Circle's Q1 performance was stable but lacked momentum; traditional reserve interest income faced pressure from rate cuts, but the introduction of the Arc ecosystem brought new valuation narratives and operational flexibility to the company.

AuthorSource: sosovalue

Circle released its first-quarter 2026 earnings report on May 11. Overall, the report was decent, but not particularly strong.

Q1 Circle reported total revenue of $694 million, a 20% year-over-year increase, below the market consensus of $720 million; adjusted EBITDA was $151 million, up 24% year-over-year but down 10% sequentially; GAAP net profit was $55 million, down 15% year-over-year and 59% sequentially; EPS was $0.21, above the consensus of $0.17 but below some optimistic forecasts of $0.25.

Looking solely at the quarterly results, the market finds it difficult to assign a high valuation. Revenue fell short of expectations, net profit declined significantly quarter-over-quarter, and reserve interest income is beginning to feel pressure from falling interest rates and rising costs. In other words, Circle’s core business is still growing, but profit elasticity is starting to come under pressure.

This earnings report introduces a new variable: the Arc ecosystem. The ARC token completed a $220 million institutional pre-sale, with a fully diluted valuation of $3 billion, and institutional investors include a16z, BlackRock, ARK Invest, Apollo, and Intercontinental Exchange. This增量 was not fully reflected in prior market expectations, giving Circle a new valuation narrative.

Overall, despite short-term macro headwinds, Circle’s long-term narrative remains highly compelling. The stablecoin business model offers strong advantages, and demand for USDC continues to grow. CPN, Managed Payments, AI Agent, and the payment network are all advancing, while the Arc ecosystem adds a new valuation driver for Circle. Additionally, market anticipation for the timely passage of the Clarity Act is serving as a catalyst for the stock price.

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

Circle's current core revenue source is still the interest on USDC reserves.

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

The issue is that the growth in USDC circulation is not yet sufficient to fully offset the downward pressure on unit yields.

The Q1 Reserve Return Rate decreased to 3.5%, a 30-basis-point decline quarter-over-quarter, in line with the decline in the secured overnight financing rate. As interest rates fall, the yield generated per dollar of reserves decreases. Circle needs faster USDC circulation growth to sustain the momentum of reserve interest income growth.

This is also the market’s primary concern regarding Circle: it still heavily relies on the revenue model of “USDC circulation × reserve yield.” While the stablecoin business model itself remains strong, if revenue continues to depend solely on reserve interest over the long term, its valuation will be constrained by interest rate cycles.

Second, the Arc ecosystem is the largest new variable in this earnings report.

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

Arc is a stablecoin financial network launched by Circle, with the core goal of further integrating USDC into payments, cross-border settlements, institutional fund transfers, and on-chain financial applications, currently under testing on the testnet.

Recently, Circle completed the institutional presale of the ARC Token, raising $2.22 billion with a fully diluted valuation of $30 billion. Investors include top-tier institutions such as a16z, BlackRock, ARK Invest, Apollo, and Intercontinental Exchange.

According to the whitepaper, the initial supply of ARC is 10 billion tokens, with 60% allocated to the ecosystem, 25% to Circle, and 15% as a long-term reserve. The Arc network gas is USDC, and the primary functions of the ARC token include staking to receive protocol fee distributions, discounted rates, and governance.

According to communications from the company's earnings call, Arc Token may potentially impact Circle's income statement in three ways:

First, Circle will hold the ARC Token on its balance sheet at zero cost. Proceeds from future token sales will convert into pure 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 income and other costs.

It is evident that 25% of ARC Tokens have the potential to become one of Circle’s new profit engines. The current guidance for the first quarter does not include the ARC Token presale, the Arc incentive program, or the future impact of Arc revenue, but there is room for an upward revision when the guidance is updated next quarter. More precisely, Arc has already introduced new operational flexibility, though management has not yet formally incorporated it into its full-year outlook.

So what the market will truly be watching going forward is whether Circle will raise its full-year guidance due to Arc-related revenue, expense recognition, or ecosystem progress in Q2 or subsequent quarters.

III. Other income growth exceeded expectations; although the scale is still small, the payment potential is significant

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

This is a relatively positive signal this quarter, indicating that Circle is making progress in commercializing its services for payments, network services, and new settlement scenarios.

Among these, the Circle Payments Network (CPN) achieved an annualized transaction volume of $8.3 billion, a 75% increase from the previous report. Managed Payments, launched in April, enables banks and payment institutions to access stablecoin settlements without directly holding digital assets.

This business segment represents Circle’s strategic shift in revenue structure: from relying solely on reserve interest to expanding into stablecoin networks, payment infrastructure, and on-chain settlement services.

Other income has high gross margins and rapid growth, but its quarterly scale is only around $40 million, accounting for approximately 6% of total revenue. It is a growth highlight, but not yet sufficient to alter Circle’s current revenue structure, which is heavily reliant on reserve interest.

IV. The AI Agent payment network continues to be implemented, enhancing the AI narrative.

In addition to Arc, Circle is also continuing to strengthen the narrative around AI and Agentic Commerce.

On May 11, Circle announced the launch of Circle Agent Stack, with initial products including Circle CLI and agent wallets, designed to meet the payment and settlement needs of AI agents.

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

Five: Maintain full-year guidance for Q1 and await further validation in Q2.

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

This guide is restrained.

Given that the Arc Token presale has just been completed, it is understandable that management did not immediately raise its full-year guidance. However, this also means that Q2 will become a more critical validation window. If Arc-related revenue, incentive structures, validator income, or network income are incorporated into the full-year model, there is room to raise Circle’s other revenue guidance; if CPN and other revenues continue to exceed expectations, it will further strengthen market confidence in the transformation of the revenue structure.

Summary

The Q1 earnings report itself is not strong.

Revenue fell below expectations, GAAP net profit declined by 59% quarter-over-quarter, reserve interest income was lower than anticipated, and USDC circulation failed to break through the market’s anticipated $80 billion threshold. Without the new variable of Arc, and given the recent higher market risk appetite, this earnings report would likely have been initially priced as negative by the market.

But Circle’s long-term story remains highly compelling. The stablecoin business model offers strong advantages, and demand for USDC continues to grow. CPN, Managed Payments, AI Agent, and the payment network are all advancing, while the Arc ecosystem adds a new valuation variable for Circle. Additionally, market anticipation for the swift passage of the Clarity Act has further fueled stock price momentum.

The most accurate current status is: the legacy business is still profitable, but declining interest rates are eroding profit elasticity; new businesses are progressing steadily but have not yet become the primary revenue driver; Arc is a new variable, but we need to see if it enters guidance and the income statement in Q2.

What the market will truly be watching next is whether Circle can transform Arc, CPN, AI Agent, and its payment network into higher other revenues, better profit margins, and a revenue structure less dependent on reserve interest. If successful, Circle’s valuation narrative will evolve from “a stablecoin company earning interest on reserves” to “a global stablecoin payment and on-chain financial network.”