Bakkt Holdings, Inc. (NYSE:BKKT) Q1 2023 Earnings Call Transcript

Bakkt Holdings, Inc. (NYSE:BKKT) Q1 2023 Earnings Call Transcript May 11, 2023

Bakkt Holdings, Inc. beats earnings expectations. Reported EPS is $-0.17, expectations were $-0.18.

Operator: 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.

Ann DeVries: 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.

Gavin Michael: 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 first day of the second quarter. As we’ve shared, Apex Crypto is transformational for our crypto capabilities, and with the powerful combination of our secure custody and Apex’s advanced trading capabilities, Bakkt is holistically positioned to be the crypto infrastructure provider of choice for a broad spectrum of businesses.

The acquisition provides immediate scale to our platform with more than 5.8 million crypto-enabled accounts, along with significant expansion of distribution opportunities to new markets and new customer segments. It fast tracks our approach to bring new crypto capabilities to market and bolsters our path to profitability while adding a pool of extremely talented employees across product, engineering and operations to our team. We’re focused on executing on the integration seamlessly to ensure that we realize the full potential of the acquisition and capitalize on new opportunities. This includes making thoughtful decisions about our offerings. Following the closing of our acquisition, we conducted a detailed analysis of the coins against our listing policy and made the decision to delist a number of coins on the platform.

Our clients and their customers’ best interests are our core commitment, and our review process ensures that those interests are best served when we contemplate the most up-to-date regulatory environment. We are working to expand into international markets through our client base, many of which have operations internationally today. The regions that we’re most excited about and focused on in the near term are the UK, EU and Southeast Asia, and we’ll continue to make investments in capabilities that have near-term growth opportunity as well as work with Apex Fintech Solutions as part of our commercial agreement to provide new services to their client base. Our acquisition significantly broadens our client reach to include fintechs, neobanks, trading platforms and wealth managers, in addition to our clients in TradFi, travel and entertainment and merchants.

This group represents an attractive addressable market, and it’s noteworthy that we’re now serving the rapidly-growing fintech industry. Fintech firms are much more agile. They have shorter activation time lines and serve attractive customer demographics, including younger, more tech savvy individuals who are more likely to understand and trade crypto. With the Apex Crypto acquisition closed, we also have a big opportunity to deepen relationships with the current roster of clients, and as you can see on the right-hand side of the slide, we’re serving some amazing clients in Webull, Stash, Public.com, M1 Finance and many more. We’re actively exploring how we can collaborate more closely to elevate crypto trading capabilities and increased platform volumes.

We know from our research that customers are looking to get their crypto from the companies that they already know and trust for ease and simplification. Our latest crypto research study is finding that consumers believe purchasing crypto through an investing or personal finance provider is more trustworthy than purchasing crypto through a traditional crypto exchange. Also, consumers who primarily purchased crypto through a fintech provider have less safety and regulation concerns than those who purchased crypto through a traditional exchange. Further, we are seeing that clients we serve, like fintechs, are looking for new ways to increase the ways they serve their customers, with more opportunities to drive engagement and power revenue growth through new offerings like crypto.

The Apex platform is complementary to our offerings and accelerates our ability to offer advanced capabilities to our clients. Now, let’s look more deeply at what we’re able to offer now that the acquisition is complete. By partnering with several top liquidity providers, we’re able to provide unparalleled liquidity and price quality. Customers receive deep, tight and transparent pricing as well as redundant markets, which enable 100% uptime. Clients integrate seamlessly with a rich set of APIs that enable them to be in production on the platform in around 45 days. We enable clients to offer investing in multiple asset classes from the same platform and a broad range of account types, along with instant fund settlement for customers with no prefunding required.

The ability for customers to seamlessly invest and settle between multiple asset classes is a significant competitive advantage and provides strong opportunity to deepen relationships and drive activity with these clients and their end users. Additionally, failover protection ensures customers can access our platform 24/7, just as the crypto markets operate all the time. A full spectrum of order types with broad execution capabilities including quantity order denomination, block trading and allocations, multiple fee structures such as trade fees that can be customized per order, cost base of services, gifting and coin transfers with sending and receiving of Bitcoin, light coin and Bitcoin cash, with more coming soon. We remain committed to the U.S. market, but we also recognize there are compelling growth opportunities internationally.

We’re already seeing demand from our clients to expand into new markets together. Based on those conversations, we see the greatest interest in the EU, the U.K. and Southeast Asia. Not only are these markets appealing to our clients, but we’ve seen enhanced regulatory clarity. For example, the European Parliament’s progress with MiCA. The U.K. is introducing legislation to position itself as a hub for crypto. Hong Kong unveiled a proposed set of rules to regulate crypto activity, and South Korean lawmakers recently approved an initial review of a comprehensive crypto regulation bill. These regions also boast positive consumer sentiment towards crypto with really impressive levels of transaction volumes and progressing consumer adoption. Now turning to Apex Crypto key performance indicators.

This quarter, we’re showing historical performance of the Apex Crypto platform. But going forward, we’ll be reporting the company’s combined key performance indicators. As you can see, the number of crypto-enabled accounts have continued to grow throughout the past several months even when there was volatility across crypto market, reinforcing the attractiveness of the market segment served by Apex Crypto. When you look at the active accounts, we see the figures hold steady, but we expect to see these numbers increase as we see green shoots begin to emerge in crypto markets. Within the notional traded crypto volume, it’s clear that this metric aligns with the pullback that we saw in the broader crypto market at the end of last year and the beginning of positive momentum in the first quarter.

You can also see a positive trend reflected in the first quarter assets under custody, where a lift can be attributed to an increase in crypto prices with a specific emphasis on Bitcoin. Following the fallout from last year and so many direct crypto exchanges going out of business, we benefit from the flight to quality in the industry, with retail customers utilizing their existing relationships like those with fintechs and trading apps to buy and trade crypto. As the crypto winter turns to spring, we’re seeing signs of life. And while it takes time to translate into tangible revenue, Apex Crypto continues to win new business as clients seek to do more to drive engagement and drive growth with their customers. We are poised to capture increasing market share, both domestically and internationally, as the market improves.

Now, I’ll hand it over to Karen to guide us through our expected outlook for Apex Crypto and the rest of our financial results.

Karen Alexander: 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 of the impact of the coin delisting actions Gavin described earlier. Taking all of these factors into account, our gross revenue outlook for the full year is in the range of approximately $1.9 billion to $2.4 billion. We expect crypto costs to be proportionate with these revenue levels, which you can see on this slide. Apex Crypto provides a strong lift to our revenue base even in a year with a tough environment for the crypto market. We’re excited about the positive impact it will have on our path to profitability as the environment continues to recover. Moving to the next page. I will now walk you through the first quarter financial results.

A quick reminder that since our acquisition of Apex Crypto closed on April 1, 2023, their results are not reflected in the financials I’m going to walk you through. Apex Crypto will be included in our financial results beginning with second quarter 2023 earnings. Turning to Slide 12, we have our first quarter 2023 financial results. We had net revenue for the quarter of $13.0 million, which increased by $500,000 or 4% compared to the first quarter of 2022, primarily driven by transaction activity from loyalty redemptions. Operating expenses were $58.4 million in the period, which is down $2.6 million or 4% year-over-year. The current quarter operating expense includes a nonrecurring restructuring expense of $4.3 million related to our actions earlier this year around headcount reduction.

Excluding the nonrecurring restructuring expense, expenses were down 11% year-over-year, driving strong improvement in our operating margin as revenue growth, coupled with efficiencies in our expense base, improved margins. The net loss for the quarter was $44.9 million, which resulted in a diluted loss of $0.17 per share on an average diluted share base of 81.9 million shares. Net loss allocated to the noncontrolling interest in the operating company was $30.9 million, leaving a $14.0 million loss attributable to Bakkt Holdings, Inc. or a net loss of $0.17 per share at an average basic share count of 81.9 million shares. Our total share count as of March 31 was 265.9 million shares. ICE remains our largest shareholder with ownership at 66% of aggregate shares, which has remained relatively consistent with their shareholding as of December 31, 2022.

On Slide 13, we have our EBITDA and adjusted EBITDA for the first quarter of 2023. Adjusted EBITDA reflects adjustments for noncash and acquisition-related items that impacted the period. EBITDA and adjusted EBITDA for the quarter were losses of $43.4 million and $28.9 million, respectively. Adjusted EBITDA loss was unchanged versus the prior year period, primarily due to higher nonshare-based and unit-based compensation costs related to higher headcount as we grew the company in the earlier part of the year, offset by lower marketing costs and professional service fees. On Slide 14, we show net revenue broken out between subscription and service revenue and transaction revenue. The total net revenue in the first quarter of 2023 was $13.0 million, which is up 4% year-over-year.

Transaction revenues of $7.5 million increased 15% year-over-year. The first quarter is typically seasonally strong for travel bookings, which is reflected in the significant increase you saw in air travel volume. However, this was partially offset by lower hotel and car booking volumes which have remained under pressure since the latter half of 2022. Subscription and service revenues of $5.5 million declined 8% year-over-year, primarily due to a reduction in volume-based service revenue. Service revenue has a variable component, and it’s driven by activity levels at our customer call centers and technology development work out on behalf of our clients. Subscription revenue increased slightly in the year-over-year period. Turning to Slide 15, we have total operating expense.

Total expense for the first quarter of $58.4 million decreased 4% year-over-year. Excluding the $4.3 million salary restructuring expense we took this quarter, operating expenses were down 11% year-over-year. The year-over-year decline in operating expenses was primarily driven by a decrease in depreciation and amortization and SG&A expenses as marketing expenses declined. Total compensation expense of $34.1 million declined 3% compared to the first quarter of 2022 due to a decrease in noncash compensation expense. Other expense of $17.6 million increased 7% year-over-year and included the $4.3 million restructuring expense related to our recent actions around headcount reduction. Looking ahead, we expect to recognize $6 million to $7 million acquisition-related deal expenses in the second quarter of 2023.

We expect our compensation expense to decline for the remaining quarters of this year as the impact from our recent headcount reductions become fully reflected in our financials starting in the second quarter. As a reminder, we expect the impact from the restructuring actions in 2023 to be $29 million in expense savings and an incremental $7 million of expense savings is expected in 2024. On Slide 16, we have our key performance indicators. These KPIs reflect the full breadth of how our capabilities are accessed across both partner and Bakkt experiences and across crypto and loyalty experiences. Transacting accounts across the Bakkt platform were 690,000. Digital asset conversions are a dollar-weighted measure and more directly aligned to revenue growth.

Volume of $193 million was up 6% year-over-year. Activity levels reflect strong year-over-year growth in air travel volume, while hotel and car bookings were down. As a reminder, the first quarter is generally seasonally strong for traveling volumes. While volumes reflected this to some degree, the year-over-year growth rates in the first quarter were more muted than what we experienced in 2022, when we had a very strong rebound coming out of the pandemic. A quick reminder that our fourth quarter is seasonally strong due to the holiday season, which is why there is a quarter-on-quarter decline in these metrics. We continue to see strong interest in our platform from consumers, with a 10% increase year-over-year in website visitors to our platform.

Gavin shared with you earlier on the call the key performance indicators related to Apex Crypto that we expect to report going forward. As a result of our acquisition, starting next quarter, the KPIs that we report will change to reflect the metrics for the combined company. Turning to Slide 17, we have our condensed balance sheet. We ended the first quarter with $117.6 million of cash, cash equivalents and available-for-sale securities. In the first quarter, we had several significant nonrecurring items, which resulted in cash usage of $121.8 million. These nonrecurring uses of cash included the $67.2 million of cash moved into an escrow account for the closing of the Apex Crypto transaction. This was comprised of the $55 million cash purchase price and $12 million for Apex Crypto’s cash.

First quarter cash usage also reflected $13.6 million of seasonably high payable settlements, which included $4.1 million of acquisition-related expenses. This is consistent with the fourth quarter being seasonably higher for redemption volume, which drives settlements with suppliers and purchasing facilities. First quarter cash usage also included $4.3 million of cash severance costs related to the fourth quarter ’22 and first quarter ’23 restructuring, and $2.8 million of cash that was moved into restricted cash is collateral for surety bonds. During the quarter, we also used $1.4 million of cash to settle withholding taxes on vested stock awards. I wanted to highlight that although we don’t have an official stock buyback program, by using cash to withhold to cover taxes, we’re actually reducing shareholder dilution from the shares that otherwise would have been released to the market.

Excluding these items, our cash usages for the quarter was approximately $33 million. With regards to Apex Crypto, we will recognize the impact from their operations in our results starting in the second quarter. Excluding deal cost, we expect the inclusion of Apex Crypto’s operations for the remainder of 2023 to be approximately free cash flow breakeven. I will now pass it back to Gavin for his closing remarks.

Gavin Michael: 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.

A – Ann DeVries: 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?

Q&A Session

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

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

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

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

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

Operator: 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.

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

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