Author: SoSoValue

Circle released its financial report for the first quarter of 2026 on May 11. Overall, the report was not bad, but it wasn't particularly strong either.

Circle's total revenue for Q1 was $694 million, up 20% year-over-year, but below the market consensus of $720 million; adjusted EBITDA was $151 million, up 24% year-over-year but down 10% quarter-over-quarter; GAAP net income was $55 million, down 15% year-over-year and down 59% quarter-over-quarter; EPS was $0.21, higher than the consensus estimate of $0.17, but lower than some optimistic estimates of $0.25.

Looking solely at the quarterly results, the market is hesitant to give it a high rating. Revenue fell short of expectations, net profit declined sharply quarter-over-quarter, and interest income from reserves began to face pressure from declining interest rates and rising costs. In other words, while Circle's core business is still growing, its profit elasticity is starting to come under pressure.

A new variable in this earnings report is the Arc ecosystem. ARC Token completed a $222 million institutional pre-sale, bringing the total FDV to $3 billion. Investors included a16z, BlackRock, ARK Invest, Apollo, and Intercontinental Exchange. This increase was not previously fully reflected in market expectations, giving Circle a new valuation narrative.

Overall, despite short-term macroeconomic headwinds, Circle's long-term story remains compelling. Its stablecoin business model is advantageous, and demand for USDC continues to grow. CPN, Managed Payments, AI Agents, and payment networks are progressing, while the Arc ecosystem adds new valuation variables to Circle. Furthermore, market anticipation for the swift passage of the Clarity Act has also contributed to the stock price increase.

I. Reserve business is still growing, but profit pressure from interest rate cuts has already emerged.

Circle's core revenue source remains USDC reserve interest.

Q1 reserve interest income was $653 million, up 17% year-over-year, but below the market consensus of $680 million. USDC circulation reached $77 billion, up 28% year-over-year, a slight increase from $75.3 billion in Q4 2025; on-chain transaction volume increased by 263% year-over-year, indicating that demand for USDC remains strong.

The problem is that the increase in USDC circulation is not enough to fully offset the downward pressure on unit yield.

The Q1 Reserve Return Rate fell to 3.5%, a 30 basis point decrease quarter-over-quarter, roughly in line with the decline in secured overnight repo rates. As interest rates fall, the return per dollar of reserves decreases. Circle needs faster growth in USDC circulation to maintain the growth momentum of reserve interest income.

This is also the market's core concern about Circle: it still heavily relies on a revenue model based on "USDC circulating supply × reserve yield." While the stablecoin business model itself remains excellent, if its revenue structure remains solely based on reserve interest for an extended period, its valuation will be suppressed by interest rate cycles.

II. The Arc ecosystem is the biggest new variable in this financial report.

The most important new variable in this financial report is the Arc ecosystem.

Arc is a stablecoin financial network launched by Circle. Its core goal is to further embed USDC into payments, cross-border settlements, institutional fund transfers, and on-chain financial applications. It is currently being tested on the testnet.

Recently, Circle completed its ARC Token institutional presale, raising $222 million and reaching a FDV of $3 billion. Investors included top institutions such as a16z, BlackRock, ARK Invest, Apollo, and Intercontinental Exchange.

According to the white paper, the initial supply of ARC is 10 billion tokens, with 60% allocated to the ecosystem, 25% to Circle, and 15% held as a long-term reserve. The Arc network uses USDC as its gas, and the main functions of the ARC token include staking to obtain protocol fee allocations, discounted rates, and governance.

According to the company's earnings call, Arc Token may affect Circle's profit and loss statement in three ways in the future:

• First, Circle will hold ARC Tokens on its balance sheet at zero cost. When tokens are subsequently sold, the proceeds will be converted into net profit, thereby increasing EBITDA.
• Second, Circle can earn network rewards by running validator nodes and other methods.
• Third, to promote the Arc Network, Circle will issue incentive grants to developers or partners, which will be reflected in other revenue and other costs.

As can be seen, 25% of the ARC Token is expected to become one of Circle's new profit engines. The current Q1 guidance does not include the impact of the ARC Token pre-sale, the Arc incentive program, and future Arc revenue, but there is room for upward revision when the guidance is updated next quarter. More precisely, Arc has provided new earnings flexibility, but management has not yet formally included it in the full-year forecast.

Therefore, what the market really needs to watch is whether Circle will raise its full-year guidance in Q2 or subsequent quarters due to Arc-related revenue, expense recognition, or ecosystem progress.

III. Other income grew better than expected; although the amount is still small, its payment potential is significant.

Circle's Q1 other revenue was $41.63 million, up 101% year-over-year and 12.5% ​​quarter-over-quarter, exceeding the market consensus of $37.4 million.

This is a relatively positive sign for the quarter, indicating that Circle's commercialization in payments, online services, and new settlement scenarios is progressing.

The annualized transaction volume of CPN (Circle Payments Network) reached $8.3 billion, a 75% increase from the previous financial report. The Managed Payments service, launched in April, also allows banks and payment institutions to access stablecoin settlements without directly holding digital assets.

This part of the business represents the direction of Circle's future revenue structure transformation: from solely reserving interest to gradually expanding into stablecoin networks, payment infrastructure, and on-chain settlement services.

Other revenue has a high gross margin and is growing rapidly, but its quarterly size is only over $40 million, accounting for about 6% of total revenue. It is a growth highlight, but not enough to change Circle's current revenue structure, which is highly dependent on reserve interest.

IV. The AI ​​Agent payment network continues to be deployed, enriching the AI ​​narrative.

In addition to Arc, Circle is also continuing to strengthen its story of AI and Agentic Commerce.

On May 11, Circle announced the launch of Circle Agent Stack, with the first batch of products including Circle CLI and smart agent wallet, aiming to serve the payment and settlement needs of AI agents.

Stablecoins are naturally well-suited as assets for machine payments, automated settlements, and small-value, high-frequency transactions. If AI agents become a significant source of demand for on-chain payments in the future, USDC has the potential to become one of the underlying settlement assets.

V. Q1 maintains full-year guidance unchanged, awaiting further confirmation from Q2.

Circle maintains its full-year KPI guidance unchanged this quarter: other revenue is expected to be between $150 million and $170 million; the medium- to long-term CAGR target for USDC circulation is 40%; the RLDC Margin is expected to be between 38% and 40%; and adjusted operating expenses are expected to be between $570 million and $585 million.

This guidance leans towards restraint.

Given that the Arc Token presale has just ended, it's understandable that management hasn't immediately raised its full-year guidance. However, this also means that Q2 will be a more crucial validation window. If Arc-related revenue, incentive arrangements, validator revenue, or network revenue are included in the full-year model, there's room for upward revisions to Circle's other revenue guidance; if CPN and other revenue continue to exceed expectations, it will also strengthen market confidence in the revenue structure transformation.

Summarize

Circle's Q1 financial report itself was not strong.

Revenue fell short of expectations, GAAP net profit declined 59% sequentially, reserve interest income was lower than expected, and USDC circulation also failed to surpass the market's expectation of $80 billion. Without the added variable of Arc, coupled with the recent high market risk appetite, this earnings report would likely have been traded as negative by the market.

However, Circle's long-term story remains compelling. Its stablecoin business model is advantageous, and demand for USDC continues to grow. CPN, Managed Payments, AI Agents, and payment networks are progressing, while the Arc ecosystem adds new valuation variables to Circle. Furthermore, market anticipation for the swift passage of the Clarity Act has also contributed to the stock price increase.

The most accurate assessment of Circle's current situation is: its existing businesses are still profitable, but declining interest rates are weakening profit elasticity; new businesses are progressing steadily, but have not yet truly become the main source of revenue; Arc is a new variable, but we need to see if it is included in guidance and the profit statement in Q2.

What the market really needs to see next is whether Circle can transform Arc, CPN, AI Agent, and the payment network into higher additional revenue streams, better profit margins, and a revenue structure less reliant on reserve interest. If it can do this, Circle's valuation logic will upgrade from "a stablecoin company that makes money from reserve interest" to "a global stablecoin payment and on-chain financial network."