Coinbase Q4 Earnings: Another Mixed Bag

It’s once again earnings reporting season for Coinbase (COIN).

As we have been doing for years (see Q2 and Q3), let’s go over the good, the bad, and the hopeful for Coinbase’s fourth-quarter earnings report.

The Good

Despite the FTX nuclear disaster in Q4, Coinbase posted net revenue of $605 million, beating the analyst expectation of $588 million and up 5% from Q3’s $590 million.

This positive revenue gain was driven by a boom in subscription revenue from $210.5 million in Q3 to $282.8 million in Q4, a 34% increase. As it was in Q3, Coinbase can thank the Fed for this subscription revenue. That’s because the primary catalyst of Coinbase’s subscription revenue is interest payments on its stack of $2 billion USDC stablecoin. Because the Fed has raised interest rates so dramatically, these interest payments have become extremely lucrative.

Subscription and service revenue has become a key focus for Coinbase, especially as the bear market depresses transaction volume, so it is very encouraging to see a 34% Q/Q increase in revenue.

The Bad

Unfortunately, there was a whole lot of bad in Coinbase’s Q4 earnings.

• Consumer transaction revenue was $308.8 million, down 11% from Q3’s $346.1 million and a whopping 85% from Q421’s tally of $2.85 billion.

• Institutional transaction revenue came in at $13.4 million, down 32% from Q3’s $19.8 million and 85% from Q4’21’s count of $90.8 million.

• The total revenue of $322.1 million is down 12% from Q3’s $365.9 million and 85% from Q4’21’s $2.276 billion.

• Trading volume has dropped from $26 billion in Q3 to $20 billion in Q2, a 23% decrease.

• The net loss for Q4 was $557 million, and $2.6 billion for the full year.

The Embarrassing

Looking deeper into the financials, there are a few things that are just downright embarrassing at this point for a company that has been around as long as Coinbase.

• The company still can’t stabilize revenue. Transaction revenue, or the revenue that Coinbase makes on every trade on the platform, continues to whipsaw back and forth based on the whims of the crypto market. Although that is to be somewhat expected, it makes it very difficult to be an investor in the stock at this point. Coinbase investors are practically token investors nowadays, as the stock price pretty much just correlates with BTC and the rest of the cryptoasset market. The only bright side here is that they no longer have FTX as a competitor who was forcing fee compression.

• Stock based compensation is ridiculous. Although revenues in 2022 were down more than 50%, stock based compensation was up more than 50%. This is pure dilution to shareholders and now makes up nearly 70% of total revenue. The worst part is, it doesn’t look like the company has major plans to slow this down.

• Headcount remains high. Although Coinbase announced major layoffs over the past few months, their financial statement still shows a YoY increase from 3,730 to 4,510. Now, to be fair, the updated head count might not show up in the statements until Q1 2023.

The Hopeful

2022 was a bad year for Coinbase. But there are signs that better days are ahead.

• Its main US competitor, FTX, is in the grave.

• Regulation is on the way, and as the preeminent regulatory-compliant exchange, Coinbase is in a strong position to benefit from the increase in institutional trading that regulation would bring.

• The company is still flush with cash – $5.49 billion to be exact.

• The crypto markets are possibly turning a corner, and Coinbase has benefited, generating $120 million in transaction revenue in January 2023.

Considering the strong position that Coinbase is in regarding runway and regulation, if the markets do flip bullish, Coinbase can easily become profitable once again.

Some Predictions

Like most public companies struggling to keep their shareholders happy, Coinbase will likely look to pivot or double-down in certain areas of its business. Here are some possibilities:

• Will acquire a “Digital Identity” company. Brian Armstrong has been hot on this concept for a while, and he mentioned it once again on the earnings call. Digital Identity is the idea of using cryptographic technologies to create “passports” and have the ability to verify identity on the internet. Some potential acquisitions include Unstoppable Domains and Disco, which Coinbase both invested in.

• Continued focus on SaaS revenue. As we touched on in the ‘embarrassing’ section above, Coinbase can’t seem to get its arms around stabilized revenue. We would expect the company to continue to focus on recurring SaaS-type revenue through product offerings such as Coinbase One.

• Prime Brokerage business offering should increase. With the collapse of Genesis, we would expect Coinbase to pick up a good amount of customers in this business unit in 2023 and beyond.

• ETH staking revenue will increase. After the Ethereum merge in late 2022, ETH yield briefly jumped from ~4.5% to 5-7% or more. We would expect to see this added revenue show up in Q1 2023.

Putting it all together, Q4 wasn’t the best showing for the “premier” crypto exchange. The financials weren’t great, the earnings call was boring, and regulation continues to be a major factor.

With that being said, this is the Coinbase team’s 4th crypto cycle. With that experience and $5.5 billion in cash on the balance sheet, we wouldn’t count the company out just yet.