Circle's ARC Mainnet Faces First Earnings Test As USDC Growth Slows And Margins Compress

Circle Internet Group heads into its third-quarter report with two stories competing for the same income statement. One is a new growth engine: the ARC blockchain was slated to move from testnet to mainnet on September 16, with DTCC, BlackRock, Visa and MasterCard attached, and management lifted full-year guidance on the strength of it. The other is the legacy reserve-income business, where USDC circulation growth has cooled sharply and falling rates keep shaving the yield on reserves. The November 4 release, due before the open, is the first look at whether the new story can carry the weight the old one is starting to shed.

The Street is looking for earnings of $0.40 a share on revenue of $797.0 million. That revenue figure would be up 7.7% from a year ago and a sizable step up from the $701.3 million reported last quarter, while earnings would fall 37.5% from the $0.64 posted in the year-ago period. Growth without profit growth is the defining shape of this quarter. The Earnings Whisper sits at $0.45, a nickel above consensus, which on a base this small signals that more optimistic investors expect a cleaner beat than published estimates imply.

The arithmetic behind management's raised guidance explains why ARC matters so much. Other revenue is now guided to $310 million to $330 million for the year, up from $150 million to $170 million, and roughly $180 million of that comes from recognizing revenue on the $242 million ARC token presale as milestones are reached. With only about $76 million booked across the first two quarters, and other revenue actually slipping to $34 million last quarter, the back half has to deliver a large leap. A successful mainnet launch is the obvious milestone, so this report should reveal how much token revenue lands now versus later. Clear recognition, along with progress toward the raised margin target of 41.7% to 43.7% on a revenue-less-distribution-cost basis, would validate the reset. Vague timing would invite questions about how much of the raise rests on accounting milestones rather than recurring demand.

The core business deserves equal scrutiny. USDC circulation ended the second quarter at $73.3 billion, up only about 20% year over year after growth above 100% a year earlier, and the ending balance trailed the record quarterly average. Reserve returns have slid from 4.15% to 3.48% over three quarters, the Hyperliquid revenue-share arrangement begins to cost money this quarter, and operating expenses are tracking toward the high end of the $570 million to $585 million range. Adjusted EBITDA margin has fallen four straight quarters to 50%. Stabilizing circulation and a margin that stops sliding would go a long way. On the positive side, the Circle Payments Network had reached a $23 billion annualized run rate by late July with 175 financial institutions, and USDC's share of stablecoin transaction volume hit a record near 70% in June. Continued compounding there would show the network strategy is broadening Circle's revenue base beyond interest income.

The market has already given management the benefit of the doubt. Shares are up nearly 29% since the last report while the S&P 500 slipped, and sentiment, though still bearish, has improved markedly from the prior quarter. Yet the stock, at $79.84, sits below its 200-day average of $86.13 and well off its post-report high of $103.28, suggesting enthusiasm has cooled from its peak. The trading range has also narrowed considerably from the prior quarter's wild swings.

Ultimately, this report turns on whether ARC proves to be a durable second leg rather than a one-time token windfall. If mainnet traction, partner activity and revenue recognition line up with the raised guide while circulation holds steady, the improving narrative stays intact. If token revenue slips and the reserve business keeps eroding, the guidance raise may start to look more like a bridge than a foundation.

This earnings preview was originally published on Earnings Whispers.

This article is for informational purposes only and is not investment advice. Earnings Whispers and its staff may hold positions in the securities mentioned. It is AI-assisted, based on proprietary Earnings Whispers data and company reports, and edited by Earnings Whispers staff.