Bakkt Holdings Inc (BKKT) 2024 Q3 法說會逐字稿

greetings, and welcome to the Bakkt third-quarter 2024 earnings conference call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I will now turn the conference over to Cody Fletcher, Investor Relations Adviser at Bakkt.

Please go ahead.

Good morning, and thank you for joining Bakkt's third quarter earnings call.

Before we get started, I'd like to remind everyone that today's earnings call includes a separate supplemental presentation that can be found at our Investor Relations website at www.investors.bakkt.com.

During today's call, we will make 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 its filings with the Securities and Exchange Commission.

Further, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we also make reference to certain non-GAAP financial measures.

For more detailed information on our non-GAAP financial disclosures, please refer to our earnings release, which can be found on our Investor Relations website.

Thank you.

And I'll now turn the call over to Andy.

Thank you, Cody, and good afternoon, everyone.

Thanks for joining Bakkts' third-quarter 2024 earnings call, and it's great to connect with you all again.

With me today is Karen Alexander, our Chief Financial Officer.

Before I jump into our third-quarter results, I'd like to begin today by discussing Bakkt's strategic direction and acknowledging the favorable market conditions and increased trading volumes, we and the broader market have seen since the US presidential election on November 5.

As you will see on page 3 of our presentation, an example of the prospects of our trading services correlated to the higher crypto prices, we saw a steady ramp-up in Bakkts' notional trading volume over the past three months.

Then in November, leading up to the election and especially following the election, our notional trading volumes dramatically increased.

If you look at November's volumes by day, we saw this increase in reaction to the election results on November 5.

And then trading volume went even higher days later, along with the broader crypto prices and a new all-time high for Bitcoin.

As of November 12, we've already traded $259 million in notional volume already exceeding October's total volume by 114 million.

Compared to the broader market, we've achieved 169% of our total October volume in just the first 12 days of November, while the market as a whole has only reached 78% of this October total.

Demonstrating our potential for strong performance.

While we cannot predict future trading volumes, especially in the current environment, we believe the US presidential election results have provided a meaningful tailwind to the crypto industry that not excluded.

Turning now to page 4.

Let's jump into the highlights of our Q3 financial performance which Karen will give more detail later on.

Q3 crypto and loyalty services revenue, net of crypto costs and execution and clearing and brokerage fees, was $13.4 million down approximately 8.8% from Q3 last year.

This primarily happened as a result of the third and fourth quarter 2023, benefiting from a onetime adjustment to a revenue share agreement with Webull Pay that resulted in a temporary higher take rate, which became normalized at the start of this year.

Note that this dynamic will also impact our Q4 2024 year-over-year comps.

Sequentially, our results were down 9.5% and reflected softer trading activities which were seen across the broader market.

But as previously noted, we have seen and expect to continue to see trading volumes improvement in Q4.

Q3 operating expenditures excluding crypto cost and execution and clearing and brokerage fees were $40.7 million and was 39.7% lower year-over-year driven by our cost reduction initiatives.

These actions helped reduce our Q3 operating loss by 48.2% compared to Q3 last year.

In October, we completed another reduction in force as part of our continued cost improvement initiatives.

Moving on to our crypto business operations.

Most of 2024 has been a challenging execution environment.

That said, with the clarity from the recent election results, we are encouraged that the work we have done positions us well in the new environment.

We achieved several milestones during the third quarter that broadened our client network and product offerings for the tailwinds we are seeing in the market.

Now I'll introduce these accomplishments before diving deeper into our commercial operations.

Starting with AdEx, our institutional electronic communication network.

This past quarter, we successfully commenced trading on the BakktX platform, with back crypto solutions, backed retail-facing crypto brokerage business is one of the initial institutional trading clients.

This represents the beginning of a broader rollout strategy to institutional clients.

This rollout aims to combine the strength of our strategic partners and the BakktX ecosystem, namely back security and compliance expertise, crossover markets, high-performance technology and sub-10 microsecond matching latency, Hidden Road's global credit network for institutions and real-time risk management and operational support and our new partner, CoinRoutes, who will provide our clients with the best-in-class trading interface and algorithms.

We remain confident BakktX will be a significant growth driver for the company, and we look forward to sharing updates in the near future.

Further, we are excited to announce that we recently onboarded block wire onto our brokerage infrastructure solution.

Blackwire is an AI-driven crypto fintech infrastructure platform. offering banking, custody and payment solutions for B2B and B2B2C customers.

That will provide end-to-end crypto brokerage infrastructure for block wire spot crypto and stable coin payments platform, including liquidity and execution, custody services, fee management and potential future joint product expansions.

This new brokerage client is another demonstration of companies choosing Bakkt as their partner in growth using our preferred trusted platform for buying and selling crypto.

As we stated in our Q2 earnings, we recalibrated our go-to-market approach to focus our resources on targeting companies already established in the US and international players coming into the US who may benefit from back scalable trading capabilities.

We are seeing very good results from this recalibration with an expanding sales opportunity pipeline for potential new clients with many such opportunities in advanced stages of the sales process.

In August, we successfully introduced 9 new coins to our Bakkt crypto solutions platform.

The response from our clients has been very positive, and many have begun integrating the new coins into their platforms, and in Q3, the new coins contributed a notable improvement in our trading volumes for the quarter.

We also just launched 6 additional coins in November and we plan on bringing more coins to market in the future.

Furthermore, I'd like to give an update on our back trust and custody operations.

In October 2024, we began investigating a possible wind-down in dissolution of Bakkt Trust due to its lack of market traction and high cost of capital due to regulatory requirements.

As this process has progressed, we have also worked to find strategic alternatives for Bakkt Trust.

This decision was carefully considered and represents the next stage of our strategic initiative to focus on our brokerage and institutional trading services, where we believe we have unique competitive advantages for sustainable long-term growth.

Our decision is timely.

When you look at the macro environment, the custody space in general has seen significant margin compression, particularly over the past several quarters, along with increased competition from new players and further regulatory rate reform.

This move allows us to focus on our core strengths while also achieving an expected reduction in operating expenses.

Additionally, we anticipate a lower regulatory capital requirement during this process, which would free up significant working capital and shows another example of our ultimate goal maximizing shareholder value.

A key point to make with this decision is that our brokerage clients will continue to benefit as they do today from our custody offering enabled by our custody solutions partners.

So it's business as usual and there is no impact to our brokerage clients as we evaluate strategic alternatives to Bakkt Trust.

Finally, as you know, that operates across several complementary yet distinct business areas.

Both management and the Board are continually exploring strategic alternatives to maximize shareholder value while advancing our 2024 priorities, that Bakkt Trust being a prime example.

Turning to slide 5.

Next, I'd like to review some key regulatory and macro developments that we believe are strong indications that crypto is maturing as an asset class and provide favorable tailwinds for that going forward.

On the regulatory front, we've seen meaningful progress this year.

Notably, FASB's adoption of fair value accounting of crypto assets was a pivotal shift in reporting standards for public companies.

As I mentioned on previous calls, the launch of Bitcoin and Ethereum spot ETFs has driven record adoption and capital flows in a very short amount of time.

And more recently, the SEC's approval of options trading for BlackRock's IBIT ETF and on the NYSE has further reinforced crypto's growing presence in the US capital markets.

Meanwhile, we are now seeing that bipartisan support for crypto continues to improve.

And with Donald Trump as the president elect, we expect the narrative in crypto to improve even further as he has advocated for a more positive regulatory environment.

On the monetary front, the Federal Reserve's 50 basis point rate cut in September, following 11 consecutive hikes and the additional 25 basis point cut last Thursday signal a significant shift in monetary policy.

These reductions in the US federal interest rates have historically served as positive catalysts for risk assets such as crypto.

Taken together, these policy shifts create a highly favorable environment for Bakkt, reinforcing our confidence in the company's strategic direction.

Turning to slide 6.

Our strategy of building a robust ecosystem of partners to address the institutional market has positioned us to capitalize on the growing opportunities that drive long-term growth.

We have put together what we believe to be a unique combination of strengths to launch Bakkt, namely Bakkt advanced infrastructure with crossover markets high-performance technology, CoinRoute's rights trading interface and algorithms.

And once we have a definitive agreement with them, HiddenRoad's global credit network for institutions.

This combination delivers the unique value proposition for institutions giving them high-performance sub-10 microsecond matching latency, customizable liquidity streams and reduced trading costs.

The strength of this ecosystem delivers solutions for institutions that are highly competitive against existing crypto trading venues.

To wrap up, we are executing and making significant progress on the three strategic priorities that we laid out at the start of the year.

First, we are growing our client network and deepening our existing client relationships.

On the brokery side, we're thrilled to have Blackwire as a new client in our brokerage infrastructure solution.

Additionally, we continue to build momentum with HiddenRoad, crossover markets and our new partner CoinRoutes which demonstrates our commitment to growing our institutional client base while deepening relationships with existing partners.

We believe these collaborations enhance our offerings and position Bakkt as a critical player in the broader digital asset ecosystem.

Secondly, we are expanding our product solutions and extending the back ecosystem.

With the upcoming rollout of BakktX, we are finalizing our high-performance platform to cater to the needs of institutional investors.

This is demonstrated through our partnership with Blackwire using our end-to-end infrastructure for their crypto payment processing and brokerage services.

These milestones reflect our ongoing commitment to innovation and creating best-in-class solutions that meet market demands.

Lastly, we continue to improve our cost structure, ensuring that we operate efficiently how scaling our business.

The integration of new strategic partnerships and our disciplined approach to cost management already yielding improved results without compromising the high level of service and innovation we deliver for our clients.

Thank you for your time.

It's been a pleasure to update you on back from both a high-level financial and operational perspective.

I will now hand it over to our CFO, Karen, who will review our financial performance for the third quarter in more detail.

Karen?

Thank you, Andy.

I will now walk you through our third quarter KPIs and financial results.

As a reminder, in accordance with GAAP, we present crypto services revenue, encryptocost and execution, clearing and brokerage fees on a gross basis. as we are a principal in the crypto services we provide our customers.

By contrast, we are an agent in the loyalty reduction services that we provide our loyalty customers.

Therefore, loyalty revenue is presented on a one-line net basis.

Starting on slide 9, we have our Q3 KPIs, which provide a snapshot of the underlying trends driving our business.

We ended the third quarter with 6.5 million crypto-enabled accounts. reflecting a steady increase over the past 12 months.

This growth further underscores the increasing adoption and trust in our platform.

Next, we have our transaction accounts broken down into crypto and loyalty accounts.

There were 610,568 transacting accounts in the third quarter, of which 417,000 were related to loyalty redemptions and 193,000 were related to crypto trading.

Total national traded volume was $476.5 million with $314.9 million attributed to crypto and $161.6 million attributed to loyalty redemptions.

Crypto notional traded volume was down 36.2% sequentially, but up 64.9% year-over-year.

As Andy mentioned at the beginning of the call, we saw a 56.3% increase in notional volume month over month from September to October this year, surpassing the market average by 40.8%, and have already achieved 169% of our October volume in the first 12 days of November.

We hope to see this trend continue as market sentiment for Crypto becomes more positive.

As Andy also highlighted earlier, during the quarter, we enabled 9 new tokens for trading at our brokerage platform for our clients.

These new tokens demonstrated strong trading activity immediately and contributed approximately 10% to our September overall trading volume.

We also added an additional 6 coins in November, and believe our expanded listings that our clients' customers can trade increases and user engagement, improved liquidity and attracts more customers on to our clients' platforms.

And lastly, assets under custody at our custodian partners for our brokerage business were $938.7 million, down from the previous quarter of $974.5 million driven by slightly lower coin prices.

On slide 10, we show our total revenue broken out between our crypto and loyalty products.

Total revenue for the third quarter of 2024 was $328.4 million.

Gross crypto services revenue for the quarter was $316.3 million, an increase of 65% from the same quarter last year.

This growth trended with the overall market as overall crypto interest has increased since last year.

Our crypto services revenue, net of crypto cost and execution clearing and brokers fees totaled $1.3 million reflecting a 2.9% decrease compared to the same period last year.

As Andy mentioned earlier, this decline was primarily due to the second half of 2023 and benefiting from a temporary onetime adjustment in our revenue share agreement with Label that resulted in a higher-than-normal take rate, which reverted back to normal rates at the beginning of 2024.

Our net loyalty revenues were $12.1 million, down 7.2% year-over-year.

Of this $12.1 million loyalty transaction revenues were $6.0 million and subscription and services revenues were $6.1 million.

The majority of the decline in net royalty revenue was driven by a decline in transaction revenue.

Moving on to slide 11.

We have our total operating expenses.

Total expenses for the quarter were $355.8 million, including $315.0 million of crypto cost in execution, clearing and brokerage fees, driven by higher trading volumes.

SG&A expenses were $8.5 million, up 14% from Q3 2023 and 54.6% sequentially, and due to a $1.1 million settlement payment made in July of 2024 to terminate a 5-year strategic marketing agreement entered into in 2023.

The settlement payment release us from future obligations under the agreement.

Total compensation expense was $21.1 million, down 14.3% from last year due to lower headcount and incentive bonuses.

We continue to prioritize cost savings initiatives and have made significant strides in optimizing our expense structure.

On slide 12, we have our EBITDA and adjusted EBITDA for the third quarter of 2024.

Adjusted EBITDA reflects adjustments for noncash restructuring and acquisition-related items that impacted the period.

EBITDA and adjusted EBITDA for Q3 2024 were losses of $7.3 million and $23.7 million, respectively.

Adjusted EBITDA loss for Q3 2021 increased by $2.1 million or 9.8% compared to Q3 last year, primarily as a result of the temporary higher take rate from Webull in the second half of 2023, and and lower loyalty revenue.

Turning to slide 13.

We present our condensed profit and loss statement.

Net loss for the quarter was $6.3 billion, of which $3.4 million was attributable to the noncontrolling interest in the operating company and $2.9 million was attributable to back holdings resulting in a diluted loss of $0.45 per share on an average diluted share base of 6.4 million shares for both basic and diluted.

On slide 14, we have our condensed balance sheet as of September 30, 2024.

We ended the quarter with $35.7 million in cash, cash equivalents and available for sale securities in restricted cash.

We utilized $25.0 million of available cash in the third quarter of 2024.

The third quarter included several annual and onetime payments including $3.8 million for annual insurance premiums and a $1.1 million settlement payment associated with the termination of a strategic marketing agreement that I referred to earlier.

Additionally, $1 million was used to increase restricted cash, driven by reserves needed to support higher trading Bakkt volumes.

Moving on to slide 15.

We have an adjustment to our full year 2024 outlook from the previous quarter.

We are seeing a lower forecasted loyalty revenue range of $49 million to $50 million, missing the lower end of our range by $4 million on the higher end of our range by $7 million.

We've seen a downward trend in the loyalty business this year, which is primarily driven by lower transaction volume.

Also, we now expect the crypto revenue contribution to be at the low end of the range of $10 million to $15 million we provided last quarter.

This guidance does not include an expectation of material revenue from Bakkt debt in 2024.

Our cash utilization for the remainder of the year will be higher than previously guided due to the reduction of expected revenue and higher expenses.

We expect to end the year with $34 million to $39 million of available cash, cash equivalents and available for sale securities.

After consideration of the possible wind-down and dissolution of back press and the lower regulatory capital requirements we expect.

Our end of year expectation for available cash, cash equivalents and available for sale securities considers our lower revenue expectations for 2024 as well as higher professional services expenses.

Thank you, everyone.

That now concludes the prepared section of our Q3 2024 earnings call.

I'll now pass it back to Cody for the Q&A session.

Thank you, Karen.

Next, we will move over to a couple of questions from the investor community.

Our first question from the investor community comes from Syad H. What is that doing to bring its products to the market.

There seems to be no enthusiasm from the company itself and nothing as far as announcements.

So how can others be excited about you and your products.

Andy, can you share your perspective here?

Thank you, Syad, for your question and for being a valued stockholder.

I appreciate the opportunity to address this.

But Bakkt, our priority this year has been clear delivering innovative, high-quality products that meet market demand.

Specifically, we've concentrated on BakktX, positioning ourselves to capitalize on the growing institutional interest in crypto trading.

We've been working diligently to refine our current offerings, such as the recently announced coin listings as well as introducing BakktX as an entirely new offering.

While much of this work happens behind the scenes, it's all geared towards creating long-term value for our shareholders and establishing Bakkt as a leader in the evolving crypto ecosystem.

We understand the desire for more frequent updates, but we are committed to only announcing developments when they are finalized.

Rest assured, we are fully focused on building momentum and driving profitability and we appreciate your continued confidence in our efforts.

Thank you, Andy.

Our next question comes from Jeffrey S. What is the long-term vision for the company?

What unique value you can back to offer its customers the competitors can't match.

Andy, could you also take this one?

Thank you, Cody, and thank you, Jeffrey, for the question.

At that, our long-term vision is clear. to establish ourselves as a leader in the rapidly evolving crypto ecosystem.

We're laser focused on areas where we can deliver the most value.

Specifically through our best-in-class retail crypto trading platform and BakktX, our groundbreaking solution tailored for the institutional trickle trading market.

We believe the future of crypto and tokenization is bright, and our goal is to provide a seamless, secure entry point and crypto trading platform for brokerages and institutions venturing into the space.

Our collaboration with industry leaders like HiddenRoads, Crossover markets, CoinRoutes and Blackwire demonstrate a shared commitment to driving innovation and long-term value in this dynamic market.

Hot sets back apart is our unmatched security and compliance expertise, our strong network of partnerships across the industry and our commitment to operational efficiency as we've discussed today.

These pillars reinforce our mission to deliver sustained value to our shareholders in this burgeoning market.

And thank you, everyone, for attending our earnings call this morning.

We look forward to connecting with you again soon.

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