I want to follow up on yesterday’s post about recurring and transactional revenue with an example. Coinbase is a publicly traded company whose financials are publicly available. It offers a variety of products, but most of its revenue is made on fees charged when customers buy or sell cryptocurrency assets on its platform. This fee-based revenue is transactional since Coinbase doesn’t know when customers will transact or how much revenue it will receive when they do.

Coinbase’s latest 10K filing for the fiscal year ending December 31, 2022, shows us how the transactional nature of its revenue affected its financial performance:

• 2020: $1.27 billion in revenue and $868 million in operating expenses for $409 million pretax income (profit). Pretax income was ~32% of revenue. Operating expenses were ~68% of revenue.‍
• 2021: $7.83 billion in revenue and $4.76 billion in operating expenses for $3.02 billion pretax income (profit). Pretax income was ~39% of revenue. Operating expenses were ~61% of revenue.‍
• 2022: $3.19 billion in revenue and $5.90 billion in operating expenses for a $3.06 billion pretax loss. Pretax loss was ~96% of revenue. Operating expenses far exceeded revenue (~185% of revenue).

Coinbase’s transactional revenue fluctuated wildly during those three years. As revenue soared from 2020 to 2021, Coinbase’s expense structure also increased. This makes sense because you need more people and resources to service an increase in customer demand. As revenue plummeted from 2021 to 2022, the company’s expense structure continued to increase, causing a massive pretax loss.

Revenue increased over 600% one year and dropped almost 60% another year. While this is an extreme example because of macro factors, Coinbase demonstrates how hard it can be to forecast and plan when there are no agreements between a company and its customers that produce recurring revenue.