Q1 2022 Bakkt Holdings Inc Earnings Call
[music].
Welcome to the first quarter 2022 on a conference call at this time all participants are in a 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 it over to <unk>.
<unk> of Investor Relations. Please go ahead.
And thank you for joining us for <unk> first quarter earnings call today's presentation, including a separate earnings call presentation that can be found on our investor Relations website at www dot investors that back dot com will contain certain forward looking statements. Bob Act. These statements are based on the current expectations of the management back and are subject to uncertainty and changes in circumstances.
And many of which are beyond <unk> 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.
Related to that business. Please refer to <unk> filings with the Securities The Securities and Exchange Commission, including the discussion of risk factors in its most recent annual report on Form 10-K, and subsequent quarterly report on Form 10-Q.
During today's presentation. In addition to discussing results are calculated in accordance with generally accepted accounting principles, we will refer to certain non-GAAP financial measures for more information on the basis of our presentation for our financial results in our non-GAAP measures. Please refer to our earnings release, which was filed this morning with the SEC joining.
Joining me on today's call are Kevin Michael Chief Executive Officer, Andrew <unk>, Chief Financial Officer. After our prepared remarks, we will answer questions. We received from our investors feel the same technology platform. After that <unk> will be available to answer questions from the analyst community I will now turn it over to Kevin.
Thank you Ed good morning, everyone and thanks for joining.
In fact, we're connecting the digital economy.
Powering commerce by unlocking value from digital assets with forging new partnerships and Thats good betting out product in this growing ecosystem, while also deepening relationships with existing partners to really create new opportunity.
Momentum is building across our business.
A strong foundation for our future growth so let's begin.
We help our partners actively participate in the new and dynamic economy, Thats driven by digital assets backs crypto.
Just one of our core pillars crypto has proven that it has staying power.
Helping businesses quite catch up.
Products and services enable businesses to meet rapidly changing user needs and to increase relevance to their customers.
Let's walk through some updates on our core capabilities.
Crypto by cell capabilities, all backed crypto Kinect connect partners customers to crypto, where they're already transacting digitally.
<unk> experience will be lives with a number of partners and this is embedded experience is built upon the same crypto capabilities being used in market today tomorrow.
It includes core services to onboard customers to manage buy sell capabilities and all of this is done in a seamless experience and their trusted banking environment.
Rather than watching deposits flow out of their ecosystem.
Thanks can help keep the customer attention within their environment, while realizing the brand benefits of these in a bit of solutions.
We also enable our partners to increase customer acquisition, especially in the new and younger demographics.
Segment, everyone is competing for today.
<unk> go to market approach allows us to build scale quickly and our platform partnerships enable us to efficiently roll that capability out to potentially hundreds of member banks and millions of end users.
This is where our partnerships with platforms like five seven for that are so critical and as we've signed a number of banks, who are 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 announcements, including the addition of American Bank, which is the first bank slated to go live we expect to see a strong acceleration in the second half of this year.
Let's next turn to that crypto payout.
We all know that the war for talent is impacting every single sector transformation and innovation is happening in the payouts device quickly and backed crypto payout allows employers to differentiate their opportunities from others by allowing their employees to receive a portion of the pie in crypto.
We survived the gig economy workers and found that nearly 80%, we'd like to receive either all or a portion of that pie and crypto currency.
First partner in the gig workers, bringing me that a food delivery service platform.
We're also excited to announce today that we are adding light truck a creative marketplace for enterprises and SMA to our list of partners.
<unk>.
Creators, who take on later, our projects will be able to get paid a portion or all of their pipe in crypto.
We continue to work with our platform partners to make this quick payout capability available to a multitude of industries and market segments.
Back to crypto payout has strong applicability across gaming and gambling marketplaces, the creator economy, the sharing economy and traditional employers.
<unk> for larger audiences to possibly acquire crypto will only increase both adoption and uptake.
So moving mix 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 every month.
Consumers can earn crypto through that Tyler activity.
Our research is showing that as they get access to even small amounts of product knowledge increases significantly and they're more likely to buy and engage more deeply in the crypto economy.
Crypto rewards will be live later this year first week five served through the you choose rewards program, serving financial institutions debit and credit card card.
Todd holders any lease programs will soon have the option to redeem their points directly for crypto.
We're working across multiple partners to enable earning crypto, both with credit cards and within merchant loyalty programs with Mastercard, specifically, we're working together to integrate crypto rewards into the platform to make it easy for clients to implement once we go live we're calm.
Operating on the product customer experience and market fit.
And we're 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 their 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 tripped up at least once in the past six months.
I'll likely to redeem loyalty points.
Currency and about half of the crypto buyers are interested in earning crypto currency instead of loyalty points.
It's so very clear offering crypto rewards can drive a brand's credibility to be 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 its live with Wyndham rewards.
With this capability Wyndham rewards members can use their points to pay anywhere that apple pay and Google pay or accepted.
Pay with points enables the extension of more traditional point redemption opportunities and we can bring this type of integration through a really wide universe of brands.
We're able to create unmatched payment ease and more flexible use of loyalty points.
As brands compete to differentiate themselves.
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 the 2021 wide market of studying.
When compared to other payment options available in the industry.
90% of participants stated the pay with points, increasing the ease of redemption.
This also creates a terrific retention feature is considered let's say that would be 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 cost the speed to market. The functionality that's embedded in RF and partners like Windom use this as a storefront linking that payment capabilities.
Brands that are looking for an integrated experience, we simply embedded dysfunctionality in their ecosystem.
This product has terrific scalability, and we're able to bring the familiar experience with checking out and paying and points to really broad array of merchants.
Turning to our platform that does much more than just provide technology to our customers. We work with our partners and customers to ensure that they are complying with the regulatory standards required to offer crypto to their customers and help them work with the regulators on the overall understand.
Ending of this evolving space.
We're regulated by NY, DFS, 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 bit license Npls in every state required to be highly regulatory compliant and secure.
We also provide sales support and $24 seven customer service along with co branded marketing collateral to really help our partners educate consumers about crypto and sell that backed enabled product.
We are working to gain clarity on some of the recent statements regarding crypto from the various regulatory bodies.
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 in customer loyalty programs offered by bank kind of slides and then expanding into its banking as a service offering to include access to crypto currency and ultimately leveraging their issuing technologies for linking virtual.
Debit credit and prepaid solution.
In addition to working with them in these areas, we broadly collaborating with global payments on multinational merchant payment acceptance.
Another part that we recently signed its PSC you Dave.
They provide payment and digital banking solutions to their members, which include more than 1900 credit unions and banks.
In partnership with payers to you, we'll be burning backed crypto connect capabilities to credit unions across the country.
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 as 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 Kevin 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 backed holdings LLC prior to October 15th.
These results exclude any results from the BPC impact acquisition holdings.
Successor represents the results of back backed holdings incorporated from October 15th cohort, which is the post merger period.
Combined represents the combination of predecessor and successor for 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 billion.
Which increased by $4 4 million.
Or <unk> 54 per cent compared to the first quarter of 2021, primarily driven by strong activity from loyalty redemption.
Particularly a rebound in travel as we're coming out of the pandemic.
Revenue was down quarter over quarter, but youll 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 noncash compensation and head count.
The net loss for the quarter was $43 3 million.
Which resulted in a diluted net loss of <unk> 14 per share on an average diluted share base of 258 6 million shares.
Net loss allocated to the Noncontrolling interest in the operating company was $36 $2 million, leaving a $7 $1 million loss attributable to <unk> Holdings incorporated.
Or a net loss of <unk> 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 BPL utilization that would be created if the partnership shares converted into class a shares.
In the previous quarter, we had no such impact due to the BPL created from the Bih merger.
Any dilution from the partnership shares in the future will be dependent on the usage of their remaining DTA.
On slide 13, we have our EBITDA and adjusted EBITDA for the first quarter of 2022.
Adjusted EBITDA reflects adjustments for noncash and acquisition related items that impacted the period.
EBITDA and adjusted EBITDA for the quarter were losses of 47, and $28 $9 million respectively.
The loss in 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 invested in our business to drive future growth.
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.
Plenty of dry powder available should we come across any interesting expansion opportunities.
On Slide 14, we show net revenue broken out between subscription and service revenue and transaction revenue.
Combined net revenue in the first quarter of 2022 was $12 5 million and increased 54% compared to the first quarter of 2021.
<unk> revenue 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 totaled.
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 noncash compensation charges related to the issuance of restricted stock units. We also saw a 54% year over year increase in SG&A to $94 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 power capabilities, our access across both partner and backed experiences whether it's through a community banks trusted digital platform to a large financial institutions loyalty storefront or through the back half.
We look at transacting accounts as an important metric to reflect activity on their overall platform from our b to B to C model.
Transacting accounts across the <unk> platform was 678000 in the first quarter of 2022 up 26% year over year.
Digital asset conversions are a dollar 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 in 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 partner's Gavin just spoke about as well as build some new relationships.
The lockup for class B shares that were issued as consideration for the merger expired on April 18th.
The class B shares may be exchanged for class a shares on a one for one basis and in an exchange does not necessarily mean that the holder has sold their shares to the market for.
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.
<unk> does not exchange any of their class B shares and now hold 90% of the remaining class B shares.
As a reminder, last quarter, we gave guidance of net revenue for the full year of 2022 of $60 million to $80 million in cash burn of $150 million to $170 million to be used for investing and growing our business, leaving us ample liquidity for the future the.
The high end of our revenue guidance is dependent on activating our new partnerships, yielding consumer growth based on those implementations.
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 Kevin for his closing remarks.
Our priorities remain consistent and aligned with our vision to connect the digital economy.
Buildup and activate our partnerships 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 capabilities.
Last quarter, we laid out a roadmap for the year, we launched pay with points and we expect to rollout 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 partnerships that we have we're working with them every day to find innovative solutions to their pain point.
And finally execute on expansion activity, we're 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 will turn to and to manage our Q&A.
Thanks, Devin, let's move over to questions from the Investor community, leading into a Q&A session will start by answering the top questions from say ranked by number of votes given the great value my questions. They have seen we will look to get those questions that were addressed in our presentation and we will group together questions that share common themes after that we will.
Turning to live questions from the analyst community.
Our first group of questions is around our growth strategy, specifically look T and others ask what is your strategy this year and to drive customer adoption and growth and increase revenues.
Kevin do you want to take that one.
Yeah sure look I will take that 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, but we know we're capable of.
Near term, we expect more of that 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.
But we're taking the time to work closely with our partners integration to ensure that we ultimately provide a seamless experience for their end customers and one that we are very very confident it's going to scale when.
When we start to activate these relationships more broadly you'll see the gross flow onto our platform and 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.
Exceptionally well capitalized to continue investing in our business and to drive future growth.
Thanks, Kevin Our next question is from Matthew.
He asked do you plan on rolling out our marketing campaigns and how do you plan on building our customer base what is the current cost per acquisition.
Can you answer this one.
Sure happy to our marketing strategy mirrors, our business strategy, our marketing focuses on a few key areas.
<unk>, where we are building out content product marketing campaigns against our core products 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 branch brand sponsorships, where partners who can help.
Let's drive awareness inactivate core elements of our business model, mostly exploring areas crypto rewards <unk> payments and payouts.
The majority of our marketing will be done in conjunction with our partners.
Attract their customers to our platform and provide incentives for adoption.
We will also invest smaller amounts of direct marketing through digital and other channels as well as some investments to build the back to Brent.
We don't disclose our CAC, but we will say that with early partner Activations, we've already seen keck below our direct to consumer testing demonstrating that a b to b to C model is effective.
Thanks, Joe next we have numerous questions related to our stock price from Santos Kumar Oscar P. Timothy <unk> and a few others.
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 increased market cap and appeal to your investors. What is your plan to look out for shareholders and improve our investments.
Can you please provide some color on this.
Yeah I'll take this one.
Well, thanks to everyone for the support and for spending bias to 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 roadmap.
Our partnerships and platform enhancements will deliver the financial results that will ultimately drive the positive momentum in our stock price.
So that's what we're focused on.
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, Kevin.
Kevin and Nicole I D and others want to know about our future partnerships, Kevin just wanted to hear you.
Yes, great question.
And marketing teams are working hard to build relationships with perspective partners.
We recently signed several new partners Global payments American Bank and light truck. These are really strong proof points for us and these partners provide entryways into new industries, new segments and the customer base.
We've got such an active pipeline of new potential partnerships, but we look forward to communicating to you all when the time is appropriate.
And 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 model.
We're working with them actively to bring the breadth of our entire platform capabilities to their businesses and so we're constantly working with them to create new and innovative solutions to the pain point that safety in their businesses.
Thanks, Kevin.
Next we have a question from working Pete who asked what is that strategy to enable crypto payments for credit areas.
I Love. This question, we enable crypto as a form of payment as well as an opportunity for people to get paid in crypto we.
<unk> during the earnings call that we've done.
<unk> entered into a partnership with light truck.
Rachel creative marketplace for enterprises in SMA trial list of partners.
Starting soon professional freelance creators who take on light truck project jobs are going to be able to get paid a portion of this these encrypted backed.
Along the same thread, we announced back in December a partnership with bring me that which is also getting close to launch.
We believe there is 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 platform 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 together.
Great.
We have time for one more question from the same platform Samuel R. S is they're still paying for the crypto debit card.
Yes look I'll take this one as well, but we rolled out our best branded visa debit card, which you can fund with crypto last year.
Can use it today any way Google pay or Apple pay is accepted.
Our card provides a really convenient option for consumers to leverage that crypto for real life spending without first having to sell it and white 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 unlocking the value of the points that divert.
And we're thrilled to bring to life the ability for consumers to use these digital assets such as trip 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 if you will.
Like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two.
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As a reminder, if you are using a speaker phone. Please remember to pick up here is that before asking your question. We will pause briefly a question are registered.
The first question comes from the line of Trevor Williams with Jefferies. You May proceed.
B, you've got enough partnerships that have yes.
Yes Hello.
Can you hear me.
Yes, good morning, Trevor we can now but the first part of the question got cut off if you could start from the beginning again, yes sure of course, good morning, guys. So Gavin this one's for you I mean, I know, we're still very early in the lifecycle of the company.
Got a number of partnerships still yet to ramp new products rolling out just balancing that against the sea change that we've started to see in the market.
In terms of strategic priorities and your focus has there been any change to what you're prioritizing over the next call. It six to 12 months I mean, it sounds like just staying heads down getting the announced partnerships up and running it's kind of a key focus but would love any more insight into how youre thinking about key priorities that you have.
Orient us to over the next six to 12 months would be great. Thanks, a lot.
Hello, Good morning. Thanks.
Thanks for the question so right now no.
I mean the.
The same focus all of that execution of activation.
<unk> seen through today's earnings together with previously announced platform partners, we have a terrific and growing ecosystem of partners.
<unk> and anxious to activate.
Seeing strong traction in the market for the ability for us to embed the connect solution the buy sell opportunity into a wide range of banking solutions. We continue to see strong traction from emerging spaces like Cryptos Hi al.
We want to be able to see new.
But on the platform are really driving new opportunities for US you see that would bring me back in late <unk>.
We've announced.
But what else is happening within our loyalty space. When you think about the crystal rewards proposition April growth marketing opportunity.
Looking to our partners about improving topline growth deepening the relationships they have with their existing customers and giving them the opportunity to really activate new Pos new customers as well so right now no change.
Execute great set of partners right prospects. Thanks, Mike.
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 impacting drew I know you said you guys are going to update guidance later this year, but just within the $60 million to $80 million. If we see a continued downdraft in prices how should we think about that impacting the revenue outlook for.
For the year. Thanks.
Yes, yes 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 theres still low until we get these partnerships up and running.
We're obviously watching what's happening in the crypto prices in the market I think it's worth reiterating we're in the two most.
Liquidity, well traded markets, bitcoin and either and low prices does not necessarily mean.
Lower activity will have to wait and 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're watching it very closely.
As we said we will update.
Our guidance mid year based on the trends that we're seeing and extrapolate that out into our forecast.
Okay perfect I appreciate it guys. Thank you.
Thank you Mr. William.
And that question comes from the line of rates with a capo.
Piper Sandler you May proceed.
Yes, good morning.
Good morning, Kevin.
I guess my question is a follow up on crypto as well and I think you've got a sort of a unique positioning.
Some of the issues that are going on the space with these new disclosures.
Yes.
If your whole crypto for.
Third party and your publicly traded you have to disclose the bankruptcy state risk. So I guess can you just clarify your relationship relationship there.
Whether youre anywhere involved with that.
Yeah, Hey, rich, it's drew Labatt I think youre talking about SAB 121 that that came out from the SEC exactly which really yes, so as a custodian of crypto assets.
We will need starting in Q2 to gross up our balance sheet for the B crypto that were.
Providing custody services for.
Then there's still the guidance is still being worked on the specific details with big four accounting firms and so we're working on getting clarity.
There is there is sort of a haircut aspect to this that relates to do you need to I'll call. It in my own words hold a reserve for the risk that you are holding at <unk>. These assets, we're 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 crypto currency assets were highly regulated we have all the controls in place that we need.
We believe we need to effectively manage crypto assets.
So we feel like we're in a good spot to adopt this.
<unk>.
And are well positioned to be a strong custodians in the future.
I'm sorry, if I missed this but did you disclose how much.
Crypto assets you have.
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, Kevin on growth of revenues.
Going forward as you.
<unk> target.
Partnerships and right now the <unk>.
<unk> subscription revenues.
Close to even evenly contributed to.
<unk> revenue so.
I guess for next year do you see that sort of <unk>.
Steady pace.
Mix or and then over the longer term, which way you should it tilt.
Yeah. Good question Rich good morning, right now.
The near future, Yes, we continue to see a pretty evenly pace as the as we see traction in the marketplace as the activations occur.
I would expect over the longer term to see the subscription revenue continued to grow.
Maybe Ed.
Nightly high right. So definitely for the near term as you said, we expect to see Peggy.
Okay.
Thank you very much that's helpful.
Thank you.
And ladies and gentlemen, if you would like to ask a question. Please press star one.
There are no questions waiting at this time I would like to pass the conference back to Adam for any closing remarks.
Great. Thank you everyone for attending our earnings call. This morning, we look forward to connecting with you again soon.
Ladies and gentlemen that concludes our event you may now disconnect.
Okay.
Okay.