BKKT - NYSE

Gavin Michael - Chief Executive Officer Drew LaBenne - Chief Financial Officer Ann DeVries - Head of Investor Relations

Greetings! Welcome to the Bakkt First Quarter 2022 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I will now turn this over to Ann DeVries, Head of Investor Relations at Bakkt. Please go ahead.

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 at our Investor Relations website at www.investors.bakkt.com will contain certain foreard-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 and its most recent annual report on Form 10-K and its subsequent quarterly report on Form 10-Q. 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 of this, the basis of our 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 Drew LaBenne, Chief Financial Officer. After our prepared remarks, we will answer questions we receive from our investors through the Say Technologies Platform. After that Gavin and Drew will be available to answer questions from the analyst community. I'll now turn it over to Gavin.

Thank you, Ann. Good morning everyone and thanks for joining. At Bakkt we are connecting the digital economy. Powering commerce by unlocking value from digital assets. We are forging new partnerships and activating our products in this growing ecosystem, while also deepening relationships with existing partners to really create new opportunity. Momentum is building across our business and we built a strong foundation for our future growth, so let's begin. We help our partners actively participate in the new and dynamic economy that's driven by digital assets. Bakkt’s crypto services are just one of our core pillars. Crypto has proven that it had staying power and we're helping businesses play catch up. Our products and services enable businesses to meet rapidly changing user need and to increase relevant to their customer. Let's walk through some updates on our core capabilities. Our Crypto buy/sell capabilities or Bakkt’s crypto connect, connects our partners customers to crypto, where they are already transacting digitally. Our embedded experience will be live soon with a number of partners and this embedded experience is built upon the same crypto capability being used in market today through our reps. It includes core services to onboard customers, to manage buy/sell capabilities, and all of this is done in a seamless experience in their trusted banking environment. Rather than watching deposits flow out of their ecosystem to crypto exchanges, banks can help keep their customer attention within their environment, while realizing the brand benefits of these innovative solutions. We also enable our partners to increase customer acquisition, especially of new and younger demographics. This is a segment everyone is competing for today. Our B2B2C go-to-market approach allows us to build scale quickly and our platform partnerships enable us to efficiently roll this capability out to potentially hundreds of member banks and millions of end users. This is where our partnerships with platforms like Fiserv and Finastra are so critical and as we’ve signed a number of banks to our crypto connect offering and continue to build the technology to launch with them later this year. Our approach has traction in the market. This is shown by our recent announcement, including the addition of American Back, which is the first bank slated to go live. We expected to see a strong acceleration in the second half of this year. Let's next turn to backed crypto payout. We all know that the war for talent is impacting every single sector. Transformation and innovation is happening in the past base quickly and backed crypto payout allows employers to differentiate their opportunities from others by allowing their employees to receive a portion of their pay in crypto. We surveyed the gig economy workers and found that nearly 80% would like to receive either all or a portion of their pay in crypto currency. Our first partner in the gig worker spaces is BringMeThat, a food delivery service platform. We're also excited to announce today that we are adding Latrobe [ph] a creative market place for enterprises and SMEs through our list of partners. Starting soon creators who take on Latrobe projects, will be able to get paid a portion or all of their pay in crypto. We continue to work with our platform partners to make this crypto payout capability available to a multitude of industries and market segments. In fact, crypto payout has strong applicability across gaming and gambling, market places, the creator economy, the sharing economy and traditional employers. The ability for larger audiences to passively acquire crypto will only increase further adoption and uptake. So moving next to crypto rewards, which we believe is a terrific entry point for crypto adoption by many more people in a passive way and we believe can democratize access and inclusivity for everyone. Consumers can earn crypto through their daily activity and our research is showing that as they get access to even small amounts of crypto, their knowledge increases significantly and they are more likely to buy and engage more deeply in the crypto economy. Crypto rewards will be live later this year. First with Fiserv through their uChoose Rewards program, serving financial instructions debt and credit cards. Card holders in these programs will soon have the option to redeem their points directly for crypto. We are working across multiple partners, to enable earning crypto both with credit cards and within merchant loyalty programs. With MasterCard specifically, we are working together to integrate crypto rewards into their platform to make it easy for clients to implement once we go live. We are collaborating on the product, customer experience, and market fit and we are taking the time to get this right to ensure that we have a seamless experience for our joint partners. Brands that also crypto rewards create this truly differentiated customer engagement, as consumers more frequently come back to check the crypto rewards and balances, and crypto buyers and holders are leading the charge on this trend. Study we released earlier this year found that over 70% of those who purchased crypto at least once in the past six months are likely to redeem loyalty points for crypto currency, and about half of the crypto buyers are interested in earning crypto currency instead of loyalty points. It’s so very clear that offering crypto rewards can drive our brand's credibility for being innovative and create a deeper connection that they are looking for, all leading to improved growth. So moving to the next page, we're excited to launch pay with points and it’s live with Wyndham Rewards. With this capability Wyndham Rewards members can use their points to pay anywhere that Apple Pay and Google Pay are accepted. Pay with points enables the extension of more traditional point redemption opportunity and we can bring this type of integration to a really wide universal brand. We are able to create unmatched payment ease and more flexible use of loyalty points. As brands compete to differentiate themselves, our pay with points capability is a big step forward for driving brand affinity, while also providing customers with new sources of funds and showing them increased value for their loyalty. We saw in 2021 a wise market of study, that when compared to other payment options available in the industry, 90% of participants stated that pay with points increases the ease of redemption. This also creates a terrific retention feature, as consumers say that they are more likely to stay with the loyalty program that offers this capability. We see lots of ways that brands can take advantage of this capability, to faster speed to market, the functionalities embedded in [inaudible] and partners like Wyndham use this as a storefront for linking their payment capabilities. For brands that are looking for an integrated experience, we simply embedded this functionality in their ecosystem. This product has terrific scalability and we’re able to bring the familiar experience of checking out and paying in points to really a broad array of merchants. Turning to our platform, Bakkt does much more than just provide technology to our customers. We work with our partners and customers to ensure that they are compliant with the regulatory standards required to offer crypto to their customers, and help them work with their regulators on the overall understanding of this evolving space. We are regulated by NYDFS and our compliance measures controls and rigorous risk management practices are at the core of how we operate. We have the right infrastructure in place, bank trust charters, bid license, NTLs in every state required to be highly regulatory compliant and secure. We also provide sales support and 24/7 customer service, along with co-branded marketing collateral to really help our partners educate their consumers about crypto and sell that backed enabled products. We are working to gain clarity on some of the recent statements regarding crypto from the various regulatory bodies. We are working closely with our partners to navigate through regulation thoroughly. We're excited about our recent partnerships. We announced a strategic alliance with Global Payments. As part of this agreement, Global Payments will be supporting a wide range of our use cases, starting with enabling crypto currency redemption and customer loyalty programs offered by Bank Card clients and then expanding into its banking as a service offerings to include access to crypto currency, and ultimately leveraging their insurance technologies for linking virtual debit, credit and prepaid solution. In addition to working with them in these areas, we are broadly collaborating with global payments on multinational merchant payment acceptance. Another partner we recently signed is PSCU. They provide payment and digital banking solutions to their members, which include more than 1,900 credit unions and banks. In partnership with PSCU we'll be bringing back crypto connect capabilities to credit unions across the country. We are really excited to work with our new partners to activate each of these areas of collaboration, and really illustrate the value that our platform can bring to businesses and subsequently to the broader ecosystem of consumers that they all represent. And with that, I’ll pass it along to Drew for a review of our financial results for this quarter.

Thank you, Gavin, and good morning everyone. I will now walk you through the first quarter financial results. As a reminder we use the term predecessor to represent the results of Bakkt Holdings, LLC prior to October 15. These results exclude any results from the VPC Impact Acquisition Holdings. Successor represents the results of Bakkt Holdings Incorporated from October 15 forward which is the post-merger period. Combined, represents the combination of Predecessor and Successor in the applicable period. This is a non-GAAP figure. Turning to slide 12, we have our first quarter 2022 financial results. We saw strong net revenue for the quarter of $12.5 million, which increased by $4.4 million or 54% compared to the first quarter of 2021, primarily driven by strong activity from loyalty redemption, particularly a rebound in travel as we are coming out of the pandemic. Revenue was down quarter-over-quarter and you'll recall that the fourth quarter is seasonally strong for us. We had $61 million of operating expense in the period, which is up $24.5 million or 67% year-over-year due to an increase in non-cash compensation and headcount. The net loss for the quarter was $43.3 million, which resulted in the diluted net loss of $0.14 per share on an average diluted share base of $258.6 million shares. Net loss allocated to the non-controlling interest in the operating company was $36.2 million leaving at $7.1 million loss attributable to Bakkt Holdings Incorporated or a net loss of $0.12 per share on an average basic share count of 57.2 million shares. The partnership shares had a dilutive impact on EPS this quarter due to the tax benefit from the DTL utilization that would be created if the partnership shares converted to Class A shares. In the previous quarter we had no such impact due to the DTL created from the VIH merger. Any dilution from the partnership shares in the future will be dependent on new stage of the remaining DTL. On slide 13, we have our EBITDA and adjusted EBITDA in the first quarter of 2022. Adjusted EBITDA reflects adjustments for non-cash and acquisition related items that impacted the period. EBITDA and adjusted EBITDA for the quarter were losses of $40.7 and $28.9 million respectively. The loss of adjusted EBITDA was primarily due to increased investment in growing the company. In the first quarter we had $36.1 million of cash burn, as we invest in our business to drive future growth. This leaves us with over $355 million of cash readily available, representing significant liquidity to fund continued investment for growth. Our near term priority areas include continued investment in our platform capabilities and increased marketing spend as we go-to-market with our partnerships. We have plenty of dry powder available should be come across any interesting expansion in opportunities. On slide 14, we show net revenue broken out between subscription and service revenue and transaction revenue. Combined that revenue in the first quarter of 2022 is $12.5 million, an increase 54% compared to the first quarter of 2021. Strong revenue growth that we've seen in the last two quarters as a result of an increase in enterprise customers and an improvement in the economy as COVID-19 impacts have subsided. Turning to slide 15, we have total operating expense. Total expense for the quarter was $61 million, which was up 67% year-over-year. Total compensation expense of $35.1 million increased 130% compared to the first quarter of 2021. This was driven by non-cash compensation charges related to the issuance of restricted stock units. We also saw a 54% year-over-year increase in SG&A to $9.4 million as we continue to invest in the business for growth. 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, whether through a community bank’s trusted digital platform, to a large financial institutions loyalty storefront or through the Bakkt debt. We look at transacting accounts as an important metric to reflect activity on our overall platform from our B2B2C model. Transacting counts across the Bakkt platform were 678,000 in the first quarter of 2022, up 26% year-over-year. Digital asset conversions are $1 weighted measure and more directly aligned to revenue growth. This measure was up 91% year-over-year, which reflects the strong growth we saw in loyalty redemption and the impact of a heavy travel season for the first quarter. Crypto buy/sell volume is currently a relatively smaller portion of our overall platform activity. We expect this to increase in the near future as we activate the partners Gavin just spoke about, as well as build new relationships. A lock-up for Class B shares that were issued as consideration for the merger expired on April 18. The Class B shares may be exchanged for Class A shares on a one-for-one basis in an exchange that does not necessarily mean that the holder has sold their shares to the market. For example, some exchanges are done for tax purposes or for other reasons. As of this call Class B exchanges have totaled $17.5 million shares or 8% of total Class B shares. ICE has not exchanged any of their Class B shares and now holds 90% of the remaining Class B shares. As a reminder, last quarter we gave guidance of net revenue for the full year 2022 of $60 million to $80 million and cash burn of $115 million to $117 million to be used for investing and growing our business and leaving us ample liquidity for the future. The high end of our revenue guidance has ended on activating our new partnerships and yielding consumer growth based on those implementations. We plan to provide updates on guidance midway through the year on our second quarter earnings call. That concludes my section on the financial results. I will now turn it back over to Gavin for his closing remarks.

Our priorities remain consistent and aligned with our vision to connected the digital economy, build out and activate our partnership. We are laser focused on this and expect to activate and ramp up our partnerships throughout the remainder of this year, investing in products and capability. Last quarter we laid out our roadmap to the year. We launched pay with points and we expect to roll out real time funding by the end of this quarter. We expect to continue to launch many of the other items in the second half of this year. Deepening our relationships with our existing partners, we are actively working to bring the breadth of our entire platform capabilities to the existing partner set that we have. We're working with them every day to find innovative solutions to their pain points. And finally, execute on expansion activities. We are prioritizing new markets, new product capabilities and other growth opportunities, and I really look forward to keeping you updated on these initiatives as we continue to execute. And now with that, I'll turn to Ann to manage our Q&A.

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 Say, ranked by number of votes. Given the great volume of questions we have seen, we’ll look to skip those questions that were addressed in our presentation and we’ll group together questions that share common themes. After that, we'll turn to live questions from the Analyst Community. Our first group of questions is around our growth strategy. Specifically Luke Tee and others asked, what is your strategy that’s here to drive customer adoption and growth and increased revenues. Gavin, do you want to take that one?

Yeah sure, look I'll take it. We've just discussed our growth priorities and as I’ve said, these remain consistent. We know that sticking to our priorities will ultimately deliver the customer adoption and revenue growth that we know we're all capable of. Near term we expect more of our growth to come from the loyalty business as we ramp up and activate new capabilities in other areas of the platform. Our teams are working hard and moving with urgency to activate all of the things we’ve told you about. So we’re taking the time to work closely with our partners on integration, to ensure that we ultimately provide a seamless experience for their end customers, and one that we are very, very confident is going to scale. When we start to activate these relationships more broadly, you see the growth flow onto our platform. We have an addressable market of well over 100 million users. We have incredible reach with what we’ve built. Further, we have over 355 million in available cash. We are exceptionally well capitalized to continue investing in our business and to drive future growth.

Thanks Gavin. Our next question is from Matthew M. He asked, do you plan on rolling out a marketing campaign soon? How do you plan on building a customer base? What is the current cost for acquisition? Drew, can you answer this one?

Sure, happy to. Our marketing strategy mirrors our business strategy. Our marketing focuses on a few key areas. First B2B where we are building out content and product marketing campaigns against our core products, and rolling out those products through activations. Next, consumer facing incentives delivered through our partners such as bonus points or crypto for their first transaction. Then consumer facing digital marketing with a focus on testing incentives and messages we believe will help us with partner activations of case studies. And then finally, exploring brand sponsorships where partners who can help us drive awareness and activate core elements of our business model, mostly exploring areas of crypto rewards and/or payments and payouts. The majority of our marketing will be done in conjunction with our partners, to attract their customers to our platform and provide incentives for adoption. We will also invest smaller amounts at direct marketing through digital and other channels, as well as some investments to build the Bakkt brand. We don't disclose our CAC, but we will say that with early partner activations we've already seen CAC below our direct-to-consumer testing, demonstrating that a B2B2C model is effective.

Thanks Drew. Next we have numerous questions related to our stock price from Santosh Kumar, Oscar P, Timothy T and a few others. They ask, how are you going to improve your stock price which went from $50 to the mid $3 level? What will you do going forward to increase market cap in the field to your investors? What is your plan to look out for shareholders and improve our investments? Gavin, can you please provide some color on this?

Yeah, I’ll take this one. Look first, thanks to everyone for their support, and for standing by us as shareholders. We understand your frustration. The markets have been incredibly volatile and challenging and our stock has been very volatile since we went public. It's not easy being a shareholder in fintech growth stocks in the current macro environment. Our focus is on building a company with long term growth and sustainable returns for our shareholders, executing on our road map, like our partnerships and platform enhancements we’ll deliver the financial result that will ultimately drive the positive momentum in our stock price. So that's what we're focused on, our best opportunity to increase the market cap is pretty simple, execute, execute, execute. That's what's going to generate long term value for all of you.

Thanks Gavin! Next up, Kevin M., Nicolai D and others want to know about our future partnerships. Gavin, this one is for you.

Yeah, great question. Look, our sales and marketing teams are working hard to build relationships with prospective partners. You know we’ve recently signed several new partners; Global payments, American Bank and Latrobe. These are really strong proof points for us, and these partners provide entryways into new industries, new segments and a customer base. We've got such an active pipeline of new potential partnerships that we look forward to communicating to you all when the time is appropriate. This is one of our key priorities and we’re confident in our ability to deliver against this priority. Simultaneously, we're also working to deepen the relationships with our existing partners. You know we're working with them actively to bring the breadth to their entire platform capability to their businesses and so we’re constantly working with them to create new and innovative solutions to the pain points that they see in their businesses.

Thanks Gavin. Next we have a question from Working P [ph] who asks, what is the backed strategy to enable crypto payments for our creators?

I love this question. You know we enabled crypto as a form of payment, as well as an opportunity for people to get paid in crypto. We mentioned during the earnings call that we've just entered into a partnership with Latrobe, a curator to create marketplace for enterprises and SMEs to our list of partners. So starting soon, professional freelance creators who take on the Latrobe project jobs are going to be able to get paid a portion of this fees in crypto with Bakkt. You know along the same thread, we announced back in December our partnership with BringMeThat, which is also getting close to launching. We believe there's a huge opportunity in the gig economy and new and exciting opportunities for many different segments of payment recipients to engage with these new digital assets. Our capabilities create key differentiators for platforms for marketplaces and in fact really any employer to really attract and retain employees with new and exciting payment and reward options. We're really looking forward to continuing to build the momentum in this space, but I think you can already see that with the partners that we've announced, the proof points are starting to gather.

Great! We have time for one more question from the same platform. Samuel R.S., is there still plan for the crypto debit card?

Yeah look, I'll tell you this one as well. Well, we rolled out our backed branded visa debit card, which you can fund with crypto last year, you can use it today, anywhere at Google Pay or Apple Pay is accepted. Our card provides a really convenient option for consumers to leverage their crypto for real life spending, without first having to select and wait to have it transferred to a bank to make the purchase. In addition to crypto, we've also enabled the ability for consumers to pay with points, you know unlocking the value of the points that they've earned, and we're thrilled to bring to life the ability for consumers to use these digital assets such as crypto and rewards points in their daily lives.

Great! Thank you, Gavin. And with that, I would now like to turn the call back over to the operator to open up the phone lines to take questions from the analyst community.

Absolutely! [Operator Instructions] The first question comes from the line of Trevor Williams with Jeffries. You may proceed.

…You’ve got enough partnerships that have…

Trevor?

Yes, hello! Can you hear me?

Yeah, good morning Trevor!

Hi Trevor! We can now, but the first part of the question got cut off. If you could start from the beginning again.

Yeah, sure, of course. Good morning guys! So Gavin, this one’s for you. I mean I know we’re still very early in the life cycle. The company got a number of partnerships still yet to ramp new products rolling out. Just balancing that against the C-change that we started to see in the market. Just in terms of strategic priorities in your focus, has there been any change to what you're prioritizing over the next, we’ll call it six to 12 months. I mean it sounds like just staying heads down, getting the announced partnerships up and running is kind of the key focus, but would love any more insight into how you're thinking about key priorities that you would orient us to over the next six to 12 months would be great. Thanks a lot.

So good morning, Trevor! Thanks for the question. So right now I mean, no change. I mean with the same focus, all of that execution and activation. You know you’ve seen through today’s earnings, together with previously announced platform partners, we have a terrific and growing ecosystem of partners that we’re keen and anxious to activate. We are seeing strong traction in the market for the ability for us to embed our crypto connect solution, the buy/sell opportunity into a wide range of banking solutions. We continue to see strong traction from emerging spaces like crypto payout, where we want to be able to see newer products on the platform, and really driving new opportunities for us. You see that with BringMeThat and Latrobe the two that we’ve be asked. And the work that’s happening within our loyalty space, you know when you think about the crypto rewards proposition, these are all growth marketing opportunities. So we are talking to our partners about improving net top line growth, deepening the relationship that they have with their existing customers and giving them the opportunity to really activate new parts, new customers as well. So right now no change, heads down, execute, great set of partners, great prospectus. Thanks mate!

Got it, that's very clear. Thank you. And then just my next question is on crypto. Specifically, I mean with how quickly prices have moved. Can you give us a sense for what you guys are seeing in real time related to volumes and activity? And I know it's still a small percentage of your overall transaction volume, but if we have a continued down drift in crypto prices, I mean how should we think about that impact? Drew I know you said you guys are going to update the guide, later this year. But just within the $60 million to $80 million if we see a continued down drift in prices, how should we think about that impacting the revenue outlook for the year. Thanks.

Yeah, sure. So I mean right now we're not seeing a lot of differences in terms of the activity levels and they are - as we've been saying, they are still low till we get these partnerships up and running. We're obviously watching what's happening to the crypto prices in the market. I think it's worth reiterating, we are in the two most liquid and well traded markets, Bitcoin and Ether. And you know low prices does not necessarily mean lower activity. We’ll have to wait to see how that plays out, but some may also view it as a buying opportunity to get into the market related to crypto. But we are watching it very closely and as we said, we'll update our guidance mid-year based on the trends that we’re seeing and extrapolate that out into our forecast.

Okay, perfect! No, I appreciate it guys. Thank you.

Thank you, Mr. William. The next question comes from the line of Rich Repetto with Piper Sandler. You may proceed.

Yes, good morning Gavin. And I guess my question is a follow up on crypto as well. And I think you got a sort of unique positioning, but some of the issues that are going on in the space with these new disclosures of – you know if you hold crypto for a third party and your publicly traded, you have the disclose the bankruptcy estate risk. So I guess, can you just clarify your relationship there and whether you are even anywhere involved with that?

Yeah, hey Rich! It’s Drew LaBenne. I think you’re talking about SAB 121 that came up in the SEC.

Exactly!

Which really – yeah, so as a custodian of the crypto assets, we will need starting in Q2 to gross up our balance sheet for the crypto that we are providing custody services for, and then there's still – the guidance is still being worked on the specific details with the update for accounting purposes, so we are working on getting clarity. There is sort of a haircut aspect to this that relates to – do you need to – I'll call it in my own words, you know hold or reserved for the risk that you're holding and sustaining these assets. We are waiting for more guidance on that, but I think what's helpful at least from our perspective is, we've had very clean historical performance on managing our crypto currency assets. We are highly regulated; we have all the controls in place that we need, that we believe we need to effectively manage crypto assets. So we feel like we're in a good spot to adopt this and are well positioned to a strong custodian in the future.

And I’m sorry if I missed this, but did you disclose how much crypto assets you have in custody?

No, we didn’t disclose that yet. But starting in Q2 I think along with all other custodians, we’ll disclose that.

Got it. Okay, and one last question. I guess Gavin on growth of revenues, you know going forward as you target partnerships, and right now the transaction subscription revenue is close to evenly contributed to revenue. So I guess for the next year, you see that sort of at a steady pace that mix or – and then over the longer term which way should it tilt?

Good question Rich, good morning! So right now in the near future, yes, we continue to see it pretty evenly paced. As the – as we see traction in the marketplace, as the activations occur, we would expect over the longer term to see the subscription revenue continue to grow maybe at a slightly higher rate. Definitely for the near term as you said, we expect to see equal payment.

Okay, thanks very much. That's helpful.

Thank you. [Operator Instructions]. There are no questions waiting at this time. I would like to pass the conference back to Ann for any closing remarks.

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