Coinbase's shareholders received an optimistic financial update during its earnings call, as the American crypto exchange managed to beat revenue estimates and reduce YoY net loss by 81%.
Coinbase filed an action in April seeking to force the Securities and Exchange Commission (SEC) to provide a clear response to its request for formal guidance in regard to cryptocurrency regulation.
CEO Brian Armstrong Discusses the Company’s Focus on the U.S. Market
As cryptocurrency markets have fluctuated over the past year, Coinbase has taken steps to diversify its revenue streams beyond trading fees through products such as staking and custodial services. On Thursday, they will report how these new lines of business have affected their bottom line. Investors should tune in!
On the earnings call, CEO Armstrong will likely be asked about their decision to continue targeting U.S. market despite increased competition from rivals such as Binance and FTX. Armstrong should discuss this decision within the context of SEC Wells Notice which informs companies they intend to recommend enforcement actions against.
Armstrong is known to be more reserved when it comes to media appearances than many of his peers; however, he has made efforts to change that by consulting leaders such as Facebook founder Mark Zuckerberg and Tobias Lutke, cofounder and CEO of Shopify on how to improve his public speaking abilities. Recently he made appearances on CNBC as well as podcasts.
Conversations with current and former employees reveal Armstrong is widely seen as "methodical." Yet some have raised issues with his approach - one former senior employee described him as being "stoic," while another claimed Armstrong couldn't empathize with people outside the c-suite.
While Coinbase has made strides toward diversifying its revenue sources, its growth remains dependent on crypto trading markets. If Coinbase fails to resolve its legal disputes with regulators by 2023, its stock price could take a hit.
Armstrong remains committed to the company he co-founded ten years ago, planning to sell approximately two percent of his shares each year to donate them for scientific research charities. Furthermore, as Armstrong holds majority voting power at Coinbase he can remain CEO in spite of any investors losing trust in him.
Subscription and Services Revenues Increased
Overall revenue increased 23% year-on-year, led by subscription and services revenues generated from Coinbase Earn, Custody, and Staking products which serve to diversify away from volatile trading fees while simultaneously creating additional transaction revenues anticipated at $120 Million this quarter.
Interest income also increased significantly year-over-year, with USDC deposits contributing the greatest portion. This boost could provide much-needed support to the firm as they work to lower operational expenses.
Crypto markets saw marked improvements over the first quarter, driving trading volume and transaction revenue higher. Yet these gains may have been offset by other exchanges experiencing an upswing in trading volumes as well.
As it pursues regulatory solutions for the cryptocurrency industry, this firm has taken measures to mitigate these risks while working toward a regulatory solution for it. They advocated for "crypto-specific rules" which would enable its full innovative potential; at present they are targeting international markets where crypto adoption may be higher such as Canada and Brazil where there may be greater demand.
Legally, the company has filed an action in federal court seeking to force the Securities and Exchange Commission (SEC) to provide an answer regarding their petition for formal rulemaking guidance for the cryptocurrency industry filed in July 2022. Rulemaking processes allow agencies like SEC to develop regulations with public input before subjecting them to judicial review.
Investors may have been encouraged by the strong start to 2023 for many industries, especially crypto. Coinbase may benefit from taking advantage of its legal issues with SEC until an agreement can be reached; consequently, its stock may seem attractively priced as an entry point into long-term investing for long-term gain in this space. Keep an eye out on Thursday's earnings report for further details; The Motley Fool owns shares of Apple and Netflix.
Total Revenue Increased 23 Percent Quarter-Over-Quarter
Coinbase (COIN) will release first-quarter earnings after market close on Thursday. Investors anticipate the San Francisco-based cryptocurrency exchange will announce narrowed losses as cost cuts offset revenue decline. Analysts forecast Coinbase to post a net loss per share equivalent to approximately one quarter of what it earned during last year's same period; revenue is anticipated to decline from roughly $1.1 billion to $651 million due mainly to lower transaction fees.
Subscription and services revenues increased 22% year-on-year to $362 million, driven by rising cryptocurrency prices that drove increased custodial service revenue as well as lower operating expenses. Coinbase also saw benefits associated with its growing trading volumes and account verification processes.
However, total transaction revenue dropped by around one-third to $103 million as the result of lower transaction fee rates and the impact of Bitcoin's lower prices which reduced transaction volumes. Meanwhile, total operating expenses decreased by roughly one fifth, falling to $284 million.
Coinbase CEO Brian Armstrong remains optimistic that 2023 will bring "greater clarity" regarding regulatory matters. He believes establishing crypto-specific rules will help the industry realize its full innovative potential and maintain America's leadership position in financial technology. In Congress there has been strong bipartisan support and Coinbase will remain committed to serving U.S. markets despite any unrest or uncertainty that arises from Brexit or US tariffs.
Investors will be looking for signs that the cryptocurrency exchange has turned a corner after several quarters of eye-popping losses and decreasing app downloads. Needham analyst John Todaro holds a Buy rating with an recently reduced price target to $73. Mike Colonnese at HC Wainwright has an Outperform rating with a $75 price target; both analysts believe current market conditions could further pressure interest income while contracting revenue this quarter; they do expect Coinbase to continue with its core mission of providing world's most trusted digital asset platform.
International Markets Continue to Grow
Coinbase has quickly expanded into numerous international markets since launching five years ago, modernising outdated financial systems to enable individuals to easily send money around the globe. While Coinbase experienced some rough patches over recent years, its subscription and services revenues experienced 28% year-on-year growth during Q1. This included staking income, custodial fees, and interest revenue.
This helped mitigate a decline in transaction revenue - its main source of income. Total revenue reached $793 million, surpassing analysts' predictions of $830 million.
However, investors will likely be keen to understand how Coinbase's decision to lay off 950 employees in January - estimated to cost them $155 million - has affected its operating costs in Q3. Analysts anticipate an expected 42% decrease this quarter.
Investors will also want to understand more of the company's international derivatives exchange strategy. With plans to launch regulated products in Europe and Japan later this year, the firm must work closely with regulators there in order to offer customers sufficient protections.
Coinbase will likely shed more light on the Securities and Exchange Commission (SEC)'s unpredictable enforcement actions, especially given their recent receipt of an "Wells Notice," an indicator of possible litigation from SEC officials. Armstrong stressed that they will continue advocating for clear regulatory frameworks in place for cryptocurrency industry operations in America.
Armstrong anticipates Coinbase's total revenue to surpass $2 billion during the second quarter. Subscription and service revenues should grow at least 28% year over year while crypto trading volume could improve as the market recovers from crypto winter; however, decreasing USDC deposits could diminish interest income earned.
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.