The crypto market is down in 2022, and it should be no surprise that Coinbase's (COIN +0.76%) results are suffering as a result. Coinbase reported second-quarter earnings after the market closed on Tuesday, and the numbers weren't good by any measure.
Revenue fell 60% from a year ago to $803 million, and the company swung from net income of $1.6 billion to a net loss of $1.1 billion. But like most earnings reports, this one requires some context. Here's what you need to know about Coinbase's results.
NASDAQ: COIN
Key Data Points
Trading is driving results
The reality is that trading drives all financial results for Coinbase, at least for now. In the second quarter, trading volume was $217 billion, down from $462 billion a year earlier. The bigger problem is that retail trading dropped from $145 billion to $46 billion, and that's where all of Coinbase's money is made.
Net retail revenue was $616.2 million in the quarter, down from $1.83 billion a year ago and compared to $39.0 million in net revenue from institutional clients. Retail is where the money is made, and retail is down by a lot.
On the subscription and services side, the business is doing better. Revenue was up from $102.6 million a year ago to $147.4 million, and with Ethereum (ETH +2.28%) staking coming up with The Merge, this revenue should increase. In the long term, it's this subscription and services segment that I think will drive more of the company's revenue.
Behind the big loss
A $1.1 billion loss sounds terrible, but it's misleading. Rules that require mark-to-market accounting on assets have a big impact; stock-based compensation is dilutive, but it isn't a cash expense. And then there are foreign currency charges that are out of Coinbase's control. Here's a breakdown of these items:
| Item | Amount |
|---|---|
| Reported net loss | $1.1 billion |
| Non-cash crypto impairment | $377 million |
| Non-cash venture impairments | $69 million |
| Stock-based compensation | $391 million |
| Net loss excluding non-cash items | $246 million |
Source: Calculations by the author with data from Coinbase earnings release.
In addition to these non-cash items, there was a $103 million net foreign exchange loss. This was from a strong dollar and a weaker euro.
When you pull out non-cash items and foreign exchange losses, the loss for Coinbase was $143 million. That's not nearly as bad as the $1.1 billion reported.
Compare this to reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of negative $151 million, and these numbers seem about right.
Survival is the name of the game
Why am I looking at real cash burn? Because we're in a crypto winter, and right now, the name of the game is survival. If Coinbase can make it to the other side, it has a lot of potential as a business in crypto and Web3.
Coinbase had $6.2 billion in cash and equivalents on the balance sheet at the end of the quarter and a goal to have a negative adjusted EBITDA of less than $500 million this year. It looks like the company has plenty of cash to survive for a few years of crypto winter if needed.
If crypto doesn't recover, neither will Coinbase. But if it does, the company should be well positioned with a strong product base and lots of operating leverage. If you're bullish on crypto, it's hard not to be bullish on Coinbase as well.
