Circle 3Q25 Quick Interpretation: Circle's third-quarter performance overall exceeded BBG consensus expectations, but the guidance upgrade was not aggressive enough. If not deliberately conservative, some indicators imply a slowdown or underperformance in Q4. Additionally, considering that not many institutions cover Circle, BBG expectations may differ from actual market expectations. Therefore, Dolphin Research will also look at Circle's actual performance from its own trend perspective.
1. USDC ecosystem accelerates expansion, but guidance remains unchanged: This is subjectively considered by Dolphin Research as the only key indicator, but it is also relatively transparent. At the end of Q3, the circulating balance of USDC was $73.7 billion, further increasing its market share in the stablecoin market to 29%.
Circle's valuation is built on future growth expectations, which means investors need to have a strong heart for short-term and even medium-term fluctuations. Although the market may still be concerned about short-term performance, Dolphin Research believes that the most critical indicator during the high-speed expansion phase is the size of the ecosystem. Especially for a 'currency,' a small ecosystem means failure.
Therefore, regardless of short-term revenue or profit, the scale of USDC has always been the most critical indicator. However, because this is more market data-oriented, it is relatively easy to track. According to Coinkecgo data, USDC's market value showed significant accelerated growth in July and August, but slowed down in September.
However, the company's guidance for future years' growth CAGR remains at 40%, unchanged from the previous quarter, which Dolphin Research is not satisfied with. Not to mention that market expectations have already been raised by the guidance given last quarter, this guidance can no longer satisfy the market's more optimistic sentiment.
More importantly, since the third quarter, market competition has actually intensified, with more 'stablecoin' suppliers ready to launch. Therefore, only by more aggressively issuing USDC and increasing more channel cooperation can we align with our long-term growth expectations.
2. Other income exceeds expectations, but Q4 may weaken: Other income once again exceeded expectations, mainly driven by CPN services in addition to issuance income. By the end of Q3, a total of 29 financial institutions had joined the CPN system, with another 55 institutions under review and 500 preparing to join.
At the end of October, Circle launched the Arc public test network, with over 100 companies participating in the test. Arc is a set of Layer-1 blockchain technology developed by Circle, intended to establish a full-stack fintech platform. The company raised its full-year guidance to 0.9-1 billion, but implied Q4 other income of 0.17-0.27 billion, a sequential decline from Q3. This can be monitored in the conference call, and Dolphin Research tends to believe the guidance is deliberately conservative.
3. Increasing self-holding ratio to hedge against increased channel sharing: In the third quarter, Circle increased its distribution channels, such as Brex, Deutsche Börse Group, Finastra, Fireblocks, Hyperliquid, Kraken, and Visa, but Q3 gross margin (RLDC) was 39.5%, still up 1.3ppt sequentially.
One reason is that Circle quickly increased its internal self-holding ratio from 7.4% in Q2 to 13.8% in Q3. As a result, the proportion of USDC held by the largest 'vassal' Coinbase fell from 23% in the second quarter to 20% in the third quarter, reducing the drag on gross margin.
The company adjusted its full-year 2025 gross margin guidance from 36-38% directly to 38%, implying a slight decline in Q4. This means that external channel cooperation will continue to increase. From Dolphin Research's perspective, compared to sticking to gross margin, we are more in favor of opening up cooperation and pursuing long-term win-win.
4. Significant increase in expenses, mainly SBC: Q3 expenses increased by 70% year-on-year, with employee benefits naturally being the main growth driver, but other infrastructure-related expenses also grew significantly. Employee expenses increased by nearly $0.5 billion sequentially, mostly driven by SBC (up $0.48 billion sequentially). Excluding this, Adj. EBITDA margin rebounded to 22.5%.
The company's guidance slightly increased for overall expenses, implying Q4 operating expenses of 1.4 billion, slightly exceeding market expectations. This does not include SBC, and the investment in infrastructure expenses has slightly increased, which Dolphin Research tends to view neutrally.
Equity dilution is one of the important factors putting pressure on Circle's stock price. Last quarter's report led to a sudden collapse after the financial report due to a sudden issuance. Although we remain optimistic about Circle's long-term prospects, Circle's IPO lock-up will be lifted early next month, and short-term volatility risks should be avoided. $Circle(CRCL.US)
