Summary Transaction volume in the broader crypto market continues to plummet. Interest income, Coinbase's largest growth segment, is likely to be lower due to ongoing USDC redemptions. Coinbase has been a net loser in ETH staking flow following the Ethereum Shanghai Upgrade. On May 4th, Coinbase ( COIN ) reported a surprisingly decent earnings update highlighting performance in the first quarter of 2023. Coinbase's net revenue increased 22% sequentially to $736 million and the company simultaneously reduced recurring opex by 37%. Despite those efforts, Coinbase still generated a net loss of $79 million in the period: Data by YCharts Net loss aside, Coinbase just had its best quarter since the crypto market top back in Q4 2021 and I think it's worth examining how the company's revenue generation story has adapted over the last 18 months. Revenue Breakout Revenue (Millions USD) Q1-22 Q2-22 Q3-22 Q4-22 Q1-23 Total Transaction Revenue 1,013.0 655.2 365.9 322.1 374.7 Total Subscription & Service Revenue 151.9 147.4 210.5 282.8 361.7 Net Revenue 1,164.9 802.6 576.4 604.9 736.4 Source: Coinbase Coinbase breaks revenue out into two main categories consisting of transaction revenue and revenue from subscriptions and services. Transaction revenue is broken out into institutional and retail customer buckets. Subscription and service revenue is broken out a bit further: Blockchain rewards Custodial fee revenue Interest income Other The combined revenue growth from those four segments has quickly pushed the subscription and services category from just 13% of total revenue in Q1 2023 to over 49% as of the last quarter. This has been driven mainly by interest income earned from a USD Coin (USDC-USD) revenue sharing agreement with token issuer Circle. Subs & Service Revenue (millions) Q1-22 Q2-22 Q3-22 Q4-22 Q1-23 Blockchain rewards 81.9 68.4 62.8 62.4 73.7 Custodial Fee Rev 31.7 22.2 14.5 11.4 17.0 Interest income 10.5 32.5 101.8 182.2 240.8 Other Sub & Service Rev 27.8 24.3 31.4 26.7 30.1 Total Subscription & Service Revenue 151.9 147.4 210.5 282.8 361.7 Source: Coinbase At just under $241 million in quarterly revenue, a third of the Coinbase's total Q1 revenue came from interest income. At $74 million, blockchain rewards have also been a significant sequential revenue growth driver quarter over quarter. Projecting Q2 Revenue On the last call , CFO Alesia Haas mentioned just $110 million in April transaction revenue and cautioned using that as a baseline for projecting category revenue for the remainder of the quarter. However, the month to date indications from May transaction volume don't look positive. According to data from The Block, May is on pace to be the industry's lowest transaction volume month since October 2020: Monthly Exchange Volume (The Block) Using margin estimates from April's $34.8 billion in transaction volume, Coinbase currently has approximately $65 million in May transaction revenue heading into a holiday weekend at the end of the month: Millions Volume Revenue April $34,800 $110 May* $20,300 $65 June** $27,550 $88 Sources: Coinbase, The Block, *Through May 24th, **Author's estimates If we average April and May to project June figures, Coinbase's transaction revenue for the second quarter is pacing just over $263 million. On the call, Haas was willing to give more concrete guidance on the subscriptions and services revenue category. There the company is guiding for $300 million this quarter and attributes the sequential decline from $361.2 million to activity in the stablecoin market: This decline is largely driven by USDC market cap which fell 23% in April from the Q1 average levels directly correlated with the banking crisis. That decline has since continued 4% lower from the $30.4 billion end of April market cap to $29.2 billion as of article submission (blue line below is USDC): Stablecoin market caps (Defi Llama) Furthermore, blockchain rewards could possibly be a smaller driver of revenue going forward as well. Despite the approximate 2 million ETH inflow following Ethereum's (ETH-USD) Shanghai upgrade , Coinbase is suffering the second largest net outflow from ETH staking behind only Kraken: Entity (ETH) Inflow Principal Outflow Rewards Outflow Net Flow Kraken 106,560 -562,783 -115,127 -571,350 Coinbase 257,824 -316,064 -164,255 -222,494 Huobi 32,448 -59,616 -11,417 -38,585 stakefish 32,416 -25,248 -24,515 -17,347 Stkr (Ankr) 32 -10,522 -5,865 -16,355 Source: Dune Analytics/Hildobby, as of 5/23/23 This reduction in aggregate ETH staking may be partially offset by the US dollar denominated increase in the price of ETH over the last several weeks: Data by YCharts However, even we project a flat quarter in rewards revenue and take the $300 million from the company's subscription & service revenue guidance as the right estimate, we still get to just $563 million in Q2 revenue given the expected decline in revenue from transaction volumes. But I have to caution that estimate is assuming June volume is larger than May and that might be overly optimistic given the macro environment. Frankly, even Coinbase's $300 million subscription and service revenue guidance might be optimistic. Circle's treasury holdings mature at the end of May. To what degree USDC is monetized going forward isn't exactly clear as the US debt ceiling showdown continues. Risks I detailed some of the regulatory implications from the Wells Notice Coinbase received in a previous article for Seeking Alpha. I won't make those same arguments here beyond simply acknowledging the crypto market in general is experiencing outflow. The regulatory climate domestically continues to be a major headwind for US-based businesses within the industry. Despite putting up a fight in the courts, Coinbase won't be immune from that. The company is projecting technology and development and general and administrative expenses will be between $600 million and $650 million in the second quarter. Q2 Guidance (Coinbase) A large portion of that expense continues to be stock-based compensation and the company isn't guiding for any further head count reduction this quarter that could potentially mitigate some of that. Furthermore, sales and marketing expense will increase sequentially. This is coupled with what is almost certainly going to be a dramatic reduction in revenue from Q1 to Q2. Summary Q1 was a solid quarter for Coinbase. The company still lost a lot of money but it was much less than during the previous four quarters. The company grew cash and investments over Q4 but it's difficult for me to see that continue given what I believe will be another 9-figure loss in Q2. Coinbase is an important business in the crypto industry but it's a fish swimming upstream at the moment. I expect Q2 revenue to decline between 20-25% sequentially. In my view, it's difficult to justify going long in this environment.
