Q2 2022 Coinbase Global Inc Earnings Call

Users.

And it's a large revenue generator for us the second is corn based prime which is our prime brokerage product.

Serving institutions around the world.

Which has ended up doing very well the third one is our <unk> business, which has also grown into a great source of subscription and services revenue and is growing nicely. The fourth one is quite as cloud our products for developers.

Which we believe will be an awesome business over time, similar to AWS or something like that helping the thousands of startups out there and actually not just startups established companies integrate crypto into their product with our suite of Apis and.

And the fifth one the last one that we call broadly web three this touches on a major future area of growth that we believe will materialize.

And it in products that we have there with coinbase wallet ourself custodial app various protocols that we're working on and some things will touch on later.

The goal of these products of course is to help 1 billion people access eventually the primary.

To access the open financial system and be the primary financial account for them.

And we generally try to differentiate our products by making them. The most trusted out there the easiest to use and building one integrated suite of products. So that if you sign up one point based accounting verify identity connect your information your bank your payment methods in your crypto you can then switchover and easily access any of our products. So there's a nice integration there into the <unk>.

Sweet.

We've had a number of really exciting product wins in the last quarter. You may have seen that we were selected by Blackrock and meta as their partners as they develop their crypto offerings. This is actually a really huge deal for a few reasons.

Blackrock.

As the largest institutional asset manager in the world. It took several years of diligence to go through with them and close this deal I think it really shows at coinbase situated uniquely to be the preferred partner to the largest companies in the world who wants to integrate crypto into their offerings, which increasingly will be more and more of the fortune 500, I believe over time and we're really the.

Only reasonable choice for many of these companies as the most trusted platform in the first public company and crept up so I.

It shows that we can build not only successful retail platform, but also closed deals with the largest companies in the world. So we can win across multiple customer segments.

Our self custodial wallet also had a number of wins this past quarter, we've been getting rave reviews.

People believe it's now the most advanced cell self custodial crypto wallet on the market.

And I think our pace of product launches has really been accelerating in this period.

So lastly, I just want to touch on the regulatory environment and.

I'll start with the recent SEC headlines, although we've been having great interactions with the CPUC and numerous regulators around the world.

So in May the SEC sent us a voluntary request for information, including for information about our asset listings processed and we do not yet know if this inquiry will become a formal investigation.

As with all regulators around the world, we're committed to productive discussion with the SEC around digital assets and securities regulation and if this inquiry is an opportunity for that discussion we welcome it.

Moving out we've been pleased to see the progress recently, both in the U S and in countries around the world toward more clearer legislation for crypto in the US there are several bills, making their way through Congress with strong bipartisan support for instance, the stabenow Bozeman Bill proposes legislation that aims to provide clarity on the regulatory authority of crypto assets between the two.

And the <unk> and others, where we frequently seem to get caught in the middle.

We look forward to engaging with all relevant parties to develop common sense frameworks for regulation and oversight to help clarify what is a crypto commodity what are the crypto security what does stable coin and what does something else entirely in the crypto ecosystems, such as and a few that are probably considered artwork.

The White house put out an executive order recently asking the various departments of government in the U S to work together on a comprehensive crypto legislation.

Preserves the innovation potential of this technology and that now seems to be happening.

When I was in D. C. Two weeks ago. Several people told me that crypto as one of the few bipartisan issues in D. C. Right now where they can actually get work done and with some luck. We may see clear stable point legislation pass later this year and comprehensive legislation for crypto past next year in the United States.

Of course coordination as a global company and we're seeing similar moves toward regulatory clarity globally, including in the EU with the recent passage of the markets in crypto assets, where Mika regulation.

We're also seeing positive developments in Australia, the UK, Hong Kong, Brazil, and other markets as well, so it's sort of strange to say, but in some ways. The most in some ways. The more regulation. There is for crypto the better it is for coin days, where the most trusted brand in crypto and have leaned into regulations since the early days of the company.

And we will continue to be a champion for this industry, ensuring that any crypto legislation passes preserves the innovation potential of this technology and that at a minimum treatment on a level playing field with traditional financial services. Therefore, we're more than happy to engage with any regulators around the world who will take time to meet with US. We don't see this as a bad thing on the contrary, we believe it's the best way to help the industry.

<unk> moved forward.

I don't have anything else I can say about the SEC information request in particular, but we plan to keep you updated on developments in the regulatory space broadly as we have more to share.

So just to wrap things up before I hand, it over to Alicia hopefully the overarching message here is clear we've been through many crypto cycle before they seem scary, but it is never as bad as a team thats numbers, because it seems quaint basis exceeded over the last 10 years by continuing to focus on great product execution during down markets and managing expenses closely with responsible company in the space with plenty of cash on the <unk>.

Balance sheet strong fundamentals, if you look over the last two years and we're winning deals with the largest companies to integrate crypto into their offerings.

We're going to be here for the long term through the ups and downs of this industry and with that let me turn it over to Alicia to discuss Q2.

Brian I'm.

Im going to briefly recap qui tam share areas of focus and strength as we adapt to these new market conditions, and then touch briefly on the outlook for the remainder of the year first of all recap QQ.

Yes.

Haynesville headwinds.

Our Q2 results, our MTS totaled $9 million.

Please proceed that decline was 2% lower as compared to Q1.

And we've now 67% or $6 million and teams are engaging with our non investment products and so we'll talk about that later, but we definitely seen a shift in behavior as empty as our trading loss, but participating increasing landscaping and other non investing products.

Our total trading volume with 217 billion and transaction revenue was $655 million down, 30% and 35% respectively.

Both metrics are influenced by a shift in consumer behavior and market activity.

This is very consistent with what we've seen in prior down markets that retail customers tend to shift from traders to heartland.

And market volume in turn then shipped to concentrate amongst market makers and profile traders.

Much of that volume the market makers, the presto traders takes place in offshore exchanges for financing and derivative products from a prevalent.

Over time, we look forward to developing products to better compete for this volume, but today, we are heavily retail concentrated platform.

Lastly, there was a spike on the trading volume in May as investors trade around the <unk> and subsequent credit demand surrounding crypto insolvencies, we've not listed Luna nor do we have exposure to these insolvencies and as a result did not participate in this volume spike.

Despite these headwinds we're really happy to see the growth of our subscription and services revenues, which were $147 million as acute pain, and notably up 44% year over year.

Okay.

We also have shared with you in the shareholder letter a way to look at our subscription and services revenue price adjusted.

I E. If you freeze price as of Q2 and look at that historic trend line, we're pleased to see pretty linear growth quarter over quarter as we continue to rollout in breadth and depth of different product experiences on our platform.

Combined our net revenue was $803 million.

Our adjusted EBITDA loss was $151 million and our net loss was $1 1 billion, but I want to call out here that that was heavily impacted by noncash impairment.

Excluding those noncash impairments, our net loss would have been $647 million.

We've taken impairments on the value of crypto assets or the value of our ventures investments fall below our carrying value of those assets.

Importantly, we don't take write ups, if the market recovers about that point, so intra quarter as crypto dropped kilos, even if it recovers intra quarter, we are taking the impairment down to the lowest point. It reached during that reporting period, and then never writing it up until we sell that asset and so that's the impact of noncash impairments on our P&L and our balance sheet.

I wanted to switch gears now and talk about how quickly. It is adjusting to these market conditions and how we're focused on the operating more efficiently as we move forward.

On the expense side, we've taken several steps to streamline our cost structure, including the 18% employee reduction that we announced in June .

We wanted to highlight that it will take some time to fully realize the financial impact of all of our actions, but we are lowering our full year expense range for technology and development and general administrative expenses to four to $4 5 billion, which is down from our prior outlook of $4 to five to five 5 billion.

On the product side, we've taken the approach of pause maintain and prioritize.

And we're focusing on five key areas that Brian outlined earlier.

We are working hard to operate within the $500 million adjusted EBITDA.

Los <unk> communicated for 2020 to.

Clearly we acknowledge these are stressed market conditions.

Based on the expense initiatives, we took in Q2, we're cautiously optimistic about our ability to operate within the Scott Graham.

That optimism is conditional on crypto market capitalization not deteriorating meaningfully below that July 2020 levels and that we don't see another significant change in the behaviors of our customers.

In the event of those events that we see further deterioration or the performance approaches to low end of our MTO range that we're providing in our updated outlook, we may not be able to reduce our expenses quickly enough and we may exceed that program.

However, despite the short term we want to commit to you that we're going to operate more efficiently as we build for the future.

Lastly, I wanted to just close with some comments about our strong capital position and our risk there.

There are three primary factors that we look at to assess our financial strength and durability first at the end of Q2, we had $6 2 billion in total USD resources, we provided enhanced disclosures in our shareholder letter to really help you understand the balance sheet and how we look at it.

This includes cash and cash equivalents and includes our USB C, which we operate with the same as cash we are treating USD stable coin as fungible to cash in our daily operations clean base until we'd like you to look at it in the same way and think about that as a cash Isa second we take a prudent approach to risk management, we've had no credit losses from our financing activities no exposure to <unk>.

Our counterparty in solvency, we have never blocked a client withdrawal or gated anybody taking assets off our platform nor have we had any changes in access to the credit products for our clients.

Stand apart in this way of how we operate risks within the crypto ecosystem today and we believe this is a strength that we can continue to broaden our financing activities and be there from our clients going forward.

Third and Brian touched a lot on this but theres a global wave towards regulation and we're committed to working alongside policymakers to build a workable regulatory framework for the telecom.

That addresses risk, but also enables the development of adoption of digital innovation.

We believe we are uniquely positioned here.

So with that let's turn to questions.

Yeah.

Okay.

Thank you.

Question comes from the line of Owen Lau with Oppenheimer. Please go ahead.

Good afternoon, and thank you for taking my question.

So in terms of expense control what does it take for coinbase to trigger maybe an out of Iran.

Resource allocation. If this crypto winter continues to last and also based on current trading volume and if the current therefore last I understand that if this winter.

For quite some time and unfortunately, some adequate to accompany it may also be in trouble.

Corn base can benefit longer term, but how confident.

You are to manage the adjusted EBITDA EBITDA loss to be around $500 million. This year and maybe next year. Thank you.

Thanks for the question Owen I'll take this one affiliation.

We share some of our philosophy in our shareholder letter, but the way that we approach our business is that we're operating across the cycle and going back to our S. One from last April we shared with you in our opening founders' letter and we're really looking to breakeven across the cycle as we think it's important in these early days in the nascent days of crypto that we're building for growth we're expanding.

Pending the breadth and depth of products on our platform and we're bringing new users into this ecosystem and so we do show historically, we've been able to generate profits and we're taking those profit and we're reinvesting those into the business and so what we do is we look at stress scenarios, we forecast out multiple different revenue scenarios and then we make sure that we can plan for expenses over a multi.

<unk> year winter historically crypto winters, Alaska, two to four years and so we do look at all of those historic scenarios to see can we operate throughout this year. We did set a guard rail that if we went into a winter that we would operate to a $500 million loss is never clear to us exactly where we are in a crypto cycle and so we're constantly updating our scenarios.

Updating our contingency plans and ensuring that we can take a long term view. So we will balance expense management with prudent investment, but make sure that we can manage that through a multi period downturn, we have not yet given an outlook for what we believe 2023 would be but we continue to think about this as investing for the future we're not looking.

To make a profit in every quarter or every year, but we are looking to continue to show growth in the adoption of our products and services seeing the green shoots seem the right progress and believe that then when we have the right expense against that opportunity.

This is neal good I'll jump back in I think we.

Reorder the call an accident. So I'll go back and stayed some ground rules for our shareholder Q&A.

Before we dive into Q&A I wanted to just quickly reiterate our principles first we're going to answer the most updated question as determined by the number of shares and we might group questions together that touch on the same themes.

Second we do not plan to answer questions related to the potential listing of new assets.

And third we will avoid questions. We've answered in the past that there are no updates for example, we still don't plan to issue a dividend.

So with that I will start the Q&A from our from our shareholders with Brian Emily and Alicia.

The first question, we have that's top of mind for many shareholders, especially in light of recent industry events is the safety and security of their assets.

As well as exposure to some of the leverage products and Counterparties at the center of the recent market market turbulence Felicia.

Thanks for the question so as I said in my opening remarks, we have seen from credit events in the second quarter.

Shocked the crypto credit market and we think there is there going to be a major inflection point for the industry.

I wanted to first note that the solvency concerns surrounding entities like <unk> voyagers and others in our view are reflection of insufficient risk controls at those entities to us. These issues were foreseeable and actually credit specific rather than crypto specific in nature.

Many of these firms were under or over leveraged with short term liabilities mismatched against longer duration or illiquid assets.

Those are common philosophy, we've seen across <unk> and now crypto alike, but these are credit specific issues <unk> had no financial exposure to these entities that I just spoke about.

We have not engaged in these types of risky lending practices and is focused on building a more sustainable financing business with prudent and deliberate taking lessons of the trade fight packed into consideration.

As I mentioned in my market, we have not blocks any client withdrawals, we have not had any access to credit changes for our clients and risk management. The first principle on our product design, we're holding customer assets one to one we're not re hypothecate ing, we're not lending any assets without customer consent, what our customers choose to do with our assets with our customers' choice claim basis, not making independent.

But what to do with those assets without customer approval.

I wanted to switch gears and then just talk about.

The safety and security beyond credit risks for a minute.

Because this was a big topic coming out of our prior com.

Customer assets are segregated and protected on client base. We've recently clarified in our retail user agreement to expressly highlight the applicability of ECC article eight.

And this provides the same legal protection for our institutional customers as well as our retail customers and it is the strongest known legal protection available to crypto assets.

Our chief legal officer, Paul Great well recently Panda blog post a few weeks ago with a very detailed approach and the mechanisms that we have put in place to safeguard customer assets and I would encourage you all to read it but we feel very good that we have industry, leading protection for crypto assets.

Great.

Our next question is that a number of shareholders have expressed disappointment with our share price performance since going public what's the plan to get the stock price back on track Brian .

Yes, so I think it's important when looking at this to distinguish between what is in our control and what's not in our control and of course, we don't control the macroeconomic factors or downturn.

We don't really even control the crypto market more broadly right. So what do we control well obviously, we can focus on building great products for our customers. We can focus on staying on the forefront of crypto technology to make sure that we're creating compelling use cases, and making those available to our customers. We can focus on our expense management closely in down markets and Frank.

We can ensure we just don't get distracted or disillusioned by short term thinking so I believe that the work we're doing today to develop and innovate new products.

And tools is going to make us really well situated to capture disproportionate share in the next up cycle.

Okay.

Our next question centers on competition.

Several shareholders have asked how coinbase intends to differentiate and compete particularly as other exchanges seem to be gaining share lowering their fees and are perceived to be moving faster and innovating faster Emily.

Yeah. Thanks for the question, let's unpack that a bit so it is true that some of our core U S. Retail customers are trading less and what we found is that our core users tend to hibernate and transact less in these periods of uncertainty we had observed similar behavior during 2018 in 2019.

And.

Yes, we're happy because for those who are still choosing to transact average revenue per investing MTO is still comfortably above the lows that we saw in the last crypto downturn that began in 2018 and it's also important to note that customers are hanging around and engaging with crypto and new passive ways, notably state aid.

There is another explanation for Q2 and that is that there was a lot of episodic activity that we didn't participate in we believe that much of this was driven by events in Q2 relating to assets, we didn't support such as lunar and Counterparties like three AC Lcs and Voyager that we had no exposure to thanks to our robust risk management and asset listing prop.

Us.

And then finally, we should note that there is a larger amount of trading volume moving offshore is high volume traders and market makers seek diversification overseas with derivatives and other products that arent currently available in the U S.

Now Quinn is live in 100, plus countries, but we are overweight the U S and that's actually the reason, we're so focused on compliance and moving the innovation conversation for it in the U S. Thats why Brian was talking about the Tripoli made to DC and the cycles, we're spending on that longer term, though the way that we move market share is just focusing on our customers and we are committed to.

<unk> regaining share overtime in a way that is compliant and safe for them, including through our new derivatives offering and continued international expansion.

Hey can I just jump in here Emily I do think we should also talk about the fee part of that question and the way I've been thinking about it is in terms of customer cohorts as we see very different behavior between our retail customers are market makers and high frequency traders and then the new institutional customers that are beginning to engage in crypto through claim based prime so.

As many of our listeners know when they generate most of our revenue from our retail customers. They trust our products because they are safe easy to use and we give them an integrated platform to engage with a range of assets in our cocoa activities like stickiness spending on your card and access to the Doc wallet entities and increasing breadth of things you can do on our platform.

We are okay with being a premium product, we feel like we've differentiated versus other services and that customers are willing to pay a premium for that service and to date, we have not seen fee compression on the retail side and have not seen the need to change that fee model. In fact, we were experimenting with pricing with for example, a clean base. One was doing a subscription product that we are bundling all these services together and giving our users.

The opportunity to trade with no fees, they surpassed spread but no fees to have better product experience.

But over the long term, we continue to believe that there will be fee compression and we started to build a diversified set of products that monetize in other ways, which is why we're so happy to see subscription and services become an increasing percentage of our net revenue 18% in Q2.

But when I shift gears, if I look at the market makers.

Where we do think that will be fee compression in the short term. This is a client segment. That's trained the highest volumes on our platforms. They are already receiving the lowest fee tiers based on our volume based pricing.

But this is a group that we are going to see increasing competition as competitors lower fees as we compete for this volume.

We talked about this extensively in our share clear letter and while this is an important group. We are more focused quite candidly on that retail customer and on that institutional customer who is coming into <unk> prime and looking at the breadth of products and services that we offer but we will be building products over time to compete more aggressively for the market make our platform.

And that is something that we can talk about later.

Yes, I think the only thing I would add here is in terms of differentiation versus competitors I think about it as three main things. The first is that where our brand I think and everything all the products that we build we really tried to be the most trusted option for customers in the industry and that comes down to cyber security preventing packs it comes down.

Through compliance Indians regulation it comes down to great customer support doing what we say, we're going to do not being sketchy. So I think being the most trusted option.

Is it goods versus pillar there. The second thing is around ease of use so again, we try to make <unk> accessible to everybody in the world and we want to eventually have 1 billion people accessing this new economy through our products and.

As crypto is still often way too difficult to use and so I think we're continually leading the industry, they're in making our products simpler and simpler and lastly, we are building an integrated product suite sort of one stop shop, if you will so.

If somebody already has a queen based account.

Non trivial to get a new account setups, and where you have to do <unk> you may have to connect your opinion methods you may have to store your crypto balances. There. So once you have a previous account, we just make it easy to switch over and try any of these products or services. So you can do any kind of crypto activity you want in one place, whether that's trading are staking or paying or borrowing or creating some something like another.

And so one stop shop is a very powerful differentiator for us over time.

Alright. Our next question is what are the tangible steps, we're taking to diversify our revenue from trading and other revenues linked to crypto asset prices Alicia.

Sure I'm going to start with first where crypto company. So all of our revenues will likely always have some correlation with broad crypto market. However, we are working hard to diversify our product mix to reduce the volatility in our revenues.

A couple of years ago, we started to invest in these products and as we shared in our shareholder letter now 18% of our net revenues are coming from subscription and services up from 4%. In 2012 Q2 2020. This is also up 44% year over year, even in this down market. So.

Sticking as a big growth driver for US. We're also starting to see significant growth from interest income, which was driven underlying from the activities that we see in USD CNR platform and the adoption of that stable coin, but this is an area. We're continuing to invest in and so if you look at our product areas that we outlined in our shareholder letter what you see in terms of the developer products with claim based cloud.

Are some of the actions that we're making within web three we think we'll continue to add diversified revenue streams over time.

Our next question is looking for a bit of clarity on our wallet strategy and particularly if we have plans to integrate it into the core Queen based platform Bryan.

Yes, I'm happy to talk a bit about choline based wallet for those of you who don't know wallet is our self custodial app, meaning that lets users store their own crypto assets instead of having a store on their behalf.

And we've seen strong customer demand for both our custodial app and self custodial apps and so it's important for us to kind of get broad coverage across the different user segments, who want both of those types of functionality.

So <unk> is really important to us for a few reasons strategically one is that it allows us to onboard customers in many different countries around the world is treated more like a software product in that regards and some customers are starting their own funds and it also allows our customers to access the latest developments in crypto, whether that's interacting with defy our smart contracts are.

People want to use an <unk> or accessing whats broadly being called now web III.

Which is a really exciting area of development, we think it will be a big area of growth just briefly to touch on that.

So today's internet has largely run by a handful of centralized companies that access and monetize their users personal data, but web three is something thats. Its next generation about its being owned by builders and users.

During their own data in a more private way and it's often orchestrated by the different tokens, creating a more decentralized and community governed version of the Internet.

So we're also seeing a lot of startups and venture dollars and entrepreneurs building new companies and apps. Sometimes these are called decentralized apps or depth in web three and so accordingly, while it is a really important way for people to access all of this emerging functionality and in fact, we often say our strategy is to be the primary financial account for people.

In the crypto economy.

While it is an important way that that are now doing that with web III.

As I mentioned in my opening remarks, we've made a number of improvements to the wallet app over the last few quarters. So for instance, we now support more than seven different blockchain and cannabis wallet and <unk>.

Later twos, enabling users to utilize apps across all of these change without bridges or multiple wallets. We also totally redesigned wallet on a new tech stack in Q2, and we're seeing rave reviews really great customer responses from that.

Online. So we now believe it's the best Selflessly wallet on the market and we're seeing a lot of that positive chatter.

The second part of this question really asked about how we integrate wallet into our core <unk> platform.

Of course, the core retail has a lot of distribution and a lot of people don't want to have two apps installed they prefer to have to use our custodial outcome. So we worked really hard to bring that same functionality of this and wallet into our main coinbase out.

And we're doing that without getting too much into the technical details we've had to make a new wallet type available that met all of the stringent cyber security requirements that we have in place. It uses a technology called MPC are multiparty competition, which we spent.

Longtime investing to enable some of this functionality, but what's great about it is that now we have.

We call it the <unk> wallet inside our core retail App, we have a marketplace where people can try these different third party applications interface with them seamlessly.

And it is enabling to do all of these things that I mentioned earlier defy and achieve web III, just like they would be able to in the wallet out but now we brought it to 100% of our customers.

So the technical details don't matter as much as the customer experience I think.

We're really excited about empowering some of this new functionality is helping us.

And retain more and more customers in this space.

It's going to keep moving really quickly so I'm glad that we've been able to provide these experiences to our customers.

Okay, great. Thanks Bryan.

So now with that Sarah let's switch gears and go back to the live questions from our analysts please.

Thank you.

Our question comes from Lisa Ellis with Moffett Nathanson. Please go ahead.

Good afternoon. Thanks for taking my question and thanks for the additional disclosures I thought this bridge on page 18 of the shareholder letters Super helpful that was actually the direction of where I wanted to go with my question, maybe just one.

Alicia for you on sort of how you think about cash burn at coinbase.

This bridge shows down $423 million in the quarter.

And that's that's kind of the decrease in cash available I think looking back at Q1.

Exact number except to state this exact math, but it's similar or slightly higher than that so is that how we should be thinking about cash burn and are you thinking about sort of solving for a cash burn rate.

In the same way you are thinking about solving for an adjusted EBITDA figure.

Thank you.

Thanks for the question Lisa So we do think about EBITDA and cash a little bit separately, because the EBITDA is closer proxy to what we're spending on operations, but we continue to make investments. We think our venture investments are an important part of developing the ecosystem and giving us a lens into the future and then we also think of our financing activities for the products that.

We offered to institutional and retail customers as an important part of our business and so you will see cash fluctuating within our investing and financing activities that we think is just adding good revenue and good future strategic value to the company independent from the operating cash.

So I do think about our operating cash is the metric that I would focus you on that we are managing closely and ensuring that we are prudent in how much we burn <unk> our balance sheet resources.

Okay.

Your next question comes from the line of Ken Worthington with Jpmorgan. Please go ahead.

Hi, good afternoon. Thank you for taking the question.

Crypto markets have been under pressure and during the last call you mentioned that in the past claim base was able to accelerate its growth by.

By investing in acquiring and I think Alicia brought up. The example of acquiring chapeau in the last call and this call you mentioned the repurchase of your debt in the past and we.

We've seen a couple of your peers acquire distressed assets and sort of high profile ways.

So I don't think we've seen at least in an obvious way coinbase leveraging the downturn to acquire its way into building. The business. So I think first has coinbase taken advantage of the selloff and stress in the market to build to see M&A or debt paying a paydown and if not why not yet.

And then second there are a number of bears that point out that claim based debt is trading at distressed levels.

And claim base is burning some cash and therefore these actions.

Not taking place because youre not in a position to do so.

Can you talk about the pricing of the debt and maybe it's a misperception that you are hearing about your balance sheet.

That would be great. Thank you.

Sure why don't I address the debt and then Emily I'll turn it over you can talk a little bit out of our mrna philosophy, and where we see opportunities in this market. So what I would share with you is we strategically raised capital in 2021, and we are very long dated liabilities. So the convert comes due in 2026% and we they're a seven and 10 year high yield notes. We believe this gives us the resources to operate for many.

And those were priced to interest rates that frankly, we couldnt get in the market today, we don't anticipate being able to find the market for the next two to three years.

This gives us the resources quite candidly to invest through winter. This gives us the resources to be able to offer financing products to our customers off our balance sheet.

And this gives us a lot of flexibility to make decisions for a much longer term duration. So we are not looking to take advantage of the price dislocation and just buy that back because we think thats, a financial engineering activity and not really in the best interest of building a long sustainable operating business, which is what we're focused on doing.

And then with regards to M&A I'm only going to talk about how we think about these market share we continue to be active across both ventures in M&A, it's an area that.

Has helped us gain access to the innovation happening in the crypto ecosystem. It helps us strengthen our competitive positioning it helps us execute against our mission.

And crypto winters, we view as builders markets, it's often the best time for us to be greedy when others are fearful. So you mentioned the <unk> acquisition that underpins our custody offering with about last crypto winter. We also did the acquisition of <unk>, which essentially laid the foundation for our prime brokerage platform and you can expect that we'll continue to do targeted M&A.

That has high hurdles for ROI in this type of a market, we will probably have higher higher hurdles.

And then on the venture side, we typically like seed stage investments. During this time because again, it's a builders market you tend to see a lot of innovation happening at the ground level such as open fee. During 2018, when we invested in Nazi ground. During the last crypto winter. So we're going to be prudent about capital allocation, but we think we have a very unique.

<unk> lens on development across the crypto space and we're going to take advantage of it.

Okay.

Yeah.

Your next question comes from the line of Richard Repetto with Piper Sandler. Please go ahead.

Yes, good evening.

My question is more of a higher level.

More general question, but it's for Brian .

Brian in July in mid July you wrote a blog post.

Thoughtful well research post vote.

Operating efficiently at scale, and then and one of the paragraphs you talked about.

And I think this was to your employees, but you talked about avoiding spending too much time on what's going well and really sure what's what's not going well so you could improve on it.

So in the spirit of what you put out in that block.

Brian I was just trying to see what things.

Again, I know you're investing for the future Youre, making progress.

Expanding crypto to all but what things.

Aren't going so what areas could you improve.

Yes, well thanks for the question Thats certainly been an interesting cultural change for US we always try to think about okay. Let's take a minute to celebrate the things that are going well, but we always try to think about what we could be doing even better.

I think a lot is going well, but if you look back I think that we probably could have grown slower over the last couple of years right. That's something that we probably could have done better.

I think that.

We're still iterating on how we communicate.

Our expenses are actually quite predictable, but as you can see our revenue and of course that ties into EBITDA is is less predictable and so I think we're still iterating on how we want to communicate ranges publicly and things like that and making sure that.

We are waiting this new industry to the public markets, it's sort of as the first scripted company to go out I feel like we're a little bit of like a bellwether for the whole industry and we're kind of trying to write the playbook on how to understand this.

This industry if it is going to keep going through ups and downs now my guess is that those cycles will become more muted over time, just because the adoption of crypto it kind of keeps growing through all of these cycles and.

As the use cases are more and more prevalent.

Like today, there might be.

Hundreds of millions or something like that of people in the world, who tried crypto, but as it gets to be billions or something like that then I think these these are cycles will just become more muted. So I would say, we're iterating on all kinds of things in that direction.

Your next question comes from the line of Steven <unk> with Cowen. Please go ahead.

Okay.

Thanks for the question.

Can you just unpack further the puts and takes around the Q2 retail take rate coming in slightly higher versus Q1 and year over year, including the mix of pro users and the main consumer apps and just can you discuss your outlook on the retail take rate for the second half and any early reads on the impact of consolidated against trading with the main consumer app. Thanks.

Thanks for the question. So there's very little update that we have compared to our past comments at the retail fee take rate is mathematically the output of the mix of volume on our platform.

And as we know we have two pricing models. When we have the simple trading pricing model now and then we have tiered pricing for our more advanced traders.

And so as mixed shift occurs what penciled out then is the blended rate and so we didn't change pricing in Q2, but what we saw is less.

Trading at the higher volume tiers, and so it's people traded lower volumes those were higher fee tiers, which resulted in a slightly higher fee rate.

And so as we think about for the second half.

We're expecting and what we said in our outlook is that we think that volumes will be on the lower side or in line with what we've seen in July so far and those are lower volume, which means we'll see sort of be.

On the higher side of Vies, which is probably in line with what we saw in Q2, but again, it's all mathematical and mix that we have not seen any impact yet on our fees were not seen cannibalization or anything that would indicate that there would be a broad change in consumer behavior and how they trade on our platform, but again early days, we just announced the retail trade.

Within the main out this quarter, but we're watching it closely but we don't have an update to share at this time.

Your next question comes from the line of Devin Ryan with JMP Securities. Please go ahead.

Hi, good evening, maybe a little bit of a follow up just on that last line of question.

So if we look at crypto prices are up maybe.

Maybe slightly over the past month. So maybe you could say, we're seeing some stabilization after a big drop and I. Appreciate it's a very short period of time, but the trading volumes that we can track on platform is still declining a fair amount from the second quarter and youre expecting pretty healthy drop in <unk>.

<unk> in the back half of the year for the guide so just wanted to get a little more color on the interplay between crypto market cap in price and activity that would be helpful. And then also just the scaling of coinbase. One will begin to question, whether that's impacting <unk> in any direction.

Just the overall outlook.

Sure. So we have seen prices come up but I would just note that crypto is very volatile and so it's very hard to see if it's a true change in directory until we see a truly in hindsight. So.

What we're looking at is the broad headwinds of the macro environment is still putting a lot of investors on the sidelines. We're looking at the headwinds of still seen some fallout in the crypto credit environment. We just saw another exchange in Germany. Unfortunately filed for insolvency today, it might've been yesterday, but recently.

And so I think that we need to see a little bit of stabilization there.

As well as we'd like to have more certainty in the regulatory market and Thats all influencing what we're expecting for the second half, but I would comment to these markets move very quickly and we could see a shift it is very hard to predict what will happen and there could be rallied from things that we can have visibility in today. So.

So we are focusing as we shared with you where we're focused we're focused on rolling out the products and services that we have.

On our roadmap, we're really excited about the feedback we're getting from customers on some of our newly released features such as retail advanced trading and EMEA announce such as the new wallet App that we've put out there and we think that by doing that and engaging our customers will be able to bring back volume to our platform.

Okay.

Sure we have time for one more question. Please.

Thank you our final question will come from the line of will Nance with Goldman Sachs. Please go ahead.

Yeah.

Hey, guys. Good evening. Thanks for taking the question just a question on stock based comp I. Appreciate all the comments on trying to manage the business more efficiently stock based comps.

Running over half of revenue and just wondering how youre thinking one is there anything nuance in there about founder grants are things that are coming out of I exercise prices and then two just more broadly how are you guys thinking about limiting the noncash dilution the shareholders' experience from from stock based comp over time.

Sure. Thanks for that question. So I wanted to share with you is that our board and our management team really understand investor concerns around stock based comp and we're very aligned with investors. Our goal is to grow profits and growth stock price a managed solution effectively.

But given the inherent volatility in crypto were a little bit different than how we think about these metrics and we think about our stock based comp metrics. Similarly to how we think about all of our other financial metrics with which we took.

Longer term horizon deal.

So the metric that we look at is we look at gross dilution over a trailing three year average and when you look at it through that lens in 2021, our gross solution from New awards was two 4% year to date, it's been about 3%.

And we're looking at that and saying how does that benchmark against peers and we're feeling fairly good about that right now looking forward what I can share with you that if we have the same size of employee base in 2023, our stock based comp would come down on a year over year basis, as we do have some M&A earn outs and other multi year grants from prior years that are being amortized in this year and from a multiyear best.

Schedule, we're not prepared to provide a 2023 outlook right now, but we do expect a year over year decline in stock based comp.

Great. Thank you for joining us and we look forward to speaking with you on our call again next quarter.

This concludes today's call you may now disconnect your lines.

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