Coinbase Global, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results; comparisons are with Q1 2022 unless otherwise stated. Coinbase provides crypto trading, custody, staking and related financial infrastructure services.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $772.5 million | $1,166.4 million | Down 34% |
| Net revenue | $736.4 million | $1,164.9 million | Down 37% |
| Transaction revenue | $374.7 million | $1,013.0 million | Down 63% |
| Subscription and services revenue | $361.7 million | $151.9 million | Up 138% |
| Operating loss | $123.9 million | $554.5 million | Improved |
| Net loss | $78.9 million | $429.7 million | Improved |
| Adjusted EBITDA (non-GAAP) | $283.7 million | $19.7 million | Higher |
Operating loss was 16% of total revenue and net loss was 10%, compared with 48% and 37%, respectively, in Q1 2022. Adjusted EBITDA excludes items including stock-based compensation and restructuring; it is not a GAAP profit measure. Diluted loss per share was $0.34, versus $1.98.
Transaction revenue fell with lower trading activity and volatility: trading volume declined 53% to $145 billion, and management reported crypto-asset volatility down 32%. Consumer volume fell 72%; institutional volume fell 47%. Monthly transacting users averaged 8.4 million, down 9%.
Subscription and services growth was led by interest income, up $230.4 million year over year, principally from higher interest rates and USDC-related revenue sharing. This was partly offset by lower custody fees and blockchain rewards. Interest income and transaction activity therefore remain significant revenue drivers.
Operating expenses declined 48% to $896.4 million, reflecting lower technology and development, sales and marketing, and general and administrative costs. Q1 included $144.5 million of restructuring expense, including $84.0 million of accelerated stock compensation. The January restructuring affected approximately 950 employees, about 21% of year-end 2022 headcount.
Net cash provided by operating activities was $463.1 million, versus cash used of $91.4 million a year earlier. The filing attributes cash movements in part to changes in USDC and other working-capital items; operating cash flow should not be read as equivalent to recurring earnings. Investing activities used $26.1 million, while financing activities provided $460.1 million, including a $529.0 million increase in customer custodial cash liabilities. Cash, cash equivalents and restricted cash increased by $897.1 million during the quarter.
At March 31, 2023, corporate cash and cash equivalents were $5.02 billion, restricted cash was $26.7 million, and USDC holdings were $302.9 million. Customer custodial funds are held for customers and should be distinguished from corporate liquidity. Long-term debt had $3.44 billion principal outstanding and a $3.40 billion carrying value; no short-term borrowings remained at quarter-end. Credit ratings had been downgraded in January by S&P and Moody’s. Management said existing cash and cash equivalents should be sufficient for short- and long-term requirements, while noting financing may be needed if sources prove inadequate.
Material changes and unusual items
- Net revenue mix shifted: transaction revenue contracted sharply while subscription and services revenue increased, especially interest income.
- Lower costs and a smaller workforce helped reduce operating losses, but the quarter included material restructuring charges.
- Other operating results improved substantially year over year, including lower crypto-asset impairment charges and lower platform-related incident losses; derivative and crypto-asset gains also affected the period.
- A $59.2 million partial release of the valuation allowance on deferred tax assets contributed to the income tax benefit. The company still reported a net loss.
- Coinbase completed its acquisition of One River Digital Asset Management on March 3 for $96.8 million of total consideration, including cash, stock and a previously held interest. The preliminary allocation included $65.8 million of goodwill.
Outlook, risks and contingencies
No specific revenue, earnings or cash-flow guidance is provided in the filing. Management described Q1 as progress toward greater efficiency and financial discipline and said it would continue cost-reduction efforts amid crypto-market volatility and regulatory uncertainty.
- Regulatory exposure: Coinbase received a March 2023 SEC Wells Notice stating that staff had made a preliminary determination to recommend an enforcement action concerning aspects of its spot market, Coinbase Earn staking, Coinbase Prime and Coinbase Wallet. A Wells Notice is not a formal charge or final determination. The company disputes that an action is warranted; potential effects cannot be estimated, and an unfavorable outcome could materially affect the business and financial statements.
- NYDFS consent order: Coinbase paid a $50 million penalty in January and agreed to invest an additional $50 million in compliance by the end of 2024.
- Market and revenue sensitivity: Results depend on crypto prices, trading volume and volatility, as well as interest rates, USDC balances and the USDC issuer relationship. Bitcoin and Ethereum activity and USDC-related interest income are identified as meaningful revenue concentrations.
- Banking and operational risk: The filing describes instability in the banking sector and temporary disruption to USDC services following Silicon Valley Bank’s closure. Coinbase reported no material business impact from bank closures, but noted that access to banking and payment services remains a risk.
- Custody, security and counterparties: Cyberattacks, loss of private keys, service outages, third-party failures and crypto-market disruptions could lead to customer losses, litigation or regulatory action. Coinbase stated that it holds customer crypto assets on a 1:1 basis and does not reuse or rehypothecate them without consent or legal requirement; no customer-asset losses were reported for the quarter.
- Other legal matters: Securities class actions, derivative litigation and regulatory investigations remain ongoing. The company cannot estimate potential impacts for several matters and cautions that adverse outcomes could be material.
- Debt and liquidity: Debt ratings were downgraded, and additional financing, if required, could be more costly or unavailable on acceptable terms. The company reported compliance with collateral and regulatory liquidity requirements at quarter-end.
Investor verification points
- Track transaction volume, crypto volatility, MTUs and the resulting transaction-revenue trend.
- Assess whether higher interest income can persist, including sensitivity to interest rates, USDC balances and the issuer relationship.
- Separate corporate cash and liquidity from customer custodial balances when assessing the cash-flow statement and balance sheet.
- Monitor recurring operating costs and cash severance payments after the workforce reduction, and distinguish restructuring and stock-based compensation from ongoing expenses.
- Follow developments in the SEC Wells Notice and NYDFS compliance commitments, including any effects on products, costs or operations.
- Review debt service needs, credit ratings and the company’s ability to sustain liquidity through adverse crypto or banking-market conditions.