Circle's revenue rose 17%, but its reserve business earned less.

On November 4, USDC issuer Circle released its third-quarter results. Its own public chain Arc launched this quarter, and the native token ARC also appeared in the income statement as presale revenue. The company listed it under "other income," and the amount exceeded the entire revenue increase for the quarter.

The same earnings report also contains another thread. USDC is being transferred on-chain more frequently, but the outstanding balance at the end of the quarter was basically flat compared with a year earlier. For Circle, the issuer of a stablecoin, users transferring USDC and users holding USDC for the long term are two different sets of accounts. The former can be seen from on-chain transaction volume, while only the latter directly relates to how many dollar reserves can earn interest.

How much of the added revenue came from ARC?

ARC presale props up revenue growth

Circle's total revenue and reserve income this quarter was up about $125 million year over year, and the ARC presale alone recognized $182 million. The waterfall chart can be read from left to right. Start from revenue in the same period last year, subtract the reserve interest not earned this year, then subtract the gap in other income excluding the presale, and finally add back ARC to arrive at the revenue shown in the earnings report.

Looking at the ARC item on its own, revenue growth would shift from an increase of 17% to a decline of about 7.7%. Changes also appeared within the "other income" line item. The announcement said subscription and service revenue was lower than a year earlier. The launch of the Arc mainnet and the token presale are two developments in the same business, and this earnings report explicitly quantified how much revenue the presale recognized.

This also explains why, after deducting distribution, transaction and other costs, the proportion of revenue the company retained jumped to about 52%. Removing only the presale revenue from both the numerator and denominator while keeping the costs disclosed in the announcement unchanged, the ratio is about 39.7%, close to the same period last year. This is a single-item calculation based on disclosed data. It isolates the presale while related costs remain in their original line items.

USDC is transferred more often, so why are reserves earning less?

Distribution costs fell, but net reserve income still shrank

According to Circle's disclosure, USDC on-chain transaction volume grew 49% year over year, and average daily circulating balance rose 8%. Imagine a merchant doing cross-border settlement who receives payment in the morning and pays the same USDC to a supplier in the afternoon. Both transfers count toward on-chain transaction volume, but the issuer's corresponding reserves do not double just because the funds change hands.

Costs also eased a bit. Reserve income fell by about $53.62 million, while distribution and transaction costs simultaneously dropped by about $38.03 million. This can be understood as for every dollar less in reserve income, distribution and transaction expenses were about 70 cents lower in the same period. After offsetting the two, the blue bar in the chart still shrank. Under this methodology, Circle's retained revenue decreased by about 6%, and this amount still needs to cover R&D, marketing, and other operating expenses.

Looking at the company's disclosed net reserve profit margin, under this methodology, for every $100 of reserve income after deducting distribution and transaction costs, about one more dollar was retained compared to the same period last year. Proportional improvement and amount shrinkage can occur simultaneously because the distributable reserve income itself decreased. Overlaying this chart with the first one reveals why the group-level revenue share rose significantly while the amount retained at the reserve end declined.

Where did the extra operating profit go?

Of the extra operating profit, only about 10% remained as net profit

If looking only at profit metrics, this earnings report seems to show two speeds. Circle's disclosed adjusted EBITDA grew 85% year-over-year, while net profit from continuing operations grew only 5%. One metric retains the token presale revenue recognized this quarter while excluding income tax, certain financial instrument valuation changes, and other items. The other metric includes these items.

Starting the waterfall chart with last year's same-period net profit, the approximately $127 million increase in operating profit this quarter would have been enough to raise the bar significantly. Subsequently, other net income declined, and income tax shifted from a benefit in the same period last year to an expense this quarter, with the two combined consuming about 90% of the operating profit increment. The tax base is particularly notable. Last year's same-period income tax benefit elevated the comparison base, so even if this year's tax expense is not high, the year-over-year comparison would still lower the net profit growth rate.

Additionally, the increase in operating profit has already deducted operating expenses. According to company disclosures, management expenses, depreciation and amortization, technology infrastructure, and marketing expenditures rose, with total operating expenses increasing 16% year-over-year. Using presale revenue for the same single-item calculation, keeping adjustment items and costs unchanged, adjusted EBITDA would be approximately $135 million, lower than last year's same-period approximately $171 million. This difference measures the sensitivity of the disclosed metric to this revenue item.

Compared to the second quarter, reserve income is also declining. Distribution, transaction, and other costs were approximately $412 million in both quarters, remaining almost unchanged. This adds another reference point to the earlier year-over-year comparison. Compared to last year, the decline in distribution costs buffered the drop in reserve income. Compared to last quarter, the company's income from reserves continued to decline, with almost no new reduction on the distribution and transaction side to offset it.

In the same quarter, USDC circulated more actively on-chain, and Circle retained less money from its reserves.

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