure that we drive crypto forward policymakers into office and help build towards a legislative path forward.
Owen Lau
Yes. So we will talk about that maybe some of the builds in the next question. But before that, can we talk about an interesting thing going on, which is like crypto looks like has emerged as a mainstream policy issue for the upcoming U.S. elections in a way that it has not been seen like in prior elections or maybe even like a few months ago. So what happened here? And why do you think there’s been such a big focus on crypto this cycle and even right now?
Alesia Haas
I think we are making our voices heard. So we have seen extraordinary progress. And I think it’s a result of the crypto voter. We have 52 Americans that have used crypto. StandWithCrypto has 1.3 million crypto advocates globally, but many of those are in important swing states. And what is happening is advocates and crypto representatives are making their voices heard as an important building block. And so I think that U.S. officials have recognized that this is an important constituent. There is votes, there is money, and we have organized ourselves and raised capital that is being deployed to support pro crypto candidates. So politicians on both sides of the aisle have taken notice that there’s real energy behind this industry and this technology and that they need to drive comprehensive crypto legislation.
Owen Lau
Interesting. And then another interesting theme going on with the market with crypto. It just looks like somehow Democrats tried to reset the crypto stance for the party. And it just appears to us that Vice President, Harris, has shown willingness to change that stance as well. I mean do you think we are getting closer to the situation there? Like regardless of the election outcome, there will be more forward-looking regulations for the industry?
Alesia Haas
So zooming out, we firmly believe that crypto is bipartisan. And we are seeing pro crypto support on both sides of the aisle up and down the ballot. There’s an opportunity for the presidential candidates to stand up for the 52 million Americans who have owned crypto and demonstrate how each of their administrations would best represent them. Coinbase is happy to work with any administration on developing pro crypto legislation and advancing the industry because we think it is so critical to the future and the millions of jobs that the next President appoints regulators who want to keep this innovation here in America and work with Congress to put clear rules in place. So we look forward to any conversations that are available to us to help drive these conversations forward for our customers, for our investors, and for the overall crypto industry.
Owen Lau
Got it. So, going back to your earlier comment, I do want to dive a little bit deeper on the builds going on in the House. So there are two builds, market structure build FIT 21, and also stablecoin build. How do you think these two builds will play out? When do you think it can pass to Congress? Is it more likely a 2025 thing?
Alesia Haas
So we’ve seen real energy in both the House and Senate around passing legislation. I think it’s so important that we acknowledge Senator Stabenow and Representative McHenry for their leadership. Both of them has exemplified leadership in support of crypto and bipartisan legislation, and we’re very grateful to all of their initiatives. So as you saw FIT 21 pass the House, we saw overwhelmingly bipartisan majority support, and we would really like to see the Senate do the same. We are seeing good momentum and we’re cautiously optimistic we’ll continue to see this momentum through the fall. But as these things go they are difficult to predict.
Just zooming out, Owen, I think it’s important to reinforce why getting clear regulation for crypto is so important for the United States and benefits the industry and Coinbase. We believe that legislation creates clear rules of the road for the industry. We believe that that would enable developers to have clarity in the products that they can build and feel confident that they’re going to proceed without getting a Wells notice. We think it protects consumers and provides them assurances about the products and the companies that they’re engaging with. It provides a comprehensive approach so that we can all think about this on a much more macro basis and not be worried about little differences and products.
It provides paths to register new tokens. It could create new asset classes. You might see a path to crypto securities which would enable 24/7 no settlement risk within security tokens. It would give spot authority to the CFTC and close a gap that exists there in the market for spot commodities. And we believe that as I mentioned, it helps create this digital asset securities market. So we think that it will just unlock continued innovation and growth here in the U.S., create jobs, create confidence in new companies choosing to domicile here, people going into this field to build here. And the value of that can’t be understated – overstated, sorry, can’t be overstated.
Owen Lau
Got it. So I think we have like few minutes left. Alesia, any final words for us? How would you tell, like, people who are still kind of hesitated about this space or maybe Coinbase as a long term investment? Any final words for us?
Alesia Haas
So I just would remind people about this technology and what crypto technology enables is peer-to-peer decentralized transactions. It will be the first global unintermediated transaction layer that we can send value, person-to-person, business-to-business, quickly, cheaply around the world. It is still early days. We are still building the building blocks and the foundations to enable those delightful customer journeys. We are not a quarter-to-quarter stock. We are building complex technology over a very long period of time and looking to onboard customers for years and decades to come.
My simplistic view here, Owen is technology that enables this innovation. It’s not a matter of if it gets adopted, it’s just a matter of when those killer apps and killer use cases get built on top of this transaction layer. Much like the internet, it took a while to get broadband away from dial up. It took the user experience, it took geotagging, it took iPhones to get some of the amazing apps that we all use day to day to day. It will take the same in crypto to build those foundational layers of infrastructure to make the daily use cases emerge.
But what we’ve seen over the last year in terms of the speed of layer twos, the user interface improvements, where you’ve moved away from needing a 12 word passphrase to access your smart wallet, we’re just watching the technology become more usable, more scalable, and that’s a really exciting phase to be in. So, I believe there’s huge transformational potential of this technology and I am really excited to continue to see it emerge.
And as for Coinbase, Coinbase is sitting on top of a broad, diverse product offering that we’re serving our retail customers, our institutions, developers, and we’re really good at continuing to hear our customers’ needs and adapt our product suite to meet the growth and excitement of this industry. I’m really proud that we’ve been named as eight of the nine custodians for Ethereum. We continue to be selected by large, complex institutional customers to serve their business needs.
We continue to see our retail customers engage across the product platform and be excited about staking, be excited about quests, try out the smart wallet and just dive deeper into the on chain environment. And as we mentioned earlier in this call Base has become the developer platform of choice and we’re excited to see what those developers create and build on top of this exciting new layer. So, so much to be excited about. But early days and we’ve got a lot ahead.
Owen Lau
Yep, a lot of things going on. Again, thank you very much Alesia, thank you for your time. We’d appreciate it.
Alesia Haas
Thank you.
Owen Lau
Thanks. Thanks all. All right, have a good day. Bye-bye.
Question-and-Answer Session
Q –
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