Q1 2021 Coinbase Global Inc Earnings Call
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Moving on average.
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Good afternoon. My name is Erica and I will be your conference operator today at this time I would like to welcome everyone on to the Coinbase first quarter 2021 earnings call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question. During this time.
Simply press Star then the number one on your telephone keypad, if you would like to the draw on your question price per pound.
And Neal <unk>, Vice President Investor Relations you May begin your conference.
Thank you good afternoon, and welcome to the Coinbase first quarter 2021 earnings call. Joining me on today's call are Brian Armstrong co founder and CEO and Alicia Haas CFO.
I hope you've all had the opportunity to read our shareholder letter, which was published on our Investor Relations website earlier today.
Before we get started I would like to remind you that during today's call. We may make forward looking statements actual results may vary materially from today's statements information concerning risks uncertainties and other factors that could cause results to differ from these forward looking statements is included in our SEC filings and shareholder letter available on our IR website at Investor Day, Coinbase Dot com.
Our discussion today will include references to adjusted EBITDA, a non-GAAP financial measure.
We believe that certain non-GAAP measures of financial results provide useful information to management and investors regarding trends relating to our financial condition and results of operations.
Non-GAAP financial measures should be considered in addition to not as a substitute for or in isolation from GAAP measures.
You can find additional disclosures regarding adjusted EBITDA, including a reconciliation to net income the comparable GAAP measure in our shareholder letter and current report on form 8-K.
Which are posted on our IR website.
Last week, we announced that we will use the same technologies to enable all coinbase shareholders the opportunity to submit in our book questions for our management team. Thank you to everyone who participated in this process we.
We will start today's call by answering some of the most uploaded questions.
We will also take live questions from Wall Street analysts many of whom have done significant amounts of work to understand our business, which we are very appreciative of.
So with that let's dive into the first question.
Geordie why asks when will users to be able to trade those.
Alright, I'll take that one thank you for the question Geordie and as asset addition is something that's near and Dear to my heart.
More and more assets being created in the crypto economy, I think it's going to be something kind of like asking the app store on the iPhone, where eventually millions of these assets created over time and so we're putting a lot of work and thought into how do we accelerate our pace of asset addition, and one of those is <unk> as you mentioned, which is the beginning a lot of attention recently.
So to answer your question directly we plan to <unk> in the next six to eight weeks and then more broadly we're going to be focused on how we can accelerate asset addition in the future.
Our next question comes from Garrett H, who asks as volatility increases with the crypto market.
Can we expect to see a continuous profit and revenue growth as with the most recent quarter. And addition can we look forward to additional ventures to cover the potential feel its future of crypto trading.
Thanks, and I'll I'll take this one.
Gary. Thanks. This is a great question on there's a lot to unpack here.
I wanted to start by saying that we do not believe in CE.
Future trading at least in the near term.
That said, we are definitely focused on the other new products and services and to diversify our revenue stream.
Many of these new revenue streams are reported net subscription and services revenue, which generated $56 million net revenue in the first quarter.
Our goal is to become the primary can inflict on crypto economy for our users and to achieve that goal. We are focused on the speaking our customers from your products services, adding new assets as Brian Just mentioned every time, we believed all of this will drive diversification of our revenue.
But going back to the first part of your question as to whether we can expect to see continuous profit and revenue growth when volatility increases.
I think it's really important to understand crypto volatility and crypto asset prices can and have fluctuated meaningfully quarter to quarter.
And historically low.
Curious, where we see a hype on price and higher crypto asset price on maturity. There are two factors have driven to higher trading volume index for higher transaction fee revenue periods for our client base.
However, it does or not a shortly.
Could see periods of increase or decrease.
In our shareholder letter we included an outlook for Q2, along with full year 2021 outlook.
Quarter to date for the second quarter, we have seen the containment of the strong crypto price cycle with high levels of volatility.
In retail and institutional.
We expect our trading volume to meet or exceed the Q1 level that our performance continues at the current pace.
We have seen growth in <unk> since the end of Q1, driven by the continued strength in crypto market today.
So just to remember to close I think it's important to remind you all that our revenue on both can be volatile and we couldnt be carried the cloud we can.
Kerry just stability and we could see decline on revenue.
Our next question comes from Alan <unk>, who asks as crypto it becomes more mainstream how does coinbase view competition with decentralized exchanges.
Yes, so I'll take that one.
So we are very excited about decentralized exchanges I think this is a really important innovation in the crypto economy and it's a great example of.
On the kinds of services out there that our customers want to use.
Even if it happens to be somewhat competitive with one of the products that coinbase offerings, which is a centralized exchange. So I think in the future. There is going to be centralized exchanges and also decentralized exchanges, we need to make the full breadth of those products available to our customers.
Not a fan of trying to force people to use something just because it happens to be our product we need to give our customers access to everything they want to use in the crypto economy.
And they can do that today through our self custody wallet coinbase wallet.
It can also they can access new decentralized exchanges directly from that product. We also have something called a smart order router that our institutional customers use.
Which basically route orders to whatever exchange has best pricing and so in the future you may see us integrate that into our retail product as well, where every order that come through it can be routed behind the scenes the customer doesn't even really need to know is it going to a centralized exchange a decentralized exchange.
Something run by Coinbase something out there in the world as long as Theyre getting the best pricing, they probably don't really care and.
A feature that we hope to offer in the future.
So we had several other top questions that had similar themes. So we'll combine them here one from <unk>, one from Lee L John and Tim G.
They asked about longer term product strategy our new.
Potential new <unk> service offering an update on staking and thoughts on introducing an NFC marketplace.
Yes, so again happy to jump in here. So there is a ton of innovation happening in the crypto content. This is great. So we heard a lot of examples here with <unk> and <unk>. There is a lot of third party applications. Some people call them staffs are decentralized apps <unk> and other name for that.
And kind of like I said in the previous answer we want to make all of these things available to our customers and just make them easy to use and trusted and so.
We're going to do that in a number of different ways again coinbase wallet as an example on our sub custody App, where you can.
People are already using a number of these things.
And we hope to integrate that kind of functionality further into the main coinbase app as well in a perfect world.
Be able to just tap.
Tap and open one of these third party applications and it'll already have their wallet connected.
Because of course, our strategy is to be that primary financial accounts in the cricket O'connor.
And in the future, maybe even their identity and everything is already connected when they just opened one of these third party applications. So I think that's going to be really important part of how the crypto economy growth.
In terms of staking and through other question about that as well.
This has been going really well, we actually crossed the 1 million customers using our sticking products in Q1, and it's become a nice source of revenue for us.
Our next question comes from Shell shocked me.
Who asks what is claim based on strategy to deal with other exchanges with cheaper fees apart from pricing what other levers can you pull to attract more customers.
Why don't I take us on.
So just to be clear our biggest focus right now is to keep up with the current demand. We are not focused on competing with feeds we're not even went on beef we're trying to win on being the most testing easy to use on providing all the assets on our customers to transact with.
On being able to provide a yield on crypto assets the opportunity to engage in defiance, Brian just talked about.
Our customers choose us because they trust us to keep assets safe.
Provide an EPS platform on a growing number of links to trim back on us.
Our institutions are choosing us first just curious George as well on caustic.
Solution on the deep liquidity, we offer on our exchange and our best trading execution, where we arent able to route orders across more than 10 liquidity value, including other changes to find the best place to work to execute client interest.
On the retail side, we are bundling custody and storage services into our training team and our customers really see value in the feed that we provide based on the services crypto.
It's so dynamic and is expanding and evolving every single weekly to say this is not a commodity service.
And therefore fees are not until based on the customer flash from day engagement.
In Q1, with our Mt's growth up to $6 1 million up over 200 per cent compared to Q4 of 2020. So.
So while the telecom excluded more and more users exceeding <unk> eight and.
And our services to access to catch up on me.
We have another question from Alan <unk>, who asks would have claim based on stance on government regulation over crypto currency are there any long term risks associated with us to claim basis core business model.
Yes, so our sales on regulation is that we have always decided to embrace regulation and we've always assumed debt for this industry to reach 1 billion people using a critical economy, which is what we want to do it's going to have to be a regulated industry.
And from the earliest days of Coinbase, we actually proactively reached out to regulators and sought to be an educational resource for them to.
To teach them about crypto and tried to be thoughtful and proactive in our steps in doing the reasonable thing even if it wasn't necessarily required yet in the law.
So we're going to continue to follow that strategy in fact.
This week I was actually NBC meeting with a number of policymakers in the United States and we do that in a variety of countries around the world where we.
Where we operate and our goal is really to continue to help educate and created clear regulatory frameworks, where the entire on crypto economy, not just coinbase can thrive because we need lots of startups from businesses to be built in this space.
So we generally see a lot of value in regulation, we can we see it as a business enabler, we see it as an important long term strategy.
The question also asked about are there any long term risks associated with this I mean I think.
The risk is that basically it causes us to move more slowly it takes time to operating in that environment.
There are certain indications, where there is products that our competitors might offer that we don't feel comfortable offering because of the feedback that we're getting from from regulators.
So the risk is really around speed of execution, but I think.
On the right approach is to not try and cut any corners is to try to.
Work with regulators to create a trusted environment and help the industry growth in that framework.
Our next question comes from Samir <unk>, who asks what is your plan for international growth, which countries outside the U S are you most bullish on.
Thanks for the question from here.
And that for growth is a top priority and we are bullish on on a global market overall.
And when I say that we are moving more slowly than we would like.
We would always like to move faster in our approach to growth from the international market timer and this is a multi step multi acquiring sometimes multiyear process and just like Brian just share any because we take on regulated approach.
And sometimes taking the range anything approaching the day, it's a little bit slower than what Mike.
We need to seek licenses to operate in these countries.
Bank partnerships, we can offer Fiat decrypt around.
And there are things take time to team.
Does that kind of single country outside the U S debt. We are most force on is our goal to create economic freedom from <unk> and that has net orders.
We do have some current initiatives in process in Asia to begin expanding on our offerings in that region, but we are looking globally and hope to be expanding as much as we can in our international markets.
Our next question is from Adam <unk>, who asks as crypto currency becomes more institutionally accepted and used by the banking industry Hello Coinbase responds.
Will there be more of a push to work with these institutions rather than individuals.
Yeah.
So we don't think of it as institutions rather than individuals actually both of those customer segments are equally important tests, both retail and institutional.
And I think for there is a lot of Fiat money in the world both on institutions and with retail.
Individuals and so we need both of them to be served equally to get the crypto economy really off the ground on behalf of 1 billion people using it.
Now in terms of banks are starting to work with crypto currency.
There is actually an opportunity here for coinbase to help and by that I mean, there's a lot of really difficult technology problems that we've had to solve in terms of how we integrate with dozens of blockchain how historic record currency securely.
Geographically distributed way, which is very difficult.
How we do compliance on blockchain then do block.
Washington analytics and transaction monitoring in a way that meets our compliance obligations and so but I think we can do is start to expose some of these <unk>.
Solutions that we've built that other companies can build on build upon and we're doing that through a product called <unk> cloud.
You can imagine it is kind of like our AWS for crypto it where we're starting to offer more if guidance services like this that other banks than really any other kind of company can use integrate with the blockchain. So I think that will be a big opportunity for us over time.
Ed and methane Youll see both asked this question what parameters are used to qualify various clients or tokens to add to your selection and why aren't there more choices.
Additionally, how quickly can your process add.
Additionally, how quickly can you process add debut issue coins.
As new client prices can escalate quickly such that other exchanges get a new listing advantage.
Yes. This is a great question kind of similar to the first one about those in a way where I mentioned debt.
I think there's going to be millions of different crypto assets out there, especially as we see new assets being created for companies.
Company is being created and Theres, even in Ftes and individuals who have taken on I think their time and so in a world, where there's going to be millions and millions of these crypto assets out there.
We get this question a lot how.
How are you deciding which ones to add and how can you accelerate it. So today, we use a number of factors we look at Ciber.
Cyber security around the coin to make sure that.
There is not going to be an issue that would cause customer loss. We also look at it from a legal point of view on a compliance point of view there is.
Various concerns out there about security for instance.
We've worked with things like the Crypto rating Council.
To help create clear regulatory framework for that.
So these are all things that we look at but there is no doubt that we need to accelerate the process by which we review assets and we add them to the site because.
We're quickly going to be in the world here, where there.
And there are still many that we're not going to be able to keep other unless we accelerate that process.
Last thing I'll, just mentioned well sorry. The question also asked about the debut coins.
On the call those day one lifting.
I think these are really important in the past we would sort of say is this coin has it reached some substantial scale and then we would add it but I think we're going to have to do in the future is actually the first listed a number of these coins.
And thats going to be really important to our business.
On the last thing I'll say is we did launch a product called coinbase asset hub.
And the goal of this is to really help asset issuers out there to get more clarity about the process of how to get listed on coinbase.
So any acid issuers can go there submit a request.
And we will hopefully get more real time feedback from our team about making their way through that process and so we can demystify it accelerated in <unk>.
We've had hundreds of acid issuer submit through there and there's a backlog of assets that we need to get through.
Our next question comes from Ryan <unk>, who asks Ive seen significant coinbase advertising as of late what efforts are being put in into user base growth. What are the anticipated growth for this year and does coinbase expect this growth trajectory to remain constant in the coming years.
Thanks, and I'm glad that you've seen our advertising so in.
And thirdly, we spent less than 5% on revenue on sales and marketing. If you look at our financial results for 2019 and 2020 as we shared in our outlook. We are planning to make significant investments to increase our spend here.
12%, 15% on net revenue and we are beginning to see some early signs.
They are having traction.
And does that is by our update on our shareholder letter that our key Q quarterly net MP trend has been increasing from our key accounts.
And also what we've seen in.
<unk>.
For two weeks, our App has been in the top 10 free App on iOS and Android.
So we are seeing these.
Efforts into our sales and marketing paying off.
As we've shared earlier, we don't provide specific outlook on the growth per night scenarios about what the potential growth on our <unk> could be.
And the other thing I would just note on your question on debt claim expense to.
<unk> remained constant in the coming years.
Clean data has shared with you historically, there's a lot of voluntary in our revenue as our revenue is influenced by trading volume on our platform, which in turn really reflects the type of around crypto economy conditions price of bitcoin crypto asset price volatility and number of claims that are out in the market and total consistency is not a feature of our platform.
Thanks, I'll attorney, but we do think we can grow over long term and over price cycles and Keith on the engagement of users on our platform.
Okay.
So Eric I will turn it over to questions from analysts.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Lisa Ellis with <unk>.
Thanks Nathan.
Hey, good afternoon. Thanks for taking my question and for joining this call them great content already covered and I wanted to ask a follow up on that.
The question about the.
Hi.
Partnering potentially with the traditional digital wallets and retail brokerage assets.
That are beginning to offer a crypto investing to their consumers.
Are you finding you're engaging with these players like more its competitors or more as partners. I mean, you called out in the shareholder letter that Youre seeing interest in Mike White label versions, I guess, it's sort of a coinbase inside type of model kind of what's your overall strategy as we are seeing this like pretty rapid ramp of crypto capabilities at true.
Traditional brokerages. Thank you.
Yes, so I'll take a crack at it and Elisa feel free to jump in.
I think that as I mentioned previously on the call.
There are a lot of really hard technology problems that we had a solid and building coinbase and it's probably not.
Necessarily clear from the outside what some of those are I think integrating with these blockchain turns out to be really difficult there need to be constantly in sync with them, they're upgrading their having various issues, where you need to have alerts on.
Same with restore crypto currency turned out to be an incredibly hard problem from a cyber security point of view and we've gotten a number of.
Actual property think in place on a ton of infrastructure. So what we're seeing is that as a variety of companies out there begin to integrate crypto, whether they're brokerages or other impacts or just regular company. It could be anything at this point or startups. There. They are often reaching out to us to say how can we build on top of it.
This platform that you've built I don't think thats going to necessarily true be true with every.
Company out there from who will try to build it in house some of them will try to use other than the space, but we are seeing inbound interest and the strategy is essentially to product ties. These services that we've built in what we all commodity cloud.
And that's something that we're investing in actively and have our sales team around and things like that at least anything going on.
No I think Thats right I think we're optimistic that we can help kind of building interest into crypto impart by Dean D C, where we help.
And our own customers on Bob on that also in the <unk>, where we can help on other interesting financial institutions offer to their customers and hope that this creates a very vibrant crypto kind of mean.
Yes, and just add to that I think some of those other companies may even be competitive with coinbase right and we're okay with that.
We want the entire crypto economy to grow we think that.
Other impacts are offering some of these things, but it's powered by coinbase. That's that's great, it's bringing more and more people into the crypto economy and so at this stage, it's a little bit like we're just trying to grow the size of the pie kind of like in the early days of the Internet.
Google wanted there to be more websites out there so we need the whole crypto economy to grow in offering those services can help.
Your next question is from <unk>.
With K B W.
Hi, good evening.
Maybe just one on the retail transaction fee rate in the quarter and it came in closer to the 120 basis points versus where you were at last year at around 140 basis points.
Is that driven by coinbase pro users hitting higher volume tiers or was it simply a on mix.
Volume shifted towards the Coinbase pro users versus the.
Coinbase Dot com users and then.
I think.
Also it was driven by that volume mix, just wondering whether youre seeing any migration of customers from coinbase to coinbase pro or wasn't just about with existing coinbase pro users simply trading much more thank you.
Thanks, Tom on just that question, you're absolutely right. What we saw in Q1, given the heightened behind increased on higher volume amongst the claim data pro users interest for others listening on the call within our retail fleet, we have some of our customers seeking declining consumer Robinson from co op and the climate Pro App offers tiered pricing based on volume.
On the more volume trades at a lower rate and so assets.
Users increase their volume their weighted.
Weighted average fee rate came down we do not see any material movement between the two products between consumer App on the pro App until it really lines just additional volume coming on the profit growth.
Lower fees in Q1.
Your next question is from Kenneth Hill with.
Group capital.
Great Hey, good afternoon, everyone.
I wanted to go back to that question on geographic outlooks at Coinbase solution. I think you said, you're moving a little more slowly than other regions, just given you're taking a more regulated approach.
If you could talk to maybe a little bit.
Maybe what countries have the most mature regulatory environment I think on a quarter of your revenues today come from rest of world.
And then kind of as you think about expanding outside the U S. How do you kind.
On the pitch the sales and marketing effort there.
Maybe where your brand loyalty is in a strong on a regular safeguards are play that is important.
To customers and maybe some of those other markets.
Thanks, and timing of our increased scale per year. So today, we offer a full suite of products and services in the U S and in the UK and in Europe. So when we disclose on rest of world tap today.
That.
99% of that 25% that you mentioned in the UK and Europe I'm not currently offered Fiat to per cow.
Services.
The market in those countries commercially purchased the leader in the U S. We do not have significant efforts in global marketing outside of most recent timing from when I was addressing the comment earlier on where we will continue and expand our fiats equipment services on more and more countries with that how we can provide the full suite of per clinic.
And the benefits that we offer to more users and more country uncertainties that adequate requires getting licensing getting bank partnerships to be able to combined GAAP brown and.
And once we do that we can extend marketing in those countries and introduced a clean base brand.
Obviously moving into the proper research to localize the product offering is appropriate but we are in the early day for paying infrastructure style kitchen global expansion and we're not yet net margin.
Your next question is from Mark Palmer with BPI.
Yes. Thank you for taking my question.
I wanted to get your take on what kind of demand you are seeing on the institutional side for your new prime brokerage product.
From hedge funds from low.
A large mutual fund complexes, how would you assess that demand.
And if.
If you could give some insight as well on the lending aspect of the prime brokerage product and what its prospects are thank you.
Great maybe I'll start Ceragon and Brian can jump in so we're seeing great interest from all corners and institutions, whether they are hedge funds asset managers.
Pensions endowments insurance.
On a net and people have started to explore interest in debt quantity on them and increasingly even on longer term crypto assets.
They are coming to us on looking for our services on custody in our liquidity pools that we provide on our exchange and then our smart order router, which enabled us to net back pricing on a number of these transactions so incredible interest from all corners.
Conditions are right now on doing a lot of work on assessing these platforms June 30 guidance, ensuring that they have trusted service providers must based on when we are proud to say that we are winning many of those mandates and growing our customer base today.
Today, we offer as you can see in our financial debt largely trading and custody. We are looking to expand our buyer land product suite and building out the full suite of prime brokerage services basis.
Firms will be accustomed to seeing the traditional financial services prime broker.
Maryland, perhaps a very nice net of time, and we expect to see future growth not carry on.
Debt only thing I would add one other.
From a segment we're seeing.
Interest from there is corporate treasuries as well.
Thank you.
Your next question is from Paris, <unk> with Bernstein.
Suntrust State on the development of the ecosystem you find the Tam could be economy.
I know, it's a hard question given the early innings that debt.
But can you talk about some of the most powerful applications with crypto in the next five Daniel Zhang from Paypal volume, Damian and Hogan coinbase participate as an on ramp to the crypto.
Okay.
Yes, I mean, thats a great question about the future and.
Yes.
In some ways you were on a tub spa trying to predict the future here. We can give you a couple of themes that we're excited about but I think if we were sitting here in 90 99 trying to predict what the internet would be in five or 10 years, we probably would have gotten.
Lot of it wrong.
So.
I think we're seeing crypto first be use as for investment people are trading at.
We know that it was kind of the stage one stage two is crypto in financial services.
So that's where you're starting to see things like decentralized exchanges.
Five decentralized borrowing and lending decentralized insurance.
And so I think that trend will continue and that youll see greater adoption of the <unk>.
And then I guess, the third third phase, we're going to see here in the future is really around crypto as an app platform.
And so that could mean people using crypto is kind of like the next version of the Internet. They will build their application natively on blockchain, even if they have nothing to do with financial services.
And we're seeing some early signs of that people are doing things like identity management, they're creating gains.
They're doing things like artwork with NFC is very creative things like that that could be even using virtual world.
Social sites like <unk> for instance has come out and said they want to you that they are in certain ways on their application you can imagine new versions of social media being created on blockchain.
Perhaps in a way where users on their own data could be interesting.
I think youll see new forms of governance and voting to where people are creating new types of autonomous organizations.
We're proposals can be voted on by people with these with these coins and all over the world coordinating on various problems and challenges so.
That's just like a handset what's happening by the way. There's also I think more and more central banks will start to create digital currencies, we've seen a lot of activity there in.
In China and.
I think and hope that the U S and other countries will follow.
Corn basis point agnostic and so we want to support every crypto asset out there thats legal and safe for customers and so we would include those assets as well along along the way. So I think youll see it really is kind of like we're at the very early days of the Internet and I think youre seeing a ton of innovation and hopefully that gives you a sense of some of the opportunities in the future as well.
Erica we have time for one more question.
Your final question comes from Owen Lau with Oppenheimer.
Good afternoon, and thank you for taking my question I think it's still early days, but I think your cash balance almost doubled to $2 billion in three months in the second quarter trading volume so far I think so.
To be strong so on Easter.
The capital management priority regarding we investing back through the business M&A buybacks and things like debt and the face of disconnect between the fundamentals of coinbase as a whole in the stock price how would you think about even initiating buybacks. Thank you.
Thanks for the question on focusing on growth our focus is on investing both organically and Inorganically and growth channel expanding our product suite grow on IMTT is expanding geographically at this local out earlier and pulling that through hiring will be on investing in technology and true acquisition, where that makes sense with our content and that we are not folks.
On deploying that cash for share repurchases at this time, nor for dividends or any other capital actions I think sharing with you. There is a lot of volatility on our earnings EMEA or investing in growth.
On either high end when revenues are low income into cash can be built upon our balance sheet and in periods of high revenue and high profitability to prepare for potential crypto when carriers, where we could see a decline in our revenue from all while ensuring that we have the balance sheet that can support ethanol environment per building for the long term and think that we're going to have amazing future profitability at some.
And time that we need to.
And that in this product suite and revenue diversification to get there.
Okay. Thank you very much.
Great well. Thank you everyone for joining us today, and we look forward to speaking with you on our next call.
Thank you. This does conclude today's conference call you may now disconnect.
Okay.
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