Greetings, and welcome to the Bakkt First Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference call over to our host, Ann DeVries, Head of Investor Relations at Bakkt. Please go ahead.

Good morning, and thank you for joining us for Bakkt's first quarter earnings call. Today's presentation including the separate earnings call presentation that can be found on our Investor Relations website at www.investors@bakkt.com, will contain certain forward-looking statements. These statements are based on management's current expectations and are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. For a more complete discussion of forward-looking statements and the risks and uncertainties related to Bakkt's business, please refer to its filings with the Securities and Exchange Commission. During today's presentation, in addition to discussing results that are calculated in accordance with generally-accepted accounting principles, we will refer to certain non-GAAP financial measures. For more information on this, the basis of presentation for our financial results and our non-GAAP measures, please refer to our earnings release which was filed this morning with the SEC. Joining me on today's call are Gavin Michael, Chief Executive Officer; and Karen Alexander, Chief Financial Officer. After our prepared remarks, we will answer questions we received from our investors through the Say Technologies platform. After that, Gavin and Karen will be available to answer questions from the analyst community.

Thank you, Ann. Good morning, everyone, and thanks for joining. Our differentiated platform is positioned to win in this environment through the combination of our premiere, secure custody solution and Apex Crypto's advanced trading capabilities, we are poised to be the crypto infrastructure provider of choice. In this current environment, clients are seeking a trusted partner, and our regulatory and compliance-first approach sets us apart. We separate the entities facilitating crypto trading and custody functions, and we've built a broad network that provides scale, reaching millions of users across client verticals, including the fast-growing fintech industry. Our priorities for this year further strengthened our competitive mode. We're investing in our crypto capabilities, including custody. We're building upon this core capability to enhance and expand flexibility. We are seeing significant inbound interest for our custody offering. And our SOC 1 and SOC 2 certification, along with our separate trust entity structure and overall secure approach, are really setting us apart in those conversations. We're investing in our crypto trading capabilities to expand to new international markets alongside our existing clients while strategically investing to enhance our capabilities. We remain committed to activating and broadening our already robust network. This means continuing to collaborate with existing clients to drive trading volumes, partnering with these same clients to collectively bring new platform capabilities to market. I also wanted to highlight our disciplined approach to strategically allocating capital. We are opportunistically deploying capital and remain highly focused on managing expenses. We apply rigorous analysis to inform capital allocation decisions across the organization, intentionally investing in the areas that have the most growth potential for our organization and being prudent across other aspects, leveraging the resources we already have in place. Moving to our acquisition of Apex Crypto, which we're really pleased, closed on the…

Thank you, Gavin, and good morning, everyone. Let's now turn to Apex Crypto's recent financial performance in 2022 and a preliminary look at the expected outlook for 2023. In accordance with GAAP reporting, we showed 2 line items here. Gross revenue, which captures all revenue associated with transactions, assets under management and fees on a gross basis. The gross revenue presentation aligns with Apex Crypto's role as a principal in trade with customers. We also show crypto cost and execution clearing and brokerage fees associated with the trading activity, which captures the cost of crypto, partner revenue share and other fees. Crypto costs and fees will generally follow the same trend as gross revenue. Netting these 2 line items will provide the profit contribution from creating activity, which is a non-GAAP figure. Let's move on to the numbers. You can see here that 2022 was a story of 2 halves. The first half of the year was very strong, with customer transaction activity driving $2.2 billion in gross revenue. Then the crypto market turmoil stalled activity levels for the overall industry, and we saw second half gross revenue declined by over 50% to $899 million, consistent with the broader total crypto market volume as illustrated on the prior slide. We evaluated 2023 expected gross revenue performance in light of where the markets ended in the second half of 2022. We saw Q1 2023 volume start to rebound from Q4 2022 levels, consistent with industry trends, and we expect similar volumes in the second quarter. Accordingly, our outlook for the first half of 2023 is similar to what we saw in the second half of 2022. We expect crypto market activity levels to recover as 2023 progresses, and our second half 2023 outlook reflects that. This outlook also reflects an estimate…

Thanks, Karen. Just a few final thoughts. We are really well positioned for improving crypto market conditions. We brought together a winning combination of industry-leading crypto custody solutions and advanced trading capabilities. Coupled with our regulatory and compliance-first focused approach, our platform is truly differentiated in the current market, and our company is built for sustainable growth. Our key priorities for 2023 are highly focused on areas that will drive near-term results while building for a long-term future. This includes initiatives to significantly expand our network of clients both in the U.S. and internationally. We have a great opportunity to collaborate with our existing client base and meet their needs to expand internationally, especially in markets that are providing regulatory clarity. We're continuing to have active conversations with prospects across the board. Although there remains some ongoing caution regarding the regulatory environment in the U.S., we are seeing some pockets of green shoots. We continue to strategically allocate capital to further strengthen our business, and we'll continue to evaluate growth opportunities while driving efficiencies in expense management and being highly disciplined with our decisions around how we deploy capital. This is a pivotal moment for our growth. We are confident with how we are positioned, and as the environment improves, we are really ready to take off. Thank you for joining us today. I'll now turn it over to Ann to manage our Q&A.

Thanks, Gavin. Let's move over to questions from the investor community. [Operator Instructions]. Our first question comes from Rajeev S. Who asks, is it possible that Bakkt will get acquired by a larger company? Gavin, can you please take this question?

Yes. So, look, happy to take the question. Look, we've built a great platform with a really strong value proposition that's attractive to a lot of companies. We're always monitoring the markets and making sure that we are evaluating opportunities that provide maximum value to our shareholders. We get approached about a lot of things leading to actions like our acquisition of Apex Crypto. That said, our team is really committed to building our business, and we're excited about the path ahead with Apex Crypto in the fall.

Next question is from would like an update on our Mastercard partnership. Gavin, can you give an update here?

Yes. So no trouble. Continuing to work with Mastercard on our crypto rewards offering, we remain highly committed to this and making it successful. Unfortunately, we've seen that the regulatory environment in the U.S. around crypto slowed down the activation of many of our TradFi partners. Much of the integration and go-to-market work with our TradFi partners has been completed, and many are now waiting for the right time to enter the market. Given these headwinds facing TradFi, the closing of our acquisition of Apex Crypto could not have happened at a better time. Our ability to expand into fintech verticals and internationally through our existing client base is even more compelling right now.

Next question is from who asked, when will XRP be a part of your platform and why aren't you listing it? Karen, can you answer this one?

Yes, I can take the question. Bakkt has a rigorous listing policy that takes into account a number of factors to determine if a coin is suitable and safe for listing through our partners and to their users. One of the primary factors considered is regulatory status. Bakkt is committed to complying with the relevant laws and regulations in the markets we serve, and there is currently limited guidance as to the legal status of a number of coins. Given these factors, we are taking a prudent approach to the crypto tokens that we are offering on our platform at this time. We will continue to monitor the regulatory environment as it evolves and we'll make potential changes to the coins that we list if and when appropriate.

Our next question is from working P who wants to know what are your tangible plans to drive revenue? Pay with crypto, Bitcoin custody internationally while we await regulatory clarity in the U.S.? Karen, can you jump in here?

Yes. First, I want to reiterate that we are absolutely committed to staying in the U.S. That said, as working P's question alludes to, there are jurisdictions around the world that have progressed a bit further than the U.S. with regards to crypto regulation. It's the right time to pursue these markets given the clear regulatory environment and strong demand to offer our capabilities there from our existing clients. This is an incredible opportunity to bring our secure crypto capabilities, like crypto trading, into these new markets. While I won't provide any specific timing on this right now, I will say that this is something that we really focused on and actively engaged in trying to launch before July. Just like we did in the U.S. when we first built our business, we are careful to ensure that everything that we do is secure, compliant and well thought out. Our regulatory and compliance-first approach is part of our DNA and is at the forefront of any decisions and actions that we're going to take as we look to expand.

Great. Our final question from the Say Platform is from working P who asked, are you considering the dilutive impact of issuing an additional 26 million shares to employees? While I understand the business needs to compensate adequately, are you enforcing accountability for delivering tangible business impact? Karen, can you take this one?

Sure, happy to. First, I want to clarify that the pool of 26 million shares would cover equity grants over a 3-year period. Our firm's equity compensation program is absolutely tied to performance goals for both our overall company as well as teams and individual employees. Our company's ability to execute against these concrete goals determines the available pool of equity awards for our employees. We will not pay out these equity awards if we do not deliver on metrics that include revenue and cash expense targets, among others. Our compensation program is subject to our rigorous process and is governed by the Compensation Committee of the Board.

And with that, I would now like to turn the call back over to the operator to open up the phone line to take questions from the analyst community.

[Operator Instructions]. Our first question comes from the line of Andrew Bond of Rosenblatt Securities.

Gavin, Karen and Ann. Just a couple on Apex. You've always discussed growth outside the U.S. as an opportunity down the road for Apex, but this now seems to be a greater priority and just understanding there is demand from customers. But to what extent has the regulatory environment in the U.S. has been a driver here as you're looking to grow in other countries? So in speaking with other industry participants, it seems that the regulators in current administration are doing their best to make it more difficult for brokers to allow crypto trading on their platform. So are you experiencing this post acquisition and receiving more feedback like this from clients or potential clients in the U.S.?

Andrew, it's Gavin. Let me take that one. I think when we talk about the change in positive with respect to accelerating that growth internationally, it's coming for a couple of reasons. I think, firstly, we're getting strong demand from the existing client base to enter these markets. As we're seeing legislation in other markets start to favor crypto and it's a more conducive environment, many want to take advantage of that and that provides us with an easy route into these markets. So we've spoken about the U.K., we've spoken about the EU and Southeast Asia. We're still very much committed here to the U.S., so we see -- we see the potential in the U.S. market, we see the growth opportunities. But we're trying to maximize where we grow in the short term efficiently and effectively. And so their near-term focus for us is really engaging actively with the client base to move as quickly as we can into these new markets while being thoughtful. And I think the change has been generated by the fact that post the Apex close, we now have a route into those markets that has a reasonably low barrier of entry together with the fact that those markets are becoming more crypto producer and the fact that we are being led by this client base into those spaces.

Okay. Great. And just a follow-up on custody. You spoke to a significant increase in inbound for your custody solution, I mean particularly following the banking crisis. So is this starting to translate to wins for the business? And what's the time line look like to convert more of this pipeline and interest?

Yes, we're certainly seeing a continued traction in those discussions. We're setting ourselves apart by the way we run our custody solution. SOC 1, SOC 2 certifications, a separate trust entity structure, the overall secure approach are really appealing to many crypto firms that have crypto that they want to be able to store with a custody provider like us. So there's very strong traction in those discussions. We expect to see momentum through the second half. And as we've said, we continue to invest in our custody solution to be able to broaden the basic structure and then also expand into other areas around how custody operates. We're very excited by the custody space. It's been a core competency of ours from our founding, and we continue to use that as an advantage to a great anchor product when we're talking to many folks about starting down this pathway with us.

Our next question comes from the line of Trevor Williams of Jefferies.

Great. Gavin, maybe just to start kind of higher level on the regulatory environment. I know you're mentioning -- I think this may be a little bit of a change in tone just around kind of international markets that have been at least providing a bit more regulatory clarity. But maybe just to focus on the U.S., just kind of where you see the state of the union from both, A, on the legislative side, if there's anything that you guys are expecting to progress at all through the rest of this year? And then obviously, there's just a bunch of noise with some of the enforcement actions that have been coming down, maybe just kind of how you see the regulatory environment today versus 3 or 6 months ago here in the U.S.? That would be helpful.

Trevor, look, I think we're pleased to see that the Congress and the federal regulators have certainly stepped up their attention to the crypto space. When you think about the high-profile failures through last year, it's clear to us and logical that the federal regulatory framework is needed in order to restore confidence in the market for everyone, for investors, for consumers and partners. We support the enforcement actions against bad actors in the space. But when you think about it, a good regulatory framework, a comprehensive regulatory framework shouldn't just define where the third rails are. It needs to clearly outline how good actors can conduct their operations in a highly compliant way. But also allowing for innovation and for us to be able to bring the benefits of those innovations to market in a very safe and transparent way. So we're getting more involved directly in the conversations, both on capital as well and with the relevant regulators as they consider these issues. And we acknowledge that these issues are complex, but they're very important that we get it right. We see ourselves as a resource to them as these discussions continue. I'm still hopeful that through '23, we'll see clarity in the space. We're seeing moves. The recent stable coin discussions have been very encouraging. But it's a space that we desperately need to protect the U.S. consumers in, but it's also important that we ensure that innovation happens here in the U.S. and it's not all driven offshore. Whilst we look at the other markets where we're seeing regulatory clarity evolve, that sets up a reasonable template to how these discussions can move forward. And there's a lot of similar threads whether it be with how MiCA has been put together, what Hong Kong has just come out with the U.K. paper from Treasury. All of these papers have common threads about using existing regulatory frameworks to be able to drive the way that this space should evolve. So pleased to see that the attention that we're getting. Hopeful that through the course of this year, we'll see the clarity. And we need to move away from just defining where the third rail is and into something that is a comprehensive framework that allows us to operate the business and continue to innovate.

Okay. That's helpful. And then, Karen, I don't think we heard anything incrementally on the 2023 revenue outlook that you gave last quarter. So I'm just wondering if we should still be assuming the $62 million to $72 million range on revenue is still the base expectation? And then as a part of that, the Apex contribution for this year, I just want to make sure, am I understanding the slides correctly as Apex contributing $6 million to $8 million to full year net revenue post close? Or is that the full year number and you're only going to get a portion of that for the 3 quarters that you had in the revenue base?

Happy to answer that. So in terms of the guidance that we gave last quarter, which was obviously excluding Apex Crypto, we did not provide an update on that. Typically, what we do is as we do our midyear update as far as the second quarter review, that's our time to look at whether we need to provide any updates to that guidance. And certainly, we would do that on a combined company basis now that we have closed on Apex. So no updates to revenue guidance there. In terms of the presentation, the numbers that you were seeing in terms of the $6 million to $8 million are full year numbers. So if you think about the fact that we will pick up those revenues starting in the second quarter, I can say that for the first quarter of 2023, the Apex net gross margin or net contribution was $1.3 million. So you could basically say the rest of that in that range is what we'd expect now that they are part of our results.

Our next question comes from the line of Peter Christiansen of Citigroup.

Just a couple on Apex. I mean it looks like at least the net take rate was kind of like mid- to high 20s last year. It's kind of been drifting higher. Now kind of low 30s, like 33, 34 basis points, somewhere around there. Can you talk about what's driving that? Is it underlying client mix or token mix activity-wise? And then I have a follow-up.

Pete, I'd be happy to take that one. So similar to how we've talked about how the organic Bakkt crypto offerings work, every Apex client has an agreed upon spread upon which we -- that we add to crypto buyers themselves. And so that does differ client by client. And then from there, beyond just the cost of the billing and the purchases of crypto, there is what has been termed a correspondence. That's really a rev share with the clients. Again, that is -- differs client by client. So if you are seeing mixes there, it tends to be driven by the relative trading volume by each client's underlying customer mix.

That's helpful. And then looking at the outlook for Apex to be free cash flow breakeven, I'm assuming that at current crypto prices, if we were to test that like scenario analysis, maybe plus 10%, minus 10% for crypto values, I would imagine the free cash flow change would be kind of like single millions of dollars. Is that the right assumption and the way to think about it as we stress test our models?

Obviously, the gross revenue is -- as crypto prices go up, gross revenue goes up, but then also the cost of the crypto that we provide in the rev share goes up proportionally. So I mean, I would think about it in terms of that take rate being about the same. But certainly, the -- it's based on gross volume that is being influenced by both crypto prices and the actual volume of coins that are being actively bought and sold, yes.

Okay. I just wanted to understand the fixed cost relationship down to operating income. Okay.

Our next question comes from the line of Jeff Cantwell of Wells Fargo.

Congrats on closing Apex Crypto. I wanted to ask you a couple on that. If we go to Slide 10 of your presentation, can you walk us through your assumptions for the back half of this year for Apex Crypto gross revenue? What are sort of the underlying assumptions that would drive the gross revenue to improve sequentially versus the front half of the year? I'm just trying to think through some of the underlying drivers in terms of active accounts and assets on the custody and crypto-enabled accounts, and so forth. So what were the assumptions that you're currently contemplating for the back half of this year?

I can certainly take that. So if you think about how we make money at the crypto activity, obviously, it starts with the access to the number of accounts we have now. We acquired over 5.5 million active accounts when we closed the deal. The percentage of those accounts actively trading in any period and at what notional and how frequently is really one of the behavioral drivers that we look at. So we look at that activity over time in the trend. So even for instance, if we didn't pick up an additional client relationship for the end of the year, one of the things that we've ranged is, based on the data we have over time, what do we expect that transaction behavior to look like. And then on top of that, as we've mentioned, Apex brought to us a great pipeline of additional client opportunities. So we are actively working on -- some of them are signed in and in the process of activating, others are getting to the sign phase. So that range also reflects our analysis in terms of additional clients coming on to the platform and bringing their customers with them.

Okay. Great. And then to follow up on Trevor's question earlier about the prior guidance that you gave for the full year. Can you -- without -- it doesn't sound like you give numbers this quarter, but you will next quarter. But can you help us think through what you're thinking is now about -- there's so much happening with macro and so forth, but what is your thinking about the business now relative to 3 months ago? Or any kind of color you can give us in terms of just sort of providing us an update on how you're thinking about how the full year will play out?

Yes. So when we talked last quarter about the revenue guidance, obviously, one of the things we talked about is we've got a steady-state long history with our loyalty business that provides a range. And then we also talked about the crypto contribution pre-Apex coming from our traditional pipeline of traditional finance clients more at the end of the year. So one of the things that we are constantly looking at is where do we see the momentum to start picking up activations on the TradFi space. And one of the things that -- as we think about now, the fact that Apex is part of the combined company, depending on what we see in the environment especially from a regulatory perspective, this now allows us the chance to pivot resources and focus to these subset for instance. We continue to see softness on traditional finance companies wanting to estimate because of the uncertainty in the U.S. regulatory environment. We will very quickly pivot to focusing more on the efforts where we see more of the immediate opportunities for activation and expansion. So I think all of this has come together as we think about and prepare for how we want to update our investors as part of second quarter earnings in terms of the combined potential of the company.

Our next question comes from the line of John Roy of Water Tower Research.

So Karen, obviously, there's been a lot of discussion about Apex. I was wondering, have you given any thought or can you give us any color on what new metrics or line items we might be seeing when you start doing disclosure, combine the company? That would be helpful.

Yes. So great question, John. One of the things that I'm sure people have noticed when they looked at Page 10 of our presentation and we are talking in terms of gross revenue, and that is a different way of presenting compared to how we have talked about our legacy loyalty business, which is on a net revenue basis. Some of that is just based on the accounting rules around how we have to report that crypto activity relative to how we fill this buy/sell orders. So in accounting jargon, we are considered the principal in these transactions. So every gross dollar -- crypto that we sell becomes first revenue, and then we separately have to identify the cost of fulfilling those orders like the cost of goods sold as well as the correspondent fees, the business share and any brokerage fee to really get to the net contribution. So one of the things that you'll see in the second quarter is how we will come together now with 2 very different income statement presentations for the 2 sides of our business. Apex Crypto activity, which will be on a gross basis, and then our loyalty business that will continue to be on that basis. We definitely intend, as Gavin mentioned, to complement that and expand that with the other KPIs that we were presenting historically. So if you think about things like number of asset accounts and the dollar value of transactions for transactions, that has relevance on both the loyalty and the crypto side of our business. So we look forward to seeing that, present that on a combined basis so investors can really understand what is our reach in terms of customers and active customers on our platform every quarter and what type of growth activity in dollar terms is going through the platform so investors can really see the impact, the contribution of all that activity to, call it, net revenue or gross profit. The other thing that you heard us mention on Page 9, even looking at the total number of crypto-enabled accounts we think will provide a very good measure of how we continue to sign new clients and then activate our underlying customers. And then the notional crypto volumes, again, is something that we will show and compare to what we are seeing in the industry. So far, what we have seen is Apex Crypto, prior to the acquisition, performed very consistently with the broader market trends. So we think continuing to provide that data will be helpful for our investors to understand the performance and the potential of the company.

Great. And on the expense management side, obviously, you've taken a fair number of actions this quarter and previously. I was -- and you had a cash burn of, what, $33 million this quarter. Is that likely to continue to be that way in terms of the cash burn? Can you give us any color there?

That's going to go down. I mean, one of the things that you'll see go down most notably in the second quarter is when we think about our compensation expense, the tough decisions that we had to make around headcount in March, those aren't going to really manifest themselves in the compensation expense until we get to the second quarter. . So we certainly expect compensation expense to go down. As I mentioned, there will continue to be some one-timers in the second quarter as we pay deal costs associated with Apex Crypto loans. But generally speaking, I would say that Q1 is a high, even on a normalized basis, it is a -- probably the highest cash burn quarter that we're going to have, and we certainly expect those expenses to continue to decline.

As there are no additional questions waiting at this time, I'd like to hand the conference back over to the management team for closing remarks.

Thank you, everyone, for attending our earnings call this morning. We look forward to connecting with you again soon. Have a good day.

Ladies and gentlemen, this concludes our event. You may now disconnect your lines.