Coinbase (COIN) Q4 2024 earnings call transcript

Coinbase Global, Inc. Fourth Quarter and Full Year 2024 Analyst Q&A Call February 13, 2025 Anil Gupta, Vice President, Investor Relations: Good afternoon, and welcome to Coinbase’s Fourth Quarter and Full Year 2024 Analyst Q&A Call. Joining me on today's call is Alesia Haas, CFO. Before we get started, I’d 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 is 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 measures are provided in the Shareholder Letter on our Investor Relations website.

Non-GAAP financial measures should be considered in addition to, not as a substitute for, GAAP measures. With that, Sarah, let’s open it up.

Alesia Haas, CFO: Thanks Mike. So this quarter we saw growth in both Institutional and Retail. What we tend to see is that institutions will trade in all market environments. They tend to not be as volatile and tied to overall price and volatility as Retail. Retail tends to have the most elevated trading when we see heightened volatility and big price movements, which is what really drove a lot of that Retail growth that you saw in the fourth quarter. But it's hard to say how those will evolve over time. We are now in a new regulatory clarity era where we're going to see more and more trends hopefully be driven by utility. And we think that will drive differentiated trading behaviors potentially, but it's too early to call it.

We will share any new trends that we see with customer behavior as we go through the year. But right now the fourth quarter was really driven by a combination of the market conditions that we talked about benefiting both Retail & Institutional as well as the product enhancements that we made. Adding more assets, improving the trading experience, and improving platform stability.

Alesia Haas, CFO: Great. So yes, SAB 121. So we were really supportive of seeing SAB 121 repealed by SAB 122. It will enable more and more banks and others to be able to add crypto to their balance sheet as one of the negative consequences of SAB 121 is it really kept banks out of crypto because the capital requirements of putting crypto on their balance sheet were really really prohibitive. So this will drive more engagement in crypto. We think that is great for the overall ecosystem. We think that will just continue to accelerate crypto's adoption by large financial institutions and we're really supportive. With regard to providing more competition, you're right that having more people enable custody could provide more competition, but this is one of these areas where we have safely secured client assets for over 12-13 years now, and I think it's important to share that each protocol, meaning Ethereum is different than Bitcoin than Solana is different than XRP, and needs to be custodied in a slightly different way, we have to protect it in a slightly different way.

So there are unique specialties to be able to provide custody, and what you've seen is many custodians have come into this space is they started with Bitcoin only. What we see is that institutional customers tend to hold more than one asset, and they like to have their custody be able to support them in all of the assets that they hold. Both the large, concentrated assets, and also the long-tail. And we think especially as we see the proliferation of coins that we talked about earlier, we're going to need to be able to custody more and more different types of assets. And that is something that we think we have a unique specialty in, and that is how we will compete.

That said, we also expect, and I would see this with the ETFs first, that it will be really important for large ETF issuers to have business continuity plans, which enable them to have multiple custodians to meet their business requirements. And in doing that we will probably see the growth of other custodians. So this will not be a winner take all, but this will be a winner take a big opportunity and we think that we can play and have a big opportunity with many other players in this space. Sarah, if you could pause, I need to go back and answer the second part of his question, which was regarding CAMT. So, for those who don't know, corporate alternative minimum tax is a 15% minimum tax on adjusted financial statement income, aka book income.

And what this in effect does is it would cause us to have to pay taxes on the unrealized gains on our crypto asset investments. We think this is bad policy. This is akin to a wealth tax. So, corporations are subject to this tax when the average annual adjusted financial statement income for a three-year period exceeds $1 billion. We are not going to be subject to this in 2024. And we at this point in time may not be subject to this in 2025 because when you look in a three-year period, we may not tip that unless we have a really phenomenal year in 2025. But our key focus this time is working on policy efforts because we want to make sure that crypto is treated on par with other similar investment holdings that people have, and there are exemptions for a number of other investment assets.

So this is a policy focus for us as again we think this is bad policy, and that we will work to try to reverse this. All right, Sarah, ready for the next question?

Alesia Haas, CFO: Thanks. Great questions. We are really excited to see the USDC growth that we've seen post year- end. So, you're absolutely right. USDC is the largest only MiCA compliant stablecoin, and that is positioning us very well in Europe and that is driving some adoption as other stablecoins are no longer to compete in the European market. But I think the real story here and what we would like to focus on is the growth of ecosystem participants. We think it is so important, and we and Circle are both incentivized to grow ecosystem participants so that more and more people are using USDC, embedding it in their products providing unique opportunities for their users to engage in this stablecoin.

We think this will drive liquidity. We think this will drive use cases, and the more use cases, the more liquidity, the bigger the market cap. It creates a network effect, and we will see overall growth. And so it was the addition of new ecosystem participants in Q4 that we think is accelerating some of the growth that we've seen in Q1. And then beyond rewards, beyond ecosystem participants, we do think embedding USDC in more transaction types, really making payments work, making people understand the benefits of fast, cheap, global payments, and making that an easy to use experience in our product, more deeply embedding it in various products like we have with our international exchange where it is the trading pair for most of our international perps.

These are the things that we think will grow USDC total market cap, and then broaden adoption.

Alesia Haas, CFO: Absolutely. So we have a framework with Circle to add new ecosystem participants where we both approve any new participant that will be participating with the economics of USDC. So when, and we shared this framework in our 10-K, and also I would note to you that as an exhibit to our 10-K you can see the collaboration agreement where it goes into more details about how we add ecosystem participants, how the economic arrangements work. But when we believe so deeply I just shared that growth of USDC will really be accelerated by adding new ecosystem participants and growing new use cases and more folks around the world who are using USDC, it is really important to us to give them economic stakes to help encourage this behavior.

And so that is what we did in the fourth quarter. We added ecosystem participants, and that reduced some of the revenue that would have otherwise come to Coinbase. But this 12 billion market cap we've seen since year end really validates that decision. And so this is the benefit of adding these participants. We may have short-term economic hits, but we think this will lead to long-term economic growth.

Alesia Haas, CFO: Yeah, thanks for noticing that. I would say it had significant price appreciation in the fourth quarter. And so when you see assets with unique price appreciation, they tend to get more volume and that they pop on our platform. We see this from time to time various assets have elevated transaction volumes and then they create more revenue opportunities on our platform. So nothing unique about the way that we price that asset differently than anything else this quarter. It was just the overall dynamics of XRP.

However, how do you assess the smart contract risks associated with using lending onchain protocols, and then in the event of a hack or security breach who will be responsible for users potential losses? Alesia Haas, CFO: Great question, Bo. So first of all, Morpho is built on Base, and so we do understand the risk profile of Base very thoughtfully. But I think what's really important about this product design is that we are providing access to, and a gateway from, our platform to enable customers to access. We are disclosing to them the risks of interacting with DeFi protocols. We are sharing with them they are moving off of Coinbase and then taking a loan on a DeFi protocol.

So this is not a Coinbase product offering where we are custodying the assets, storing the assets, creating a specific loan on our platform and taking underwriting or protocol risk. So this is a very different product where we're really thinking about making DeFi more accessible to our users, giving them the opportunity to gain access to these loans, but it is not necessarily a Coinbase direct product, a first-party product.

Alesia Haas, CFO: We are really pleased to see the international growth. We made big investments in 2024 around localization, streamlined onboarding, and better platform reliability in international markets, and then with those investments, we were able to really unlock marketing spend. That marketing spend has really led to some nice growth in those markets. I'd commented in my opening comments, in Brazil we were the number one crypto app, where it hit that in the fourth quarter, and the number three financial app in the App Store. More MTUs, more volume growth coming from these markets. It's been a recent trend that we've seen, that you saw then in the fourth quarter results. We really think that we have now found the playbook for international expansion.

We now have more confidence to go into new high growth regions, continue this playbook to expand our products and services around the world. As Brian has shared, we're really pleased to see this financial performance because in each of these countries, revenue is now covering the direct cost to operate in this market. We're getting the registrations we need. For example, we shared that we have new VASP registrations in the UK, in Argentina, and we will continue this playbook of growing international. So yes, we do hope that it will be a larger contribution to revenue growth over time.

Alesia Haas, CFO: We're really pleased with our efficient execution, but despite that efficient execution, you have seen us steadily grow headcount over the last two quarters. We grew about net 100 new heads in the fourth quarter. Our Q1 expectation is that we will slightly exceed that headcount growth, and continue to add new headcount to the platform. However, most of our expense growth will continue to come from variable expenses. We see opportunities to grow marketing, especially to support that core international growth I mentioned. We see opportunities to continue to strengthen our customer support and drive product excellence. We do have some variable costs that will go there, but we will be prudently continuing to lean into expense growth, and then dynamically readjust our business if market conditions change.

Is that just seasonality or what's the read from that number? Alesia Haas, CFO: It's less about seasonality. We made a change in Q4 that we described in our Q3 2024 results to take away the seasonality in our SBC and to make our SBC expense much more linear throughout the year. What you're now seeing is sort of the new expense base that would be the linear amount, if headcount was the same in Q1 for all four quarters. Within the SBC we have largely stock-based compensation for employee compensation. There's also SBC associated with some M&A acquisitions that kind of tails off, but largely you can see this is the new base that will grow along with headcount for the year.

Alesia Haas, CFO: Thanks, Owen. We're not prepared to announce the new markets that we're going into today, but we will be increasing investment, specifically marketing dollars, into the markets that we are already in. As I mentioned to you, we've made these great investments to localization, improve the product experience. Bring those products as close to parity that we have with the US as we can. And we really think that we can now drive growth in a number of markets. When we go into new markets, the very first cost that we have is to get a legal entity, build on-ramps, get banking partnerships. And so it's really the foundation. But when we go deep in those markets, we look to bring the full suite of Coinbase products.

And so we will look to bring trading, staking, Coinbase One – all of the retail products to the market that we can. We will lead with retail and then depending on the opportunities we make different decisions whether to go in with institutional products at a later time. But we will share more news throughout the year as we announce any updates on new legal entities or new flags that we plant in new countries. But these will be unlikely to monetize deeply in this year. These will just be the initial expenses to kind of put our feet on the ground much like we did in 2023 with the Brazil, Australia, Singapore cohort. With regards to crypto investments, thanks for remembering that.

So absolutely, we are still committed to growing crypto on our balance sheet. We have about $1.6 billion of crypto asset investments as of year end. And don't be surprised if that grows.

Anil Gupta, Vice President, Investor Relations: Sarah, we'll take one more question from the queue.

Alesia Haas, CFO: Thanks, Ben. The only thing I would share is that we have yet to see a material change from year end or from the fourth quarter.

Anil Gupta, Vice President, Investor Relations: Okay, thanks for joining us and we look forward to talking to you again next quarter.