Coinbase Q1/22 Shareholder Letter [pdf]

https://s27.q4cdn.com/397450999/files/doc_financials/2022/q1/Coinbase-Q122-Shareholder-Letter.pdf

by ckastner • 4 years ago

46 77 4 years ago

s27.q4cdn.com

ckastner• 4 years ago

Revenue is down to $1.165bn compared to $2.49bn in Q4/2021.

$430m loss, compared to income of $840m in Q4/2021.

pavlov• 4 years ago

Massive earnings miss.

Yesterday some people were arguing in another HN thread that Coinbase stock is a bargain because of the low P/E. That nice ratio is negative now.

mdasen4• 4 years ago

If you're looking at trailing 12-months it isn't negative yet. I can't predict the future so I don't know if they're going to continue losing money or if this is just one negative quarter.

I don't know much about what is "hot" in crypto exchanges, but FTX is saturating sports commercials and getting high-profile endorsers like Steph Curry and Tom Brady and sponsoring the Miami Heat arena. Crypto.com has the naming rights for the area that hosts the LA Lakers, LA Clippers, LA Kings, and LA Sparks as well as sponsorships of the Philly 76ers, Montreal Canadiens, UFC, and the 2022 FIFA World Cup.

Even if you believe strongly in crypto, Coinbase seems to be losing mindshare to competitors who are spending big. While some marketing spending might be considered foolish by some (I already know that Gillette exists and generally know what razors are available), with crypto they're probably targeting a lot of customer acquisition in a very new market. If FTX and Crypto.com become the faces of crypto to every sports fan looking to buy crypto, that seems like it would be a problem for Coinbase.

Coinbase might be better or worse than those other two, but as someone who has been watching sports I can tell you that FTX and Crypto.com are very front-and-center. If crypto is looking to attract lots of new buyers, it seems like FTX and Crypto.com are doing the marketing to make them first in people's heads.

rvz• 4 years ago

Well perhaps they should have listened to my warning that I outlined [0] rather than buying on the direct listing price of >$400 a share on the first day.

As I said before, it looks like the real winners were the VCs, founders and the early employees who sold at the peak.

Now retail bought in and got dumped on and bag-holding at the top. Just like buying Bitcoin at $69,000 once again.

[0] https://news.ycombinator.com/item?id=31322018

javert• 4 years ago

How are they spending so much that they have a $430M loss with $1.165B revenue? I don't mean that as a judgement, I'm just actually wondering.

oerpli• 4 years ago

Given their headcount of 4k with the usual engineering salaries and some infrastructure it's not that surprising I would say.

edit: misread your question - removed the stupid joke.

axg112• 4 years ago

They are trying to do everything:

- Professional trading platform (Coinbase Pro)

- On-ramp for the masses (Coinbase)

- NFT marketplace (Coinbase NFT)

- web3 infrastructure (Coinbase Cloud)

- Debit card w/ crypto rewards (Coinbase Card)

- Crypto for businesses (Coinbase Institutional / Coinbase Custody)

Each of these is a huge undertaking, often across multiple different markets across the globe.

gen2203• 4 years ago

Coinbase is an atypical "tech" company to analyze because they're kind of like a bank: much of their asset sheet is driven by customer deposits. Apparently $738m of customer funds were withdrawn from Coinbase in the last 3 months. This is in comparison to an inflow of $2.35bn (!) in 21Q1.

As for expenses, there is a usual culprit in the $352m of stock-based comp. There's a large impairment expense of $229m, which is caused by their crypto asset holdings. Together, those make up $600m, and don't involve the transfer of money.

Under GAAP, we are required to record impairment charges on our crypto assets held when the price falls below its cost basis.

FWIW they went from $17.6bn cash on hand to $16.1bn cash on hand.

mdasen4• 4 years ago

Transaction expense eats 24% of their revenue ($278M). Sales and marketing eats 17% ($200M). Technology and development eats $571M. General and Administrative eats $414M. Other expenses eats $259M. In total, $1.721B in operating expenses. They have nearly 5,000 employees.

As axg11 noted, they're building lots of new things. As I noted in another comment, they probably need to step up their marketing given how Crypto.com and FTX are saturating sports with their names.

If you're trying to grow a new platform with ever-changing things customers want while managing over $20B and have 9.2M monthly transacting users, it's going to cost a bunch. Could they be more efficient? Maybe. However, being more efficient might mean missing out on the Next Big Thing. One could argue an "efficient" company wouldn't have created Coinbase in the first place - a company catering to some upstart electronic token nonsense when they could be putting their energy into something people want. And in 2014/2015 it looks like Bitcoin didn't do anything amazing (Coinbase was founded in 2012, but my BTC-USD chart only goes back to 2014). It was late-2017 when we saw the spike to $19,000 and 2020 was really the first year it stayed over $10k most of the time.

So they need to spend a decent amount on R&D to basically make sure what they're doing is still the next big thing. If you just wanted to create a company making money, you could start a bank. Coinbase is trying to be a future of finance and investing - and no matter how much you believe in crypto, you don't know exactly what that future is. Coinbase needs to make sure they have a finger in every little pie and that costs money.

bdcravens3• 4 years ago

That just means they're spending about the same they spent in Q4.

bdcravens3• 4 years ago

Transaction fees are typically a percentage, so all things being equal, it makes sense their revenue would be half given crypto being worth half of what it was several months ago.

tempnow9872• 4 years ago

I don't fully understand how they have such high costs (G&A / Tech etc). Their revenue is actually fine / great. But these costs are wild - what makes up the bulk of these?

myth_drannon• 4 years ago

Very high salaries.

awa• 4 years ago

+1.. COIN trying to hire FAANG engineers so have to pay high salaries to attract them

UncleMeat• 4 years ago

I think a lot of tech companies are going to start seeing this as a big problem. When you are hiring regular rank and file engineers at 500k you blow through money really fast. We'll see if the bean counters decide that controlling payroll costs is worth having a harder time hiring.

kevstev2• 4 years ago

Ridiculously high packages- I left a premier hedge fund last year, and right as the ink dried on the paperwork for my new role, a friend called me who I worked with in the past that landed a high up role there running a big revenue generating piece of their technology org, and I was like bud, its been awhile, I have been very fortunate, you might not be able to afford me... and he blew me away with comp about 50% higher than I had just signed for, and it wasn't one of those its all stock that vests in 4 year things, it vested I believe quarterly, with no restrictions to hold further. We are talking comp around the 7 figure range. Huge numbers.

matwood2• 4 years ago

Is it though? How are stock grants counted? Yes, the big tech base salaries are higher, but the insane numbers people read typically include a very large stock component.

Someone else linked to levels for COIN and I saw mostly 100-200k base (some higher, but I doubt the company is mostly made of L7+ whatevers), but huge stock grants. The base seems perfectly reasonable for people working in a space where mistakes can cost significant amounts of money.

I think a bigger issue with big tech stocks sinking is top talent leaving to either do their own thing or take sabbaticals.

rococode• 4 years ago

Here's a reference point on their salaries for anyone curious: https://www.levels.fyi/company/Coinbase/salaries/Software-En...

paxys3• 4 years ago

When things are good you don't need to have any checks on spending. Poach engineers from FAANGs and pay them any salary they want. Hand out fat RSU packages to employees. Have no checks on expense reimbursements and discretionary spending by managers. Let your IT/infra costs balloon. Spend frivolously on sales and marketing without no measures or expectation of RoI.

It is inevitable that employees are going to (or already are) see a lot of tightening in all these areas now.

babl-yc• 4 years ago

Anecdotally, I've seen many talented + experienced ($$$) people move over, so I would assume they've been paying top of market or close to it.

tempnow9872• 4 years ago

Interesting. Sort of makes sense, as the risks in the crypto business do seem higher than say sticking it out at Google etc.

I did read their letter and eyes glazed at their Coinbase NFT push. Kind of crazy that folks are making mid - high six figured to develop stuff like that

infiniteL0Op• 4 years ago

Cash flow and assets look pretty bad compared to total liabilities.

Also, the statement "our outlook has not changed" is very ambiguous.

Horrible numbers, truly. A business modelo that rises and falls in harmony with the Bitcoin/eth pricing, this cannot end well.

Would be interesting to see the marking/affiliate cost breakdown over time.

paxys3• 4 years ago

Down 80% since IPO – yikes. Seems like it is competing with Robinhood to be the worst performing fintech player out there.

onlyrealcuzzo2• 4 years ago

Isn't -80% pretty typical for IPOs in the same time period?

TacticalCoder• 4 years ago

IPO I don't know but compared to the 2021 peak, Cloudflare is basically down 75% too.

Rough time for quite some stocks.

stusmall• 4 years ago

No. I did a quick check on stocks that IPO'd in April 2021. In general, it's true that IPOs from then aren't doing well. Only about 12% are positive. COIN is still doing worse than most though. It's in the bottom ~28% from that time period.

reducesuffering• 4 years ago

I think Affirm takes the cake for 90% off ATH. $176 -> $18

fdgsdfogijq2• 4 years ago

They are paying 500k for developers that are just good at leetcode. Hemorrhaging money, convincing themselves they are hiring "top engineers". When are these companies going to learn.

wolverine876• 4 years ago

The cryptocurrency industry consciously sells its product to the public using hype. Maybe the insiders believe their own nonsense.

avl999• 4 years ago

I had no idea Coinbase was paying so much. Even most of FAANG doesn't pay that much. My total comp when I was at AMZN after 5 years at the company circa 2019 came no way near 500k, and this was was with great reviews from both my manager and peers.

nullc• 4 years ago

Your figures are before 2020. Compensation has increased a lot.

lvl1023• 4 years ago

A lot of devs makes $400-$600K at big techs. Yes, comps have gone nuts since 2020.

lvl1023• 4 years ago

Isn’t Armstrong making $1M per day or something along those lines? Or did they come to senses since going public?

clpm4j• 4 years ago

I think he was making around $5m per month... And he only needs $1.6m per year for the property taxes on his Bel Air estate.

gr1zzlybe4r• 4 years ago

You should start to think about how well capitalized your company is if you're working at a private fintech startup.

daenz3• 4 years ago

What does "how well capitalized your company" mean?

matwood2• 4 years ago

Basics like FCF from ops, cash in the bank, lines of credit...

Ozzie_osman• 4 years ago

Broadly, how much capital the company has. So I'd look at cash vs burn rate and get a sense of runway.

izzydata• 4 years ago

What would happen if Coinbase went bankrupt? That would be rather catastrophic to the Crypto market wouldn't it? Do they have any obligation to give people access to "their" crypto wallets?

paxys3• 4 years ago

Nothing. Unless there's outright fraud those wallets will still exist regardless of the company's health. It's no different than any other traditional broker going out of business (which isn't common but does happen). People can just transfer their funds elsewhere.

JaimeThompson• 4 years ago

It's no different than any other traditional broker going out of business (which isn't common but does happen).

There are tested procedures in place that are know to work when dealing with traditional brokers. The crypto space doesn't really have such things.

mdasen4• 4 years ago

"Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors"

That's from Coinbase's 10-Q filing (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/89c60d8...). I don't necessarily think it's likely that customers would be treated as unsecured creditors, but it is possible as they note. At the very least, it seems likely that a court would need to determine (over the course of months) whether to release the crypto assets to the account holders. It seems likely that it wouldn't be as orderly as a traditional broker going out of business given that it's new ground to litigate. I do agree that it probably should be treated like any other broker, but I think there's a decent chance it'll take some time to work through courts.

Coinbase has $256B in assets on its platform. I think its creditors would certainly see value in trying to claim that the crypto isn't like stocks or bonds held at a brokerage - enough value to tie it up for a good while with appeals.

They also note that the theft or loss of private keys is a risk and they note that the value of crypto assets held by them is far greater than what they're insured for. While I'm sure Coinbase invests a lot in security, there's a lot of risk in transactions that can't be un-done. If an employee transfers money at a bank, the government and banks can un-do the transactions most of the time.

Again, I'm not saying these are likely scenarios, but there's certainly risk as a Coinbase customer.

zitterbewegung• 4 years ago

On Coinbase’s website they have this : https://help.coinbase.com/en/coinbase/other-topics/legal-pol...

dahdum• 4 years ago

It would hurt the market but keep in mind they only handle 11% of crypto trading.

They also have ~$6b in cash and are well managed, so going bankrupt any time soon doesn't seem likely.

bdcravens3• 4 years ago

What's Coinbase's share of stored crypto relative to Mt. Gox's when it declared bankruptcy?

As for obligations, each customer would be a creditor of Coinbase, and have the same claims as any other creditor.

nus072• 4 years ago

https://twitter.com/TheWinklerGroup/status/15241383296331325...

minimaxir• 4 years ago

Coinbase stock is down 10% after hours, after being down 12.6% today.

Workaccount2• 4 years ago

after being down ~40% this week.

ehathaway2• 4 years ago

Maybe I'm misunderstanding this, but their report says they have $256 billion in "assets on platform". If the total crypto market cap is $1418 billion (according to coinmarketcap), does this mean they hold 18% of all crypto?

trophycase• 4 years ago

Users can also deposit USD and other fiat

ehathaway2• 4 years ago

Ah good call. I just found the section talking about this. It looks like 96% of "assets on platform" are crypto. So they hold about 17% of all crypto?

lizardactivist• 4 years ago

Are their numbers looking better now, a month after they literally robbed 20000+ Russian users of their money?

daenz3• 4 years ago

Did Coinbase seize users wallets?

aaaaaaaaata• 4 years ago

They're not really wallets, they just look like it.

All wallets are Coinbase wallets.

redisman• 4 years ago

Sanctions are no joke when you run fintech. You can’t just choose to ignore them

woeirua• 4 years ago

I think we really could be witnessing the start of the end of massive compensation packages for many engineers. Turns out that easy money propped up the valuations of companies with marginal business models, and there just aren't that many companies out there like MAGMA that make money hand over fist and can keep growing YOY like crazy. MAGMA comp will stay high for the forseeable future, but I think a lot of people are going to take a big paycut here in the next year or two.

axg112• 4 years ago

Layoffs? Maybe. Paycut? Not at their existing companies. There's a case to be made that too many tech companies scaled too quickly. Fundamentally, Coinbase is still a solid company, they may have overextended hiring but their core businesses are very profitable.

krono• 4 years ago

Unsure if this is related, but they have definitely been having some issues beyond their usual unresponsiveness to serious problems.

The interest earnings figures (APY) were showing 0 for weeks, and have been incorrect ever since they returned.

Some of their services will randomly not load or show as "not available in your country" for a couple of hours or even days. Happens on their website, as well as their app and even their API.

Fiat out transactions are randomly blocked or delayed (fiat in transactions are A-OK, of course). Crypto transactions show as having gone through but end up never happening.

Whatever you contact support about, if you're lucky enough to get an answer, they basically tell you that either you're lying and whatever you claim never happened, or it was your own fault.

Already moved my assets out of CB a few weeks ago - not that it was a whole lot, but they've degraded so much in such a short amount of time that I wouldn't even trust them with a fiver.

lvl1023• 4 years ago

I frankly don’t know what Coinbase has done since 2013. They just sat there and did not innovate.

nus072• 4 years ago

This blows my mind if true-

https://twitter.com/TheWinklerGroup/status/15241383296331325...

jjfoooo53• 4 years ago

What is their runway with current assets on hand?

Coinbase Q1/22 Shareholder Letter [pdf]

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