Coinbase Global, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Amounts below are U.S. dollars unless noted.
Business context and operating performance
Coinbase operates a crypto-asset trading, custody, and financial-services platform. Management described Q3 as a strong quarter, while emphasizing that results are volatile and the business should be viewed as a long-term investment in the growth of the cryptoeconomy.
- Verified users reached 73 million; retail monthly transacting users (MTUs) were 7.4 million, down 16% from Q2 2021 and up from 2.1 million a year earlier.
- Assets on platform were $255 billion. Trading volume was $327 billion, down 29% sequentially; global spot trading volume fell 37% sequentially.
- Other crypto assets represented 59% of Q3 trading volume, compared with 50% in Q2. Bitcoin and Ethereum together represented 41%.
Financial results
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Total revenue | $1.312 billion | $315.4 million | +316% |
| Net revenue | $1.235 billion | $286.7 million | +331% |
| Transaction revenue | $1.090 billion | $275.9 million | +295% |
| Subscription and services revenue | $145.1 million | $10.8 million | +1,248%; +41% sequentially |
| Operating income | $291.8 million | $101.5 million | Operating margin: 22% vs. 32% |
| Net income | $406.1 million | $81.3 million | Net margin: 31% vs. 26% |
| Adjusted EBITDA | $618.2 million | $123.2 million | Non-GAAP |
| Diluted EPS | $1.62 | $0.23 |
Revenue growth reflected higher crypto trading activity, user engagement, asset prices and volatility. Subscription and services growth was led by blockchain rewards, including staking, and higher custodial fees. The Q3 income-tax benefit was $135.2 million, contributing to net income exceeding income before tax; management attributed the unusually low effective tax rate principally to tax deductions related to stock-option exercises and research credits.
Operating expenses were $1.020 billion, up 377% year over year. Notable items included $264.2 million of stock-based compensation in the quarter, $58.4 million of gross crypto-asset impairment charges, and $25.1 million of cybersecurity-incident losses during the first nine months. The company said affected customers were reimbursed.
Cash flow, debt, and liquidity
- For the first nine months of 2021, operating cash flow was $7.737 billion, investing cash outflow was $644.4 million, and financing cash inflow was $3.393 billion. Operating cash flow included a $4.938 billion inflow related to changes in custodial funds due to customers; it is not a direct measure of cash available for corporate use.
- At September 30, cash and cash equivalents were $6.353 billion, excluding $30.9 million of restricted cash and $8.957 billion of customer custodial funds. Customer custodial funds are held for customers and are not ordinary corporate liquidity.
- Current assets were $15.870 billion and current liabilities were $9.615 billion; both include substantial customer custodial balances and related obligations.
- Outstanding debt principal was approximately $3.44 billion: $1.44 billion of 0.5% convertible notes due 2026 and $2.0 billion of senior notes due 2028 and 2031. The senior notes bear interest at 3.375% and 3.625%, respectively. The company reported compliance with senior-note covenants.
- Crypto assets held for investment and operating purposes, excluding borrowed crypto assets, had a reported cost basis of $394.2 million and fair value of $793.1 million. Crypto assets are less liquid than cash, and impairment charges cannot be reversed before disposal under the company’s accounting policy.
Material changes and management outlook
- Compared with Q3 2020, revenue and earnings increased sharply; sequentially, however, trading volume and MTUs declined as market conditions softened early in the quarter. Management said market conditions improved later in Q3 and continued into early Q4.
- The company issued $1.44 billion of convertible notes in May and $2.0 billion of senior notes in September. It also completed acquisitions, including Bison Trails; goodwill rose to $567.4 million from $77.2 million at year-end 2020.
- Management said it planned continued investment in infrastructure, customer support, product development, marketing, and hiring. It hired more than 600 employees in Q3 and ended the quarter with 2,781 full-time employees. Management expects operating expenses to increase significantly in the foreseeable future.
- Product initiatives included Coinbase Prime, developer infrastructure, payroll direct deposit, retail advanced trading, and a planned NFT marketplace. Coinbase announced that it would not launch its proposed Lend program after receiving an SEC Wells Notice; the SEC later said no further response to its inquiry was needed.
- The filing provides no specific quantitative revenue or earnings guidance. Management cautioned that crypto prices, volatility, and trading activity make results difficult to forecast and that interim results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Revenue remains highly sensitive to crypto prices, volatility, trading volume, and Bitcoin and Ethereum demand. Management reported three unanticipated system disruptions in Q3, including an exchange disruption on September 7; customer accommodation trades during disruptions increased crypto-asset sales revenue and associated costs.
- Regulatory uncertainty is significant, including the classification of crypto assets and the regulation of staking, lending, stablecoins, and other yield products. The filing also describes inquiries and subpoenas from regulators.
- Three purported securities class actions relating to the direct-listing registration statement and prospectus were pending; a further purported class action was filed in October 2021. Outcomes were described as uncertain. Management said existing matters were not expected to have a material adverse effect overall, while acknowledging a particular period could be materially affected.
- The company reported customer account-takeover losses of $25.1 million during the first nine months and cited continuing cybersecurity, service-outage, custody, and third-party risks.
- Other risks include potential crypto-asset impairment, payment reversals and chargebacks, regulatory or legal costs, and the company’s substantial debt. The company stated that existing cash and cash equivalents should meet working-capital and capital-expenditure needs for at least the next 12 months.
Key facts investors should verify
- How much of operating cash flow reflects customer custodial balances versus cash generated by the company’s operations.
- Whether trading activity, revenue mix, MTUs, and customer engagement remain resilient through weaker crypto-market conditions.
- The recurring cost and dilution impact of stock-based compensation and planned hiring, marketing, and infrastructure spending.
- Progress on platform reliability and customer support following reported disruptions, and the scope and resolution of cybersecurity matters.
- Developments in the SEC and other regulatory inquiries, the Lend matter, and pending litigation, including any effect on products or financial exposure.
- Debt-service capacity and the value and liquidity of crypto assets, including the effect of impairment accounting on reported earnings.