Coinbase beats earnings estimates in Q2 amid ‘challenging environment’

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Coinbase exceeded Q2 expectations, reporting revenues of $708 million against an earlier estimate of $628 million. The company also reported an adjusted loss of $0.42 per share in the quarter, beating the estimated $0.76 loss per share.

“Q2 was a strong quarter for Coinbase as we executed well and showed resilience in a challenging environment,” said CEO Brian Armstrong.

In a letter to shareholders, Coinbase described the second quarter as a “strong period of execution.” It claimed to display progress in building an efficient company. Brian said the company had reduced costs and was well-positioned to bring more clarity to the crypto regulatory landscape.

Looking ahead to Q3, Coinbase revealed that it had generated around $110 million in transaction revenue in July. The company also anticipated that Q3 subscription and services revenue, which reached $335 million in the second quarter, would be at least $300 million in the third quarter.

Following these results, Coinbase shares initially rose nine percent but recently fell by 1.4 percent to $89.48. Despite the recent decline, Coinbase shares have gained around 160 percent this year.

Nevertheless, the Q2 revenue marked a decrease from the $808.3 million recorded in the corresponding period last year. Transaction revenue for the second quarter was $327 million, lower than the $375 million reported in the first quarter.

Total trading volume decreased to $92 billion from $145 billion in the first quarter. The company attributed the decline in transactions to “multi-year lows in crypto volatility” in its shareholder letter.

Additionally, Coinbase’s recurring operating expenses dropped nearly 50 percent year-over-year, partly due to a 30 percent reduction in headcount.

Interest income also decreased, falling to $201 million in Q2 from $241 million in Q1. Coinbase’s USDC holdings generated $151 million in Q2, lower than the $199 million earned in the first quarter. This decrease is partially attributed to a 28 percent decline in the market cap of USDC.

In an email, Berenberg analyst Mark Palmer noted that Coinbase’s revenue surpassed estimates mainly because of interest income and staking revenue. However, these areas of the business may face risks in the future due to declining USDC market capitalization and regulatory challenges to its staking programs.

“Management’s guidance for Coinbase’s current quarter was muted, and the company’s adjusted EBITDA print included a huge adjustment for stock-based compensation – an area that management had said it would look to reduce due to negative investor feedback,” said Palmer.

Legal fight against SEC

Meanwhile, the company has been involved in a legal battle with the Securities and Exchange Commission (SEC) since June 6. The SEC accuses the company of operating as an unregistered broker, clearinghouse and exchange.

In response to Coinbase’s filing in July, the SEC accuses Coinbase of trying to create its own test for defining an investment contract and misinterpreting the Howey test. The federal agency uses the Howey test to determine whether a transaction qualifies as a security.

SEC lawyers told the judge preceding the case that Coinbase had claimed to be unaware of any potential violation of federal securities laws despite having experienced legal counsel. The exchange also asserted that the SEC’s approval of its registration statement in 2021 confirmed its business activities’ legality at that time and in the future.

The lawyers also pointed out that Coinbase had used the same legal framework for making listing decisions in the past, even though the company now argues that the same framework does not apply to its current activities.

Coinbase intends to file an order seeking the dismissal of the lawsuit. The company’s legal chief, Paul Grewal, has expressed confidence in winning the case.