Coinbase Q2 Earnings Preview: A Bleak Quarter

Coinbase (NASDAQ:COIN) is scheduled to report Q2 financial results after the market closes on Thursday, August 3, 2023.

Q2 presented significant challenges for US-based crypto exchanges, including Coinbase, as the SEC intensified its regulatory actions.

In Q1, Coinbase beat the consensus EPS estimate of -$0.87 by 152.53%, reporting an actual EPS of $0.45. It also beat the Q1 consensus revenue estimate of $653.96 million by 18.13%, reporting an actual revenue of $772.53 million.

Q2 consensus EPS estimate is -$0.62, while the revenue forecast is $640.41 million, reflecting a decline of 17.20% from the revenue reported in Q1. EPS has seen 1 upward and 2 downward revisions, while revenue has seen 5 upward revisions and 11 downward revisions. Generally, analysts expect weak Q2 earnings.

Q2 Highlights: Notable Developments

The SEC Enforcement

In Q2, a significant focal point for Coinbase was the SEC litigation it faced. The SEC alleged that Coinbase had violated US securities laws by not registering as a broker and by engaging in the unregistered offer and sale of securities through its staking-as-a-service platform.

Coinbase has emerged as a dominant player in the staking landscape, securing the second position in Ethereum (ETH-USD) liquid staking, with over $2 billion in Total Value Locked (TVL). Products like liquid staking derivatives have been an important revenue stream for the company and a good way for Coinbase to diversify its sources of revenue.

The BASE Blockchain

Despite the challenges with regulatory oversight in Q2, Coinbase joined the league of major crypto exchanges that own and operate a blockchain network. Coinbase's blockchain network is called BASE. Coinbase's BASE blockchain focuses on scalability and ease of dApp (decentralized application) development. The BASE network is a Layer-2 solution built on top of the Ethereum blockchain using the Optimism (OP-USD) stack. The BASE blockchain supports the development of dApps, and Coinbase recently opened the mainnet of the BASE network to dApp developers.

It's a Bleak Quarter All-Round

Let's briefly explore how the key events in Q2 have impacted assets on platform (AOP) and trade volume on Coinbase, as well as their likely impact on Q2 revenue and earnings.

The SEC's enforcement actions in Q2 are expected to significantly hamper Q1's revenue increase and top-line growth. Coinbase's revenue is likely not to beat the consensus revenue estimate of $640.41 million for Q2. Coinbase reported an impressive 62% QoQ increase in AOP in Q1, resulting in an AOP value of $130 billion. Q2 AOP could decline by a wide margin because of the SEC's latest stance on major altcoins, labeling them as securities, and the immediate suspension of trade of these altcoins on US-based exchanges, including Coinbase. In the wake of the SEC lawsuit, Coinbase suffered positive net outflows. At one point, Coinbase customers withdrew crypto assets worth $600 million in a day.

Subscription and services revenue has made up a good chunk of Coinbase's total revenue for the past few quarters. Coinbase's subscription and services include Coinbase Cloud (its full-suite blockchain development service), Coinbase One, and Coinbase Advanced Trade (formerly Coinbase Pro). Subscription and service revenue has increased by an average of 35% for the past four quarters. I expect a continuation of this trend as the company officially launched an important zero-fee subscription service, Coinbase One, in Q2 and expanded the service to European clients.

Coinbase's transaction revenue for Q2 could largely be affected. The revenue Coinbase generates from its staking service should experience a moderate decline; this is because of increased oversight from US regulators regarding staking services. In compliance with regulation, Coinbase has halted staking-as-a-service in California, New Jersey, South Carolina, and Wisconsin in compliance with regulatory demands. Coinbase makes this revenue by charging a 25% - 35% commission on users' staking rewards.

Crypto trade volume on centralized exchanges fell to a four-year low in Q2, reports reveal. This drop in volume was recorded even before the SEC's lawsuits against Coinbase and other US-based crypto exchanges. Coinbase trade volume dropped significantly in H1 FY2023. The YTD percentage drop in trade volume on Coinbase is around 47.25%. The fall in trade volume would directly impact Coinbase's transaction revenue for Q2.

In Q1, Coinbase reported $199 million in interest income from USDC (USDC-USD) deposits. However, the Q1 depeg incident of Coinbase-backed USDC, following Circle's disclosure of exposure to collapsed Silicon Valley Bank (OTCPK:SIVBQ) had a prolonged impact in Q2. USDC market cap experienced a 33% decline from March 11 (date of depeg incident) to the end of Q2 (June 30), falling from $42.2 billion to $28.12 billion.

COIN Stock Price

Despite the headwinds faced in Q2, COIN demonstrated remarkable resiliency, with its price showing steady growth. COIN closed Q1 at $64.16 and ended Q2 at $71.55, reflecting an impressive price appreciation of 11.55% between the two quarters. YTD, COIN has soared an impressive 180%. This upward trend underscores the positive sentiment among investors regarding Coinbase's performance and prospects. Investor optimism underscores the market's recognition of Coinbase as a key player in the digital asset space. However, it is paramount to note that market sentiment can shift swiftly, and the upcoming Q2 earnings report will play a pivotal role in shaping investors' sentiment toward Coinbase.

Takeaway

The SEC has continued its enforcement actions in Q3. The latest news includes the SEC's charge against Richard Heart and three crypto projects he controls, Hex (HEX-USD), PulseChain, and PulseX, for allegedly misappropriating investor funds and the unregistered offerings of crypto asset securities. In a recent development, Brian Armstrong, the CEO of Coinbase, disclosed that the Securities and Exchange Commission (SEC) had requested the exchange to suspend trading of all digital assets except Bitcoin. However, Coinbase did not comply with this request, resulting in legal actions initiated by the SEC. This incident underscores the ongoing challenge faced by US-based crypto exchanges regarding the lack of regulatory clarity.

As highlighted in this article, Coinbase encountered difficulties due to the ambiguous regulatory landscape in the crypto industry, leading to implications for its operations and decision-making processes. Looking ahead, the focus will be on how Coinbase addresses and navigates the evolving regulatory landscape and sustains its position as a leading cryptocurrency exchange.