Today after the bell, Coinbase reported its Q1 2023 financial results, handily beating expectations. In the first three months of the year, the U.S. cryptocurrency exchange generated net revenues of $736 million, a $79 million net loss and adjusted EBITDA of $284 million.
Analysts had expected a far slimmer $655 million in revenue and a larger loss from the company in the first quarter. In after-hours trading, shares of Coinbase are up a little more than 7%.
Certainly, Coinbase’s results are a welcome dataset for both crypto bulls and investors in the company alike.
Let’s explore how Coinbase beat analyst estimates, and what it is forecasting for the coming quarter. Can the company keep up its return to adjusted profitability? What does it say concerning Q2 crypto trading activity?
Coinbase’s Q1 2023 results, explained
If we compare Coinbase’s Q1 2023 results to its year-ago totals, we are presented with an odd set of numbers. Yes, Coinbase’s revenue in Q1 2022 was far greater ($1.17 billion) than what it posted in its most recent quarter. In contrast, however, in the year-ago period, the company’s net loss was far greater ($430 million) and its adjusted EBITDA far smaller ($20 million).
Its revenue decline appears painful, but given how much better Coinbase’s result was in the first quarter when compared to estimates heading into earnings, it’s actually a win of sorts. And, after slashing costs and headcount, the company not only brought its net loss down by around $350 million, it also boosted its adjusted EBITDA result by a factor of 14x.
Even more, Coinbase improved in revenue, net loss and adjusted profit terms when compared to its Q4 2022 result. Cheerful numbers from a company that had an incredibly tough last year.
So, how did Coinbase manage the feat? Here’s the breakdown of key drivers:
- Improved transaction revenue: From both consumers and institutions, Coinbase saw more transaction revenues in the first quarter than in the fourth quarter. Together, the company’s transaction revenues grew from $322.1 million in Q4 2022 to $374.7 million in Q1 2023.
- An outstanding other revenue result: The diverse bucket of Coinbase top line called “subscription and services revenue” totaled $361.7 million in the first quarter of the year, besting both Q4 2022’s result ($282.8 million) and its year-ago comp ($151.9 million).
Services and subscription revenue was largely driven by gains in interest incomes, which rose 32% compared to Q4 2022 to $241 million. Of that figure, $199 million in revenue from the quarter came from higher interest rates making both USDC (a stablecoin) and cash (“customer fiat”) holdings more lucrative in the period. Other contributing factors to greater services and subscription revenue at the company included strong percentage growth in Coinbase One (a subscription service) and custodial fees when compared to Q4 2022.
Revenue was only part of the equation leading to Coinbase’s dramatic return to adjusted EBITDA positivity and net loss reduction in the first quarter. The other half was expense reduction. In part this came from layoffs; Coinbase headcount totaled 3,535 at the end of Q1 2023, compared to 4,510 at the end of 2022, and 4,948 at the end of Q1 2022.
Coinbase’s expenses (discounting impairment charges relating to cryptocurrencies) came to $884.3 million in the first quarter, down sharply from $1.18 billion in Q4 2022 and $1.51 billion in Q1 2022. Notably, the company’s Q1 2023 expense is inclusive of $144.5 million in costs related to restructuring its business, so you might wish to adjust its numbers accordingly.
All told, despite some tough year-over-year comps on the revenue side and even more difficult comparisons to its prior profitability peak, Coinbase’s Q1 2023 earnings statement is comfortably superior to the market expected. Points where they are earned!
What’s ahead for the company?
Before we read what Coinbase shared about what it is seeing in Q2 2023, recall that its Q1 transaction revenues came to $374.7 million (emphasis added):
Crypto market cap and crypto asset volatility have diverged in Q2 compared to Q1. Average crypto market cap in April was $1.3 trillion, up 17% compared to the Q1 average of $1.1 trillion. However, crypto asset volatility in April was 25% lower than the Q1 average. These market dynamics are reflected in our transaction business as we generated approximately $110 million of total transaction revenue in April.
The company warns against extrapolating too strongly against any single month’s data, which is valid. However, we can say that the company is not pacing through April to surpass its Q1 2023 transaction revenue in the second quarter. Throw in the fact that Coinbase expects its subscriptions and services revenue to moderate to “around $300 million” in Q2 2023, and it appears that the company is on track to post a moderate revenue decline in the current quarter.
On the expense side of things, Coinbase expects R&D, G&A and S&M expenses to come in between $680 million to $740 million in the current quarter, inclusive of just over $200 million worth of share-based compensation. If things hold steady from April, Coinbase may post positive adjusted EBITDA in the current quarter and a net loss in GAAP terms.
Given that investors are still bidding up its shares post-earnings, it seems that the company’s trailing numbers as of April and its expectations are enough for its market cap to rise. We’ll have more Friday after we parse its earnings call, but for now Coinbase is taking a modest victory lap on the public markets after proving some of its detractors wrong.
Regulation looms, but let’s not rain on an otherwise sunny day for the U.S. crypto concern.