Coinbase Global, Inc. (COIN) Earnings Call Transcript & Summary

DB Tech Conference. I'm Bryan Keane. I cover the payments processors and IT service companies here at Deutsche Bank. So today's fireside chat is with Coinbase' Alesia Haas, who is the CFO. And before we get started, I do want to mention it, I'd like to remind that during today's chat, Alesia may make forward-looking statements. Actual results may vary materially from today's statements. Information concerning risks, uncertainties and other factors that could cause results to differ from these forward-looking statements is included in the company's SEC filing and shareholder letter available on the Coinbase IR website. Our discussion today will include references to non-GAAP financial measures, and a reconciliation of non-GAAP financial measures is included in the company's most recent shareholder letter. So with that, one more housekeeping item. There is a Q&A question box, a portal box. So feel free for any investors that want to ask questions, we can try to get to those at the end. And with that, Alesia, good to see you.

Thank you so much for having me, Bryan. I'm happy to be here today.

So many investors are still ramping up on the Coinbase story. So I was hoping we could start with just what's the investment thesis here for Coinbase?

Sure. So Coinbase, we are a leading technology infrastructure provider providing access to the cryptoeconomy. We provide building blocks to facilitate the use and engagement in various transactions in crypto, and we serve our users primary financial accounts. We started with the very basic premise that you needed to be an on ramp. So we provide an on ramp from the fiat economy to the cryptoeconomy and allow our individuals, businesses and developers to easily and efficiently transition between these 2 worlds. And on our platform, they can then engage in a multitude of transactions. We really think about building products to serve what we consider 3 pillars of the cryptoeconomy. The first is crypto as an investment. So we offer the ability to buy, sell and store over 140 assets on our platform. The second, we think of it is crypto as a financial asset. And here, we build products to allow you to pay in crypto, to earn and to borrow as examples. And as we go forward and what we really are excited about in the future is we think that crypto will become an app platform. And so we're building tools to enable our customers for a seamless experience across DeFi and NFTs, and what we think will be a burgeoning growth story in the decentralized economy.

Great. And what is driving the significant acceleration in demand for crypto services? And how can Coinbase continue to make crypto more mainstream?

Well, this is a new and exciting asset class, and we're in the very early innings of development of this cryptoeconomy. We think about it as similar to the Internet. So where the Internet enable people to send information instantly and globally, crypto enables people to send value instantly without borders globally. And by using technology protocols called blockchains, which are analogous in many ways like TCP/IP or SMTP protocols that gave rise to Internet, we can build these new and exciting applications and features. So the demand for crypto is really coming from this innovation and growth of the sector. And what we see, which is really driving the growth today, specifically in 2021, is we're starting to move from that crypto as an investment that I talked about a minute ago into crypto as an utility, into it being a financial product, into it being a this application and DOGE technology. So what we're seeing on our platform is we're starting to see our users stake their assets. They're using it as a way to earn attractive yields in crypto. We're seeing them paying with their debit cards. So these are examples of them using it as a financial asset. And we're also seeing them really learning. And so they're coming to our platform to seek out new cryptos. We have a product called Earn, where you can earn a little bit of a new crypto by watching a video or downloading that new app. And we saw over 2 million users use that product in the second quarter. And so they're really seeking knowledge and really wanting to grow their experiences in crypto. And when we look further ahead, we're starting to focus our own product road map on building this app platform for crypto because we are seeing growth in DeFi, in NFTs, and we're starting to now see crypto gaming, which is a really exciting intersection between crypto and gaming and social. So here's an example on why we think this app platform is so exciting and will drive future growth at crypto. So many people are watching what we call a play to earn economy emerge. People can now earn crypto for playing video games. And a leading example of the crypto project in this space is Axie Infinity, which now has 1 million active daily users on this platform. So in the future, we're going to offer more products that enable our users to have a seamless experience connecting so they can come on Coinbase. They can buy this token. They could then move that token into their self-hosted wallet. They could use that token to participate in this video game all directly through the Coinbase platform. And that's really the future. And we think that will just drive accelerants in growth. And to answer the second part of your question, how do we think will make this more mainstream. As I said, we're seeking to be the primary financial account in the cryptoeconomy because our goal ultimately is we want to bring 1 billion users into crypto. And to achieve this, we are going have 2 core tenets. The first is to be the most trusted; and the second is to be easy to use. Crypto is very complex, and we are still in our infancy in terms of usability and making this really broadly adopted technology. You can think of it as like we're in the dial-up modem phase of crypto in many ways. We're still a little clunky, still kind of getting there, but we really see the proof and that we're really driving to that future state. And so our opportunity really here is to help with scaling, help with usability and help to obfuscate the complexity and engage people in these products in a more easy-to-use way.

How fast do you think Coinbase can grow the MTUs. I know there was some slight change in the guidance this past quarter, but can you talk about that and how you think about the growth in that MTU metric?

Sure. So for those who don't know, our MTUs are monthly transacting users, which means a user who's actively transacted in any given period. So today, we're still solely in that investing and seeing the emergence of the financial asset and the DOGE platform. And so when we think about trading as the use case that we've seen up until this point is the primary activity. Those MTUs have really correlated with market price movements and volatility. And what we see is when markets are volatile, people tend to trade more, and that has driven some of this movement in our MTUs, where the reason that we brought down our scenarios for the full year 2021 is we have seen volatility and we've seen price come down where it was in Q2. So what we're doing is we're building out nontrading products. And what I just talked about, we're building out our subscription and services revenue, staking and earn and borrow, lend in a Coinbase Card and in the future, more access to the DeFi space. So these are emerging products and services that we think will help create different behaviors within our users on our platform and help grow that MTU in a more reliable way over time. And as I mentioned, we're seeing some really nice signals here. So in Q2, we had 2.3 million users engaged with an Earn campaign on our platform. And we also saw 1.7 million customers now staking through Coinbase, and this is the way to earn yield on their crypto. So those are both really exciting trends that we're seeing significant adoption of those new products.

Definitely. Definitely. I wanted to ask about the other competing platforms for Coinbase, how it competes in? There's always this question on there that what will the yields be in this business? Will they have to come down over time as more competitors and it becomes more mainstream? How would you answer that kind of thinking about those questions?

Yes, I'll break them in parts. So the first thing that I would say is we welcome competition in this space. We have to build a whole new cryptoeconomy. We want lots of different players and products to really emerge in this space. And so we cheer on our competitors as much as we compete with them. So we are competing against many. But what I don't know is I don't think any competitors that I know of offers the breadth and depth of products that we offer to the range of customers that we serve. So we are serving 3 customer segments today: individuals, businesses and developers. And are building comprehensive product suites around each of these 3 user groups that we serve. And so we're differentiated from the traditional financial services and fintechs that are getting into crypto in as much as that we are crypto native. We are building our products on the blockchain. We are integrated with over 20 different protocols. So the protocols are separate from the assets on top of them. So these 20 blockchains are new payment rails. And this gives us the ability to create differentiated user experiences. And we will have different growth over the long term. So for example, by integrating with the blockchain, we can serve as an infrastructure provider to other companies that want to offer crypto to their end users through our APIs. And we're in the earliest days of doing that through our Coinbase Cloud offering. But on top of this platform, which has really been built on the blockchain, we're building these trusted and easy-to-use products for our customers. For individuals, we're offering them the primary financial account. And this breadth of these different experiences really is differentiated by any of our competitors at this time. And on the institutional side, we just launched Prime to be the true one-stop shop for businesses who are looking to invest, trade, get data, have financing products in crypto. And we believe that we offer best execution. We can route orders to over 10 liquidity venues, so we ensure that we're getting the best pricing for our clients. And then we also offer an institutional-grade custody solution. So you talked about fees, and this is a very important topic that we hear from all investors. So we fundamentally don't focus on fees as the primary item right now. We don't believe we're competing on fees. We believe we're competing on products. We're competing on these differentiated experiences, but I just mentioned, creating the breadth of products on our platform, getting access to more assets, more ways to transacting in crypto. But like all financial products, we do believe that we will see fee compression over time. And we believe that we'll see that when crypto becomes more commoditized. Today, with the innovations of NFTs, the new protocols coming out that need to be integrated with, we're just not at that point of commoditization. And so we don't believe that this is a near-term phenomenon. But we believe that over the long term, it is certainly possible and likely that we will see fee compression in products when they become commoditized. However, fundamentally, that's not what we're focused on. We're really focused on just adding users to our platform, growing that MTU that we just talked about, growing the number of products those MTUs are engaged with. So we're getting deeper engagement in the cryptoeconomy, and then really getting that to that utility and app phase of the cryptoeconomy. And we believe that these actions combined will drive long-term revenue growth for Coinbase.

Yes. I think it's currently 27% of MTUs are using multiple products. How fast can you grow that percentage? And how important is that in driving engagement for you guys?

I think it's really important because we think that crypto to become an economy, you need to have utility. And so the more transactions that one can do, the more likely that our users are going to be using multiple products. So I think it shows a sign that we are getting to the future state of crypto when we see that growth in our MTUs that are investing and using a noninvesting or utility profits on our platform. So we did announce 27% of MTUs are engaging with multiple products in addition to investing. Today, primarily, those are staking and earned, but we're seeing good adoption of the Coinbase Card, and we plan to leverage our history of repeatable innovation to drive additional experiences for these clients. In terms of growing this percentage, we want to see it grow over the long term because our focus is to be this primary financial account and to drive utility. So we think this is the key metric to understand if we are really achieving that future vision.

And I was going to ask, is there -- where can that ARPU go for those MTUs as you add more products? There's a lot of -- there's a lot of financial fintech companies all trying to do the same thing, is sell more products into that base. So just thinking about for you guys on the ARPU basis, where do you think that number can go?

Well, today, it's largely dependent on transaction fees. And so we think what will happen is we'll start to see diversification of that ARPU, where we will build up more of a base of more durable recurring revenue within that base. So for example, when you stake and you buy a proof of stake asset, you typically are buying that for an investment to earn a reward or a yield on that over a period of time. That's a recurring monthly reward that you earn. And so that's an example of building an ARPU base for those users that is not tied to, I traded this month, maybe I'm going to wait out the market next month. So I think what we're planning to do with ARPU is we're not focused on the total ARPU growing, we're focused on changing the mix and then growing that sticky base where then trading fees become less concentrated in that number over time.

You mentioned Coinbase Card and then there's Bitcoin Borrow. How are those products performing so far? And how do those economic models differ across those 2 products?

So I would first comment these are very young on our platform, so less than a year old for each of them. And the economics are incredibly different across each of the products that we offer, just like economics are different for loan and debit cards in the traditional finance space. So Bitcoin Borrow is a product where retail users can pledge their Bitcoin as an example and receive a U.S. dollar loan secured by that crypto. It allows them to be long-term investors in their Bitcoin, not pay tax, but access liquidity if and when needed. And so we monetize on the interest earned on the loan balance outstanding, but largely no different to a securities backed loan. And then on the flip side, the Coinbase Card is a debit card and that we earn fees for the transactions, but also because someone is then monetizing and selling that Bitcoin, we earn the fee from that Bitcoin sale or conversion to Fiat in the back end as well. So very different monetization models. Very different use cases than the invest products where you're buying and selling different crypto assets. So as I mentioned earlier, our focus here is just to provide the range of products to engage our users in multiple products and experiences on our platform. And as you just said, we are focused on the ARPU and really think about these products as being a portfolio of products around our users and then creating those engagement points on our platform will drive value over the long term.

Is there a bunch of other products and services that are in the pipeline to add to continue to grow kind of the amount of offerings you guys can offer the user?

Absolutely. So we are looking to invest across each of our customer groups. So the retail group, institutions and businesses, and all of those have robust product road maps that we plan to offer additional transaction types, additional use cases for your crypto. And we're also just adding new crypto to our platform. That's one of our largest goals is making sure that we are the place that if you learn about a crypto asset, you can come to Coinbase and find that asset as long as it is safe and legal to do so. So all of these are priorities for us to continue to drive the cryptoeconomy growth and the user engagement on our platform.

You talked about the staking and also the Earn program. I know sometimes we get confused on exactly how they differ. Can you just talk about breaking those 2 pieces apart?

Happily. So very, very different products. So I'll start with staking. So staking refers to proof of stake protocols. And what we saw in the second quarter is the Ethereum began to move from proof of work to proof of stake protocol. And these are different mechanisms to validate transactions on the blockchain. But by delegating your assets into a proof of stake validator, you kind of earn a reward and you earn that reward when you validate those transactions on the blockchain. That's complicated for any individual to set up. You don't -- you have to have a 24-hour computer system in your home working to validate transactions. But what Coinbase offers is our users the ability to delegate that responsibility to Coinbase. We validate transactions on your behalf when you own that asset, and we pass on those rewards to you when we are on a commission for doing that service. So these are just owning these particular assets where you earn a reward on these purpose stake assets and then Coinbase is doing the staking work on your behalf. What I mentioned earlier, though, is these users are engaging in these products because they view these as long-term investments where they can earn a yield and earn a reward on these assets. And so they are long-term investments for them, and these are recurring rewards that they earn every single month. This is very different than our Earn campaign. So an Earn campaign is where an asset issuer. So I'm launching a brand-new crypto. I want to educate retail users on my crypto on why it's such an exciting project. They can partner with Coinbase and develop some educational content and videos. We distribute that to our retail customers. When our customers watch a video, they may have to go and download an app or do a small test at the end of the video. They can earn a little bit of that new crypto asset. The asset issuer pays Coinbase a fee for that distribution and for sharing and educating users on their content. So those are more onetime fees that we get when a user engages with that content from the asset issuer. And so to grow that revenue stream, we have to add more assets to our platform, engage those asset issuers in completing Earn campaigns. And our users have to continue to find value and find interest in those opportunities. So very different monetization models, very different growth trajectories. One is going to grow with the proof of stake networks. One is going to grow with just total crypto assets added to the platform.

Got it. Got it. Thanks for that clarity. We're seeing the industry move to decentralized apps such as NFTs and DeFi, and I know you mentioned that in the beginning. So how can Coinbase play a role in fostering this growth? And how would you monetize this opportunity?

Sure. It is one of the most exciting developments is that it indicates we're moving more deeply into this utility phase. And this will also help diversify our revenue away from trading over time. So we do participate in a number of ways today. First, these applications are built on crypto rails. And in order to interact with them, customers need to buy crypto. And so we offer the ability to come to our platform, buy, sell and then we provide a wallet. So a safe place to store your crypto assets, including your DeFi assets. So to expand on my earlier example that I gave, for Axie Infinity, you could go to Coinbase today and buy Axie Infinity to gain investment exposure to DeFi. But the real vision and the opportunity for Coinbase is to enable our users to access DeFi more directly on our platform. We offer that through the Coinbase Wallet product today. But soon, soon, we hope to have any app built on a decentralized crypto rail will be accessible through the main Coinbase app. And we believe that the Coinbase Wallet and identity should seamlessly then integrate with any of these DeFi protocols, and this will create a better user experience. It will create more awareness for our users of what's going on in crypto. And we can then look to find new ways to monetize that engagement over time.

Great. I know you guys made an acquisition this year, the Bison Trails. And I know Coinbase wants to be the AWS of crypto. Can you explain the strategy around growing infrastructure services?

Absolutely. So yes, we did acquire Bison Trails earlier this year, and it is serving as the backbone of a product that we call our Coinbase Cloud offering. And what Coinbase Cloud is, is really a suite of cloud-based crypto services to solve the growing market needs for a variety of customers who also want to interact with blockchains, interact with crypto and build crypto products for their end users or their end tools. So we see customers that would seek out these toolings to be enterprises, developers or financial institutions, for example. And today, these tools can enable Coinbase Cloud customers to enable staking for their owned end customers or accept crypto as a payment option or receive price feeds from the Coinbase exchange. And these are current examples, so we think many, many more will come. And the reason we think this is so important is that infrastructure and API offerings in the overall cryptoeconomy are still very early in their development. And we see a big opportunity to provide developers with APIs that will accelerate their own building and ultimately drive future adoption of crypto. So an analogy that we think about is either AWS and Google Cloud is they helped usher an era of modern application development in the cloud. And we think that there's similar analogies here in crypto to enable anybody in the future to build crypto into their business operations.

Got it. I wanted to ask about the penetration of institutional accounts, which you guys have been successful in over the last year. What's the outlook for the institutional business? How much penetration is still left there for you guys to get the benefits from?

Let's start with a little bit of history. So we began to stand up our true institutional offering in earnest in early 2020. So we are 1.5 years in, and we are very pleased with the progress we've made in a short period of time. But just looking at this most recent quarter, Q2 2021, we had over 9,000 institutions on our platform and over $90 billion of institutional assets that we held. We are just starting to see institutions make allocations in a non-Bitcoin crypto Ethereum as they deepen their journey into crypto. So we shared in our Q2 shareholder letter that our customers include 10% of the top 100 hedge funds by AUM. And we're starting to see continued growth in this population, but we're seeing growth now in all pockets of money. So we started [indiscernible] pension, corporate treasuries and the variety of -- the vast variety of institutions are now looking to make an allocation into crypto and increasingly beyond Bitcoin. So we're seeing that acceleration from very early days. And the way that we like to think about it is, crypto has largely been a consumer-driven trend up until this point. And so what we see like the early crypto adopters doing now, shortly thereafter mass retail is doing it, shortly thereafter businesses are doing it, and then it just kind of goes down this waterfall. So we're excited about how quickly the progression of adoption of crypto is through our various user bases. So when we look at the outlook, though, specifically for institutional you asked about, we do think more and more customers will onboard the Coinbase platform and leverage our new Prime offering that we've announced. And they're choosing us because of a couple of reasons. One, I mentioned earlier, we do offer a smart order router, so we can offer best execution across a variety of liquidity venues. We offer a qualified custodian, which is regulated by NYDFS, and we have a long history of security and protecting client assets where we're holding over 10% of global crypto on our platform. We're going to offer financing like post-trade credit, portfolio leverage and short financing and then crypto-native features like staking and governance. So we believe that we have the broadest platform and product offering to institutional customer base, and that will help really accelerate the growth and adoption of crypto.

Got it. Great. I wanted to turn to the international markets and thinking about how fast penetration can go there and how economics might differ internationally versus the U.S. market?

It's really hard to generalize at this time. But fundamentally, crypto is a global phenomenon. It's the first global payment rail that we've ever had, and we want our full suite of products and services to be available to everyone and everywhere. As we're making meaningful investments to drive this growth, and it's a key focus area for us. Today, we're available in 100 countries worldwide, but the licenses required to operate in the regulatory frameworks in each place is highly variable. So most recently, we launched services in Japan after a lengthy process to procure the JFSA license, and in Germany where we secured a license for crypto trading and custody from BaFin, which was the first of any of its kind in the EU. The economics have the potential to vary by country, one based on the products adopted in those countries, we don't have a belief that all products experiences will be the same in each country and also local market conditions and competition. So it's too early to comment on how this may impact our overall financial metrics. But as mentioned earlier, we're first and foremost, just focused on growing the users on our platform, growing those users' engagement with products, and we think that this will drive top line revenue growth.

I know you guys have done a lot of work and continue to be out front on the regulatory side for crypto. Can you just give us an update on some of the latest regulatory and legislation environment?

Well, I think it's clear now that crypto is in the focus of regulators and that leaves me pretty optimistic that we may see the clarity that the industry has long hoped for. So the Coinbase goals are to achieve clarity and a level playing field. For far too long, there's been ambiguity and the breadth of product offerings across the space have been based on different approaches and interpretations of which products were permissible. So I can't speculate as to exactly what will happen, but we are starting to see action, and I think that we'll see a lot of increased action in the coming quarters and years. We're going to see that in a lot of areas. I think we'll see that with clarity around tax like we saw with the infrastructure bill. I think we'll see clarity coming out of the SEC on potentially what assets are determined to be securities versus utilities at the token layer, and also then what products are deemed to be permissible for crypto companies to offer to the customers. And what I would just leave you with is that Coinbase remains highly committed to proactively engaging with global regulators and to drive this clarity so that none of the industry, including us, is left guessing.

Got it. I want to go to the portal, there are a few questions here. Considering you have stated strategy of buying crypto for your balance sheet, the implication is that you have excess profits that don't have a home for reinvestment. Why not cut price to compete with peers offering free or cheaper trading versus higher commissions on retail trading?

Great. So we have started to invest more heavily in crypto on our balance sheet, but it's not because of excess profits. It's actually because we are starting to see more of our liabilities exist in crypto. So we pay payroll in crypto, we're paying our rent in crypto, and we are doing other activities that require holding crypto to offset the business operations. And so the way I think about this is we're actually match funding our balance sheet. We hold fiat our fiat needs, we hold crypto for our crypto needs, and they're all on purpose of serving our product needs, our customer needs and the Coinbase corporate needs at this time. So I view those as incredibly different strategies. What we may do to offer competitive products on price is very different than what we need to manage the balance sheet effectively.

Great. Another question just asking about Coinbase Ventures and its place in the growth strategy for you guys?

Yes. Coinbase Ventures is a really exciting part of our strategy. And for those who don't know what we do, we make a number of seed investments, Series A, Series B to really help grow the cryptoeconomy. And what this does for us is a number of things. One, it helps us be aware of new projects in the field. It helps us figure out if there are opportunities for Coinbase to partner, to acquire burgeoning technologies that would allow us to really accelerate our own product road maps. It also gives us exposure to exciting developments. So I would say, one, it's awareness for our product road map. Two, is for M&A opportunities. And three, is to grow this economy that we mentioned earlier. It's so important to get 1 billion users in, we need a robust economy. So it offers a future playing field for competitors as well.

Got it. I see a question on capital allocation, and I also was going to ask about the spike in activity in M&A in the crypto space. What are your thoughts on consolidation in the industry and Coinbase's appetite for acquisitions?

There has been an increased activity in the crypto market, which reflects just the pace of growth in innovation, I think, across the industry. So we approach everything on a buy, build or partner approach. All of the acquisitions we've done to date have been in support of our product road map. We think about those acquisitions coming from Ventures, but we also have opportunities coming from the market as well. We have a fairly long history now of being opportunistically acquisitive. So we bought Bison Trails. We bought a company called Skew that's going to augment our data analytics for our institutional customers on our platform. And in the past, we did Xapo, which really helped accelerate our custody business. And Tagomi, which really accelerated our institutional prime brokerage business. So we are definitely continuing to look to be acquisitive, and we'll do that for both product bolt-ons, we acquire talent and would look to find ways to expand internationally through organic or inorganic means if those opportunities presented themselves.

Great. Another question, just asking about the SEC had an inquiry on the Lend product. I think Bryan had some comments about that yesterday.

He did. Is there a more specific question?

No, I guess they're just asking if you had any comments about that SEC inquiry?

So I think we've shared our comments as a company based on our blog post and Bryan's tweets. I think what we are looking for and from a first principle standpoint is we're seeking regulatory clarity. We're seeking a level playing field. And we're seeking to have good dialogue. And we want to make sure that we are able to proactively engage with regulators both in the U.S. and globally to drive an industry that will create a lot of jobs, a lot of value for the local governments that embrace crypto. And I think that this is an opportunity for us to a thoughtful regulation in the U.S. And so we're hoping to have those conversations to make sure we're no longer guessing on what the rules may be.

So Alesia, what does Coinbase, and we'll leave it here, I know we're going to run out of time. So what does Coinbase look like even from a 5- to 10-year kind of a longer-term picture? Because it looks like you're building something well that goes well beyond just being a platform. You're talking about additional services and infrastructure; it just seems like a much bigger play inside of everything crypto. So just trying to get a picture of how you see it kind of longer term.

I think it goes back to what we said, we're building a primary financial account. So we want to be the place where if you think crypto, you're coming to Coinbase first. And you can come to, engage in buying new cryptos, engaging in DeFi, buying an NFT, sending it to your friends, doing any transaction that you can think of, we want to be the place that you think of going to first. And that's for individuals, that's for businesses. And then when we think about our developer products, all of the tooling that we're building to integrate natively to these blockchains, doing transaction monitoring, being able to think through our compliance tooling or just the APIs that we're building, we want to make those available to other companies so that they can also build in this cryptoeconomy and continue to grow the overall market. And we believe that, that will continue to exist.

Yes. With that, I'm excited to see how it continues to evolve. I know the IPO has been exciting, and congratulations on that, and we'll continue to monitor all your guys' great progress. Thanks so much for taking some time.

Thanks, Bryan.

Bye, Alesia.