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

Hi, Alesia.

Hi, Rich. Good to see you.

Our next speaker is the CFO of Coinbase. She's been the CFO since April of 2018, Alesia Haas. Thank you very much. Alesia has agreed to do this from her vacation overseas as well. Coinbase went public in April 2021. And first, Alesia, she's just going to read the safe harbor statement really to start off with.

Thank you for accommodating, Richard. My lawyers will be very pleased with me. So before we get started, I'd like to remind you all that during this call today, I may make forward-looking statements. Actual results may vary materially from the statements I make. Information concerning risks, uncertainties and other factors that can cause these results to differ is included in our SEC filings. Our discussion today may also include references to certain non-GAAP financial measures, and these reconciliations to the most recent shareholder letter, non-GAAP and GAAP measures. Thank you. Let's get started.

Thanks, Alesia. So I think most of us in the room that follow crypto are aware of the correction that's occurred since the highs in November. So you've been experiencing -- certainly Coinbase's experience with crypto cycles, is there anything in this cycle that you see as unique or different? Or is this the typical volatility that investors should expect in this new asset class?

It's a great question. So you're right that we have experienced crypto cycles before. There's been roughly 4 of them since crypto was introduced with the Satoshi White Paper. And most recently, in the 2017 to 2018 cycle, Bitcoin declined roughly 80% peak-to-trough. In 2019, we saw roughly a 50% decline from peak-to-trough within the year. And during Q2 of 2021, we also saw a 50% decline over a 2-month period. So we are no -- we have definitely seen this type of volatility before in these types of significant designs. What we're seeing right now, Bitcoin is down roughly 50% since the November 2021 peak. And the key difference that we have not seen for is the broader macro environment. So this is the first broader macro changes since crypto was adopted, and we now have higher interest rates, higher inflation. And we do not know exactly how those will impact crypto. And so while those may be headwinds, at the same time, we see a lot of tailwinds, which there are millions more crypto users. We've seen broad institutional adoption since the last crypto price cycle. We have broader utility in crypto, broader product suites, and many, many more companies offering crypto. So we have positives and we have negatives, and it's a little unpredictable, to say the least. So while we see it unpredictable and cyclical in nature, we are very much focused on the growth over a very long-time horizon. And we historically have seen higher peaks from cycle to cycle as well as higher trough cycle to cycle. And so that is our belief that we will continue to see that pattern over the next few months, quarters or years, whatever the case may be. And so while it is down 50%, as I noted, it is still up 3x since the middle of 2020, where it was about $10,000 per Bitcoin. And likewise, our MTUs are up. So again, there's things that are similar, there's things that are different, but we remain long-term focused and remained very optimistic about the future of crypto.

Understood. I'm going to go a little bit out of order because I think this follows on with what you just said, Alesia. But back -- I'm fortunate one of the people -- unfortunately I've been around 20 years to watch the Internet cycle, the Internet boom and bust. And you saw at least one broad takeaway that I saw was the companies have stayed focused on their core business segment, like the online brokerage where we experienced tremendous competition from big banks, but they still made it through the cycle. So Coinbase is staying focused on crypto. Can you explain that focus? And how does that come about? And sort of how does that sort of put -- affects your strategies and put guardrails upon where you're heading in the future?

Sure. I was there with you, Rich. I was also here in the 1999 through 2003 peak-and-trough. So no [indiscernible] familiarity with those histories. So anyone, anywhere should be able to easily and securely send and receive Bitcoin, which was the first crypto asset. It has always been in our DNA. And the reason we believe that we should be crypto-focused and crypto-native is that we see huge opportunities ahead for crypto. This is one of the most innovative technologies developed in recent years, and we are just beginning to scratch the surface of what is possible. Crypto offers instant, borderless, low-cost transactions. It offers ways to innovate in terms of the creator economy and how you create new forms of payments who are creating content for example, with the NFTs and [indiscernible]. And we believe that this innovation is just rapidly innovating. There's new blockchains emerging, new consensus mechanisms. These blockchains, they fork, they have air drops, they have new ways that people can transact to them. And so we think that this is where we need to move into new areas outside of crypto. And developers are now solving problems that we, in crypto, that has been a barrier to some adoption. One of the challenges that we see is we need to improve transaction speeds, and we need the loans that offer faster settlement transactions for lower cost. And we need to stay focused on this forefront of innovation and be able to offer these products and services to our customers. That said, we also believe this technology will underpin the future of many products. So we believe that we're going to see tokenization of all forms of asset classes as well as we're going to see Web3 innovate around social media and content creation. And we're building tools that will underpin this future. Much like in the early days of the Internet, there were companies that are building underlying technology that we now see large tech firms providing products and services on. So as we go deeper into the frontier of crypto, we're starting to see others starting to invest, and this really keeps the focus that we're heading in the right direction. We just may be a few years ahead.

Got it. That's -- I think that's what is differentiated Coinbase is that you're focused -- so focused on crypto, not trying to trade equity stocks or equity options. And I know you get asked about that a lot. One thing that did come up in this past quarter was a recent SEC disclosure, a mandated disclosure, I believe, that required you to talk about a risk of how crypto assets are -- assets cash could be included -- may not be excluded from the bankruptcy laws. I guess, in general, can you explain what the issue was? And are customers cash-safe at Coinbase?

Yes. Let me mention that everyone should take away is that customer's crypto and cash are safe at Coinbase. They always have been, and they always will be. We shared extensive information about this in a blog post last week, which I would encourage all of you listening to read. But I think goes into all the relevant details here, but very safe.

Yes. And I'm -- it's not cash, it's the crypto assets that the disclosure covers. So -- okay. Another thing. Now -- again, we definitely support your focus on crypto, but it is a difficult environment. And you've talked about, first, slowing down hiring. It was supposed to triple, and then you put a slowdown. And then, most recently, you actually have paused. If I got it incrementally correct, you paused hiring and actually rescinded some offers. So can you talk about this balance of growth versus expense controls and what you happened to do and what you see in this current environment that caused you to make these changes?

Thanks for the question. So I'll start by stating the obvious here, which is that we're operating incredibly in uncertain time. As I said in my opening comments, this is the first time that crypto has gone through the macroeconomic challenges that we're experiencing broadly in the economy. And so what we started with was a business model that was inherently difficult to forecast given crypto asset volatility and all of the innovation and adoption of crypto, and now we have broader macroeconomic trends to deal with. So our focus has shifted to what we can control, which is largely our expenses. And so we are focused diligently on making sure that we are putting our resources to the highest best use within our product suite, and that we have chosen to slow down and really be prudent in operating these expenses so that we ensure that we have maximum levers at our disposal right now. We've recently -- as you've said, we've frozen hiring for the foreseeable future. We've reallocated all these sources to our highest priority business [ schools ], which is primarily investing in products like retail and institutional trading cost to be staking. We're continuing to make more medium and long-term investments, but we are not being -- doing as many things in parallel as we started off in the beginning of the year.

Understood. So you've talked about some of the growth initiatives, and that you're not going to sacrifice growth -- the top growth priorities in a crypto cycle that's pulling back. So you mentioned staking. Could you go through some of the other initiatives that Coinbase stays committed to and that will pave the way for the future growth of the company, staking being one, some of the others being the NFT marketplace and derivatives trading, things that we've talked about on your conference calls? And could you just give us an update on what keeps you excited about these opportunities?

So much. So I'll start with staking, as you mentioned. And we continue to see strong demand with regards to staking on our platform. There are new staking protocols that we're adding. Users are engaging on and participating these networks. So today, Ethereum accounts for the majority of revenue, although we've seen healthy growth in terms of both users and native units across all of their assets that we will provide staking on as well. With regards to Ethereum, the merge is something that we think will have an impact on our growth as, over time, it will allow for more liquid on Ethereum. And while the merge itself is outside of our control, we believe we should see that occur in the latter half of 2022. And we should see it unlock even more demand for staking. And this is one reason that we believe we should continue to see strong growth to the remainder of the year and beyond as well as adding new proof of state protocols for both retail and institutional users. Like we shared previously, we added Cardano at the end of Q1, and saw immediate interests from users who stake their assets and earn rewards. Switching gears to NFTs. We've launched our -- beta of our Coinbase NFT platform in April, and it was now available to all users to be able to buy, sell, create profile and use our NFT platform. But this was just the very tip of the spear. We have much more functionality that we wish to roll out over time. And in terms of how we're approaching this in the market downturn, we remain convicted in the long-term potential of NFTs. And we think the paradigm shift towards digital ownership will only increase in the future, and we want to have a great product in the market. At the same time, we're balancing that future optimism by ensuring that our investments are prudent across the board, and that we're really rightsizing for what the market opportunity is in the short term.

Understood. Your Chief Product Officer recently gave a presentation at the Permissionless Conference, a big crypto conference down in Texas. Can you talk -- she talked about some of the self-custody product innovations. Could you talk -- first explain what a self-custody product is and what you're doing in that area?

Absolutely. Thanks for this opportunity. It's an exciting development in crypto. So until recently, a customer really had 2 options when they came to storing their crypto. It offered a full custody solution, much like you give your assets to Coinbase, and Coinbase is controlling your private keys and providing security on behalf of you for your assets or you had a self-custody solution, where you control your own keys. In this self-custody solution or asset, there was no ability for a company, like Coinbase, to recover assets on your behalf. And so it was your keys, your risk. We've kind of brought a solution in the middle of those 2 outcomes. And this is important because you need a self-hosted wallet or a self-custody solution to participate in DeFi, to participate to buy an NFT because these are ways that you engage in with the protocols on the blockchain. And so what we've introduced now is the new Coinbase ADA wallet. And what this enables is for our users to explore DeFi and apps without having to manage their own recovery phase. And the reason we can do this is we have a new experience powered by a technology called multi-party computation. And that enables our customers to have a dedicated on-chain wallet, but Coinbase is helping to keep you secured. And it's due to the way the wallet is set up, which means the key is now split between the user and Coinbase. And so ultimately now if the user loses access to their device, the key to your data is still safe and Coinbase is going to assist you to the recovery process live support. And this now offers the best of both worlds. Users can now explore DeFi, but not to bear the risk of losing a key and if we're losing all of their assets because we can provide that backup protection to our users.

Alesia, this is, again, reminds me a lot of the e-brokers back in the Internet boom, where they were able to stay ahead of the traditional brokers because they stayed focused on online trading. So with that sort of backdrop, I do want to ask you about competition in the crypto space. Any just overviews on competition that you're seeing in the crypto space? There has been some talk about exchanges -- do you exchange share and so, but any thoughts on competition?

Absolutely. So there are lots of companies getting into crypto, and we view that as a positive because it means that the crypto economy is growing. And we believe it validates our long-term strategy of this ecosystem becoming more and more part of consumer and businesses' daily lives. And so, one, if we believe this is a rising tide that will lift all boats. Two, with the current market dynamics, we also think we'll start to separate the good companies from the great companies. And we're going to see that experience -- user experience of the products obviously getting the complexity, providing safety and security, we're going to have differentiation. This is going to play to the long-term growth of the industry. Over time, much like the Internet Rich, we actually believe that everyone is going to have a crypto strategy as more and more companies come on board, just like we started off in the early dot.com days, where we had companies that had an online presence in a brick-and-mortar presence. We're going to see more and more people thinking about crypto is underlying their payment networks or crypto providing the loyalty program, rewards programs to engage with their customer base and build our own community with an NFT position. So it's a rich landscape of lots of opportunities, and we believe that we are providing tools to enable this. We realized that our users to engage with also to transact types, and that we have an opportunity to differentiate ourselves amongst the growing competitive landscape.

Got it. Two last questions, Alesia. First, at noon -- at lunch today, we'll have Chair Gensler talk to us about regulation. We're not sure what he's going to say about crypto. I think he's probably going to be more pointed at some other topics. But there's also been a bill, I think, that's been floated , Senator Lummis and Senator Gillibrand on crypto as well. I know you're on vacation, so you may not have gotten to read, but just your broad thoughts on regulation of the industry overall. What kind of an impact could it have?

I don't want to surprise you, but I have read it. We're very keen on the regulatory issues -- hard questions and doing work to develop comprehensive solutions when it comes to crypto. This is a great example of what we've just seen out of Senator Lummis. So we welcome this, and we believe this work will help create a strong foundation that will enable innovation, while at the same time, protecting consumers. We also applaud the Biden administrative executive order, which, for the first time, identified a whole of government approach for crypto, which we think is critically important. Because the EO is rightly recognizing that digital assets are going to play a role in the economy of the future, and that the U.S.'s global competitiveness is closely linked to crypto. And so we are looking forward to working with the administration as they can continue to determine how to create this responsible innovation through prudent and responsible regulation. I think you know this, Rich, but Coinbase was long called for frameworks that create a level playing field for exchanges and how they operate in the U.S. and put its consumers at the core of our efforts. And we're hopeful that regulators will work with us to create this playing field that doesn't hinder innovation or economic equality.

Understood. Last question, and I try to give the speaker ability to communicate forward-looking just opinions. And again, you made your caveat about the forward-looking statements. But I guess Coinbase remains bullish on crypto, if I made the right assumption. And then I guess as you look forward, what are the catalysts that will continue to propel the adoption of crypto even in a macroeconomic cycle? We all, I think, recognized it's fairly uncertain. But what are the broad things that need to happen to continue the adoption of crypto and to make Coinbase successful?

Thanks for the question. Whether or not the macroeconomic environment changes, we believe there's 3 kind of key foundational elements to crypto adoption. Number one is scalability of the underlying blockchains, that we're making efforts across the industry to make them faster, make them cheaper to use and they can do the same transaction volumes at current payment networks as an example. So scalability. Number two, usability. Crypto is still complex, and we want to build tools and surface applications that obviously get the complexity. It's super simple for you to buy an NFT without having to first buy your Ethereum or selling or transfer your self-hosted wallet and then buy an NFT. We want to make the simple connected world. So usability is number two. And third is regulatory clarity. Having a level playing field, knowing what the boundaries are, knowing what customers to be able to do it to operate safely in this environment. We think we'll bring more capital -- institutional capital into these markets. And we believe that is sort of the third kind of pillar to unlock growth here. So usability, scalability, regulation.

That's great, Alesia. I want to thank you. I don't know -- I'm so appreciative that you made the effort to really to inform our audience and investors about Coinbase. And this is, again, I apologize about the technology sort of breaks here, but it does. It shows your commitment to trying to keep investors to go out of your way to do this speech -- to talk with us, Alesia. So thank you, and I will thank Alesia Haas for her participation. Enjoy your vacation.

Thank you.