Earnings Labs

Bakkt Holdings, Inc. (BKKT)

Q3 2023 Earnings Call· Tue, Nov 14, 2023

$8.58

-4.67%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+18.76%

1 Week

+65.45%

1 Month

+91.84%

vs S&P

+87.25%

Transcript

Operator

Operator

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

Ann DeVries

Analyst

Good morning, and thank you for joining us for Bakkt's third 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 that we received 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.

Gavin Michael

Analyst

Thank you, Ann. Good morning, everyone, and thanks for joining. Earlier this year, we communicated our plan to simplify our business and allocate our capital towards areas of the business with strong product market fit, scalability, and a clear path to profitability. During the course of 2023, we've made substantial progress against this goal. A specific priority for the year included expanding our crypto platform, expanding and activating our client network, and strategically allocating capital. Our teams have been nimble and flexed to deliver on all of these priorities despite challenging market conditions. The U.S. crypto market remains challenging. We still lack a clear regulatory framework, and headwinds from bad actors in the space have muted trading volumes. However, we are seeing green shoots with institutional investors looking to participate in crypto ETFs and digit asset tokenization. We've been flexible in adjusting our strategy as needed to meet these challenges. We've made international expansion a key priority, and we've demonstrated our ability to act quickly with our capabilities active in nine new markets by the end of this year. And there's more to come on the international front. This is just the beginning for us. This will generate strong revenue growth for us as we look to 2024. We continue our focus on custody and signing up new clients with the recent flight to quality that we've experienced, as well as delivering enhancements to our offering. The custody product further diversifies our future revenue streams, given it's not as reliant on trading volumes. We've also reduced our reliance on market volumes and the related volatility in our revenue stream by signing on new clients with more of a subscription-based revenue model. Lastly, in light of the challenging market and slower revenue opportunities this year, we've been focused on controlling expenses.…

Karen Alexander

Analyst

Thanks, Gavin. I'll now walk you through our third quarter financial results. A quick reminder that in accordance with GAAP, we present crypto services revenue in crypto costs and execution, clearing, and brokerage fees on a growth basis, since we are a principal in the crypto services we provide 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 costs and execution, clearing, and brokerage fees, which we will refer to as crypto costs and ECB for the remainder of this call, drive gross crypto services revenue, and the difference between these line items represents crypto trading's contribution to margin. Please see the next section of our earnings presentation for additional detail on crypto services revenue and related costs. Turning to Slide 13, we have our third quarter 2023 financial results. We had total revenue of $204.8 million, of which $191.8 million was gross crypto services revenue. Total revenues increased significantly year-over-year due to our acquisition of Apex Crypto, which closed on April 1, 2023. We had $13.0 million of net loyalty services revenue. Operating expenses were $257.6 million, which reflects a significant year-over-year increase in crypto costs and ECB, driven by related crypto services activity. During the third quarter, in accordance with generally accepted accounting principles, we conducted our annual goodwill and intangible assets impairment testing. Earlier this year, we spoke about strategically allocating more of our capital towards the crypto business while maintaining existing offerings and relationships in the loyalty business. We made this decision given our expectations for which products have a clearer path to profitability. Given the pullback and significant investments in the loyalty business, we've lowered our long-term revenue growth expectations for this business. As a…

Gavin Michael

Analyst

Thanks, Karen. Just a few final thoughts. We've made substantial progress this past quarter and we're building momentum for future growth and success. This was another consecutive quarter where we clearly demonstrated our ability to execute and leverage our industry leading platform, made stronger from our acquisition of Apex Crypto to win new clients and deliver results for our existing ones. We're actively executing on our international growth strategy. Our crypto capabilities will be live in nine attractive international markets by year's end. This is a significant milestone for us and testament to how we push forward when faced with challenges, in this case, a difficult environment in the U.S. around crypto regulation. Our team is flexible, adaptable, and quick to find other paths to success. We're still going strong with adding new clients to our roster. We're building an extensive network of clients in a diverse group of industries as the synergies of our expanded crypto capabilities and industry leading infrastructure resonates with market participants. We're pleased with the progress we're making, but what's even more important is that we're moving quickly to onboard all of these clients and activate our crypto capabilities expeditiously. Lastly, we'll continue to be prudent on how we allocate capital and manage our expenses. Our results this quarter clearly demonstrate that our disciplined approach to managing expenses are yielding results, but we won't skimp on making investments in areas that make sense and have a clear path to profitability, such as the redevelopment of our custody foundation to make it even stronger for our clients or the investments that we're making in the Lightning Network to increase crypto's utility. We're being smart with where we spend our hard-earned money and look forward to sharing with you in the future how those investments are reaping rewards. Thank you for joining us today. And with that, I'll turn over to Ann to manage Q&A.

A - Ann DeVries

Analyst

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 today, ranked by number of votes. We have consolidated some of the questions that address similar themes. After that, we'll turn to live questions from the analyst community. The first question we will address is about our stock price, which several investors, including Working P, Syed H, and Jeffrey C submitted. They would like to know what our plan is to raise the stock price. Whether we are at risk for delisting? And why we aren't using cash to do a stock repurchase. Karen, can you answer this question?

Karen Alexander

Analyst

Of course. I know that the downward pressure on our stock price has been incredibly frustrating to all of our shareholders. As a fellow shareholder, I've certainly been disappointed by the stock price performance. We are closely monitoring our stock price, and should we receive a delisting notice, we would take necessary action to remediate, such as a reverse stock split. We are committed to our shareholders and to remaining a public company. Ultimately, we believe the best way to allocate our capital to generate higher returns for our shareholders is to invest in the business, deliver on milestones, and accelerate our past profitability. That's what will drive our stock price higher. We always consider all options, and while a stock repurchase sounds tempting, it ultimately will not provide sustainable growth and returns that investing in our business will. Thank you to all of our shareholders for sticking with us. It hasn't been an easy journey, but I believe there are better days ahead for this company and our shareholders.

Ann DeVries

Analyst

Thanks, Karen. Our next question hits on a few themes from Jabril H, Syed H, and Sheila S around the status of partnerships, including MasterCard, and our plans to drive future success. Gavin, can you take this one?

Gavin Michael

Analyst

Yes, sure. I think there was a comment from one of the investors mentioned that we haven't had any major partnerships since we announced the acquisition of Apex Crypto a year ago. I don't quite agree with that. We've signed up numerous new clients since April 1, which is when we closed our acquisition of Apex Crypto, and have a number of other clients in late-stage negotiations who we expect to announce before too long. Our new relationships span across new and diverse industries, and also marks our foray into new international markets. This will enable us to land and expand and greatly broaden our reach across the world. We've formed strategic alliances with industry leaders such as Plaid and Fireblocks. which provides an extensive network of clients. Also, prior to closing our acquisition, we signed up Caesars Entertainment as a new client, which as I mentioned, will launch early in Q1. This marks our entry into the gaming and entertainment industry, which should provide exciting opportunities to expand. I've said this before, and I will reiterate that we greatly value our relationship with MasterCard and continue to work with them on being able to provide our crypto capabilities to their customers. Our respective teams have completed the development work, and we're in the process of testing. We expect to be able to commence a collective sales effort soon. But that said, until the U.S. regulatory environment for crypto gets fixed, I think many TradFi companies will remain on the sidelines and wait to activate their crypto strategies. We'll be here, ready to resume our work with them when that happens. But I think that catalyst really does need to happen fast.

Ann DeVries

Analyst

Our last question from the SAFE platform is from Syed H, who asks if we are involved in any of the spot ETF applications. Gavin, can you give your thoughts on this one?

Gavin Michael

Analyst

Yes, look, thanks for the question. The applications themselves have been a stamp of approval from traditional finance, and SEC approval of spot Bitcoin ETFs will be a positive step towards mainstream acceptance and legitimacy in the financial world. We're excited to see this happen and for the opportunities this will bring to the larger market. With custody being a core anchor product for Bakkt, approval would open up the market for us, and we're prepared to serve as a qualified custodian. We're looking forward to providing you with updates here when appropriate.

Ann DeVries

Analyst

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

Operator

Thank you. [Operator Instructions] Our first question comes from Trevor Williams from Jefferies. Trevor, your line is open. Please go ahead.

Yvonne Jiang

Analyst

Hi, this is Yvonne Jiang on for Trevor Williams. Thanks for taking my question. My first one relates to the crypto services revenue and the increase in the take rate this quarter. Can you provide more color about the change in the revenue share agreement with Webull pay and how we should expect the take rate, the trend going forward? And my second question is, what do you see as a normalized pace of OpEx growth beyond 2023, excluding crypto costs and ECBCs? Thank you.

Karen Alexander

Analyst

Hi there. It's Karen. I'm happy to take that question. Starting with the take rate, as we mentioned earlier, we've worked and successfully completed a migration of the Webull crypto accounts over to Webull Pay during the third quarter. That migration required existing customers to activate new accounts at Webull Pay to continue to create crypto. So it wasn't surprising that we saw some disruption and decrease in trading engagement metrics from that group of customers as they were acclimating themselves to the new Webull Pay experience. So we've been working actually very closely with Webull to monitor this customer activity and roll out enhancements. And in the meantime, I think the adjustment that Webull made to our rev share agreement to allow us to retain more of that reduced gross volume of trading is really a testament to our collaborative relationship. So we expect that to continue through the end of the year. And then the expectation at this point is as the Webull Pay customer experience continues to evolve, we'll see those trading levels return and we will revert back in 2024 to our more historical take rate, which has typically been, if you include the historical Apex history, it's typically been between 30 and 40 bps. And then just in terms of the second question, can you just repeat it one more time just to make sure I have it?

Yvonne Jiang

Analyst

Yes. I was just curious what you see as a more normalized pace of expense growth beyond this year, excluding crypto costs and ECBCs?

Karen Alexander

Analyst

Yes. So on the expense growth, one of the things that we've highlighted is we've taken a lot of actions in 2023 to reset our expense footprint. We're seeing and continue to see a lot of opportunities to increase efficiencies through the integration of the Apex team and systems with the legacy Bakkt team. So we actually expect our cash expenses to continue to come down in 2024. When you look at the guidance - preliminary guidance that I gave for 2024 in terms of free cash flow utilization, that reflects - when you compare that to the revenue guidance that we've provided, we are looking at continued reductions to our expense rate in 2024, probably expenses somewhere in the $130 million rate on a cash basis.

Yvonne Jiang

Analyst

Thank you so much. That's super helpful.

Karen Alexander

Analyst

No problem.

Operator

Operator

The next question comes from Andrew Bond from Rosenblatt Securities. Andrew, your line is open. Please go ahead.

Andrew Bond

Analyst

Thanks. Hi, good morning. I just want to start with guidance on the revenue side. For 2024, you're expecting a pretty big ramp in growth and net revenue from the current run rate. So I just wanted to get an idea if its primarily from the international edition and kind of what are your assumptions on the broader volume environment given to crypto's [ph] activity or growth? And additionally, how are volumes tracking quarter-to-date with the stronger October for crypto?

Karen Alexander

Analyst

Yes, Andrew, happy to take that question. In terms of the outlook for 2024, I guess first, we thought it was important and helpful to give a preliminary outlook in 2024 given the fact that we have made traction in signing new clients and relationships as we mentioned earlier in the call. A lot of these are set for activation towards the very end of 2023. So if you - while we don't see a lot of impact of these new relationships in 2023, we do see it as a strong backlog as we get into 2024. The range that I provided when you break down that revenue and you put it on a net basis for crypto is somewhere between $20 and $40 million. And that really is - that range reflects a variance in what we expect market engagement to be as well as timeline for activations. The international component is going to be a big component of that range. So if you look under any scenario, we think that international retail crypto revenue can be almost half of that net crypto revenue coming into 2024. And again, we look at that as not only the progress that we've made signing these relationships internationally, as Gavin mentioned, it really is a land and expand as we activate and gain footholds into these markets. But also, a lot of these international relationships, they have signed up for a form of subscription model in how we will generate revenue. And the fact that they will sign up for a tier of trading where they basically pay a flat amount or within a certain tier, and if they go above that volume, then it will revert to more of a volume-based model. So I think in terms of the composition of that, it would be that the ARR component of that also provides a good - find a site in terms of how we're guiding at least initially 2024.

Andrew Bond

Analyst

Okay. And just on that recurring subscription piece and the expected shift there, can you remind us what kind of what percentage of your revenue is currently recurring? And where do you expect that to get to over the next 12 months as you kind of onboard some of these international partners with this new subscription plan?

Karen Alexander

Analyst

Yes. So right now the subscription portion of our revenue stream is in the loyalty part of our business. So it's about - if you break down the loyalty revenues, about $10 million of the revenues are purely subscription-based revenues. And then looking into what the potential risk for 2024? We can see that increasing anywhere from 25% to 50% on a dollar basis based on the contribution of crypto ARR contracts, in particular from international, but we're certainly not limited to international for that type of crypto.

Andrew Bond

Analyst

Okay. And just lastly for me on the capital front, how are you guys feeling your position heading into next year, just given your current run rates and particularly if the volume of the environment doesn't improve much from here, any plans in the adult capital front?

Karen Alexander

Analyst

Yes. So as I mentioned when we - I talked about the outlook for 2024, looking at the progress that we're making in reducing expenses and the potential revenue outlook, we continue to see a path to breakeven on an adjusted EBITDA basis by the end of 2024. At the moment, we have sufficient cash to finance our operations. Yes. Certainly as you think about the company's journey, the original fundraising that we did from the [indiscernible] was intended to fund a three-year roadmap. So I think as we get into 2024, we would be naturally looking at the next steps for the company in terms of a capital raise, but it's not something that we imminently need to execute on the plans that we outlined and the guidance that we gave.

Andrew Bond

Analyst

Great. Thanks, Karen.

Operator

Operator

The next question comes from Peter Christiansen from Citi. Peter, your line is open. Please go ahead.

Peter Christiansen

Analyst

Good morning. Thanks for the question. A quick one on the Webull disruption. Just curious, was that throughout the quarter or halfway or towards the end? Just a sense there. And then on the re-launch of the custody product, just curious if you're seeing incremental value added, generating value-based pricing. We continually hear that custody pricing has been under pressure. Just curious if the re-launch and some of the new capabilities is helping you drive pricing? Thank you.

Karen Alexander

Analyst

Yes. Hi, Pete. I can certainly take the first part of the question on Webull Pay. So Webull started their migration of customers over to the new Webull Pay experience at the beginning of Q3, so in July. So we started to see that impact on engagement levels at the beginning of the third quarter. And the adjustment to the rev share agreement that we executed with them is retroactive to July 1st. In terms of the custody product and what we're seeing in terms of pricing. Most of the pricing that we're executing is AUC fee model that is scaled to the amount of AUC that we bring out to the platform. There are some minimums, so it's not completely volatile, but there are other elements of custody type services that have a more of a subscription component as well. So, for instance, disaster recovery is something that we've talked about as a capability that we see the market coming to us for. That is more of a monthly subscription amount. So, I would say, mostly fee on AUC with some opportunities for the additional subscription-based revenue. And certainly as we expand those capabilities, we see that opportunity for subscription or AR type revenue to increase.

Peter Christiansen

Analyst

Great. Thank you, Kevin. Appreciate it.

Operator

Operator

[Operator Instructions] Next question comes from John Roy from Water Tower Research. John, your line is open. Please go ahead.

John Roy

Analyst

Sure. Great. I got two questions. And with the unchained network, I'd love to get a little more color on that and anything on timing would be useful?

Gavin Michael

Analyst

Hi, John, I'll take the unchained one. Being part of this network is really an added dimension to what we're doing for custody. So if you think about, you know, as Karen said earlier in responding to Pete's question that we have the assets under custody model, but what we're seeing of these valuated services that are coming into the market. And the partnership with unchained is one of those where we're holding part of the key, as I said in the prepared remarks. And then we're acting as one of the key signers in the transaction. We like this model a lot. It's hugely scalable. We anticipate being active in that network by year's end.

John Roy

Analyst

Great. And then maybe transitioning a little bit to the international, I was curious, obviously the U.S. market needs some regulatory clarity to say at least. Which markets do you see having the best setup or the least barriers for you outside the U.S.?

Gavin Michael

Analyst

John, I think it's the ones that we've spoken about this morning where we see strong regulatory clarity. We see a strong pathway for our entry. We've already demonstrated with markets like Spain where we're live today together with some of the LatAm markets that we're working with regulators who have provided good guardrails for how the assets and the trading should operate. And we're working with partners who really want to take advantage of that shifting sentiment within the market. As we see regulatory clarity, we see the consumer sentiment return to a very positive level. So the ones that we've spoken about this morning, those in LatAm, Hong Kong, Singapore, Australia are all markets that we like a lot together with the UK and parts of Europe. And as Karen also mentioned, the shift to an ARR model to a subscription model as we are growing and evolving the business, I think provides good underpinnings to the forecast and outlook that Karen gave as part of the presentation. I think us being able to take advantage of that good regulatory clarity, consumer sentiment together with strong backlog against a recurring revenue model is really giving us great confidence as we move into 2024.

John Roy

Analyst

Great. Thanks so much.

Operator

Operator

We have no further questions. So I'll hand the call back to the management team for any concluding remarks.

Ann DeVries

Analyst

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

Operator

Operator

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.