Coinbase(US:COIN)2023-11-01 16:00Financial Performance - Net loss for the three and nine months ended September 30, 2023 was $2.3 million and $178.6 million, respectively, compared to a net loss of $544.6 million and $2.1 billion for the same periods in 2022[245] - Adjusted EBITDA for the three and nine months ended September 30, 2023 was $180.9 million and $658.5 million, respectively, compared to negative $115.9 million and negative $247.3 million for the same periods in 2022[245] - Net loss for the three months ended September 30, 2023 was $(2.3 million), compared to $(544.6 million) in the same period in 2022[281] - Basic net loss per share for the three months ended September 30, 2023 was $(0.01), compared to $(2.43) in the same period in 2022[281] - Weighted-average shares of common stock used to compute net loss per share for the three months ended September 30, 2023 was 237.3 million, compared to 223.9 million in the same period in 2022[281] - Total net revenue for the three and nine months ended September 30, 2023 was $623.0 million and $2.0 billion, respectively, with transaction revenue of $288.6 million and $990.4 million, respectively[305] - Subscription and services revenue for the three and nine months ended September 30, 2023 was $334.4 million and $1.0 billion, respectively, compared to $210.5 million and $509.8 million for the same periods in 2022[305] - Total operating expenses decreased by 34% to $753.97 million for the three months ended September 30, 2023, compared to $1.15 billion in the same period in 2022[370] - Transaction expenses decreased by 11% to $90.58 million for the three months ended September 30, 2023, compared to $101.88 million in the same period in 2022[371] - Technology and development expenses decreased by 42% to $322.76 million for the three months ended September 30, 2023, compared to $556.34 million in the same period in 2022[374] - Personnel-related expenses decreased by 41% to $241.00 million for the three months ended September 30, 2023, compared to $406.40 million in the same period in 2022[374] - Website hosting and infrastructure expenses decreased by 58% to $40.60 million for the three months ended September 30, 2023, compared to $96.30 million in the same period in 2022[374] - Sales and marketing expenses decreased by $190.9 million (46%) for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to reduced media and brand spend[393][395] - General and administrative expenses decreased by $462.5 million (38%) for the nine months ended September 30, 2023, driven by a 20% reduction in average headcount and $229.8 million in reduced customer support costs[396] - Restructuring expense was $142.6 million for the nine months ended September 30, 2023, driven by separation pay and stock-based compensation related to workforce reductions[397] - Crypto asset impairment, net decreased by $637.9 million for the nine months ended September 30, 2023, compared to the same period in 2022, due to lower crypto asset balances and higher recoveries[400] - Other operating expense (income), net decreased by $112.0 million (111%) for the nine months ended September 30, 2023, primarily due to lower platform-related incidents and gains on crypto asset derivatives[401] - Interest expense decreased by $686 thousand (3%) for the three months ended September 30, 2023, compared to the same period in 2022, and decreased by $3.272 million (5%) for the nine months ended September 30, 2023[402] - Provision for income taxes increased by $135.981 million (137%) for the three months ended September 30, 2023, compared to the same period in 2022, and increased by $394.624 million (93%) for the nine months ended September 30, 2023[405] - Losses on foreign exchange decreased by $64.127 million (99%) for the three months ended September 30, 2023, compared to the same period in 2022, and decreased by $187.975 million (95%) for the nine months ended September 30, 2023[416] - Gains on strategic investments increased by $45.080 million (1323%) for the three months ended September 30, 2023, compared to the same period in 2022, and increased by $108.483 million (155%) for the nine months ended September 30, 2023[416] - Gain on extinguishment of long-term debt was $81.591 million for the three months ended September 30, 2023, and $99.446 million for the nine months ended September 30, 2023[416] - Total other (income) expense, net decreased by $201.006 million (306%) for the three months ended September 30, 2023, compared to the same period in 2022, and decreased by $402.673 million (149%) for the nine months ended September 30, 2023[416] - The company incurred a gain of $49.9 million from an equity investment transaction with Circle US Holdings, Inc. during the third quarter of 2023[416] - The company recorded a net gain of $17.8 million on the repurchase of certain 2026 Convertible Notes and $81.6 million on the repurchase of certain Senior Notes during the second and third quarters of 2023, respectively[416] - The benefit from income taxes decreased due to lower tax benefits from a reduction of pretax loss, partially offset by certain stock-based compensation and a lower valuation allowance recorded on impairment charges[417] Stock-Based Compensation - As of September 30, 2023, there was total unrecognized compensation cost of $87.3 million related to unvested stock options, expected to be recognized over a weighted-average period of approximately 2.3 years[249] - As of September 30, 2023, there was total unrecognized compensation cost of $429.1 million related to unvested RSUs, expected to be recognized over a weighted-average period of approximately 1.3 years[253] - The Company granted the President & Chief Operating Officer an award of PRSUs covering a target of 401,983 shares and up to a maximum of 803,966 shares of Class A common stock, with a total grant date fair value of $25.1 million[256][258] - As of September 30, 2023, there was total unrecognized compensation cost of $18.8 million related to unvested PRSUs, expected to be recognized over a weighted-average period of approximately 2.0 years[262] - As of September 30, 2023, there was total unrecognized compensation cost of $40.4 million related to unvested restricted Class A common stock, expected to be recognized over a weighted-average period of approximately 1.6 years[264] - Stock-based compensation expense for the three and nine months ended September 30, 2023 was $218.2 million and $700.8 million, respectively, compared to $391.4 million and $1.1 billion for the same periods in 2022[267] - During the three and nine months ended September 30, 2023, $15.7 million and $44.7 million of stock-based compensation expense was included in capitalized software, respectively[269] Tax and Valuation Allowance - The company's effective tax rate (ETR) for the three months ended September 30, 2023 was 106.5%, significantly higher than the U.S. statutory rate of 21.0%, mainly due to a lower estimated annual effective tax rate applied to year-to-date losses and an increase in valuation allowance[272] - As of September 30, 2023, the company released a net partial valuation allowance of $40.0 million on deferred tax assets due to crypto asset appreciation providing more gains to offset losses[273] - The company had a valuation allowance of $177.2 million recorded against its deferred capital loss tax asset balance of $225.2 million as of December 31, 2022[273] - The company's ETR for the nine months ended September 30, 2023 was 14.9%, lower than the U.S. statutory rate of 21.0%, primarily due to non-deductible stock compensation expense and tax on non-U.S. earnings[272] Legal and Regulatory Risks - The company is subject to various litigation, regulatory investigations, and other legal proceedings, including securities class actions and shareholder derivative suits[287][288][289][290] - The company has indemnity agreements with certain officers and directors, and provides indemnities or similar commitments on standard commercial terms in the ordinary course of business[284][285] - The company faces significant regulatory risks, including potential fines, license revocations, and operational restrictions due to evolving laws and regulations in the cryptoeconomy[352][353] - The company faces significant regulatory uncertainty, particularly regarding staking, lending, and rewards products, which could implicate U.S. federal and state securities laws[360] - The European Union's Markets in Crypto-Assets Regulation (MiCA) is expected to introduce new compliance and authorization requirements for crypto asset service providers, impacting the company's operations in the EU[358] - The company competes with unregulated or less regulated companies that can offer products and services without complying with stringent licensing requirements, potentially impacting its market position[366] - The company is subject to ongoing regulatory scrutiny, including a June 2023 SEC complaint alleging violations related to its staking program and unregistered securities activities[362] - The company settled a NYDFS compliance investigation in January 2023 for a $50.0 million penalty and committed to $50.0 million in compliance program investments by the end of 2024[392] - The company is subject to ongoing SEC litigation, with potential material impacts on business, operating results, and financial condition if resolved adversely[392] - State securities regulators in multiple U.S. states have initiated legal actions against the company regarding staking services, leading to agreements restricting new staking in certain states[392] - The company faces heightened regulatory risks globally, with potential for overlapping investigations and enforcement actions across jurisdictions[390] - The company is subject to material litigation, including class action lawsuits and regulatory investigations, which could result in substantial payments and harm to business operations[391] - The company faces potential regulatory scrutiny and legal challenges due to the uncertain classification of crypto assets as securities, which could impact its business, operating results, and financial condition[413][414][422][424] - Coinbase only permits trading of crypto assets that are determined not to be securities, based on a comprehensive legal analysis[427] - The SEC filed a complaint against Coinbase in June 2023, and the company responded with a motion for judgment on the pleadings in August 2023[427] - If a supported crypto asset is deemed a security, Coinbase may remove it from the platform, potentially impacting business operations and financial condition[429] - Bitcoin, Ethereum, or stablecoins being classified as securities could severely limit their liquidity, usability, and transactability[430] Crypto Asset Trading and Market Trends - Monthly Transacting Users (MTUs) decreased by 21% to 6.7 million for the three months ended September 30, 2023, and by 16% to 7.5 million for the nine months ended September 30, 2023[309] - Trading volume for the three and nine months ended September 30, 2023 was $76 billion and $313 billion, respectively, a decrease of 52% and 54% compared to the same periods in 2022[309] - Bitcoin trading volume accounted for 38% and 36% of total trading volume for the three and nine months ended September 30, 2023, respectively, an increase from 31% and 28% in the same periods in 2022[315] - Ethereum trading volume accounted for 19% and 22% of total trading volume for the three and nine months ended September 30, 2023, respectively, a decrease from 33% and 24% in the same periods in 2022[315] - USDT trading volume increased significantly, accounting for 15% and 10% of total trading volume for the three and nine months ended September 30, 2023, respectively, compared to 2% in both periods in 2022[315] - Crypto market capitalization declined by 64% or approximately $1.5 trillion in 2022, impacting Coinbase trading volume and transaction revenues[317] - During the three and nine months ended September 30, 2023, no asset other than Bitcoin, Ethereum, and USDT individually represented more than 10% of Coinbase's trading volume[318] - Crypto asset borrowings with embedded derivatives decreased from $80,999 thousand in December 2022 to $51,149 thousand in September 2023[323] - The total fair value of derivative assets and liabilities increased from $3,838 thousand in December 2022 to $19,997 thousand in September 2023[325] - Borrowing fees on crypto asset borrowings ranged from 1.5% to 9.3% during the nine months ended September 30, 2023[325] - The company incurred $3.4 million in borrowing fees in crypto assets during the nine months ended September 30, 2023[325] - Crypto asset futures designated as hedging instruments decreased from $136,230 thousand in December 2022 to $7,889 thousand in September 2023[323] - Accounts and loans receivable denominated in crypto assets decreased from $101,598 thousand in December 2022 to $59,714 thousand in September 2023[323] - Other payables denominated in crypto assets increased from $4,267 thousand in December 2022 to $13,111 thousand in September 2023[323] - The total derivative liabilities increased from $19,583 thousand in December 2022 to $6,025 thousand in September 2023[325] - Total assets as of September 30, 2023, amounted to $120.64 billion, including $114.29 billion in safeguarding customer crypto assets[330] - Cash and cash equivalents stood at $3.68 billion, excluding $1.3 billion of corporate cash held in deposit at banks and $163.5 million held at venues[331] - Customer custodial funds totaled $2.54 billion, excluding $0.9 billion held in deposit at financial institutions[331] - Crypto assets held by the company were valued at $56.56 million, excluding $399.4 million held at cost[331] - Derivative assets were recorded at $10.46 million, with embedded derivative assets of $9.5 million related to crypto asset loans receivable[331] - Transaction revenue is primarily driven by consumer and institutional trading volume, with consumer trading volume having a more pronounced impact on revenue[335] - Subscription and services revenue includes stablecoin revenue, blockchain rewards, and interest income, with staking revenue dependent on customer balances staked and reward rates[336][338][339] - Custodial fee revenue is derived from a percentage of the daily value of customer crypto assets held in cold storage, influenced by the quantity, price, and type of crypto asset[341] - Stablecoin revenue increased by $95.5 million (124%) to $172.4 million for the three months ended September 30, 2023, driven by higher average interest rates on USDC reserves[367] - Blockchain rewards revenue grew by $11.7 million (19%) to $74.5 million for the three months ended September 30, 2023, due to increased user participation in reward-generating activities[367] - Interest income rose by $14.5 million (58%) to $39.5 million for the three months ended September 30, 2023, reflecting higher average interest rates on customer custodial cash[367] - Total subscription and services revenue increased by $123.9 million (59%) to $334.4 million for the three months ended September 30, 2023[367] - Corporate interest and other income surged by $37.2 million (266%) to $51.1 million for the three months ended September 30, 2023, driven by higher average interest rates on corporate balances[368] - Custodial fee revenue decreased by $18.6 million (27%) to $49.8 million for the nine months ended September 30, 2023, due to a $16.9 billion decline in average assets under custody[367] Cybersecurity and Operational Risks - Cybersecurity threats and potential breaches could harm the company's reputation, business operations, and financial condition, despite existing security measures and insurance coverage[349][350] - Coinbase relies on third-party service providers for critical operations, and disruptions in their services could harm the business[433] - Loss of critical banking relationships could disrupt Coinbase's platform and custodial services, especially due to regulatory scrutiny and instability in the global banking system[435] - The closure of Silvergate Capital Corp. and Signature Bank in March 2023 temporarily impacted fiat currency transfers for Coinbase and its institutional customers[436] - Coinbase depends on insurance carriers for customer loss coverage, and inability to maintain appropriate insurance could lead to business disruptions[437] - A temporary disruption to USDC services occurred in March 2023 following the closure of Silicon Valley Bank, affecting Coinbase's platform operations[440] - System disruptions or cyberattacks could result in customer losses, reputational damage, and regulatory scrutiny for Coinbase[443] Other Expenses and Income - Total other (income) expense, net for the three months ended September 30, 2023 was $(135.3 million), compared to $65.7 million in the same period in 2022, primarily due to gains on strategic investments and extinguishment of long-term debt[270] - Blockchain rewards fees increased by 21% to $51.66 million for the three months ended September 30, 2023, compared to $42.79 million in the same period in 2022[371] - Payment processing and account verification expenses decreased by 52% to $16.80 million for the three months ended September 30, 2023, compared to $35.20 million in the same period in 2022[371] - Transaction reversal losses decreased by 31% to $10.86 million for the three months ended September 30, 2023, compared to $15.73 million in the same period in 2022[371] - Miner fees decreased by 10