Greetings, and welcome to the Bakkt Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn it over to Ann DeVries, Head of Investor Relations at Bakkt. Please go ahead.

Good morning, and thank you for joining us for Bakkt's Second Quarter Earnings Call. Today's presentation includes a 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 on forward-looking statements and the risks and uncertainties related to Bakkt's business, please refer to the 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 the 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 will receive from our investors through the Say Technologies platform. After that, Gavin and Karen will be available to answer questions from the analysts community. I'll now turn it over to Gavin.

Thank you, Ann. Good morning, everyone, and thanks for joining. We're making meaningful progress executing on the key priorities we set out at the beginning of the year. We expanded our crypto platform through the acquisition and integration of Apex Crypto while activating and broadening our client network and we've been prudent with capital allocation. We're winning new custody and crypto trading clients and building strategic alliances with prominent players as our capabilities and best-in-class infrastructure resonates with the market. We're expanding into new international markets alongside our clients, with Latin America expected to launch in the fourth quarter and other markets such as the U.K., European Union, Hong Kong and Australia to follow. We're focused on delivering solid results for our existing loyalty clients as we work together to grow transaction volume. Lastly, we continue to prudently manage expenses, resulting in improved gross profit margin. We're also updating our full year 2023 operating cash flow outlook and expect to improve approximately 20% from our prior guidance. Our platform provides end-to-end crypto capabilities from advanced trading and secured custody to fiat on-ramps. We also secured custody of assets, founded in traditional finance and built to uphold the shifting regulatory standards. Regulated by the NYDFS as a limited-purpose trust company, that custody has reliable infrastructure with multilayered security for streamlined management and Disaster Recovery Services to help ensure customer funds are safe and recoverable. We offer curative, secure and regulated crypto trading with API and UI options to activate trading responsibly. This includes unparalleled liquidity and price quality with 100% uptime and seamless integration and customer experience which enables clients to integrate in less than 45 days with instant fund settlement and failover protection. Capabilities also include coin transfer and advanced order management system and multiple fee structures. As part of…

Thanks, Gavin. I will now walk you through our second quarter financial results. A quick reminder that this quarter includes the results of Apex Crypto, which we acquired on April 1, 2023. Apex Crypto materially increases our crypto service revenue, such that we now present crypto services revenue as a distinct component of our revenue. In accordance with GAAP, we are presenting crypto service revenue as well as crypto cost and execution clearing and brokerage fees on a gross basis since we are a principal executive services we provide to our customers. By contrast, we are an agent in the loyalty redemption services we provide our loyalty customers. So loyalty revenue is presented on a one line net basis. Crypto cost and execution, clearing and brokerage fees, which we will refer to as crypto costs and ECB for the remainder of this call will drive crypto services revenue and the difference between these 2 line items represents crypto's trading contribution to margins. Please see the notes section of our earnings presentation for additional detail on crypto services revenue and related costs. Turning to Slide 13. We have our second quarter 2023 financial results. We had total revenues of $347.6 million, of which $335.3 million was gross crypto services revenue, which increased significantly due to our acquisition of Apex Crypto. We had $12.3 million of net loyalty services revenue. Operating expenses were $398.7 million in the period, which reflects a significant increase in crypto cost and ECB, driven by the related crypto services activity. During the quarter, we had $17.0 million of acquisition-related expenses, $10.4 million of this was a noncash accrual related to the estimated fair value of the contingent stack burn-out associated with our acquisition of Apex Crypto through 2025. We will update the estimated fair value of the…

Thanks, Karen. Just a few final one. We've made substantial progress this past quarter, and we're building momentum for future growth. We were at a pivotal moment at the beginning of the quarter, having just closed our acquisition of Apex Crypto on April 1. We've been off to the races soon, integrating Apex Crypto, launching new capabilities, expanding internationally, signing new client relationships and building new strategic alliances with leading brands such as Plaid and Fireblocks. I'm proud of our teams who have worked tirelessly to make this progress happen in such a short amount of time. There's still so much more to come. We pulled a platform that's really ready to take off and grow. We've made many of our big investments, and we're now leveraging the capabilities to scale our business. We will continue to work hard every day to deliver strong results to our clients, our partners and our shareholders. I'm optimistic about our future. I can't wait to share more as we continue to execute and win. Thank you for joining us today. I'll turn it over to Ann to manage Q&A.

Thanks, Gavin. Let's move over to questions from the investor community. Leading into our Q&A session, we'll start by answering the top questions from Say ranked by number of votes. After that, we'll turn to live questions from the analyst community. Our first question comes from working [indiscernible] who would like an update on the progress we've made on previously announced partnerships. They know that crypto market conditions have improved in the last quarter significantly and wants to know what this means to our partnerships. Gavin, can you take the question?

Yes, sure. Look, I'm happy to. Thanks for the question. We discussed in detail during our prepared remarks the substantial progress you've seen us make recently, building out our client base and forging new collaborations with industry leaders such as Plaid and Fireblocks. But we're really pleased with the momentum that we're building and it really is a proof point of how our acquisition of Apex Crypto could not have happened at a better time. Our ability to expand into the rapidly growing fintech space and into international markets is even more compelling right now. Although we're seeing some more activity in the U.S. around regulation for crypto, we're still not where we need to be. The lack of regulatory clarity for crypto has kept the activation of our client and partners on We've long since completed most of the integration and go-to-market work with our client and partners and we'll be ready to go when the time is right to enter the market. We're making good progress with our non-trade clients. With Caesars, we are actively engaged and executing with them to launch crypto rewards. Our cross-functional teams, including engineering, sales, marketing and design are collaborating closely to activate these capabilities. Stay tuned as we anticipate providing additional announcements on this before not too long.

Thanks, Gavin. Next, we have another question from working [indiscernible] who would like to know why Bakkt was not selected to provide custody solutions for any of the recently announced Bitcoin spot ETF despite our compliance-first approach? Karen, can you take this one?

Sure. Happy to take that question. Custody has always been a very important part of our business. Our secured and reliable platform is trusted by clients and is the backbone of our company. That said, historically, we have focused much of our sales and marketing efforts and the more scalable go-to-market opportunities through our B2B2C approach. While custody has always been an important part of the platform, given our focus on B2B2C, we were not always aggressively marketing our custody capabilities to win new business. We have been fortunate that our clients are proactively reaching out to us with interest in our secure, trusted institutional-grade custody platform. This influx of client interest has been even more pronounced following recent disruptive events in the crypto markets, which have highlighted the difficulty in storing digital assets safely and the need for multi-custodian access and secure self-custodial functionality. We have been successfully signing up new clients for our custody products, and we are focused on building this momentum to continue expanding our client base and custody capabilities.

Thanks, Karen. Next, a few people have asked about international expansion and a status update around when we expect to launch. I think we answered this in the prepared remarks. But Gavin, please add any additional thoughts you might have here.

We mentioned earlier in the prepared remarks that we've signed an agreement with ibex to offer crypto trading for Latin America which we expect to launch in the fourth quarter of this year. We're working closely with our existing clients to bring our capabilities into the United Kingdom, European Union, Hong Kong and Australia. While we're making solid progress on these efforts and hope to be live soon, as everything we do, we're being careful to ensure that we're following all of the rules and regulations in these markets. Our compliance-first focused approach is what differentiates us, and we do not make compromises with it. We think that we're getting close with expansion into additional markets, and I hope to share more with you soon.

Thanks for that, Gavin. Our final question from the Say platform will be from Jonathan P who asks, will Bakkt be a company that investors will look back on and be proud of having invested their hard earned money into? Karen this one is for you.

Sure, happy to take that on. Hopefully, you've gathered some of our strategic highlights for the quarter, a great amount of progress that we've made and the momentum that we're building. We're taking the [indiscernible] platform that we've worked tirelessly to build and leveraging it to scale and grow. We've done the heavy-lifting already with the investments and the infrastructure build and the product development. Now it's our time to scale and grow. I truly believe that Bakkt is well positioned to succeed and win, and our teams work day and night to make that happen. I'm extremely proud to be a part of this organization. And with that, our shareholders will look back and be proud of all that we've accomplished. I know being an investor in our stock has not always been an easy journey, and I thank you for sticking with us. While we can't control all of the market and economic factors that have negatively impacted our stock, we will continue to control what we can to drive positive shareholder value. That includes a disciplined expense management, balanced with strategic capital allocation in areas where there is a clear path to profitability.

Thanks, Karen. 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 today comes from Trevor Williams from Jefferies.

Great. Maybe to start, Gavin, just would love your perspective on the regulatory environment, all the moving pieces? I know it's a very fluid month-to-month situation, but just maybe kind of the state of the union of how you guys view the regulatory environment, what you're expecting to come out of Congress. If anything, over the next 6 to 12 months, how some of the recent SEC actions in court cases, how many of that affects you guys? So would just love kind of your broader perspective on it.

Thanks for the question. I think when you look overall, I think it still is a tail of the U.S. versus what's happening outside of the U.S. In the U.S., obviously, the ripple decision has been a -- sort of a setback to the SEC with respect to some of the enforcement actions that we've seen against industry participants looking at unregistered securities. But when you look at it as a whole, I think it will act as a catalyst for where we're going with Congress, and we'll start to see some movement. But when we think about it overall, I think the lack of clarity on how crypto should be regulated is still apparent with where we are. While I'm hopeful that Congress is paying attention to this, and I'm encouraged by the progress that we've seen, I think the market structure bill in the house is a good example. As I said, there's a long way to go before it or any of the other bills coming for more. We continue to make our voice heard on Capitol Hill to sort of encourage Congress to resolve the lack of clarity quickly. I think when we look outside of the U.S., I think we're seeing clarity coming to some of the markets that we've spoken about in our prepared remarks and ones that we're excited about, and we see the entry. But I think here in the U.S., we're still seeing that ambiguity. And it's that lack of clarity that has moved forcing some of the participants to still sit back and continue to watch what's happening with that landscape because without the clarity, they're unsure about what their entry strategy should be.

Got it. That's helpful. And then maybe for both you and Karen, it's nice to see the cash burn coming down just a little -- maybe give us a sense for kind of where some of the reallocated priorities have been just within kind of your investment spend framework where maybe kind of deemphasized or reemphasized within the updated outlook for expenses?

I can take that. Trevor, so I'm glad that you noticed that I think we're making a lot of great progress in terms of reducing cash burn and really being prudent with expenses. So the trend that you see for the second quarter, that's going to actually continue. Our free cash flow for the second half of the year is going to be 70%, 80% less than what we had at the beginning of the year. A lot of that came through some very tough decisions that we had to make earlier in the year in terms of headcount reductions. But we're also at the point now where we've built a lot of the infrastructure and technology that we need to go to market. We are still investing in the crypto business, but we're really being prudent in those additional investments, making sure that we're putting them where there's immediate product market. So one of the things that we talked about earlier in the presentation was custody. That's a great example of where the market is actually coming to us, recognizing what we can contribute with our platform, with our compliance-first approach, with the fact that we are Qualified Custodian. So custody is one of those areas where we're allocating capital because we see the return there. And then we also continue to see the return in the opportunities on the crypto trading piece. Not only with our international opportunities, but as Gavin mentioned, we do see demand increase for the fiat rails that Bakkt historically has been able to provide. So that's another area where you'll see us continue to add capital. But at this point, I think with the actions that we took, as you've heard me talk about before, those actions reset the operating expenses by $29 million in 2023 with an additional $7 million reduction in 2024. So we're really looking to have this reset expense base to drive future growth.

The next question on the line is from Andrew Bond from Rosenblatt Securities.

So it looks like you guys are definitely starting to make some strong progress across the board here. With regards to custody, just thinking from a modeling perspective, when do you think new customer growth should begin to translate to meaningful revenue there?

Yes. Andrew, it's Karen. So in terms of what we've given as the outlook for 2023, we haven't broken that up between custody and trading. I can just give you a little bit of color in terms of how we price those services. So typically, you're looking at a pricing model that has -- that's based on assets under custody was a minimum. And then you're also looking for -- looking at incremental transactional revenue withdraws and deposit activity. But as Gavin mentioned, it's -- we're offering more than just traditional custody. So for instance, the backup key work that we're doing, that is something that is actually a platform-based kind of -- almost like a subscription-based model. So you're going to see a combination of both of those things as we ramp that up into 2024.

Got it. Okay. And Karen, you mentioned kind of an outperformance in trading relative to the broader market. And there was some noted share shift during the quarter among some of your competitors. So I mean, can you talk about how you guys are looking at market share dynamic and if anything stands out for Bakkt broadly or particularly within some of the different Apex customer segments you guys have?

So I think one of the things when we look at our trading activity compared to what we've seen in the broader market, we have a customer base through the acquisition of Apex that is based in fintech, they are active equity traders, and we see a strong correlation there between investors who our active equity traders and their propensity to trade in crypto as well. So I think -- compared to the broader market, I think we have an investor base that is probably more active as they see market volatility. So I think that's one of the reasons that we receive a little bit more durability. Our lows did not go as low as the market in general, and then we were able to revamp quickly. So as you probably know, May was probably the worst month off the 2nd quarter. I think everybody had a bad May, but our May was not nearly as bad as everybody else, and that's how importantly, our June rebounded faster than the market in general.

Okay. And just lastly, in terms of the partnerships with rewards, I know those were asked before, just thinking about actually the cross-sell opportunities to some of your -- the legacy Apex clients and has that kind of been in any progress there? And have you seen some interest from some of the clients that came over from Apex in your reward solutions?

Andrew, I'll take that one. We certainly see it in terms of the discussions that we're having. I mean, there's interest around the engagement that these platforms want to be able to create with their customers. Obviously, they are highly engaged platforms because of the trading activity. What they're looking to do is to look at other ways in which they can potentially diversify the revenue streams or bring people back into their environment on a more frequent basis. And we think some of the rewards proposition, particularly on the crypto rewards side, have the ability to do that. So there's definitely been strong discussions with some of those clients. And we're hoping to see it turn into opportunity. But right now, their focus is on addressing and ensuring that their trading businesses work in the current backlog.

The next question on the line is from John Roy from Water Tower Research.

Great. Thank you. So given that Apex just closed this quarter, how should we be thinking about the take rate on the crypto transactions there?

This is Karen. That's a great question, especially because with this material increase in crypto revenue, our income statement is now showing a lot of big numbers on a gross basis. So maybe what's most helpful is if I take you through the statement of operations, and so how we think -- what we're seeing is take rate and what drives it. So when you think about the gross crypto services revenue that we have, the vast majority of that is from the gross trading volume that we have with our customers. But that is not the only thing that's been there. So there are platform minimums of these that also come into play with that line item. Crypto cost is really the cost of providing the crypto basically after the spread that we charge and then we have execution clearing and brokerage fees, which is really the -- if you think about how we partner with our partners, they're really serving us introducing our to us. And so that's the RevShare that we give them. So if you think about all those things together, as I mentioned in the call, the gross crypto services revenue, less the crypto cost and execution clearing and brokerage fees really represents the net contribution of crypto trading to our operations. And so if you do the math, for instance, for the second quarter, you're seeing a take rate of about 38 bps. And so again, that's really the -- it's the spread in the minimums that we get on the trading, less what we shared to our partners, which is really a byproduct of our B2B2C approach, which is what we think is a very efficient way to get access to all these customers. So as we go forward, I think we'll be talking about how that take rate again -- but the difference between those 3 line items changes over time in the key drivers because every -- partners are different in terms of how they want to set fee spread and then we have different arrangements with different tiers of profit-sharing. So that is going to be somewhat dynamic over time. But we've been seeing it in the high 30s rate for some time.

Great. Now obviously, there's been a lot of discussion on OpEx. So it seems to be if you adjust for acquisition expense and crypto cost, your OpEx seems to be coming down. So what do we want to think about a run rate for OpEx going forward? And any kind of color you can give me on the noncash accrual for acquisition stuff, that would be helpful as well.

Yes. Yes. Yes. So in terms of OpEx, I think, obviously, one of the biggest component is our compensation of benefit expense. So hopefully, the guidance that we provided earlier in terms of the impact of the decisions that we had made earlier in the year, it is coming down in the second half and then you'll see additional declines in that OpEx expense in 2024 when you get the full year impact of those decisions of about $7 million. As it relates to the accrual that is in the acquisition expense, it's probably a little bit unusual, but you have to think back to the structure that we put in place when we bought Apex. So there was -- if you recall, the cash component of the purchase price and then the were stock earn-outs that were dependent on revenue performance over certain periods. And so what you're seeing there in that $10.4 million noncash accrual is GAAP requires us every quarter to fair value that contingent consideration, that stock consideration that will be paid out through '24 and '25 based on our expected outlook of the contribution that Apex Crypto's customer base has to our net revenue. So yes, the fact that we have an accrual is certainly not the whole $100 million potential stock compensation that they could get over '23 and '24 performance yet. But we are seeing -- based on what we see now, we see scenarios where some of that stock comp can give paid out. So that's we're [indiscernible] for, but that's going to change every quarter. And it's really just having to wait until year-end '23 and year-end '24, where we actually fixed those amounts. And again, I remind you that, that is not a cash expense, that is all stock burnout.

[Operator Instructions]. It appears we have no further questions. I'd like to hand back to Ann to conclude.

Thank you, everyone, for attending our earnings call this morning. We look forward to connecting with you again soon. Take care.

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