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

All right. Well, in the interest of time, I think we should get started here. Good morning, everyone. My name is James Yaro. I cover brokers, crypto and investment banks at GS Research. With us directly to my left, we have Emilie Choi, President and COO of Coinbase. And further down, we have Alesia Haas, CFO of Coinbase. Emilie and Alesia both joined Coinbase in 2018, something I just recently figured out. Emilie has served as COO since June 2019 as President since November of 2020, while Alesia joined and has remained CFO, the entire time. Together, they've contributed to building one of the key global digital asset exchange and infrastructure businesses. Thanks so much for joining us. Quickly, just a safe harbor here. During today's discussion, Coinbase may make forward-looking statements. Actual results may vary materially from statements. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in Coinbase's SEC filings. The 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 Investor Relations website. Non-GAAP financial measures should be considered in addition to, but not as a substitute for GAAP measures.

All right. Let's get started. Alesia, let's start with you. Coinbase business has evolved significantly since going public in 2021. You serve multiple customer segments and you also have a meaningful infrastructure business. How are you able to cover so much surface area within the digital asset space?

Well, thank you for having us. It's a delight to be back here with you this here, James. So we went public. We basically serve spot trading needs for both retail and institutional customers. And over the last 5 years, we're really pleased to have really expanded out the number of assets that we offer to our customers to trade also deepened our institutional business and built out an infrastructure business, as you know to James. It's really important to us as the most trusted player within the crypto ecosystem to ensure that we are building durable financial infrastructure to now enable customers, both retail institutions to buy, trade, sell, engage with crypto in the largest sense. And once we did that, we wanted to make those tools available to others whether they be other fintechs, banks or other corporates who wanted to build our infrastructure. So today, just to give it as a point of reference, Bitcoin spot trading weeks up about 10% just over of our total revenue when we went public, that was over 50%. So we've really diversified our subscription and services revenue now is about $2.5 billion on an annualized basis, meaningfully higher than it was when we went public, where it was less than 5% of our total revenue at the time. That's grown on the back of stablecoin. Stablecoins have seen tremendous product market set over the last 5 years, huge volume in terms of payments, trading settlement now happening on stable point rails. And that concept of tokenizing a U.S. dollar has now opened up the doors to tokenizing many other assets, and we can talk more about that in a later day. But it all comes down to we're building on a solid foundation. We start with the premise of safely storing assets with our custody products. We store more crypto than any other player, roughly 12% of the world's on chain assets are held on our platform. On top of that, we have deep liquidity so we can really provide best pricing when people are trading. We have the whole set of compliance, security controls that live on top. So it's an ecosystem that offering these additional products, created a network effect on or infrastructure base. And that's where we keep building and expanding, scaling the infrastructure, expanding the product set.

Great. All right. Emilie, let's bring you in here. We've seen a lot of construction progress from legislators and regulators over the past couple of years. What in your view have been the primary unlocks? And what are the opportunities you see ahead given the current regulatory trajectory?

It's been a sea change this administration. We were joking in the lobby just about the previous administration was about regulation by enforcement. We were living day-to-day, not knowing how we could ship our products in a compliant manner because we got no guidance. We just got a wells notice, and so this administration has just been so much more productive. We have a great SEC and CFTC head who are aggressively moving towards rule-making. We're very excited about the possibility of the Clarity Act getting passed by the Senate next week. We have gotten preliminary approval for an OCC charter. So it's been a very productive environment. I mean globally, we've also gotten our mega license. Last year, the Genius Act, which was a stablecoin Act pass. So it's just this whole confluence of great things that are pushing the whole ecosystem forward.

Okay. Maybe another one for you, Emilie. Over the past year, we've seen a substantial number of trade, traditional finance institutions entering the digital asset space, crypto trading. And we've also seen a number of IPOs of digital asset companies. Maybe you could just talk a little bit about the competitive backdrop and how it's evolved over the past year?

Yes. It's funny. I think this is really much a validation of our whole strategy, which was we got in the digital asset space very early 13 years ago. and seeing all of these competitors get into the space is just -- it's kind of like, yes, we were right. This is a disruption of the existing financial system, and so we are kind of excited about all these different players wanting to get into it. It validates the space. It helps us bring things forward. We're big believers in free markets. And at the same time, I think it's kind of the analogy I like to use is just you had Amazon that was digital native in e-commerce just like we are a digital native and crypto native products and infrastructure, and then competing against those who kind of have legacy systems and architectures because we invested in that so early. I think we just have a very unique proprietary advantage in terms of thinking about the way that the systems are built out the types of talent that we want to hire. And so we feel really good about the spaces it evolves. It's definitely more competitive, but it's one that is -- there's a reason that everybody is playing in it right now.

Okay. And then maybe what's, in your opinion, the overall vision for the everything exchange? And I guess, what's your right to win across those products?

So the vision for the -- everything exchange is actually quite simple. We want one place where customers can trade any asset anytime. And we started, as Alesia was mentioning, with crypto spot trading, that was our core, and over time, we've built more and more products to help support this. So we launched derivatives, which reached an all-time high in market share in Q2. We recently launched our prediction markets product, which is at $100 million annualized revenue run rate, one of our fastest-growing revenue products of all time. And we launched our traditional equities product in Q1. So it's about having one place, one platform where everybody can trade and access all of these different assets. In terms of right to win, we're the #1 regulated crypto custodian in the world. And I think that we have these roots in security, safety, trust with our customers. And customers want to be able to trade where their assets reside. So I think that, that's a huge moat for us. We've also invested very much in liquidity. We want to make sure that we have the deepest pool of liquidity globally. We made an acquisition of a company called Terabit that helped us become the #1 crypto options exchange in the world. We have an international exchange. We have the retail and institutional pools of liquidity. So I think all of these things contribute to a competitive advantage in the market.

Let's turn back to you, Alesia. You've said the everything exchange strategy is now working, delivering real revenue diversification and customer value, not just green shoots. Can you help size us what's driving the inflection? How much more growth is left? And I guess as derivatives purpose and prediction markets continue to scale?

You want to talk about our stapling is what we want to talk about in James Yes. Moving on from our seedlings and our green shoots. So as Emilie said, everything exchange is about diversifying from spot crypto trading to derivatives equities and prediction markets. So we now have 4 pillars of trading products offered to our retail customers. And as we shared in our Q2 update, we're really starting to see some traction. Prediction markets crossed $100 million of revenue. to show some additional data there. That was up 2x in terms of revenue and contracts quarter-over-quarter from the launch in Q1. As we then launched crypto binaries, we've seen in 3x average daily traders and a 4x increase in average revenue on those products. We then launched combos, and we're seeing additional lift coming from combos. So we just are getting started with prediction markets, but we have seen the ability to take a product, enter the market and see the scaling occur. What is really nice about this market, and we can go into potential growth areas is this isn't a green field. There's new contracts that people want to trade, we can express these on weather. We can express on politics. We're just getting in a football season. There's a lot of momentum here with prediction markets that we think gives the ability to grow this product. Similarly, derivatives. We had some important licenses to get in place. We have important wins to get out of the CFTC that Emilie has cited that we're really pleased with share Sealing and the ability to innovate now in the United States. But we brought real perps to the U.S., i.e., well, has been the large global market for crypto has been trading perpetual futures. We brought this product to the U.S. market. We're now going to harmonize liquidity and really grow that product in the U.S. So starting to see some momentum in growth there. As Emilie said, we reached an all-time high in trading volume market share. but more importantly, we're gaining new users, new traders to our platform with this product. And equities is the same thing. We think that having now the place where you can hold more and more of your assets, building on the layers of cross margin, providing more capital efficiency when trading, unifying that on one technology stack is what we're really unique and differentiated. And so that is why we believe that we've moved on that is working. We're starting to see this momentum. And James, this is before marketing. This isn't new customers. This is cross-selling existing customers. So we are just getting started with these products. Once these products harden, we think we can turn on the growth engine here.

Excellent. Emilie, it does seem that the barrier to entry for purchase is perhaps low although maybe you'll disagree with me. But I guess, in the sense that there could be multiple providers that come into the space. I guess maybe you could narrowly focus on differentiating that offering from others.

Yes. I would slightly disagree. I think launching a PERP is not very challenging. I think it's about the distribution. And this goes back to what I was saying about the liquidity pools that we've invested so much in terms of our retail and institutional, U.S. and international clients are building an international exchange, owning Darabit, our options exchange and having this ability to cross margin and have the best execution, our prime offering is best-in-class. So I think, yes, unto itself, launching a PERP may be simple, but actually making it successful is the thing that is challenging, and we feel really good about our competitive advantages there.

Okay. So maybe just one more here because I just want to nuance the pointer. So you secured the CFTC, the no-action relief for global -- I guess, connecting U.S. customers to global PERP liquidity. Can you just talk about why that's significant? Why you chose to do it that way in terms of building your U.S. PERP offering?

Sure. And just for context, obviously, perps are like many multiple kind of volume type of product than spot. So spot is our core, but we think that PERPs and derivatives tend to be a higher volume thing. So I think the thing that's really novel here is that this is the first time that U.S. customers can access global PERP not under a VPN. They can do it compliantly and access this and have all the great access to the other products that we have and liquidity pools we have. So it is novel. It's very compelling, and we were super excited with the CFTC was willing to move forward with us. We -- again, we find them very proactive, and we have a slew of other things that we want to work with them in the SEC on, but this is a big unlock for our customers.

The big benefit here is global liquidity, meaning you get best price. And it's the best outcome for customers to be able to trade on the deepest liquid order books that they can possibly trade. So getting the U.S. to agree to this and not fragmenting liquidity by country around the world is an end benefit to all participants in these markets. The other benefit that we have that we haven't talked about, but I maybe just want to from the CFO seat way on here is we're a great counterparty. We're a public company. You can look at our balance sheet, you can understand our capital in our entities. And that really stands apart to global market participants at this time in terms of just our size, stature and our control environment that we can offer.

That makes sense. Alesia, you touched a little bit on prediction markets. I want to come back to that. How big do you think that could become for Coinbase over time? And what's the road map to expanding prediciton markets products or maybe verticalizing the offering? And then I guess in terms of behavior, do you view this as additive or potentially cannibalizing other trading products?

Let's start there and then we'll go backwards No. we do not view this as cannibalistic. What we've seen so far is that prediction market trading is incremental to our other revenue. So we're really excited that this is just a new path to engage customers with a new product set and drive added revenue to Coinbase. Going backwards, prediction markets in general, the entire asset class has been a growth category for many. This has created a lot of excitement with traders with market participants, we have many customers. We have many employees who just watch the market daily. They're not trading necessarily, but the information they're getting by understanding what's happening and where people are placing trades, is really interesting as a new social channel in some ways. So what we're focused on doing is distributing more and more contracts to our customers. I mentioned earlier in my comments, we launched Binaries, we launched combos. We're continuing to spend out the types of contracts that one could participate in. So that is the huge growth factor. James, I view and this will come with time. I think it's really interesting to think of a future when there's deep participation and liquidity and these become meaningful markets, where investors can think about expressing views on corporate KPIs around earnings different from the overall stock price that a KPI swap on the U.S. DC on our platform could become an interesting contract separate from what is Coinbase's overall earnings for the quarter. So I do think the market will continue to expand with different types of contracts, different types of market participants. As these products grow as regulatory clarity becomes clear. As you know, there's also some litigation in this space that the industry is working through. So I think that the market is large and growing. And then on our own road map, as I mentioned, looking to continue to expand out the contracts, distribute these to our customers. hard in our product, it is still a 6-month old product. So we do have some work to just continue to make that product great. And when we think about that and other opportunities, we came to the market early with a partnership with Cachi. We could expand our partners. We can choose to do a vertical integration, so we had more control over the contracts. All of those are options that will continue to export like explore as we grow this product.

You have been able to grow trading volume, market share despite being in a bear market. What's different about your trading business maybe versus prior cycles? And how are you thinking about your share and how durable that could be going forward, Alesia?

We have grown share, and part of it is structural. because we've continued to add on the products that we offer trading for. So I mentioned in my prior comments when we went public, it was spot trading. And we had a really great share in spot trading. We were the largest U.S. spot trading venue, and we were growing our international share. Now we are a derivatives trader. And so when we look at our market share today, we now express that as a percentage of total crypto both spot and derivatives around the world. So everything that's crypto-related, and we're just over 10%. One, we have an opportunity to grow internationally. Our bread and butter is the U.S., but we are continuing to expand that international product offering. And now we're bringing international products to the U.S., as we mentioned earlier. So we're also growing our U.S. trading by continuing to grow out that TAM in the U.S. for perpetual trading in the United States. So it's a structural change by offering more and more products and providing more of that trading on one venue where we can continue to gain share of wallet gain trading with our customers on our platform versus that being fragmented across many platforms. And that's what we're going to continue to do. The next chapter that you'll see from us in addition to continuing to add contracts and products is providing margin and cross collateralization both, to retail and institutional customers. And when they can trade with more capital efficiency on our platform.

So we think that will be another structural advantage to us to gain share of trading on our platform. So I want to ask 1 on the everything change. You're adding all these products. You have all this data. One thing that traditional exchanges have done is monetize the data. I'm curious what your approach or potential strategy might be to monetizing that data, especially as the market institutionalizes more?