Coinbase Global : Analyst Q&A Transcript

Coinbase Global, Inc.

Third Quarter 2023 Analyst Q&A Call

November 2, 2023

Anil Gupta, Vice President, Investor Relations: Thank you and good afternoon. Welcome to the Coinbase third quarter 2023 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 our shareholder letter on our IR website.

Non-GAAP financial measures should be considered in addition to, not as a substitute for, GAAP measures. And with that, Sarah, let's open it up and take our first question.

Operator: Your first question comes from the line of Pete Christiansen with Citi. Your line is open.

Pete Christiansen, Citi: Thank you. Good evening. Thanks for doing this call. Alesia I was just curious, congrats on getting the derivatives license here and launching Coinbase Financial Markets now. Just curious, how should we think about how that business scales from here? How do you now attract institutions that had been previously on unregulated exchanges or other participants there to come on board? What is the value proposition that you're pitching? Thank you.

Alesia Haas, CFO: Thanks for the question. So we had multiple announcements this quarter with regards to expanding derivatives to our customers. The first, as you noted, Coinbase Financial Markets, did receive a license in Q3 and then just yesterday, launched derivatives to our investors in the US. Internationally, though, is where we'll be competing for the global base and against the perpetual futures product out of our INTX exchange - so this is the International exchange that received a license in Bermuda. And this is offering non-retail opportunities for those market makers, hedge funds, institutions who trade and make up the majority of the crypto trading market today.

There, and Brian talked a little about this on our previous call, our goal is to bring our trusted brand to this market. I do believe that counterparties are critically important to many of these market participants in light of events of the last year. And we believe that we have a differentiated brand.

We have doubled the number of institutions that we've onboard, now over 100. We've done $10 billion of notional trading in the third quarter. And our goal here is to continue to expand the number of markets - meaning the order books and contracts that we offer - to enable better capital efficiency, i.e. different amounts of leverage and financing, and to scale this business over time.

Right now on our pricing strategy, it's very competitive pricing in order to build liquidity and to attract users. And we'll continue to experiment with that as we scale. And so our goal, Pete, is to expand market share right now. We're really working on building that platform.

I wanted to switch back to the US for a second - this is now one day old, and so it's really early. And so we'll provide feedback on that next quarter.

Pete Christiansen, Citi: That's great, thank you, that's helpful. I'm just curious - at least here in the US, I mean granted you are the first crypto native leader here. Are you limited in who you can deal with from a counterparty perspective, with other broker dealers that aren't regulated? Are there any limitations there, as we wait for this market to fully evolve?

Alesia Haas, CFO: So Coinbase Financial Markets received a license that enables it to offer derivatives - cash settled crypto futures - in the US to retail investors. And we're the first crypto native platform to receive this specific license. This does not have a limitation. You have to be an eligible customer. You've gotta go through our onboarding requirements to be compliant with Coinbase Financial Markets onboarding. But beyond that, there's not a specific customer that is prohibited from transacting in these products.

Operator: Your next question comes from the line of Kyle Voigt with KBW. Your line is open.

Kyle Voigt, KBW: Hi, good evening. Thanks for taking my questions. So when we think about potential ETF related

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custody fees, should we think about those fee rates as being materially different from your current institutional custody fee rates on a blended basis which is around 10 basis points?

Alesia Haas, CFO: We haven't disclosed fees for that product at this time.

Kyle Voigt, KBW. Okay. In terms of pricing on the consumer side, I think there were some fee increases that went into effect in 1Q of this year. It sounds like you're evaluating additional fee changes - whether it's by product or by a specific cryptocurrencies. From an implementation perspective, is that something that you typically try to make once per year?

Should we think about it as an annual ongoing thing as we look out into 1Q24?

Alesia Haas, CFO: The product team is constantly doing pricing experiments of different times and evaluating whether or not those experiments should be rolled out to a broader group of our products or a broader group of customers on that product platform. So it is not an annual event. There is constant experimentation and iteration to find the best pricing to drive revenue on our platform.

Operator: Your next question comes from the line of Steven Glagola with TD Cowen. Your line is open.

Steven Glagola, TD Cowen: Thank you. And thanks for all the color you guys are providing in the 10Q now around expenses. And just around that I was going to ask, how do you feel, going into next year on your headcount with around 3,400 people? Do you feel comfortable with that in light of what you're seeing with the fundamental business? And then I have one more follow up. Thanks.

Alesia Haas, CFO: As we shared going into Q4, we provided an outlook on our expenses for both Tech & Dev and G&A and then for sales & marketing. And you can see they're down slightly quarter over quarter largely driven by stock-based compensation and so underneath that we don't see any material change in headcount in Q4. We haven't provided a 2024 outlook at this time. But as I said in my earlier remarks, our focus is to drive positive Adjusted EBITDA in all market conditions and we're looking at 2024 in the early days around what could inform our revenue scenarios and seeing both positive catalysts and some risks that we want to factor in and we'll provide more information about expenses and outlook as we get to next quarter.

Steven Glagola, TD Cowen: That makes sense Alesia. And on MTUs being down 8% quarter over quarter, can you unpack that, too? What were the drivers there? And what signs are you looking for for the return of the retail consumer on a transaction basis? That is something that comes up all of a sudden in this industry? Out of the blue? Will it be an ETF? What would you be looking for for drivers there? Thank you.

Alesia Haas, CFO: Thanks for the question. So historically, trading MTUs specifically, which is what is driving the decline quarter over quarter. They have been influenced by overall crypto market cap, the overall volatility environment, episodic events in crypto, specific news around a certain token, a variety of catalysts we've seen heightened activity historically around the halvening around Bitcoin. And we've seen heightened volatility in just the last few weeks with rumors around an ETF. So there are many, many catalysts that could cause the change in retail behavior on our platform. We do believe that what's causing the decline right now is volatility and it's comparable to what we've seen in past crypto winters and past low volatility environments with behaviors on our platform. So we can't point to a certain thing that then drives back up volatility. I think that there's catalysts that could increase volatility. And we also believe that fundamentally what we're focused on is building crypto utility and different use cases for people to engage in crypto and that will drive more behaviors and adoption over time.

Operator: Your next question comes from the line of Ben Budish with Barclays. Your line is open.

Ben Budish, Barclays: Hi there, sorry about that. Thanks for taking me again. I wanted to ask - could you talk a little about Prime financing? I think you had done some lending business a few years ago and then stopped and it sounds like that is coming back a little bit. Can you talk about the size of that business? What you're focused on? Who the typical borrowers are? Any other color? I know it's probably quite early but just as that business perhaps gets bigger, just a sense of what your goals are there.

Alesia Haas, CFO: Great. Thanks for asking about Prime financing. So Prime financing is offered to Coinbase Prime customers. These are institutions that engage with that product. And these are typically, at this point in time, hedge funds or other types of customers that are looking for leverage or looking to be more capital efficient in their trading strategies. We believe that this is an important part of any institutional prime offering. And we will see broader adoption and growth in crypto.

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It's important to note these are fully underwritten customers. These are secured loans that we are putting out at this time. It is not material to our financials at this time. And so that is in our other subscription and services revenue. We did see growth quarter over quarter as we shared in the shareholder letter but we'll disclose more as it becomes material.

The last thing I'll just point out is that we have disclosures in our 10Q around the overall loan book. Around the collateral. And other features of the financing program.

Ben Budish, Barclays: Great, that's helpful. And then I was wondering if you could talk about - on the derivatives side - the usage of leverage around the world? There's anecdotal understanding that derivatives volume are multiples times larger than spot markets. But how do you think your leverage levels currently compare to what is - not too long ago on some of the international platforms you got extreme leverage levels, I think those have come back a bit. How do you think your leverage levels compare to what is the global average? And what are the considerations for raising that over time as you think out over the next few years?

Alesia Haas, CFO: Good question. I think that sometimes the headlined potential leverage than what customers are actually engaging with leverage on these platforms. And so we believe that we are building to the place that will meet the majority of customer needs in terms of leverage. We started off in the international exchange with more conservative levels as we wanted to get more experience and confidence in overall operations and risk models as we build into this market. But we believe we can offer more leverage over time as we expand the product and as we expand into more contracts and assets that we support for these products. I think that we'll be able to meet the customer needs in these markets - both in the US and globally.

Ben Budish, Barclays: Got it, thanks so much.

Operator: There are no further questions at this time. I will turn the call back to Anil for closing remarks.

Anil Gupta, Vice President, Investor Relations: Thank you all for joining us and we look forward to speaking to you again next quarter.

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