Gemini's Bet On New Products Faces A Test As Crypto Trading Volumes Keep Shrinking

Gemini enters its third-quarter report with a problem that cost cuts alone cannot solve. Over the past year the company has turned itself into a multi-product platform. It now offers prediction markets, an in-house derivatives clearinghouse, commission-free US equities and more than 5,000 tradable markets. The business that historically paid the bills, spot crypto trading, keeps contracting. The report due after the close on November 12 should show whether the newer products are growing fast enough to offset that decline.

The Street expects a loss of $1.13 a share on revenue of about $45.4 million. That would be roughly a 38% improvement in the per-share loss from a year ago. It would also be a wider loss than the $0.89 posted last quarter. Revenue would be essentially flat with the prior quarter's $45.5 million and down about 10% from a year earlier. Management offers no formal revenue guidance. Last quarter it narrowed its full-year technology and G&A expense outlook to $155 million to $170 million, cutting $20 million from the top end. That makes spending the one area where the company has given investors a clear yardstick.

The flat revenue forecast hides a tough mix shift. Spot volume fell to $3.8 billion last quarter, down from $16.4 billion a year earlier. Management also said third-quarter volumes were tracking below the second quarter. Holding revenue steady therefore requires services and interest income to keep doing more of the work. That category rose to 59% of net revenue from 49% one quarter earlier. Card pre-provision net revenue jumped 44% sequentially, and prediction-market activity reached record monthly volumes in July. A quarter in which these lines clearly absorb another drop in exchange revenue would support management's argument that bear markets are for building. If revenue slips below consensus because the newer businesses are still too small to matter, the turnaround story will look more distant.

Credit quality is the second swing factor. A fraud event pushed transaction losses to $20.1 million last quarter from $11.1 million and lifted headline card delinquency to 9.4%. Management traced nearly all of that to a single first-quarter cohort and put non-fraud delinquency near 3.3%. This quarter should show whether that problem is contained. Falling losses would help validate the explanation. Another increase would raise questions about underwriting just as card sign-ups have collapsed, to about 5,000 last quarter from 64,000 a year earlier, after the company cut marketing to almost nothing.

On costs, investors should want to see quarterly operating expenses at or below last quarter's $122.4 million and the operating loss improving for a fourth straight quarter. Updates on the futures commission merchant application are also worth watching, since approval would open a path to US crypto perpetual futures. Advisory revenue of about $2.7 million a quarter ends after this period. That makes the fourth-quarter outlook a cleaner test of underlying revenue strength than this print.

The market has already reached its own conclusion. Shares have fallen about 30% since the last report, against a roughly 3% decline in the S&P 500. At $2.72, the stock trades near the bottom of its post-earnings range of $2.59 to $6.20 and far below its 200-day moving average of $5.17. Sentiment has grown noticeably more bearish than it was heading into last quarter. Low expectations can soften the reaction to merely adequate results, but they do not create a catalyst. The key question is whether the new products have grown enough to stabilize revenue without help from crypto trading. If they have, the cost reset starts to look like the foundation for a recovery. If not, the losses will keep falling mainly on shareholders.

This earnings preview was originally published on Earnings Whispers.

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