Coinbase Global, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results are compared with the corresponding 2020 periods. Coinbase operates a crypto-economy financial platform spanning retail, institutional trading and custody, and developer services. Its Class A shares began trading on Nasdaq in April 2021.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $2.228 billion | $186.4 million | $4.029 billion | $377.0 million |
| Net revenue | $2.033 billion | $178.3 million | $3.630 billion | $357.4 million |
| Operating income | $874.7 million | $42.1 million | $1.862 billion | $80.9 million |
| Net income | $1.606 billion | $32.3 million | $2.378 billion | $64.2 million |
| Adjusted EBITDA | $1.150 billion | $61.2 million | $2.267 billion | $116.4 million |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $7.395 billion | $637.6 million |
Q2 operating margin was approximately 39% of total revenue. Net income included a $737.5 million income-tax benefit; the company attributed the unusually low effective tax rate largely to tax effects of deductible stock-option exercises, partly offset by non-deductible compensation and other items. Q2 diluted earnings per share were $6.42; six-month diluted EPS was $9.60.
- Revenue mix: Q2 transaction revenue was $1.930 billion, including $1.828 billion retail and $102.4 million institutional. Subscription and services revenue was $102.6 million; other revenue was $195.0 million.
- Trading and users: Q2 trading volume was $462 billion, versus $28 billion a year earlier. Retail monthly transacting users (MTUs) were 8.8 million, up 44% from Q1 2021; verified users were 68 million and assets on platform were $180 billion.
- Expenses and unusual items: Q2 operating expenses totaled $1.353 billion. Other operating expense, net, was $282.4 million, including crypto-asset impairment and costs of using company crypto assets to accommodate customer transactions during exchange incidents. Q2 crypto-asset impairment charges were $174.8 million gross; $57.3 million of net impairment on assets still held was added back in the Adjusted EBITDA reconciliation. Direct-listing expenses were $39.2 million for the first half.
- Cash and liquidity: At June 30, cash and cash equivalents were $4.366 billion, restricted cash $30.8 million, and customer custodial funds $8.962 billion, with $8.969 billion of custodial funds due to customers. The company said eligible liquid assets exceeded the customer custodial obligation. Operating cash flow for the first half included $5.1 billion from the change in custodial funds due to customers, so reported cash generation is materially affected by customer balances.
- Debt and capital: Coinbase issued $1.44 billion of 0.50% senior unsecured convertible notes due 2026, with an approximately $370.45 initial conversion price. The balance-sheet carrying amount, net of discounts and costs, was $1.407 billion. It paid $90.1 million for capped calls intended to reduce potential dilution or conversion cash costs. Cash and cash equivalents rose from $1.062 billion at year-end 2020 to $4.366 billion; total stockholders’ equity was $4.623 billion.
Changes versus comparable periods
- Q2 total revenue rose about 1,095% year over year; net revenue increased about 1,040%. Transaction revenue grew about 1,023%, reflecting substantially higher trading volume, crypto prices, and volatility. For the first half, total revenue increased about 969% year over year.
- Growth came with sharply higher costs: Q2 total operating expenses increased to $1.353 billion from $144.3 million. Stock-based compensation was $189.3 million in Q2 and $294.0 million for the first half, versus $15.9 million and $25.1 million, respectively, a year earlier.
- Trading mix broadened: Bitcoin represented 24% of Q2 trading volume, Ethereum 26%, and other assets 50%. The filing notes transaction revenue remains exposed to crypto activity and asset prices.
- Balance-sheet growth includes acquisitions: goodwill rose to $501.3 million from $77.2 million at year-end 2020, primarily reflecting 2021 acquisitions, including Bison Trails.
Outlook, management commentary and risks
Management provided no numerical revenue or earnings guidance in the supplied filing text. It emphasized that Q2 reflected high volatility: Bitcoin and Ethereum reached highs early in the quarter, then each fell more than 45% from its peak. Because trading revenue correlates with trading activity, crypto prices, and volatility, management cautioned that results may fluctuate materially and that interim results are not necessarily indicative of future periods. The company said it expects cash and cash equivalents to cover working-capital and capital-expenditure needs for at least the next 12 months.
- Management plans continued investment in platform capacity, customer support, products, international expansion, and regulatory compliance. Priorities include adding assets, expanding products internationally, and enabling access to decentralized applications through third-party interfaces and self-custody.
- System performance is a material operating issue: the company reported four Q2 unanticipated system disruptions, including a May 19 event during an exceptional volume spike. These incidents led to customer accommodation transactions using Coinbase’s own crypto assets; the company said it is investing in infrastructure to reduce disruptions.
- Principal risks include crypto-price and volume volatility; concentration in Bitcoin and Ethereum; security breaches, custody and private-key loss; outages and third-party service dependencies; intense competition, including decentralized platforms; and evolving U.S. and international regulation, including uncertainty around asset classification and staking, lending, and yield products.
- Legal and regulatory matters include a $6.5 million CFTC civil penalty paid in April 2021 under a settlement concerning historical transaction reporting and a former employee’s trading. A securities class action filed July 22, 2021 challenges statements and omissions associated with the direct-listing registration statement and prospectus; the company disputes the claims. The filing also reports ongoing regulatory inquiries, including inquiries concerning customer programs and planned products. Management said outcomes of legal matters are uncertain and could adversely affect a particular period.
Key facts for investors to verify
- How trading revenue, MTUs, trading volume, and assets on platform respond to changes in crypto prices and volatility, and whether subscription and services revenue becomes a larger, steadier share of revenue.
- The extent to which earnings and cash flow depend on the tax benefit, customer custodial-fund movements, crypto impairment accounting, and other unusual items.
- Whether operating capacity, customer support, and system reliability improve during peak trading activity.
- Potential dilution and repayment or conversion implications of the 2026 notes, alongside stock-based compensation and outstanding equity awards.
- Developments in the direct-listing securities action, regulatory inquiries, and rules affecting asset listings, staking, lending, stablecoins, and tax reporting.