"First stock of stablecoins" Circle's Q2 revenue increased by 53% year-on-year, and the circulation of USDC surged by 90% year-on-year | Financial Report Insights

The first quarterly financial report of Circle, the "first stock of stablecoins" in the United States, shows typical high-growth characteristics: core business indicators performed impressively, but accounting profits were severely dragged down by huge non-cash expenses.

On Tuesday before the U.S. stock market opened, Circle released its first financial report since going public. Key points are as follows:

Financial Performance:

• Strong revenue growth: Total revenue and reserve revenue increased by 53% year-on-year to $658 million, mainly driven by a significant increase in USDC circulation, exceeding analysts' expectations of $647.3 million.
• Net loss: A net loss of $482 million, mainly impacted by $591 million in non-cash expenses related to the IPO, including $424 million in equity incentive expenses.
• Good adjusted EBITDA performance: Increased by 52% year-on-year to $126 million, surpassing market expectations of $121.1 million, indicating stable profitability in core business.

Core Business Progress:

• Rapid expansion of USDC circulation: Circulation reached $61.3 billion at the end of the quarter, a year-on-year surge of 90%; further increased to $65.2 billion on August 10.
• Continuous market share improvement: Stablecoin market share reached 28%, an increase of 595 basis points year-on-year.
• Rapid development of platform business: USDC balance on the platform reached $6 billion, a year-on-year increase of 924%.
• Rising distribution costs: Distribution expenses increased by 64% year-on-year to $407 million, mainly influenced by the growth of holdings from partners like Coinbase.

Performance Guidance: Management expects a compound annual growth rate of 40% for USDC circulation; guidance for other revenues in fiscal year 2025 is $75-85 million, with adjusted operating expenses of $475-490 million.

After the data was released, Circle's stock price quickly surged nearly 8% in pre-market trading.

Financial Performance "Kidnapped" by IPO Costs

Circle reported a net loss of $482 million in the second quarter, a figure that seems alarming at first glance, but a closer look reveals that $591 million in non-cash expenses is the main culprit.

Of this, $424 million came from equity incentive expenses triggered by the IPO, and $167 million was due to the increase in fair value of convertible bonds caused by the rise in stock price.

The adjusted EBITDA, which better reflects the substance of the business, reached $126 million, a year-on-year increase of 52%, with an adjusted EBITDA margin of 50%, demonstrating the high profitability characteristics of the stablecoin business. This "loss but profitable" financial performance is not uncommon in the first quarter after a tech company's IPO.

Strong Growth Momentum for USDC, but Increasing Competition

USDC circulation reached $61.3 billion, a year-on-year increase of 90%, with its market share in the fiat-backed stablecoin market rising to 28%.

As of August 10, the circulating market value of USDC was $65 billion, firmly holding the position of the second-largest stablecoin globally, second only to Tether's $165 billion USDT. Although there is still a gap in market share, Circle's compliance label and transparency of dollar assets are attracting more and more traditional merchants and payment networks to adopt stablecoins for settlement In addition, the number of meaningful wallets increased by 68% to 5.7 million, indicating a continuous expansion of the user base.

However, the reserve return rate decreased by 103 basis points year-on-year to 4.1%, reflecting the impact of changes in the interest rate environment on profitability. At the same time, the daily average weighted proportion of USDC on the platform was 7.4%, which, although an increase of 536 basis points year-on-year, remains relatively low in absolute terms, indicating that most USDC circulates on third-party platforms.

Circle's core revenue source—reserve income reached $634 million, a year-on-year increase of 50%. The main driver of growth was an 86% year-on-year increase in the average circulation of USDC, but the decline in the reserve return rate by 103 basis points to 4.1% partially offset the growth effect.

This decline in the reserve return rate reflects the impact of changes in the interest rate environment on Circle's business model. As a company holding a large amount of short-term U.S. Treasury bonds and money market funds, Circle's reserve income is directly affected by Federal Reserve policies. The current return rate of 4.1% remains healthy, but investors need to pay attention to the potential impact of the interest rate downcycle on the company's profitability.

Rising Distribution Costs Are a Cause for Concern

In the second quarter, distribution costs increased by 64% year-on-year to $407 million, significantly outpacing revenue growth, leading to a decline in RLDC profit margin from 42% in the same period last year to 38%.

Management attributed this to the growth in USDC circulation and new distribution agreements with strategic partners such as Coinbase.

This trend is worth close attention from investors. Although Circle has achieved scale growth through partner distribution, the rapid rise in distribution costs may erode profit margins. The company's guidance for a 36-38% RLDC profit margin for fiscal year 2025 indicates that management expects this pressure to persist.

In June, Circle announced that it had applied to the Office of the Comptroller of the Currency (OCC) to establish a national trust bank. Once approved, the company will be able to self-custody reserve assets and is expected to directly access the U.S. payment system through a Federal Reserve master account—this will significantly reduce clearing costs and improve capital efficiency, and is a key part of Circle's future efforts to increase net profits.

Improved Regulatory Environment, but Challenges Remain

The signing of the GENIUS Act establishes a federal regulatory framework for U.S. payment stablecoins, which is a significant benefit for Circle's long-term compliance status. As one of the first stablecoin issuers to achieve regulatory compliance, Circle's competitive advantage in the new regulatory environment may be further strengthened.

However, Circle also acknowledges in its risk disclosures that it faces numerous challenges: intensified competition for yield-bearing digital assets, potential stablecoin run risks, technology disruption risks, and an evolving regulatory environment.

Management maintains a relatively optimistic outlook for the future, expecting a compound annual growth rate of 40% for USDC circulation over the years. The guidance for other income in fiscal year 2025 is $75-85 million, with RLDC profit margin expectations maintained at 36-38%, and adjusted operating expenses of $475-490 million.

From a valuation perspective, Circle's story presents both enticing growth prospects and significant execution risks. The rapid growth of the stablecoin market offers tremendous opportunities for the company, but factors such as margin pressure, regulatory uncertainty, and intensified competition cannot be overlooked Investors need to closely monitor whether Circle can improve profitability while maintaining growth, and whether its strategic transformation can be successfully realized