Bakkt, Inc. (BKKT) Earnings Call Transcript & Summary

Greetings, and welcome to today's conference call to discuss Bakkt's acquisition of Apex Crypto. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn it over to Ann DeVries, Head of Investor Relations at Bakkt. Please go ahead.

Thank you, and good morning, everyone. Today's presentation, including the separate investor presentation that can be found on our Investor Relations website at www.investors.bakkt.com, will contain certain forward-looking statements about Bakkt. These statements are based on the current expectations of the management of Bakkt and are subject to uncertainty and changes in circumstances, many of which are beyond Bakkt's control, 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 uncertainties related to Bakkt's business, please refer to its filings with the Securities and Exchange Commission, including the discussion of Bakkt's Risk Factors in its most recent annual report on Form 10-K and its subsequent quarterly report on Form 10-Q. Note that the pending acquisition of Apex Crypto, which will be discussed this morning, is subject to regulatory approvals. Joining me on today's call are Gavin Michael, Chief Executive Officer; and Karen Alexander, Chief Financial Officer. I'll now turn it over to Gavin.

Thanks, Ann. Good morning, everyone, and thank you for joining today's call. I'm thrilled to be here to discuss our proposed acquisition of Apex Crypto from its parent company, Apex Fintech Solutions. This is an incredible opportunity for both our companies, one that we think will build significant scale for us. The addition of our complementary, robust platforms and significant expansion of our addressable market are expected to create a winning combination that's poised to be an [ indisconnect ] to digital economy. We think of this as our north star. It acts as a guide for every decision that we make, including our acquisition of Apex Crypto. We found a like-minded fit with Apex Crypto, who, like us, want to be able to enable consumers, businesses and institutions to unlock value from digital assets. Our acquisition will further our focus on connecting the digital economy and making it easier to access and utilize digital assets. The addition of Apex Crypto will position us as an industry leader, a one-stop shop across digital assets. Our platform is designed to help our partners and their customers actively participate in this new and dynamic economy that is driven by digital assets. We have a robust set of capabilities across crypto and loyalty, supported by our institutional-grade technology platform, which is at the core of everything we do. We've talked about our business model before, but our solutions support our partners end-to-end. Our Bakkt Crypto Connect service, which includes buy-sell capabilities and secure custody, enables businesses and institutions to bring crypto to their customers directly in their trusted environments. We are leading the way in enabling non-native crypto companies to compete in the space by bringing end-to-end crypto services to them. Let's look at this a little deeper. Bakkt Crypto Connect plays a central role for TradFi companies who want to compete in the growing crypto economy. We know that they are eager to offer capabilities to their end customers, but they don't always have the resources and in-house expertise to meet all of the regulatory, licensing, technology and security requirements to build the infrastructure themselves. So that's where we come in. We're able to provide TradFi firms a single full-service, easy-to-integrate platform for crypto, enabling them to quickly implement a crypto strategy. Through Bakkt Crypto Connect, they're able to easily gain access to this space. Consumers get the value of crypto in their everyday experiences, enabling them to buy, sell and hold crypto within their trusted TradFi company environment. We are truly bringing crypto to the masses and, in turn, promoting its wider spread, adoption and usage. Our acquisition of Apex Crypto will provide us with a robust complementary set of digital asset capabilities coming together on our secure, institutional-grade and compliance-focused platform. We will further the breadth and depth of our offering beyond any competitor. And we'll talk more about the specific benefits Apex Crypto brings to the table in a moment, but we truly believe the acquisition will create immediate network effects and scalability that we believe will establish Bakkt as a powerhouse player in the digital asset space and accelerate our vision to connect the digital economy. We believe this will be a truly transformational acquisition for us that bolsters our platform capabilities and significantly broadens our scale with expansion into new client verticals. So looking a little deeper into the Apex Crypto business and the robust platform that they've built. Apex Crypto is a turnkey platform for embedded crypto trading. They offer extensive crypto trading capabilities to partners and consumers, with over 30 coins offered on their platform. Their connections to a network of the largest liquidity providers provides deep market access and enables them to offer competitive pricing to customers. They provide end-to-end solutions for their clients, including execution, settlement and custody. Apex Crypto has built a significant presence in the fintech industry, with over 30 fintech partners signed on to the platform. They already have approximately 5 million crypto-enabled accounts on their platform, with over 31 million total trades and over $11 billion of notional traded value to date on their platform. And they're continuing to add more volume to their platform with immense future growth potential. Apex Crypto's parent company, Apex Fintech Solutions, is a leading B2B technology player that enables growth and continued success of financial technology and financial services companies globally, with over 23 million accounts and approximately $100 billion of assets under custody for their brokerage, custody and clearing business across more than 220 clients, which we believe represents a penetrable future client base for us. We're excited to be buying this business from AFS and to continue working closely together in the future. And we'll look at that relationship in a little bit more detail later on this call, but you can see the scale that Apex Crypto has already built and the incredible opportunities that sits before us to grow further. Apex Crypto will provide immense scale from day 1 post closing, and we expect to continue to grow the business from there. Our acquisition will significantly expand our crypto client base and provide us with faster speed to market for new crypto capabilities. Furthermore, it will broaden our range of products and capabilities by combining 2 highly complementary platforms. Through this addition, we'll be able to leverage the best of Bakkt and Apex Crypto's capabilities for new and existing partners. So this includes providing our partners and consumers with more choice, such as the expanded coin offering; new products and capabilities, including staking, external wallet transfers and NFTs, subject to regulatory approval; and enhancing our end-to-end execution and support. All of this will provide a seamless experience for our partners and customers, which is what we strive to do every day. I could not be more pleased to have Apex Crypto employees join our team. I've been just so impressed with the team members that I've met so far. They have diverse backgrounds in crypto, in trading, in technology. And I know that given our 2 companies are well aligned in culture and values around teamwork, client-first mindset and innovation, they're going to fit right in with our Bakkt employees. Given the increased scalability in our addressable market and enhanced platform capabilities, this transaction is expected to provide meaningful synergies, be accretive to our revenue growth rate and bolster our path to profitability. We're excited that the future addition of Apex Crypto's platform will enable us to bring new features and enhance existing ones for our partners and clients. Apex Crypto enhances our existing capabilities around Bakkt Crypto Connect. Importantly, we believe that we will be able to greatly expand our client network into the fintech industry with the addition of their existing clients and pipeline. This is a transformational benefit that I think will be a game changer. Adding Apex Crypto will also provide us with the ability to offer new products and features, such as additional coins, staking, NFTs, advanced order types and order advise functionality. We believe this will accelerate our product road map and greatly expand the choice and convenience that we can bring to Bakkt's existing customer base. We know how important these capabilities are to our partners and customers, and we're thrilled to bring forward the time line in which we can provide them. Importantly, we'll also be able to take our products and services and use them to deepen relationships within the existing Apex Crypto clients. Our unique position at the intersection of crypto, rewards and payments provides a wealth of opportunities to drive additional scale. We'll leverage our in-house, highly secure custody services or crypto reward solutions. This is a great opportunity to deliver value to our expanded client base. I think it's important to note similarities in which we've built our companies. We have a similar mindset on critical issues, such as compliance and security. We've both made sure that these are key components of our respective infrastructures. We've invested the time and the resources to each obtain an NYDFS BitLicense and to get appropriate approvals to operate in all 50 states. To give you just a few examples. This gives us confidence that our combined company will continue to provide a safe, secure and reliable platform for our customers. And this is just the start of this journey. We're excited to leverage our combined strength to establish Bakkt as a powerhouse across digital assets. Our customer bases are also complementary, and that represents an incredible opportunity to scale our platform. Historically, we've each focused on different segments of the financial space for our crypto solutions. Bakkt has largely focused on traditional banks and platform companies, while Apex Crypto has focused on the fintech industry. Expanding our client base into the fintech industry will greatly broaden our distribution capabilities. And the fintech industry is a very attractive space for us. It has a high growth rate and a large percentage of younger customers, who tend to be more active investors in crypto. We also have a great opportunity to deepen relationships with our expanded customer base by offering them the breadth of our combined platform. including Bakkt-enabled solutions, such as Crypto Rewards and Crypto Payout. We're just so excited to deepen our relationship with our combined expansive product set. Through this acquisition, we will bring together new client verticals, which will meaningfully expand the opportunity set for our businesses. Another terrific part of this transaction is the commercial arrangement we will have with AFS, which will enable us to work closely together to provide a seamless experience for each of our partners and customer bases. As part of our agreement, we will continue to sell and service crypto offerings to AFS clients and customers. And that represents an extensive ecosystem with more than 220 clients, 23 million accounts and approximately $100 billion in assets under custody that we will have the opportunity to tap into. Their expansive ecosystem will provide us with exciting prospecting opportunities for our crypto and broader platform solutions. We will continue to leverage some of the core infrastructure already built at AFS to ensure a seamless experience with no disruptions to our clients. Next, I wanted to highlight the opportunity that we will each have to bring our products and solutions to each other's respective clients. That means AFS clients will have access to things like our loyalty solutions, and we can choose to offer our clients some of AFS' expansive suite of products, including equities, cost basis and tax solutions, security-based lending, funding tools and account onboarding tools. This opens up a whole new world of opportunity for each of our companies. And we're so excited to have found such a great partner in AFS, and I'm so looking forward to working closely with them as we strive to connect the digital economy. I'm now going to pass the call over to Karen to provide an overview of the transaction structure.

Thanks, Gavin. I will now take you through a few highlights of the transaction structure for this deal. First, let's review the financial consideration for this deal. We will make an initial cash payment of $55 million upon closing of the deal. There is also an earn-out component to this transaction, which includes up to $45 million in Bakkt stock, depending on the achievement of financial targets by the acquired business in the fourth quarter of 2022 and up to an additional $100 million in Bakkt stock and seller notes depending on the achievement of financial targets by the inquired business through 2025. The agreed-upon targets include revenue growth rates and certain other targets. We expect that the acquisition of Apex Crypto will bolster our count to profitability. The addition of Apex Crypto to our business is expected to be accretive to our revenue growth and provide synergies and cost savings. We are targeting ABL closing by the first half of 2023. This target date is subject to conditions set forth in the first [indiscernible], including regulatory approvals. We will work diligently with regulators and all other stakeholders to complete this transaction in a timely manner. I'll now pass it back to Gavin for his closing remarks.

Thanks, Karen. We found a unique asset in Apex Crypto. This pending acquisition aligns with our long-term strategy, and we believe will enable us to execute on our key priorities, which we've made consistent. We are building out and activating our partnerships with an even more robust platform and new client verticals post closing. We believe this acquisition will accelerate our product road map with the addition of new products and services from Apex Crypto. Our enhanced platform will enable us to deepen relationships across our combined customer base. And finally, we will look to expand into new opportunities with this acquisition. I hope you all share my excitement and enthusiasm for this incredible opportunity that this acquisition provides. This deal will position Bakkt to be a provider of choice for any financial institution, merchant or loyalty program that wants to offer seamless digital asset experiences to their customers. It's clear in our minds that this acquisition will be a game changer for us. And there are so many amazing things to come. We can't wait to deliver it to all our partners, customers and shareholders. We're going to remain incredibly focused on execution, which will now include integrating the Apex Crypto business into our company post closing. And as Karen said, we'll be working diligently internally and with all of our stakeholders to ensure this happens in an expeditious manner. I want to thank all the teams at Bakkt and Apex Crypto, including Bill Capuzzi and Rachel Saunders, who have been working tirelessly to sign this deal and bring us closer to our vision of connecting the digital economy. I also want to extend a very warm welcome to the Apex Crypto employees, customers and partners, who will be joining the Bakkt team upon closing. We're so incredibly excited to work with you all. I'm looking forward to speaking with you again soon on our third quarter earnings call on November 10. Similar to prior quarters, investors can submit questions to us through the SAFE Technology Platform, starting later this morning. Thanks again for joining us today.

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