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

Well, welcome, everyone. I'm John Roy, Managing Director here at Water Tower Research. And I'm very pleased today to have the CFO, Karen Alexander here from Bakkt. Hi Karen, how are you doing?

I'm well, how are you, John?

Not too bad. So Karen, for people who don't particularly know you that well, maybe you could give a little bit of introduction of your background and what really brought you to Bakkt?

Yes, absolutely I'd be happy to. So I joined Bakkt almost 2 years ago. Originally as the Chief Accounting Officer, and then I stepped into the CFO role about a year ago. My background before that, I've always been in financial services, but I would say a little bit more of the traditional financial services. I had spent 16 years at GE Capital. And then before that, I was in public accounting focused on a variety of financial services institutions. It was interesting for me after spending 16 years at GE Capital, a very specific commercial finance activities that they do, looking at the space and what was happening in financial services, both with the pace of technology, some of the innovations that are coming out of the use of crypto assets and digital assets and really disruptive trends. It's great for me to kind of pivot to this role where I'm really -- seeing really an industry and a product that is still in a nascent stage and then being able to take that and really grow it through the life cycle.

Interesting. So you just reported the fourth quarter and the full year '22. Maybe you could tell us a little bit of that and give us some color and give us the highlights.

Yes. No, absolutely. No doubt that 2022 was a challenging environment, certainly challenging from a macroeconomic perspective, and a lot of turmoils in the crypto markets. With that said, we're really proud of what we're able to accomplish in 2022. We grew our full year 2022 revenue to $55 million, which was up 38%. We spent a lot of time focusing on the product road map for crypto, and we made really significant progress with our partner network. One of the things you probably saw in the news is we signed a definitive agreement to acquire Apex Crypto. We are very excited about that because it really allows us to break into new client verticals and tapping -- they've got a universe of 5 million crypto-enabled accounts, which really excites us in complements what we have been building organically on our side. The external market environment remains challenging. So one of the things that we are trying to do is to take a number of specific and strategic actions to really position us for strength and durability amidst this -- what we're seeing in the market. We did initiatives to focus on areas of the business where we think have scalability and a path to profitability. And as a result, in really looking at that product market fit and where we want to invest capital, we did take some recent restructurings that will reduce our head count by about 40% by year-end 2023. And listen, this was a really tough decision for us to reduce our employee base. But we knew that it was necessary for us to take these actions, just given what we're seeing with the headwinds in the market. And it really helps us make sure that we are positioning the company to where it needs to be to be here for the long term when the market conditions stabilize.

So you did give an outlook for 2023, obviously. And it would be really helpful if you could give us some of the color on the thinking around, I know you gave revenue and free cash flow. So maybe those 2 would be good to kind of delve into.

Yes, absolutely. So I'll start with the net revenue side. We gave a range of net revenue of $62 million to $72 million. That's up 15% to 30% from 2022. And just one thing to note, I mentioned before the acquisition of Apex that's still pending regulatory approval. So that revenue growth is organic. It does not include Apex acquisition because it is still subject to that approval to close. When we thought about guidance for revenue. We do have an expectation that crypto activation time lines will be continued to be impacted by market conditions. Based on everything that we've seen, conversations we've had in the industry and other market intelligence, the guidance is based on an expectation that we see activations ramp up in the second half of 2023. Now we hope that the market takes a more positive turn. But we think that this level of cautious view about the market is appropriate given what we're seeing right now. We also assume that loyalty redemption activity we'll continue to face some pressure just given what's happening from a macroeconomic environment. I talked a little bit in last week's earnings release about what we saw on the travel side where supply constraints are really impacting consumers' ability to redeem loyalty points as well as on the merchandise side, where I think we saw in the holiday season what the consumer retail space saw, generally speaking, in terms of a little bit of a softening in the demand for certain merchandise. The other item that we gave in terms of guidance is free cash flow utilization. I think this is really helpful because it's not only how we use cash for operations, but it does also reflect CapEx and that's a really important part of how we manage the business in terms of making investments in our technology. The guidance that we gave is for free cash flow utilization of -- between 105% to 115%. And so that's -- sorry, 25% to 30% reduction to what we had in 2022. So really, you're seeing 2 things. You're seeing revenue increase on both the back half of '23 from the crypto side as well as continued increase in revenues from the loyalty side. And then you're also seeing the benefit from some of the prudent expense reduction actions that we talked about last week. And so you think about, for instance, just with the restructurings alone that will save us $29 million of cash in 2023. And on a full run rate basis, it will be a $36 million savings given the fact that those are going to be coming in not on a full year basis this year. The other thing about that free cash outlook is that it has some one timers in it. So obviously, with the acquisition of Apex Crypto, there's deal costs in that utilization of about $13 million. And then we also have the cash utilization from the restructuring. So just to sum it up, I think with that, I think we have an expectation for 2023 that reduces our cash utilization while really pursuing those opportunities for revenue growth.

Great. Well, you were mentioning a fair amount about Apex Crypto. Maybe you could give us a little bit of an update there. And maybe talk specifically about the earn-out, which you announced for the fourth quarter, I think it was $9 million. Any kind of color there would be great.

Yes, absolutely. So we are making a lot of progress in closing this acquisition. So as you can imagine, in this type of space we need a number of regulatory approvals at the state level. So we're making great traction in getting those already from a majority of the states. And we're in active dialogue where -- with the remaining states where we need those approvals. Even before getting all those approvals, we're still talking to Apex on a regular basis about how to optimize the integration of our platforms. Also really hearing about what Apex is seeing in their business. Since we announced the deal in November, they signed 2 new partners. What you think about it in today's environment, we're excited about the fact that they had an increase of their signed partners. And then when you look at their Q4 results, one of the ways -- things we talked about when we structured the deal, is there a cash price component of it of $55 million. And then there's various earn-outs based on how Apex Crypto performed on a net revenue basis in the forth quarter of '22 as well as additional earn-outs for '23 and '24. So if you think about the fourth quarter of 2022, given everything that happened, all the headwinds of FDX and what that did with trading activity. They had a total potential earn-out of $45 million of our stock. They achieved approximately a $9 million earn-out, which, again, it's not the full earn-out, but put it in the context in terms of what we all saw in the fourth quarter. It's, I think, a really great testament to the durability of their business during what everybody saw as a very tough quarter for crypto. And the other thing I would say with earn-outs, obviously, earn-outs are negotiation between buyer and seller. So the full earn-out potential is an aggressive target. I always tell people that if they are performing to the extent that we are paying the full amount of earn-out in stock, I may be thrilled because the growth that is reflected in those earn-out targets is pretty significant. So again, I think what they did in the fourth quarter in this environment, certainly, I continue to be impressed, and we will work towards closing the acquisition, and we'll provide more guidance after the acquisition closes about what the combined company looks like.

Great. Now earlier on, you were talking about business simplification and focusing your resources down on key elements. Maybe you could give us a little more color as to what that means and I know you're sunsetting the consumer app, and maybe you could walk us through that a little bit.

Yes. Exactly. I'd be happy to. So we continue to focus on crypto and loyalty offerings. And we're looking at areas where we can provide those offerings in a way they have efficient scale and then strong product market fit. Crypto is going to remain a really core part of our strategy. We are really believers in the future growth potential in the space. 2022 was a big investment year for us. We've invested in our core capabilities to expand offerings, and we'll continue to do that in 2023. And we're also going to do things that enable institutional participation in crypto. One of the things that came out of FDX is that I think a lot of people have seen is practically a flight to quality and a flight to reputational safety. And players like us that have a regulatory first and compliance-first approach. So we see -- we're going to see opportunities there to continue to provide those institutional players capabilities, especially in the custody space. On loyalty, we've got a great roster of existing loyalty partners, and we're really looking to serve and grow volume with these existing partners. And we're always looking for ways to innovate. And we find that our loyalty partners are great actually partners with us, where we together see the ability to invest to basically innovate what they could then offer to their customers. We always talked about kind of turning to the app, and we've received some questions about why did we sunset the app, why now? What does it do to your growth? The one thing I always remind people of is we've been talking for -- basically since the destock about the fact that our platform is able to provide a crypto set of services. Through a variety of ways. We have APIs. We have embedded partner web experiences. The app was a piece of it, but the app wasn't the only way that we were going to market to deliver crypto services. So when we think about what we saw in the past year and really looking at product market fit and talking to potential customers, we really saw that there is a way through our B2B2C strategy to be able to provide scalable crypto solutions to partners without having to use the app. So the decision to sunset the app was really to allow us to focus the go-to-market delivery model that we think is most efficient and actually works very well. And frankly, it's always what we contemplated in terms of how do we think about the growth opportunities in crypto?

Interesting, interesting. So you just recently announced a partnership with Caesars, and I believe there's a lot going on there. But can you give us some more color?

Yes. This strategic alliance is a huge amount of potential for us. We're really excited about it. It's a new client vertical for us, kind of looking at how crypto can play a role in the entertainment sector. And if you think about Caesars customer base, we now have access to millions of users through the Caesars partnership. So the first focus for the partnership is to offer Caesars Reward members, the access to crypto rewards through our platform. So that way, if you think of your Caesars customer right now, you have Caesars Reward points. You can redeem those reward points for crypto services or crypto currency, I should say, and we will support that. So that really enables millions of Caesars Reward members to access crypto through that. It doesn't stop there although. So there's other ways that we can innovate further with Caesars. So crypto payout functionality is another one that we see as an opportunity to work with Caesars. Again, really excited about the opportunity because the access to the entertainment sector. And then it's the additional opportunities where you think about our [indiscernible] and crypto capabilities and products, really a multifaceted partnership where we can bring multiple solutions to the crypto network -- to the Caesars network.

Nice. It will be interesting to watch that. So to say what's on everybody's mind, capital markets, obviously, it have been going out a little interesting these days. Are you guys thinking of a stock repurchase? Do you think you need to raise capital this year?

Yes. Again, repeating the obvious, the markets have definitely been volatile. No question about that. We're always looking for market opportunities as to how to best deploy our capital. And we're in this to generate positive returns for our shareholders in the company. We continue to think that the best use of our capital is investing into the business and we're focused on business opportunities that can scale revenue on the path to profitability. I understand the appeal of a stock repurchase program to certain investors. But I think the economic benefits of that are very short term relative to what we can do in terms of deploying that cash into longer-term opportunities that really support the revenue growth of the company. I think one of the things we talked about last week with the earnings results is we're really trying to balance, discipline capital allocation and making sure that we are investing in areas where we see the path to profitability and then also being very disciplined in expense management. And we're fortunate that we have $240 million of cash and other liquid assets. And we think that, that cash and liquid asset position combined with our expense discipline is definitely able to self-fund our road map, including the purchase price of Apex. And so we don't expect to, to need to raise additional capital in the foreseeable future.

Great. Well, maybe as a final question, you can talk a little bit about the longer-term goals and maybe also what's your time line for profitability? Any kind of information there would be great.

Yes. Yes. So we've talked about the time line for profitability for instance, a breakeven on an adjusted EBITDA basis as being about a 3-year journey for us since the time [ EBITDA ] is back. We still see that path to profitability on an adjusted EBITDA basis by the end of 2024. It's been our goal for some time. I think the acquisition of Apex Crypto is very important to us. We're excited that it's really going to provide us a client base and the ability for synergies that will accelerate that path to profitability. And a big piece of it as well is the continued discipline on expenses. I think what we've shown through some very tough decisions and very necessary decisions on the recent restructuring actions that we can balance that expense discipline with focus on executing the longer-term goals and really being there to take advantage of market conditions as they improve.

Great. Well, this has been super helpful, Karen. Thank you much for spending the time with us. Investors, if you have any questions at all just send it to me and I'll get them to Karen and you can get them answered. Well, again, everyone, have a great day, And Karen, we'll talk to you soon.

Okay. Thanks, John. Appreciate it.