Q2 2021 Coinbase Global Inc Earnings Call
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Good afternoon, My name is Maria and I'll be your conference operator today at this time I would like to welcome everyone City Coinbase second quarter 2021earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's presentation, there will be a question and answer session.
Question during the session you will need to press star 1 on your telephone keypad and if you require any further assistance. Please press star zero.
And I would now like to turn the call over to your first Speaker Aneel group.
Ice President of Investor Relations you May begin your conference.
Good afternoon, and welcome to the Coinbase second quarter 2021 earnings call. Joining me on today's call are Brian Armstrong co founder and CEO and Alicia 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 <unk>.
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 at 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.
Similar to last quarter, we are using say technologies to enable all coinbase shareholders analysts the opportunity to submit in a boat questions for our management team.
We had several thematic questions. So I'll summarize some of them with that let's go ahead and get started.
So Brian Q2 was a strong quarter for coinbase, what trends do you think are most important to highlight to our investors.
So you are correct. So Q2 was a really strong quarter for us we had amazing growth in terms of users added to the platform assets on the platform revenue just about everything.
And also great diversification across our revenue line users. So this is really going to see more and more people are using crypto and using a crypto economy individuals' businesses developers all over the world.
It's important to remember that just because we had a strong quarter.
We always think about longer term cycles of crypto. This is a theme you're going to hear us talk about a lot here on these earnings calls. So we don't try to get too excited about any particular quarter being up or down we're always looking at the long term trends about how are people using this new technology hows, the crypto economy growing and how is that eventually influencing our mission of creating more economic freedom.
In the world.
The question asked about trends as well.
Really 2 that came to mind from me that I think are really important in the last quarter.
The first 1 is that we're continuing to see this trend of people using crypto for more and more things beyond trading.
So for example, we shared in the letter that we now have $1.7 million users.
The stake in crypto, which has a weighted earned yield on your assets.
And this is up from basically that that number would probably zero a year ago and I think if you go back to 2019 late 2019, we had less than 1 million empty uses on our retail side for coinbase in total and now we have $1.7 million just doing 1 type of activities, taking so we're seeing people do more and more things crypto whether that.
Earning money with crypto borrowing and lending staking using credit card and then of course trading and so I think we'll continue to see that percentage go up over time, which is great because that tells us that a truly a crypto economy is forming it's not just the trading platform.
And then the second big trend, we're seeing is.
This idea of a pervasive embracing decentralization and I wrote a blog post about this.
And really what this means for US is that we believe the future of this industry is going to be centralized theres going to be more and more third party apps that are being created our people want to connect their wallets to it.
Coinbase as their primary financial accounts, where we need to make it easy for people to connect to and integrate with all of these third party apps out there that are happening in ftes and defy and there's hundreds of startups now being built.
We're also focusing on international expansion and other form of centralization, and just listing more and more assets, we want to be the Amazon of assets list.
Every asset out there in crypto that legal and events.
And today, they are eventually going to be millions of them.
These are this is the all under the theme of embracing decentralization. So those are the 2 big trends that I'm seeing today.
Great. Thanks, and Alicia could you recap the financial highlights before we dive into investor questions.
Thanks Neil.
Second quarter was a strong quarter for <unk>.
Can you just elaborate on connecting to Brian to talk about volume set that's across the board with our return to institutions and our ecosystem partners.
The metric that we really focus on is what percent of our return to use are now using multiple products on volume base.
And in Q2 is going to 27% from <unk>.
5% in the first quarter.
What's really notable to me that when I look at this number is the Hoboken underlying MTS and how many we get from there have been multiple products from our platform.
Brian could we have $1.7 million.
Taking the order of about $2.3 non users engaging on campaign during the quarter.
Separately on our institutional side bursting broad adoption 1 of the things that we highlighted for you. All is that we now have 10% of the top 100 hedge funds as measured by <unk>.
Now clients, a clean base and ultimately the crypto economy.
I guess I, Brian Cherokee years ago, where we had very few I'm, telling you that like a year ago very few stinkers.
About a year ago hedge funds weren't participating you kept guidance of the really from that we see that more and more hedge funds are making allocation the crypto economy.
Multiple assets on our platform.
Combined our users generated $462 billion of trading volume looks.
It looks like a $2 billion net revenue and $1.1 billion of adjusted EBITDA.
We were also pleased to see the growth in our subscription and services revenue, which totaled $103 million in situ roughly 5% of our total revenue.
I want to take that not just to remind everybody that crypto asset prices and volatility heavily influenced our transaction revenue.
And these inputs continue to be volatile and very hard to forecast, we do not extrapolate our credit results. We said our current outlook of potential future full year 2021 scenario for cash shareholder letter and we believe that any of those outcomes are possible for the full year.
Okay, great. Thanks, So, let's now turn to the questions that we've received from our analysts and investors through the same technology platform.
We had several questions centered around the regulatory landscape from our analysts so will nance at Goldman Sachs, China core Gannett Rosenblatt, rich Repetto with Piper Sandler.
Lisa Ellis of Moffett Nathanson harshly over lot at Bernstein, and Patrick O'shaughnessy at Raymond James I'll ask about this topic.
So Brian let's start with your view on the current regulatory environment, what kinds of proposals or actions do you view as likely coming off of the recent events and commentary and how should that be viewed for the industry. Overall, what does it mean for coinbase relative to perhaps less conservative competitors.
Yes, so the regulatory environments and Super interesting recently, if you've been following along in the news and on social media just.
Just recently with the Senate vote on the language in the infrastructure, Bill, which has kind of gotten a lot of attention. So.
A couple of things.
I'm taking away from this I mean, the first 1 is the crypto community has really kind of come out as a powerful constituents, which it has.
Something like on the order of 20 million people in the U S and how crypto, we don't know exactly.
But they're now actually becoming a book.
Participants in the policy efforts around the U S and I think thats going to happen around the globe eventually.
The other thing is that there is still a really big GAAP and understanding we're seeing a number of our policymakers out there go to bat really for the crypto community and understand the potential of this technology, what it can do and others, who still have quite a bit of skepticism or frankly lack of understanding and so just like with the birth of the Internet I think theres a huge opportunity.
Acuity here for governments around the world to benefit from the economic growth and innovation that can happen with crypto, but of course some of the risks need to be mitigated and that's just an opportunity for us to go out there and educate.
So.
What if climate is doing well really from the earliest days of coinbase. When it was founded we made this decision that we wanted to go out there and Dean educational resource with regulators in both the government.
Try to be the most trusted per company out there and really invest in compliance.
Have that kind of tone from the top and we felt like that was more difficult path to go on but it was the right long term approach that would pay dividends.
And.
B a business enabler for us and so we've continued that approach we're doing that in a variety of ways. We just recently hired prior share the auditors the former.
He's our chief policy Officer and.
The co head of government affairs.
Goldman Sachs and he was also with the White House National Security Council number.
So that's been great. He's building out his team as you can imagine just having started quite busy these days.
We're also investing in something called the Crypto Council for innovation, which is a advocacy group.
A number of other companies in the industry have come together on and we're using that as a vehicle to kind of go out there and educate so.
I think we've always welcome sensible regulation in this space we've.
We basically just want to be treated on a level playing field with any other traditional financial services companies out there and I think unlike maybe some traditional tech companies that sort of have weighted for something bad to happen.
Reluctantly go engage with government I think we view it as our role is to kind of go out there proactively before an issue comes up Theta educational resource and kind of advise world leaders in finance ministers on how they can adapt their economies to capture the opportunity.
Crypto economy.
Central Bank digital currencies are a hot topic of competitiveness with China is really kind of taken a lead on this and so it's about shifting people's mentality from thinking about crypto as a set of risks they have to deal with to thinking of it as an opportunity and we can mitigate those risks, but that's actually not the most important thing in front of us. So that's what we're doing on the policy side.
Sure.
Okay, great and as a follow up for Alicia lending in particular seems top of mind not just for a SEC chairman Denver, but first states as well that have taken action against other companies.
Could you talk about what types of lending activities Coinbase and is currently engaged in in what concerns do you have around scaling. These efforts while also remaining compliant with any forthcoming regulations.
Thanks, Neal it's a great question from.
So we've begun to build out a robust.
Today, we offer bilateral lending in post trade credit <unk> institutional clients on the retail side, our retail bond.
Alright.
Gross.
And we know any of our customers from pilot to a $100000 against that crept up holdings.
These products are offered through this credit and lending.
Blending licenses that we have it's important to note that today, we lend fund off our own balance sheet.
We are being careful attention to SEC chairman, Kevin public statements.
Understanding the legal framework, we tend to hear trane, and Hal and yes. It does.
It may impact our product roadmap as Brian said, we earned.
And we reiterate our commitment to bring to the market reality to their attention.
And are looking for hurricane insurance regulators to drive smart regulation to provide clarity and to enable archive.
Okay, let's turn to some questions that we received from our investors we had a number of questions this quarter, including some of it.
Top voted once that deal with the topic of decentralization and applications like <unk> and Ftes web 3 <unk> and others, Brian could you help investors understand a bit more about that shift and talk about the investments coinbase is making here.
Yes sure so.
Founded it was founded probably about 9 years ago and people always ask me kind of what are the where are the use cases aside from trading and the good news is that we're now seeing tons of these cases pop up.
But from crypto.
Some of them are mentioned.
<unk> and <unk> and all the third party staff for this web 3 point O concept is literally 100 startups out there being funded by top tier vcs with really great founding team, it's kind of like basically the dotcom startups of the Internet era and so there are tons of use cases out there that are being created.
Coinbase as the primary financial accounted for many of the people participating in the crypto Connie if first want to take those assets. They are storing with us and they'll use them with all these different new applications out there. These third party applications. So what do we need to do to make sure that we can enable that well with quite a big wallet today, which is our sales.
You can go participate in all of these things.
And a key third party applications and a number of our customers are taking advantage of that but how do we bring that functionality to the main point based off the 1 that has the majority of our users well that's the best the next thing that we're working on and so we're doing that with a kind of crypto App store. If you will that's true.
We built the App.
We're also doing some work to re architect our hot wallet.
Using a technology called MPC or multiparty computation, which is to make our hot wallet compatible with these with these SaaS with third party applications.
Some really important engineering architecture work happening there.
Just the concept of embracing decentralization is bigger than just ftes or day by or whatever the hottest thing is what's happening.
This month in crypto, it's also about embracing a global mindset. We are trying to build a company that enables people all over the world access to crypto economy. So we're doing a lot of effort and international expansion.
Also about enabling all the new assets that are being created in crypto as I mentioned earlier, we really want to be the Amazon of assets.
There is eventually going to be millions of crypto assets out there.
You can imagine that there's going to be a crypto assets for every crypto startup that wants to get created and who wants to raise money or.
Any kind of individual may critical line or theres been a tease and like there's so many new assets being created that we eventually need to support millions of these and so there's a lot of work going into how we scale that process internally and niche we're ready for all of that growth.
Great switching gears a bit we got a question about asset listings, so Shanghai, Oregon over at Rosenblatt Securities asked about engagement and activity on coinbase. After the introduction of those last quarter.
And how that approach has if that approach is if that approach has changed as we look at new assets in.
Brian could you just overall expand on our approach our approach to asset listings in general.
Yeah. So no major changes as a result of that asset lifting but that was 1 of the 22 that we did in Q2.
Our overall approach is.
We're agnostic about which assets are going to win we really just wanted to support every assets legal for our customers and we have a very rigorous process. We've created on the compliance and the legal.
Legal in the cyber security evaluation of these assets to make sure they comply with those standards.
But once we get comfortable with that we want to list every asset that meets those listing criteria.
<expletive> pointed as CRM still make up about 50% of our trading volume and the other 50% is kind of the long tail of all the other assets that we support.
No no single 1 of those Lanzhou assets accounts from our more than 10% of our trading volume. So it's really starting to become quite a diverse set of assets out there in any given week or month. There is something interesting is happening and 1 of them and it tends to trend up or down. So we never know, which 1 is going to be there. The active 1 that week, but we need to know.
That we need to support the entire ecosystem.
That's out there for our customers.
Great Brian several shareholders have asked about our institutional business and how coinbase offering is not only differentiated relative to other service providers in the market today, but also how you believe the product evolves over time as more established players enter the space could you talk a little bit about that.
Yeah sure so I'm really excited about our institutional backing.
Going Super well.
We've now base it becomes the dominant Spacex and Tesla also P&C banks third point and wisdom tree.
As I mentioned earlier 10 percentage of top 100 hedge funds by AUM now on boarded with our institutional product.
And so we're just really excited about this product the asset managers corporate treasuries are now using this product.
Pension fund.
So it's really a quite a lot of adoption that we've seen.
So the question asked about it why are they choosing point base.
With defensible about it so I think the main thing is defensible is that we are really the fully integrated solution from here right. So people not only trust us do custody and store crypto assets, but we also have our prime brokerage products integrated so they have the full suite of products. There in terms of our smart order router, which.
Connecting to more than 10 venues to get best liquidity.
We also have a number of products or services for them like postpaid credit.
If they wanted to it's taking on those assets and earn yield or they want to participate in the governance. Some of these blockchain either all features that are institutional customers ask for we have also integrated.
Our market in answering data analytics products in a way that is providing them a lot of value and so we basically have this 1 stop shop, where you can sort of crypto trade it earned yield.
Do post trade credits and things like that that are needed all in 1 place.
But I think it also really helps that you've established yourself as the first public crypto company.
Offering this kind of service. It's now larger companies are much more comfortable trading with us and the work that we've done to create this product is really difficult people, sometimes don't realize that integrating with all these different blockchain.
Doing transaction monitoring.
For compliance storing these private keys and material in a way that distributed globally have redundancy in consensus mechanisms and its audited pen testing. This is all really core differentiator for us and so.
We're really the last part of the question really is what's.
What's going to happen and is more established players entering the space I mean first of all I think we're really excited about that we want every single financial services company out there to enter the crypto space. Because we believe this is going to be a huge part of the economy in the future.
A substantial portion of global GDP and so we want every.
Bank and financial services from can Fintech out there to to each day crypto if they haven't started already.
So I think this is partially.
Competition for us, but it's also partially an opportunity because 1 of the things. We're building is called Coinbase cloud and this is kind of our AWS from crypto product.
It's taking all those difficult things that we've had to build that I mentioned with.
With blockchain transaction monitoring in custody and everything and exposing those through API is in a way that any third party. It can actually build on top of those those services. Those API is to get to market faster and we're seeing interest from a number of those.
Financial service players for instance, and so I think that we may have an opportunity to actually create a big business out of that as more and more people enter the space and not have it just be purely competitive.
Thank you.
Alicia investors often ask about our marketing efforts in the wake of the incremental investment we spoke about last quarter could you outline our marketing efforts on what they've looked like to date, what we've learned.
And any clarification on the marketing strategy for the remainder of the year and beyond for Coinbase.
Thanks Neil.
Our marketing spend has grown about 65% quarter over quarter. So we're definitely ramping up our efforts here to date, our spend is primarily centered on PD, 1 non digital channels and rebuild the sales and marketing.
But the key component of the growth of our MTS Esquire.
And we look forward that we pleasingly ramp of additional marketing 3 range.
The global drive brand awareness growing customer acquisition, and increasing our customer retention globally.
The second scenario is a brand awareness think partnerships and sponsorships, we're going to look to new strategic channels and new venture channels for assets from TV or out of home.
Also the digital space.
I think fundamentally new marketing channel for quite a bit can we expect them to perform differently than the optimize core performance marketing means investing to date.
Well, we're looking to do here is test learn and iterate to get the right balance between optimizing channel can drive additional growth and return on our investments over time.
We believe all these new investment in brand campaigns and strategic inventor channel will drive the full funnel catch numbers and bring more and more people into crypto economy, which is really our long term goal of driving going people at current trading economic freedom.
As we looked at the last thing in terms of spend we've left our outlook unchanged and we believe sales and marketing expense as a percentage of our net revenue per full year 2021 will range between 12% to 15% of our net revenue.
About half a dozen shareholders inquired about topics related to our capital allocation principles, how coinbase evaluated investment opportunities, how we fund these opportunities and ultimately if and when capital may be returned to shareholders.
Lisa can you provide a framework for helping investors understand our approach to capital allocation.
So we are a high growth company and we are in what we think of it.
Early sales.
Our massive global opportunity to bring potential than people.
As such we can give the best opportunity.
Our capital to work in our growth strategy by them from.
Product development to add users to our platform.
Assets to our platform and build the exciting product product segment, we have.
We invested $3.70 to 2010 framework.
Thinking about 70% per cent, <unk> core where 20% to strategic investments and then 10% to innovative new ideas.
We also think about investing both organically and Inorganically and think about using our capital for the potential for opportunistic acquisition in service of our product Road map.
When we think about the use of our cash flow for all been to fund our operations.
Core business operations, we also think about for strategic purposes, and last thing what we win for.
Investing cash we're very mindful of the crypto is volatile and we want to ensure we have enough cash and resources to weather any prolonged low interest cycle and stepping up to grow our business and executing our guidance call.
So as we said previously we have no intention of any near term return of capital to shareholders.
Dividend or share repurchase.
Okay. Thanks.
Ryan customer service continues to be a hot button issue in a very important topic for many of our shareholders than consumers. What would you tell shareholders about the state of customer service that coinbase and what are we doing to address ongoing customer concerns.
Yes.
The type of growth happening in the last couple of quarters. You can imagine this has been a big focus for us. So proud to report that we are doing much better, but there's always more to do we increase the head count 5 extra sales in January this year.
Working on quarter, specifically and so that means there is now more than 3000 people dedicated to solving customer support issues. We're also rolling out live support for customers via chat iPhone later, this year and a more robust fashion. So some of these things along with or just improving our education resources, making sure health centers up to date with all.
The latest feature of these are all investments that are happening and I think we'll continue to make progress there.
A few investors honed in on the consumer financing products, we brought to market recently like Coinbase class Coinbase card in Bitcoin borrow Brian can you talk about the vision for those offerings early learnings from how consumers are engaging with them in how and when we intend to intend to expand those programs.
Yeah sure so clearly.
Card and previous borrow.
Are both examples of what we think of it is expanding the crypto economy. If this trend that we've talked about where crypto started office something that's true.
Merrily keep more trading and then they thought about what else can I do with this can I spend it can I get alone can I earn money with crypto.
And participate in crypto economy in a broader way of doing all of those people might do with money eventually.
Good.
The big 1 barrel feature is the great way that we've allowed customers to secure a USD loans using the bitcoin collateral.
And it's great to rollout product out previous card is allowing customers actually go spend their crypto on a debit card.
Where that visa is accepted.
1 of our goals long term is how do we get more and more.
Commerce transactions for goods and services and the other day economy happening with crypto and there's a few things that need to get in place for that to happen.
1 is that you need to get the blockchain to be more scalable and so there's some work we're doing will have a few from that the other is that you need to get both.
The merchants and a set of consumers who both want it's been crypto. So thats kind of a 2 sided marketplace, a chicken and egg problem and so credit card is a way for us to dial up 1 side of the 2 sided market.
By allowing you don't need the merchant specifically accept crypto they can as long as the deeper you can spend your crypto with them.
We'll dial up 1 side of the market people spending their crypto.
And once we get that to be larger we can then go see who are the merchants accepting the most payments in crypto and then we can go direct to those merchants and say Hey, maybe maybe if you want to think about accepting crypto directly and see what kind of fees.
Like that.
So that's a little bit of how we think about it all fits broadly under this concept of how do we grow the crypto economy, how do we get people using crypto from more and more thing all of the things that they would use money for value for our traditionally but also probably some new ones, which are don't have a direct the equivalents in the traditional comp.
Okay, Great I think we've got time for 1 last question here, which comes from Owen Lau at Oppenheimer about fees.
Alicia you mentioned before coinbase doesn't compete on fees, but could you elaborate on a reported fees in Q2 as well as thoughts on both fee and spread going forward.
Yes.
You are correct, we had said before that we do not compete on fees.
So that focusing on being the lowest price platform, we focus on providing this value to customers.
Custody or security and storage and additional trade execution is critical for their strength crept out.
From the retail side the services are bundled into our transaction fee.
So that continues on for these users based on their product suite. As we shared earlier are you should continue to further engage with the economy and non trading products like <unk> 9.
These types of services, new assets, new ways to engage with crypto I wont attract index decline base.
If you look at retail transaction revenue relative term tell training team Alright volume you will see that our weighted average retail transaction fees were $1.2 6 per cent compared to 1 from 2.1% in Q1.
Given by a mix shift between our customers with some more volume on consumer versus <unk>.
I'd also remind you that just weren't quite match volume.
On the institutional side customers are choosing us starting to liquidity in the integrated products.
<unk> talked about earlier as well as our share it security and compliance.
If you look at our institutional transaction revenue relative to our institutional trading line, you'll see that our weighted average fee was 3 basis points as compared to 42 points from Q1, driven by our tier based pricing higher volume that we signed you Kim.
We haven't seen any broad modifications to our pricing sometime but.
But we are constantly menu pricing experiments and testing if there are opportunities to better serve different customer segments with different pricing models.
Great well, thank you and so with that I think we're done.
And this concludes today's conference call. Thank you for participating you may now disconnect your line.
These have been removed from the comp.
Goodbye.
Okay.
Yes.
Okay.
Your line.
Yes.
Okay.