Q3 2022 Coinbase Global Inc Earnings Call
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After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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<unk> one on your telephone keypad. Thank you.
And Neal <unk>, Vice President Investor Relations you May begin your conference.
Okay.
Good afternoon, and welcome to the <unk> third quarter 2022 earnings call. Joining me on today's call are Brian Armstrong co founder and CEO .
Emily Chilean President and CEO , Alicia <unk> 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. These results to differ are included in our SEC filings.
Our discussion today will also include references to certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measure are provided in our shareholder letter on our IR website.
non-GAAP financial measures should be considered in addition to not as a substitute for GAAP measures.
We are once again using <unk> technologies to enable our shareholders to post questions and in addition, we'll take some questions from our research analysts.
With that I'll turn it over to Brian and Alicia for opening comments.
Thanks Neil.
Alright, so as I look back at the quarter. Obviously, there were some macro headwinds just as the macro environment being down and that ties directly into our trading revenue.
But I was really excited to see the growth in our subscription and services revenue. This is something where three plus years ago. We started planting the seeds of building some of these different product lines with different revenue streams.
And we've really started to see that come to fruition, which means the portfolio of <unk>.
But clean base has an works on.
It started to provide less volatility for the parent company revenue overall.
We still have a long ways to go on that but it's a great trend and it's moving in the right direction.
Okay.
So I just wanted to touch on a few topics. One is I wanted to touch on our move to a product group structure in the company that I think will help us move even faster.
And then I'm going to touch on the regulatory environment and I'll end by sharing a few thoughts about how we're going to continue to lead in this environment.
Alright, So you may have read the news that.
Our chief product officer is going to be leaving the company in this kind of accelerated a change that we had been thinking about for a little while which was the idea of elevating our product group leaders in the org.
And so we decided to make that change and they're now going to be reporting directly to me it will be on the executive team.
And we really have three different customer segments that <unk> serves.
So it is the product groups cleanly break down across those three customer segments, we've got consumers.
Institutions and developers now we're going to have a forest product group, which we're calling platform and this product group is there to build the shared components across the different product groups that all of our products used for instance, connecting into a different block chains out there generating transactions, starting crypto things like that.
So I'm really excited about this change for a few reasons I think that we're a big enough company now where we want to have more autonomy and P&L ownership for each of the different product group leaders, we want to give them the ability to move quickly and nimbly pushing.
Pushing down decision, making in the org, having them operate a little bit like three different startups.
Within our larger company.
And.
I'm really excited to see what the leaders of each of those product groups can do and we have some really incredible talent from rising stars in the company and we're giving them more more ownership here, which I think will drive our efficiency at scale, which is why I put out a blog post earlier this year, how we're going to operate efficiently at scale is probably good to go back and look at that too.
So let me just touch on the regulatory environment as well because of course the.
The regulatory environment I think it's one of the biggest unlocks that we're going to have.
In terms of growing this industry and perhaps even getting the prices to go back up in the right direction. I think there is an opportunity at some point for the crypto prices potentially decouple I think from the broader macro environment.
We don't know if that will happen, but I think it's one of the possibilities and regulatory clarity as one of the things that could help kick that off.
Just generally if I look at the whole world because of course, we are engaging with policymakers all over the world.
<unk> with the exception of China has actually been generally positive moving towards regulatory clarity, whether it's in Europe or in Hong Kong or in Australia or Brazil.
We're seeing regulatory clarity emerge around the globe and that's really exciting and positive.
The U S. I would say is a little bit behind but.
It's also moving in a positive direction, there's a bill going through Congress called the <unk> Bill or simultaneously, it's being referred to as the DC CPA that digital currency Consumer Protection Act.
And this is a really positive development overall it gives spot market authority to the CFCC. It helps clarify the regulatory environment for centralized exchanges and custodians, which of course is the primary thing that we do.
And clarify some of the regulation around stable claims which is also good.
There is also part of the language in the Bill that we're going back and forth with policymakers, helping.
Provide input and drive some of this is.
Around <unk> am.
And look I think that defy and sub custodial wallets are super important part of where crypto is going.
When you hear about web three and <unk>.
Decentralized apps or gaps.
And <unk> itself. These are really essential to have.
The ability for new companies and participants to go ability protocols and and really get access to these tools that people all over the world, including the $1 7 billion people in roles that don't have access to any <unk>.
Encounter financial services today, so we'd like to see.
Five preserves and the innovation potential of that preserve I really think in this established Bozeman build everybody can basically agree that centralized exchanges and custodians should be regulated.
My ideal World I think we would really just focus the bill on that plus stable coin and just take the when there is a lot of good work to duty and for the industry in regulation, we can come back to <unk> later, but if it <unk> need to be included and somehow maybe there's a way to sort of.
Create further study and not necessarily opine on something so early in that bill.
So anyway, we're very excited to see that bill make its way through Congress that has bipartisan support.
I think it would be a great change actually to the current environment in the U S where unfortunately, we're seeing this kind of regulation by enforcement from the SEC and I do think Thats key.
Creating a chilling effect on the U S market, it's it's harming U S investors in the sense that it's encouraging them to go to offshore.
Exchanges that are less regulated or not regulated.
We'd like to see that change in the U S and for them to be.
Regulatory clarity so that the U S can continue to be a leader in this space.
As we are working on all these policy efforts. We're also not just sitting back idly, we're going to continue to build and innovate across all of our product suites and it's going to continue to make us think about how we're making investments internationally because of course.
Our mission is increased economic freedom for the world and there's various jurisdictions around the world that are.
A little further ahead on the regulatory clarity on or even trying to attract crypto businesses there.
Building, something where people can serve the rest of the world and so we have to think about all of that at the same time as we help you policy efforts coming to fruition in countries around the world.
So yes, just in this down environment, the Downmarket I should say.
I'm actually really excited and energized we've been through for crypto cycles in.
In the last 10 years at Coinbase, and it's kind of funny I actually enjoy the down cycle is a little bit more in up cycles.
<unk> tons of scaling effort that has to happen in a lot of people rush into crypto for sometimes the wrong reasons in the down markets you get to focus on building and everyone's there who is a true believer in a true builder and Thats no different in this case there is a ton of innovation happening, there's still a ton of institutions signing up kind of getting ready to take advantage. When this market we find the bottom.
The macro environment.
And climate is going to continue to lead in this environment doing what we've always done in the sense that we're taking a very trusted and compliant approach globally, we're not trying to cut any corners or moved too fast we're trying to do the right thing for the long term, even if it's more difficult in the short term I think that will pay off for US. We're also leaning into all the variety of different use.
Cases that are emerging in the crypto economy, we're leaning into web three usage.
Building a lot of this functionality natively into our App trading is great and it's been a big source of revenue for us that will continue to be in the future.
But we also want to support all of the use cases crypto.
Not just trading so that's the key.
I prefer to economy can really come to fruition and that'll be a diversity of different revenue streams that come into our platforms.
I mean crypto easier to use and that's how we're going to get to 1 billion people and eventually have the world onto using crypto and benefiting from it. So I think there's been a leader in terms of ease of use and design and of course, we haven't we're one of the companies that has a portfolio of different products and so this is great. Our customers love that they can just sign up once but anything they want to do with crypto, it's easy they already.
Their crypto started with us it just one more click to buy in an FTE or a stake and earn yield on there on the crypto and so the portfolio of products that we've created I think is unmatched in the industry and we'll continue to build that out.
So with that let me turn it over to Alicia who is going to go through our Q3 numbers.
Thanks, Brian .
Quickly recap a few key financial highlights in the quarter. Our results are covered in great detail on that link in our shareholder letter.
So while our net revenue declined sequentially to $576 million or net loss and adjusted EBITDA, both improved sequentially to negative $545 million and negative $116 million, respectively, and we think thats really speaks to the cost management efforts.
In Q3.
Our trading volume declined 44% sequentially driven by ongoing headwinds we discussed in our letter.
<unk> declined 6% to $8 5 million as either behaviors continuing to shift from trading and non trading transactions and our users are increasingly engaging speaking and reward generating products.
Massive reduction in prices and lower crude oil price volatility.
So please and Brian alluded to this earlier that our subscription and services revenue grew 43% sequentially to $211 million and importantly, we hold price content Q3 prices were the same price. They were in Q2 that would have grown 82%.
The biggest contributor within this line item is interest income, which is benefiting from a rising interest rate environment.
We took very decisive action on costs, and we were able to reduce our operating expenses by 38% sequentially or 22% when you back out the impact of noncash impairment charges on our crypto assets.
We are actively updating and evaluating our scenario plans and preparing to reduce operating census, further if market conditions worsen.
We ended the quarter with $5 6 billion in total U S dollar and resources.
In addition, we held a portfolio of $418 million.
And combined we believe this puts us in a strong position to manage through these market headwinds we face.
Concluding I want to touch on our outlook.
For 2020, Kim for full year 2019, we remain cautiously optimistic that we will be able to operate within the $500 million adjusted EBITDA loss Cardwell.
Got it.
This is assuming that market cap doesn't.
Go down into deteriorate meaningfully below October and we don't see any changes in customer behaviors.
As we approach 2023 planning, we're currently preparing with a conservative bias and assuming the current macroeconomic headwinds will persist and potentially intensify we are not providing quantitative outlook at this time.
We feel confident we're in a good position to manage the distressed market and we will emerge stronger on the other side so with that let's go to questions.
Great. Thank you both before we get into Q&A I'll quickly reiterate our call principles. So first of all answer the most updated question as determined by the number of shares and we might group questions together that touch on the same teams.
We don't plan to answer questions related to the potential listing of new assets and.
And third we'll avoid questions you've answered in the past or issued blog post about in the past that there are no material updates.
So with that first question is from manual.
What's your prediction for the next five years Brian .
Yes, thanks, Neil so of course.
Just to clarify we always have to say, we can't actually predict the future I don't want to make the lawyers too nervous here on the forward looking statements.
I kind of like just the best way to predict the future is to invent. It. So we can certainly do our best to build some of the things that we think have potential.
And.
That's a great way that people can have an impact on the world. So I mean, what's going to be different in crypto in five years.
Look as I addressed earlier, I think there's going to be more clear regulatory environments across the G. 20 on are really around the world that's going to unlock a lot more institutional capital, we're seeing that under the surface. Even in this challenging market. We are seeing the adoption from instant and so investors that are basically signing up to our prime platform.
And I like the language that you used in the shareholder letter around the spring is coiling.
I think theres a lot of people preparing for when the next upswing could happen.
I think the scalability of the block chain will continue to improve we saw this a little bit with the experience emerge this year, but they have a lot more updates there. We're seeing other blockchain continue to scale with lightning network in various layer <unk> solutions, which is really exciting that'll just unlocked a whole bunch of new use cases similar to how the internet moved from dialogue.
Broadband.
I think decentralized trading with Texas decentralized exchanges.
We will continue to grow as a percentage of all global trading and.
We're excited about that.
I think youll see actually more countries in the world adopt crypto currency as legal tender kind of in a way that El Salvador did with bitcoin I know that they were a very early adopter and there's probably going to be in the next five years I would be surprised that we didn't see other countries continue to adopt.
Crypto currency as their as illegal tenders similar to how some countries actually just peg their currencies to the U S dollar.
I think a lot of countries are also going to pursue central bank digital currencies and in the U S.
Zinc actually USD pointed will end up being kind of the the facto central bank digital currency in the U S.
Words.
The policymakers in the U S will set the frameworks that need to be followed with the private market will actually.
Create the solutions and USD point has been on a really rapid rise.
And I think it will and I think it will probably be the largest in the world at that point ahead of tether, if I had to guess.
I think Christian will just start to have a really big impact on economic freedom. That's kind of what we believe is going to happen that submission appoint base.
And.
The market will recognize us for the long term and thoughtful approach that we've made around compliance trust security and ease of use.
And hopefully we have at that time of 1 billion people using crypto today I think there's probably two to 300 million people in the world.
Who've used crypto and I think we could easily be at 1 billion people using crypto within five years, but again, we can't tell for sure and this is going to take a lot of hard work.
Okay. Our next question comes from Cordero asked who asked house claim based plan on surviving the current economic downturn.
Yes.
One kind of language knit I'll mentioned that I don't like the word just surviving in the current economic downturn, I think theres actually opportunities to thrive in this environment.
And whether the market is up there are opportunities, obviously, we could raise money at higher valuations or whatever but the in down markets. There is also opportunities all around us.
There is opportunities to do good M&A deals.
We're looking at a lot of those.
Got dry powder to take advantage of that when prices come down.
And there's all kinds of opportunities to build right. If we don't have to focus so much on just scaling.
A hyper growth environment theres opportunities to help build future Paydown tech that we're seeing a lot of improvements across our technical infrastructure.
Around.
Check that that will help us get to the next order of magnitude in the next round.
So there's lots of opportunities to drive of course subscription and services is another big one that I mentioned right. We planted the seeds to diversify our revenue streams thats really coming to fruition.
And we don't know exactly what will take off in the next cycle. So we've got to continue building.
And innovating that's part of why I'm. So excited about how we're making <unk> easier to use there is I think a lot of exciting work happening with decentralized social media.
Dow's decentralized gaming all of these things we need to make sure the meta versus people want to own digitally digitally native items inside the universe and various games. So we need to make sure all these things.
Get easier and easier to use over time, and we've got opportunities with our products there as well not just around trading but all these other use cases.
Let's see what else I mean, I don't know.
We're continuing to do great partnerships.
<unk> and meta and Google as a public company I think we've been really delighted to see that.
Other public companies are drilling and excited to work with us in our diligence processes with them has gone.
Even better.
And just overall I think we're going to manage through this the way we've done through the last crypto last for crypto cycles that we've been through as a company. So obviously, we have to be rigorous about managing costs and things like that but theres good revenue growth opportunities in these different areas.
And.
Yes, we're going to keep operating as efficiently and making some of these changes around our product groups.
And if I could I just like to add a couple of numbers behind your comment.
So just to add on to this question, we get and Q3 was $5 6 billion in total USD resources and $480 million <unk> over $6 billion in combined cash resources on our operating expense side as I mentioned earlier, we reduced our operating income by 22% excluding impairment and we're continuing to manage expense.
Very closely given the macro conditions and just a final thought from me I think it's important to see how our team thinks about operating trends in these volatile markets and as a team. We spent a lot of time thinking through a variety of scenarios and developing contingency plans. We believe we have the balance sheet to weather a multiyear downturn and we have action plans that we develop to lower our expenses and are running.
If needed.
We had several questions about competition.
I'll summarize by saying how do you plan to compete with companies that offer zero fee trades or other companies that are starting to get into the U S market Emily.
Thanks for the question.
So we are seeing a lot of headlines about CRM fees and I want to make sure we unpack that a little bit.
So there is two ways that companies generally generate revenue through trading there is spread and there is a fee and companies that say zero fee are still generating a spread or charging a partner. So right. Now we are roughly in line with other companies in terms of our total costs.
Any case customers are willing to pay for a premium product and we've talked before about we are not going to compete on price. It hasnt the quality of the product. We also offer cloud based <unk>, a subscription product where customers can do to your FTE trades.
So then now let me move on to how we compete.
At the highest level our goal is to grow the share of users and wallet across our three customer segments consumer institutional and developer.
We have three major differentiator is our value prop. One is that we are the most trusted we've always taken a long term view on compliance and security and we're widely viewed as the safest and most compliant player in the space.
Ease of use we know that crypto is too complex for the average person and with if people can get the utility of crypto technology without having to understand all of the technical details.
Finally, we have an integrated product suite, we know that there will be many winners in crypto and theres going to be plenty of opportunities for everyone to keep extra.
Extract great Pam like Coinbase as one of the only places where you can have one crypto account and do every store to pick up activity you can trade stake pay borrow earn create et cetera.
And we believe that we have begun to prove out this multi product strategy. So examples of that one is that we started to invest in the U S. SEC back in 2018, we invested in <unk> in 2019 and now we're seeing that these efforts are yielding pretty great results as demonstrated by the growth of our subscription and services revenue and we continue to plant seeds for future growth through <unk>.
<unk> like the ones, we've announced with Blackrock, Google and others.
And then finally as we look towards big opportunities and Big Tam expansion. We should note that our product suite has historically been focused around crypto spot market, specifically U S spot markets and that is a great opportunity, but thats also a smaller tam compared with the global trading markets. So as we look at product and geographic expanse.
Our opportunities to grow revenue and a larger Tam market.
That includes things like derivatives in the U S and globally, we think theres a lot of ways to expand that Tam. So in summary lots of demo spending we believe that being the most trusted easiest to use and having an integrated product suite over time across these three different customer segments is going to help us continue to win share of users and wallet over time.
Thanks. Our next question comes from a W. Who asked what are the ways you can diversify your revenue and profits from crypto prices Alicia.
Thanks for the question Andrew.
So I think it's important to start with work up the company.
And we're 100% of our online also so our revenue and profit will be intrinsically tied to the overall crypto market in some former fashion. However, we can dampen the effect of direct comparison. So today, our largest revenue stream trading revenues is directly correlate with crypto prices and price volatility so we experience.
Walter as you can see over the last 18 months as prices were rising and high vol. In 2021 we generate a lot of revenue as prices have come down and volatility. Thank Alan we've had trading when trading headwinds. This year. So we are very proud of our trading platform and we recognize that theres going to be volatility given how early we are in this industry, but because of that volatility years ago, we started with.
Investing in new revenue streams, specifically, our subscription and services revenues.
This is Ben comment that you've heard from Brian in Emily earlier that it takes time to build these great products and for them to achieve scale, but we're really proud that we started planning the <unk> back in 2018 with co founding center with great Great USB C. In 2019, we rolled out our first stinking asset and you can now see both of these products generating significant growth within our subscription and service.
Revenue lines.
In 2020, I think it's important to note that subscription and services was $45 million for full year revenue $45 million in 2021, it grew to over $500 million and this year. Our outlook is now over $700 million and thats. Despite the headwinds we talked about in a couple of markets and significant price declines.
I'm pleased with the progress, we're making and we think that we need to continue to invest to create the multi product strategy and this will diversify the drivers of our revenue and tapping out some of the volatility we've seen.
Our next question comes from Manuel who asked Harry planning can detach the share value from baseline value Alicia alright.
Different question same flavor. So we just talked about diversifying our revenues to reduced P&L volatility from crypto prices and it's a similar answer on reducing the correlation in our stock Cohen from Bitcoin. So again the coin is the largest crypto asset by market cap and we generate meaningful revenue from that clean trading and custody.
Always be some element of correlation between our stock at that point.
It's important to note that this has not been a consistent relationship. So interestingly there has been periods of 80%, 90% correlation between clean and bitcoin and in Q3, we have terrific low correlation it was approximately 30%. So I don't know how investors are thinking about this but I think theres a few things important to note. So one is not all asset managers or margins.
<unk> actually have the ability to directly invest in spot bitcoin and so is the first public companies. Some investors are gaining access quintin crypto broadly via coin and so they're using our stock as a proxy for how they may or may not have traded the underlying assets.
I believe as ECS to hopefully get approved in markets or companies go public I can see less correlation between coin in bitcoin.
Further to these trends, we could see less correlation with the development of more institutional trading alongside financing and derivative markets in the U S where investors could have more vehicles easy access to short the queen directly as opposed to.
Lastly, it comes back to what I said before the more we can create multi product strategies with different revenue drivers and diversify our P&L I think we'll see less correlation to any single client or crypto overall.
And that is the thing that is most in our control to drive that product strategy deliver value to our customers and what we are singularly focused on.
Our next question comes from Stephen J, who asks what software our technological updates this claim based on the way.
Yes, I can take that one so.
Well first of all I don't want to pre announce anything thats coming down the pipe here, but I just can talk generally about what technology updates I think that.
We have in the process are we have already lives that are really powerful for us. So one of them I think is sort of underappreciated is actually our MPC or multiparty competition Tech stack.
For those who aren't familiar.
MPC is a way that you can store crypto securely.
<unk>.
Different keys in difference.
Sure environments without getting into the technical details of it what it does is it allows us to.
Store crypto more securely.
In our heart wallet and things like that it also enables functionality.
Like in our in our App, we have something called adapt wallet, which allows customers even using our core retail app to go access.
<unk> apps and decentralized apps sorry.
Sorry, if this is too much technical jargon, but basically it allows the customers to go access. These third party apps and participate just like they would with a self custodial wallet, but they have all the security and protection.
Normally rely on within this this was a core piece of technology that we developed in house, we got a lot of key talent came in through the acquisition of unbound.
Some real cryptography, it and cyber security experts that made this work in practice and I think this is going to be actually a really core differentiator for us over time.
Other core technology updates, we acquired Fedex, our derivatives exchange and that has allowed us to have some really best in class IP in house to make the most reliable and scalable exchanged over time.
Both on spot in derivatives.
<unk> had a really cool update recently, where we actually begin aggregating listings across various marketplaces out there and one thing that's really nice about the blockchain and the interoperability of these different protocols is that it allows us to interface with the various.
Absent ecosystems marketplaces out there to build.
World Class experience for our customers using <unk> and then of course, we've been working a lot on that.
Our service oriented architecture, and our scalability in the background, especially during this <unk>.
One market that we want to make sure we can get to 1 billion users over time and that requires a lot of investments in our tech stack.
Moving to the service oriented architecture, it's allowed us to be.
It has improved the performance and scalability, but it's also improve the resiliency of our app in the sense that it's one aspect of our App has a problem it doesn't bring down the whole opex generally things would degrade gracefully and.
These are the kinds of investments that you have seen in major all major tech companies upscale Google and Amazon and.
It's really our tech stack evolve from the startup that we that we used to be that we still keep a little bit of that startup closer, but our tech stack now has to be able to serve over 100 million users and we think that will oversee over $1 billion in future.
Okay, Great, we'll take one more question before switching over to the analysts so.
Michael T asked well my money ever be backed by funds on your exchange in case of theft and what are your procedures for taking you were taking to ensure safety Emily.
Thanks for the question Michael.
So we have invested over the history of the company I am being the most trusted player in this space and we take the responsibility of securing customer funds very seriously.
And that work.
Should that we've never had an event where the systems have been materially compromise in any way and this is because of all of the things that we have invested in since 2012.
We have an industry, leading insurance policy for the hop wallet, we have $1 million account protection for our cloud based <unk> subscribers. We've invested in best in class AI and machine learning fraud detection, we have a 200 plus person and security team and life, some support and in App chat and we will continue to.
<unk> in these things and more.
So it is important to note the crypto as a nascent technology and like many new technologies cameras will always seek to take advantage of the users. So we also invest heavily in educating our users about how to keep their credentials and account space for example, using <unk> and other things.
So with that that would be why don't we turn it over to the analysts for questions.
Your first question comes from the line of Lisa Ellis from Moffitt Nation.
Hi, good afternoon. Thanks for taking my question and good stuff here I wanted to follow up.
Brian on the International strategy, you had highlighted I think in the shareholder letter that crypto trading volumes have been moving offshore over the course of this year and I noticed you guys recently added Singapore, the Netherlands, and then you also added.
Zero Commission trading for Fiat USCC coin.
Can you just kind of tie all of that together for us Holistically talk about how corn basis thinking about <unk>.
Sharing some of that offshore volume continuing to expand.
Thank you.
Yes, sure. So international expansion is really core to our mission of increasing economic freedom in the world. We want to make sure that we're doing that with a global mindset and we have seen really good progress on the regulatory front acquiring licenses in a variety of different locations.
I am in Singapore, right now and we just got our in principal approval for to hopefully end up with a license here from the monetary authority of Singapore, which has been a great step in that direction as well.
<unk>.
We have seen the percentage of U S spot trading has shrunk from the beginning of this year.
As we've seen more of it overseas.
<unk>.
I don't know the exact reason for that I think thats showing effect that some of the regulatory environment and the rhetoric. There may not have helped.
So it is causing us to make sure we have our international markets served even more fully.
And.
No I don't want to share anything too much beyond that at this point, but it is important for us to make sure. We have global coverage and we are serving customers from the best jurisdictions that we can globally.
And we need to see the regulatory environment evolve.
Get to that clarity both in the U S and in other markets, where we will continue to invest.
And we at least I think if you want to.
Yeah.
No that covers it.
Your next question comes from the line of Owen Lau from Oppenheimer.
Okay.
Thank you for taking my question. So based on my math Coinbase has a loss of about $147 million.
Adjusted EBITDA year to date, if trading volume if trading revenue states at October lateral and you continue to benefit from rising rate is there any reason why you have a loss of over $250 million in EBITDA in the fourth quarter.
And then without getting any.
Any specific guidance Youre adjusted EBIT.
Adjusted EBITDA loss has been shrinking could you. Please talk about if you have any aspirational goal of achieving positive adjusted EBITDA in the near term. Thank you.
Thank you for the questions Alan.
As we articulated in our outlook right now we are just.
Really focused on operating to the guard rail metric that we set forth.
And we are being prudent in our expense management.
Prudently trying to grow our subscription services that we are facing headwinds on trading so theres nothing that I have to specifically talk about that could be a one time loss at this time in Q4.
Okay.
Our focus is just managing towards that 500, and it's basically now we are thinking about investing as much as we can for growth.
As Brian said, there is a lot of exciting areas that we can invest in the crypto market and we want to ensure that we are investing through the cycle that we are opportunistically regarding dry powder from M&A opportunities and so we're not immediately focused on getting to EBITDA profitable. We are trying to manage to profitability across a cycle as we set forth in our S. One public about 18 months ago.
When we're in <unk>, we're going to make profits lowering downturns, we're going think prudent losses and what it does in the construct of the overall balance sheet capacity that we have so it is not a near term goal of ours, a focus of ours to drive to EBITDA positive in the near term however, if market.
The couple of as Brian said, it's a possibility we could see a second train EBITDA, but it's on an intentional call, but the management team is selling for today.
Okay.
Yes, similar to what Alicia said I think it's important just to kind of.
Touch on and reiterate this point about managing through cycles right. So last year in 2021, we did roughly 7 billion of revenue and 4 billion of positive EBITDA and so this year, we're going to we're targeting this negative 500 million EBITDA as our guardrail. So you can see that.
The up markets.
Do quite a lot of positive EBITDA in a down market, we don't want it to be excessive but I think it's reasonable to have some moderate amount of.
Negative EBITDA and burn there just to continue to invest through cycles, especially given the strength of our balance sheet.
So hopefully that gives you a little bit of a sense of how we're thinking about it.
Okay.
Next question comes from the line of Kenneth Worthington from JP Morgan Securities.
Good afternoon, Thanks for taking my questions I have.
Q on the competitive environment I'm going to try to wrap together.
So first we see binance offering a number of I'll say pricing concessions or promotions.
Pricing seem to be having an impact on retail behavior that you see as sort of persistent or sustainable.
And if so is it impacting the type of customer that you want on the claim based platform and then second I know, it's still early days for coin base, one, but it is up and running how effective is claim base.
<unk> of response for fee trading offerings elsewhere, and can you walk us through the characteristic of.
Target claim based upon customer and how the transition impacts the overall economics of point base.
Yes sure.
Michael Directions go ahead Im sure why don't I start and Brian and Alicia. Please jump in I think that tier to your first question.
We do.
Clearly.
Some competitors can kind of drive market share with zero fees.
In certain parts of the market.
And I just wanted to reiterate my point about the fact that there is still spreading theyre still a fee and that companies that are still generating a thread. We found that when we benchmark were roughly in line with other companies and we are not going to compete on price because of the premium nature of our offering.
I can't speak to the percentage of users that might kind of go for zero fees on a competitor site I can say that the nature of the users that we have is one where.
They tend to be fairly stickier. During these crypto winter they tend to be hot bars and hold on to their holdings and are less active but then come back as the market comes back comes back a bit.
Whereas there are other behaviors, we're very active traders might be trading in long tail assets.
And potentially are more price sensitive and go to those other platforms. During these times Alicia do you want to add on.
Yeah, there's a couple of things I'd like to add on thanks Emily.
First is and we showed this in our shareholder letter that even though our retail investors and Emilie alluded to this.
Not trading as much we do not see them, leaving our platform and so when we look at our retention rates of those customers Ied holdings in their wallets.
It's very high retention rates and it's very comparable to the same behaviors. We saw on the 2018 2019 Hyperion.
What we see is that our retail investors just go into hotaling Monday seek out yield basic out other activities. They can do with the crypto, but theyre not converting it to Fiat and leaving the platform, they're not sending aircraft out to competitors and in trading on that topic. They may indeed have other accounts away from corn acreage, we can't see but we don't see behavior of our customers, leaving our platform I wanted to touch on the claim is one question that because.
We really are excited about this product offering so the purpose of claim just wanted to be a product for all of our users as we think it offers a series of benefits that can.
To enable everybody to half a million dollars of account protection at previous <unk> premium customer service. It provides a low monthly fee to be able to get unlimited trading and just other perks and access to our platform. So we've seen really good both paid and total subscriber base growth quarter over quarter.
And we have not made these numbers public it's in our other subscription and services revenue within the breakout of our revenue on our P&L.
We're seeing good behavior, and we're seeing <unk> customers is higher than our other users.
Engage with baseline.
Your next question comes from the line of Benjamin.
From Barclays.
Hi, guys. Thanks, so much for taking my question I wanted to ask about USD <unk>, obviously kind of the biggest driver of your interest income in the quarter.
Can you maybe talk about I know, it's a little bit hard to as Brian said, you can't predict the future, but what's sort of your kind of near to medium term outlook and maybe can you talk about the things that are within your control perhaps.
Your expectations for Coinbase generated issuance of USB C, where do you see the biggest opportunities is it retail users looking to use it to get to define institutional customers that'd be helpful.
Maybe I'll start with this one feel free to add on Brian Emily. So we've made a series of announcements recently around USB C. That we think can really help drive adoption. So for example, we want to make <unk> more accessible to our global customer base. We have now made the fees commensurate with our U S customers in Europe , so customers, who want to buy what you see with euros.
GDP do not have any fees to do so we think this will really generate growth for non U S. Holders of this asset. We've also started to payout yield on your SBC warrant technically and we made an announcement with maker Dow which is a large Dci protocol, where theyre going to bring one $6 billion of USD SEDAR platform.
We're going to pay them, a one 5% reward rate. So we think continuing to make USCC Franklin got better dollar meaning it.
Faster at $27 365, and now it pays an attractive reward great will help with adoption not only for us for folks who are looking to have a stable crypto as they think about trading and moving to other assets but.
Getting access to U S dollar exposure in countries that don't have easy access. So those are some of the growth initiatives that we have within our product control that we're starting to experiment with and rollout and with regards to our partnership with circle, we make money in two ways. One is just with regards to the USB C. We closed on our platform for lot of these initiatives that I spoke to you we will hopefully grow assets on our platform and that we would.
Revenues from that behavior, and then there is another problem that a revenue share thats based on the percent that we distribute of USCC into the ecosystem.
Yes, It goes alembic cap growth in our behavior and then interest rates are the three drivers of that revenue.
Yes.
Your question touched on sort of the different use cases across different customer segments.
We used to see has applicability across many different customer segments. So.
Obviously its use in trading peers quite a bit right both in <unk> and with centralized exchanges traders use it quite a bit.
It is also used by businesses, we're seeing some businesses make intercompany.
Payments that way or <unk> payments, it's just faster than getting a wire.
Arrive in a few.
Two seconds and with less fees and sending wire so for <unk> payments I think it's useful we're seeing some people do payroll in USB C. We're seeing venture investments happen with USB C and then retail customers.
Is it is not just the earned yield on their dollars.
Alicia mentioned, but.
If there is any people in the world who would like to have.
Pin count, but they can't actually access it but through.
So custodial wallet or something like that they can actually hold U S dollars through USD point, so it's applicable.
Across a wide variety of use cases, and as I said in the opening remarks I think.
USB C will probably end up being kind of like the facto central bank digital currency for the U S.
It is a little different than some other countries that are trying to really create themselves.
So yes, I think the use cases are many.
Your next question comes from the line will Nance from Goldman Sachs.
Hey, guys I. Appreciate you taking the question I guess I just wanted to understand.
How important do you think it is for client base to be U S Domiciled company.
If we see so much crypto activity moving overseas I mean, do you guys ever make the decision or are that you need to be.
More active in international markets to protect for potentially even primarily in international markets in order to compete with all of that is happening outside of the U S. In the ecosystem.
Okay.
It's a good question just zooming out I mean look I think it's the right long term choice to be have the parent company based in the U S and of course, we have entities in variety of countries around the world. So we can serve.
Don't think were especially hindered in that regard in the sense that we can we can spin up an entity in another region that serves non U S customers and I think our hands are not necessarily tied in that regard.
But.
This was a big decision even going back to the very founding of the company.
I didn't really know it was back in 2012.
I didn't really know how the grocery landscape would evolve in the U S and I did the thought did cross my mind.
At that time was like should I go grid company in Hong Kong or.
Singapore or somewhere.
Switzerland, or something like that but I made the decision back then to actually build the company in the U S and I felt like.
Look it may be a bit difficult.
More difficult because the U S doesn't always act as quickly nimbly as some kind of like a special economic zone like Hong Kong Singapore.
But I think it's the right debt long term right in the sense that.
I.
You can read <unk> changing world order, who knows what will happen in 50 years, but at least for today, the United States is kind of the leading economy and it's the best place with rule of law and.
Strong property rights and everything to build a global company that can reach the rest of the world.
Yes, I would say, sometimes it's felt like we're actually at a disadvantage and it's caused us to move more slowly than.
Foreign competitors.
Some of that by the way is just our own execution, that's fully in our control, but other times its the regulatory environment. It does feel like we're almost facing.
Unnecessary headwinds.
Well, what we're trying to do the right thing right, which is definitely frustrating but.
I think it's the right long term debt and it's going to allow us to prevail.
Like a company that stands the test of time globally and regulators don't always act quickly, but they do eventually act and so we'll see that regulatory clarity here in the U S and we will see hopefully a more level playing field emerge globally over time.
Ryan I would just also add to the reader.
Reiterate this is I think when you see the data historically that the volumes are moving offshore.
We're optimistic that U S law makers legislators and regulators understand that now is the time to act on.
Very sensible regulation, so that innovation and technology tax sellers can actually happen in the U S.
Yes.
I think that's right I mean, that's the message that we deliver a lot in meetings with policymakers is.
By pushing so hard on the local companies youre not actually protecting investors you are just encouraging them to move offshore even less regulated options right. So.
That's an important message I think for all regulators to here.
Even here in Singapore.
Meeting with Mes and Temasek and GIC in various parties.
There is a similar message here, which is the Singapore current Singapore regulators are some of the most sophisticated in the world.
They've been very open to having institutions crypto institutions operate here and stable point, but they were a little hesitant recently on retail trading so self hosted wallets and I kind of made the point to them.
It's incompatible.
Want to be a web three hub, which Singapore has come out and said you cant actually prevent retail trading you kept prevent self hosted while it's the only way to access web three in many cases is through self hosted wallet. So.
They were very receptive to that conversation they were eager to work with us.
I think it actually created a much more.
Hope, we had a positive outcome there.
So yes, I think these regulatory conversations are really important globally to make sure things head in the right direction that protects investors, but also preserve the innovation potential of this technology.
We have time for one final question.
Our final question will come from the line of Rich Repetto from Piper Sandler.
Yes, good evening, Brian Alicia.
I guess my.
I want to be respectful of IEM respect, we've been through a crypto winter and what you have acknowledged I think Brian and I will ensure that this.
You haven't been to one with interest rates rising like rehab. So I guess my question I've looked at the head count head count is down 5% quarter over quarter.
It's actually up 25% from year end and I'm just trying to understand have you got expenses.
Increasing in the fourth quarter. So just trying to see how you sort of felt like you've right sized.
Given the sort of the risk given that and the potential for loss.
If we stay in this crypto winter.
It looks like trading volumes are flat to a little bit down to start so.
How do you how do you justify that right size the company.
Given this volatility.
And the net okay.
I'll start even for your fridge.
As Lisa mentioned.
<unk> targeted this negative 500 million for the year and at least so far we seem to be on track for that.
Do you think it's reasonable to given the positive 4 billion of EBITDA last year to sort of have some kind of moderate negative EBITDA in this down environment. So.
It's about investing in the future.
So far capitalized well enough to do that which I think.
It makes sense now of course, we're just going to continue to monitor the market conditions I think.
It's very plausible that we will see a further down.
Downtrend in the market and next year and.
If we feel that we're not on track to meet our goals in terms of EBITDA.
Speed to react to that and that kind of environment, but I think right now we're basically monitoring the situation and we're going to see what happens over the coming quarters.
Alicia would you want to add.
No I think Thats right I, just wanted to reiterate rich.
In our outlook, we speak to 2023 is that we're taking a conservative bias towards the year end that we think that these headwinds could persist and possibly intensifying and so if we do that we're doing a lot of scenario planning and understanding what that means we're not prepared to offer quantitative outlook. Today. However, I just wanted to.
Everyone know that we are committed to managing our expenses prudently and watching the macro conditions and the business performance closely and that will continue to update all of our scenarios of conditions involved and we would take additional actions to further manage our expenses, if we deemed that warranted.
Great. Thank you all for joining us today, and we look forward to speaking to you again on our next call.
This concludes today's call you may now disconnect.
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