Coinbase Global, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Coinbase operates a global crypto financial platform, serving retail users, institutions, and ecosystem partners. Amounts below are in U.S. dollars; financial-statement amounts are unaudited.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Total revenue | $590.3 million | $1,311.9 million | -55% |
| Net revenue | $576.4 million | $1,234.7 million | -53% |
| Transaction revenue | $365.9 million | $1,089.7 million | -66% |
| Subscription and services revenue | $210.5 million | $145.1 million | +45% |
| Operating expenses | $1,146.8 million | $1,020.1 million | +12% |
| Operating loss | $556.5 million | Operating income of $291.8 million | — |
| Net loss | $544.6 million | Net income of $406.1 million | — |
| Adjusted EBITDA loss | $115.9 million | Adjusted EBITDA income of $618.2 million | — |
| Basic and diluted loss per share | $2.43 | Basic income per share $1.92; diluted $1.62 | — |
Operating and net margins were approximately -94% and -92%, respectively, based on total revenue. The filing does not present a conventional gross margin measure.
Balance sheet, liquidity, debt, and cash flow
- At September 30, 2022, cash and cash equivalents were $5.0 billion, down from $7.1 billion at December 31, 2021. The company also reported $23.1 million restricted cash and $368.1 million of USDC, which it treats as a liquidity resource but not cash or cash equivalents. It had posted $145.0 million cash collateral against foreign-exchange forwards.
- Customer custodial cash was $6.6 billion, with corresponding custodial cash liabilities of $6.4 billion. Under SAB 121, customer crypto assets and matching liabilities were each recorded at $95.1 billion. These safeguarded customer balances should not be viewed as corporate liquidity.
- Long-term debt had $3.44 billion principal outstanding, with a $3.39 billion net carrying value: $1.44 billion of 2026 convertible notes and $2.0 billion of senior notes due in 2028 and 2031. No covenant non-compliance was reported. S&P downgraded the issuer and senior unsecured debt to BB; Moody’s affirmed its ratings but maintained a negative outlook.
- Stockholders’ equity was $5.63 billion. Total assets and liabilities include the large, offsetting customer crypto safeguarding balances.
- For the first nine months, operating cash flow was negative $4.82 billion, investing cash flow negative $637.7 million, and financing cash flow negative $228.6 million. The operating outflow included a $4.0 billion reduction in customer custodial cash liabilities; management cautions that such movements can materially distort period-to-period operating cash flow.
- Management stated that existing cash and cash equivalents should be sufficient for short- and long-term requirements, while noting future liquidity depends on business and market conditions and additional financing might be needed.
Changes versus the prior comparable period
- Trading volume fell 51% to $159 billion in Q3: retail volume declined 72% and institutional volume 43%. Management attributed the decline to macroeconomic and crypto-market headwinds, lower crypto prices and volatility, and trading volume moving offshore.
- Subscription and services revenue increased, led by interest income, which rose to $101.8 million from $8.4 million, primarily due to higher interest rates and the USDC revenue-sharing arrangement. Staking and other subscription offerings also contributed; lower custody fees partly offset growth.
- Key operating metrics were mixed: monthly transacting users rose 16% to 8.5 million and verified users rose 48% to 108 million, while assets on platform fell 60% to $101 billion.
- Nine-month total revenue declined 52% to $2.57 billion, and net results moved from $2.78 billion income to a $2.07 billion loss. Nine-month Adjusted EBITDA moved from $2.89 billion income to a $247.3 million loss.
- Technology and development expense rose 56% in Q3; general and administrative expense rose 40%. The company said higher personnel, stock-based compensation, software, customer support, and professional services contributed. It reduced its workforce by approximately 18% (about 1,100 employees) in June.
Outlook, commentary, risks, and unusual items
- Management described the quarter as mixed. Its stated priorities were to narrow product focus, improve customer experience, and reduce operating expenses. The filing gives no specific numerical revenue, earnings, or cash-flow guidance.
- Crypto-asset impairments were $689.1 million for the first nine months, including $25.9 million in Q3; the nine-month total included $441.2 million on the investment portfolio. Strategic investment impairments were $70.9 million for the nine months. Foreign-exchange losses also weighed on results: net realized and unrealized losses were $87.4 million in Q3 and $221.8 million for the nine months.
- Stock-based compensation was $391.4 million in Q3 and $1.14 billion for the first nine months. Q3 restructuring expense was a $1.2 million benefit from released accruals; nine-month restructuring expense was $41.2 million. Management said it expected no additional charges for the June restructuring.
- Regulatory uncertainty is material. Coinbase reported an NYDFS investigation concerning compliance, cybersecurity, and customer support, and SEC subpoenas and information requests concerning customer programs, asset listings, staking, stablecoin, and yield products. The outcomes and potential financial effects were not estimable in the filing.
- The company also disclosed securities class actions, derivative litigation, and other proceedings. It disputes the claims and said it could not estimate potential impacts for several matters; adverse resolutions or additional accruals could affect results.
- Principal business risks include dependence on crypto prices and trading volume, revenue concentration in Bitcoin and Ethereum transactions and USDC-related interest, competition (including offshore and decentralized platforms), evolving regulation, cybersecurity and custody risks, third-party and banking dependencies, and the possibility of continued losses or negative operating cash flow.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether trading volume, transaction revenue, crypto prices, and customer activity stabilize, and whether subscription revenue can offset transaction-market weakness.
- How much of reported cash-flow movement reflects customer custodial balances versus underlying corporate operating performance.
- The sustainability of expense reductions and the trajectory of stock-based compensation and other operating costs.
- Developments in SEC and NYDFS matters, asset-classification questions, staking and stablecoin oversight, and disclosed litigation.
- Corporate liquidity and access to financing after credit-rating downgrades, alongside debt service, purchase commitments, and customer-asset safeguarding requirements.
- The effect of crypto impairments, foreign-exchange movements, strategic investment valuations, and other market-sensitive items on future results.
- The revised MTU methodology: Coinbase disclosed that previously reported September 2021 MTUs were overstated and revised the figure from 7.4 million to 7.3 million.