Q2 2023 Bakkt Holdings Inc Earnings Call
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Greetings and welcome to the second quarter 2023 earnings conference call. At this time all participants are in listen only mode. A question and session will follow the formal presentation. As a reminder, this conference call is being recorded.
Now, let's turn it over to Andres head of Investor Relations. Please go ahead.
Good morning, and thank you for joining us for <unk> second quarter earnings call. Today's presentation includes a separate earnings call presentation that can be found on our investor relations website at www dot investors Dot dot dot com will contain certain forward looking statements. These statements are based on management's current expectations and are subject to risks and uncertainties, which may cause actual.
To differ materially from those expressed or implied in such forward looking statements for a more complete discussion on forward looking statements and the risks and uncertainties related to that business. Please refer to its filing with the securities and Exchange Commission.
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 on the basis of the 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 me on today's call are Kevin, Mike Boyle, Chief Executive Officer, and Karen Alexander Chief Financial Officer. After our prepared remarks, we will answer your questions. We received from our investors, who let's say technologies platform after that Gavin and Karen 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.
We're making meaningful progress executing our key priorities, we set out at the beginning of the year, we expanded our Crimson platform through the acquisition and integration of apex crypto, while activating a broadening our client.
And if we're being prudent.
Occasion.
We're winning new custody and crypto trading clients and building strategic alliances with prominent players of our capabilities and best in class infrastructure resonates with the market.
We're expanding into new international markets alongside our clients.
Latin America expected to launch in the fourth quarter.
Other markets such as the UK European Union, Hong Kong, and Australia to follow on.
We're focused on delivering solid results for our existing multi client as we work together to broader transaction volume.
Lastly, we continue to prudently manage expenses, resulting in improved gross profit margin were also updating our full year 2023 operating cash flow outlook and expect to improve approximately 20% from our prior guidance.
Our platform provides insulated from Doug capabilities from advanced trading and secure top to see it on roads.
We also secured custody of assets founded in traditional funded and built to uphold the shifting regulatory standards.
Regulated by the NY DFS as a limited purpose Trust company.
<unk> has reliable infrastructure with multi line security streamlined management and disaster recovery services to help ensure customer funds a safe number are comparable.
We offer.
Secure unregulated crypto trading with Ipi at UI auctions to activate and trading responsibly.
This includes unparalleled liquidity across quality with 100% uptime, and seamless integration and customer experience, which enables clients to integrate and less than 45 days within the fund settlement and follow up of protection.
Capabilities also include coin trends.
Order management system and multiple fee structures.
As part of crypto trying to our clients are increasingly utilizing backfill on reps.
C H debit or wire transfer for smooth that end to end customer experience.
As we continue to work for innovative ways for consumers to access crypto, including through rewards redemption and by earning or getting paid in crypto.
Our loyalty redemption capabilities remain a strength and offer a full spectrum of content, including Apple products and the other merchandise travel and gift cards, we've introduced personalized offerings and additional apple products, while maintaining a strong list of skus and modernizing our infrastructure.
And the architecture with cloud capabilities.
Yeah.
Through our B to B to C approach, we have a broad client reach in high growth sectors that provide efficient scalability.
Network is looking to expand their relationship with their millions of customers and crypto it presents an opportunity to differentiate their services.
Drive engagement and revenue growth and for back it enables us to reach millions of end customers across a variety of providers.
We've made progress in integrating apex crypto into our business, including employee on boarding integrating our product and technology processes and managing key functions like compliance and risk all with minimal impact to our existing client base, we completed the rebranding of apex crypto chips.
<unk>.
And transitioned all necessary documentation and materials for clients.
With the integration of this deal mostly done we're now focused on leveraging the synergies and expanded capabilities from this transformational deal to continue growing and drive further efficiencies on a go forward basis.
Throw a client led model, we're always working with our key clients to grow their business.
I worked with people is a prime example of our ability to successfully execute.
Together, the combined strengths of legacy back and apex crypto.
We pulled approached us to develop a new innovator that aci's funding rounds for their crypto customer.
Our teams mobilized quickly, bringing together apex, crypto trading and backed funding capabilities to launch weibo pay and less than 40 days.
Solving for this we also built ACI its funding functionality, which provides a competitive advantage and we're seeing significant interest from other clients and prospects and utilizing it on rates.
Additionally, I'm pleased to share that back will be one of plants crypto solution partners, but it's customers who are interested in offering crypto solutions to their end users.
This is particularly exciting since plant has an extensive network of 8000 fin techs using that platform today.
Through the Plaid and backed partnership post index will be able to easily and safely explore offering crypto solutions to their use.
Place to share that we've expanded our network of crypto trading clients, mostly in the Fintech industry. We've recently signed on several new clients and are engaged in late stage negotiations with a number of additional prospects.
We're also making solid progress on our international expansion strategy.
Typically working with our client base to develop and execute our go to market strategy in markets, where we see regulatory clarity.
We will serve as investors crypto provider in the U S. Our relationships sourced through our commercial agreement with apex in Tech solutions.
We're also working with small and big coin to provide end to end bitcoin trading fit on rats and qualified custody.
We also signed block chain Dot com, one of the first and largest crypto wallet providers in the world along with site and crypto and mom to provide end to end crypto trading.
On the International front, we signed an agreement with the IMAX to offer crypto trading for Latin America.
These recent wins are strong testament to the product fit about capabilities and the continued focus on growing our colstrip touch solution.
Recent market events have highlighted the difficulty in storing digital asset safely and the need for multi custodian access and self custodial functionality.
Our secure and compliant custody platform offers unparalleled protection and complete customer control over their asset.
It utilizes multilayered technology and the latest breakthroughs in Mtc cryptography with hardware isolation, ensuring the customer funds are protected from the various threats, including cyber attacks and tuttle collusion and human error.
Given this backdrop, we continued to see an increase in new client activity. We successfully signed new clients and are in late stage negotiations with multiple prospects in mining family offices registered investment advisers and corporate Treasury industries.
<unk> sales opportunities are up 10 times in the first half of 2023 versus the second half of 2022.
The custody platform generate stable recurring platform fees as well as assets under custody based revenue further diversifying our revenue.
<unk> institutional grade custody platform offers the security of licensing clients are looking for including qualified custodian status with the New York Department of financial services comprehensive security controls regulatory compliance and streamlined user management and consensus protocols.
Given its prominence as a strong anchor product, we're continuing to invest in our custody offering to meet demand from new and existing clients.
We're redesigning the application to enhance our offering and exceed client expectations and anticipate launching the upgrades throughout the remainder of this year.
In this enhanced offering will maintain all of the elements that make back close to the exceptional.
It will continue to offer our compliance first focused approach with multiple lines of security and outstanding operational management.
These upgrades will make it easy to launch additional products.
Such as the ability to add new blockchain networks, and the assets almost network retail and.
In institutional staking, which adds yield generating opportunities for institutional clients.
We have a new multifaceted strategic agreement with five blocks as part of this agreement backed who will provide disaster recovery services to five boxes off exchange customers.
And we will join the five blocks qualified custodian network.
The five watts of exchange solution allows participants to maintain control of their private kids without sacrificing the convenience and speed of trading on centralized exchanges.
This has become a high focus products for the market as recent misappropriation of customer funds by exchanges has led to the demand for safe trading solutions.
We're also integrating five blocks technology to fortify our custody offerings.
For disaster recovery services, we will leverage our secure infrastructure to provide backup storage to ensure customer funds are safe and we're comfortable.
Every off exchange customer will require a disaster recovery package. So there's tremendous opportunity for back in safeguarding these assets.
By joining the five blocks qualified custodian network will be connected to the thousands of organizations across the crypto ecosystem.
Use the network every day.
Including exchanges liquidity providers and custodians.
There's only a select group of qualified custodians in this network and we're proud that our differentiated secure and compliant first focused approach enabled us to be selective.
The broad reach of this network will fuel our pipeline of prospects for our full suite of crypto solution.
We will continue working with five blocks to jointly deliver additional use cases and capabilities to the market through this strategic alliance.
With that I'll turn it over to Karen to discuss our financial and operating results for this quarter.
Thanks, Kevin.
Walk you through our second quarter financial results.
Quick reminder, that this quarter includes the results of apex crept down, which we acquired in April 2023.
Ripped out materially increases our crypto service revenue such that we now have prevented crypto services revenue stream to come upon anytime in Rotterdam in accordance with GAAP. We are presenting from debt service revenue and wireless crypto costume execution clearing and brokerage opinions on a gross basis since they are in principle.
San Francisco, we provide for our customers.
Contrast, where an agent.
Okay redemption services provider to customers so.
Well keep dropping and is presented on a combined basis.
Crept up cost and execution clearing and brokerage fees, which we refer to as crypto cross and ECB for the remainder of this call will drive crypto services revenue.
Difference between these two line items represents crypto trading contribution to margin.
The next section of our earnings presentation for additional detail.
Our services revenue and related costs.
Turning to slide 13, we have our second quarter 2023 financial my problems we.
We had total revenues of $347 $6 million.
$335 $3 million.
Script as services revenue, which increased significantly due to our acquisition of expert down we had totaling $3 million net royalty San Francis ripening.
Operating expenses were 398 $7 million in the period, which reflects a significant increase and kept it constant ECB drug inside the related services activity.
During the quarter, we had 17 million.
A million dollars in acquisition related expenses.
$10 $4 million with a non cash accrual related to the estimated fair value change.
Tien Tsin stock burnout associated with our acquisition of Apis come down through 2025.
We will update the estimated fair value of the contingent stock or a quarterly basis based on the forecasted compressed crypto revenue, that's cryptoclastic ECB associated with the apex their relationships as such the accrued stock earn out as of June 30th subject to change as our revenue forecast changes.
2023 'twenty 'twenty four earn outs will be finalized as part of our 'twenty to 'twenty three 'twenty hunting for Iraq reporting operating expenses, excluding crypto costs in <unk>.
Were $64 $7 million.
Excluding acquisition related expenses operating expenses were 47 $7 million, which represents a decrease of 16% year over year, primarily Detroit reduction and total compensation and benefits as we are starting to see the benefit from earlier expense actions.
The net loss for the quarter was $55 million, which resulted in a diluted net loss of 19 pence per share and an average diluted share me at 89 8 million shares.
Net loss allocated to the Noncontrolling interest in the operating company with $33 $7 million.
I think a $16 $8 million loss attributable to back Holdings, Inc.
Net loss of <unk> 19 per share and an average basic share count of $89 8 million shares.
Total share count as of June 30. It was 274 6 million shares eight remains our largest shareholder and they own 64% of our aggregate chairs, which has remained relatively consistent with their shareholding in prior periods.
As a percentage ownership is down slightly from prior periods due to new class eight share issuances and back due to the sale of shares by ice.
And Fortunately, we have our EBITDA and adjusted EBITDA for the second quarter of 2023.
Good EBITDA reflects adjustments for noncash and acquisition related items that impacted the period.
EBITDA and adjusted EBITDA for the quarter were losses at $47 2 million and $24 $5 million respectively.
Adjusted EBITDA loss improved versus the prior year period, primarily due to lower compensation and benefit costs.
On Slide 15, we show revenues for the company given the increase in crypto revenue, resulting from our acquisition of apex script out we are now presenting revenue broken out between crypto and royalty revenue. In addition to the revenue detail for subscription and services revenue.
Actual revenue total revenue in the second quarter of 2023 of 347 $6 million as I noted earlier the services wrap and name is reported on a gross basis.
For the second quarter Prescriptive services revenue was $335 $3 million.
Which was the result of the increased script, our transaction volumes from our acquisition of apex paradigm.
Net royalty revenues of $12 $3 million were down 8% year over year.
This was driven by a decline in subscription and service revenues, which were $5 million for the quarter down 23% year over year.
In production, we saw here was primarily due to lower volume based surface mapping and.
Surface revenue has a variable component and it's driven by activity levels at our customer call centers and technology development work on behalf of our clients loyalty transaction revenues of $7 $3 million increased 6% year over year due to an increase in air travel.
However, this was partially offset by lower metallic car booking volumes remained under pressure since the latter half of 2022.
Turning to slide 16, we have total operating expense total expense for the second quarter of $398 $7 million.
$334.0 million crypto Cos and ECB.
These costs are driven by crypto trading value.
SG&A expenses of $7 $6 million for that 23% year over year due to a reduction in marketing expenses.
Total compensation expense of $27 $1 million declined 21%.
Second quarter of 2022, due to lower headcount and a decrease in noncash compensation expense.
Other expenses of $31 million included $17 million of acquisition related expenses of which $10 $4 million is the noncash accrual of apex stock contingent earn out that was previously.
We are pleased that we were starting to see the benefits in our gross margins from our prudent expense management actions.
As a reminder, we expect the impact from earlier restructuring actions in 'twenty, two 'twenty three to be $29 billion expense savings and an incremental $7 million of expense savings is expected in 2024.
Turning to slide 17, we have a new slide comparing gross crypto services revenue and Presto pasta and ECB on a quarterly basis you can see on this chart, how crypto cost and ECB drive gross crypto services revenue the gap in the two columns break given time period. It takes.
The net contribution to margin from their trading activities.
Risk services revenue of $335 $3 million was impacted by lower industry wide activity levels in may.
You will see in our key performance indicators on the next slide crypto costs and ECB at $334.0 million were in line with revenue levels.
On slide 18, we have our key performance indicators, we have made updates to try and keep your eye disclosures to provide additional detail on volume activity for legacy apex crypto although.
Our acquisition of ethics crept up close on April <unk> 2023, and include an apex crept out and the historical Kpis figures on the slide for comparison purposes.
The Kpis, we will not be disclosing our crypto enabled accounts.
Transacting accounts.
Trading volume and assets under custody.
For more information on how we define these metrics. Please see the next section of our earnings presentation.
We had 650 million crypto enabled accounts at the end of the second quarter, which reflects steady increase over time.
Next we have are transacting accounts, which we breakout into crypto and loyalty I count there were 1.2 million transacting accounts in the second quarter of which 740000 horsepower of royalty production and 441004 crept decorating.
That's T production transacting accounts were up 9% year over year due to higher air travel activity.
Crypto transacting accounts were down 10% sequentially due to the industry wide slowdown in the crypto market activity in that.
Notional traded volume is also broken out between crept down and loyalty redemptions.
Total notional traded volume with $531 million of which 334 million was from crypto and 198 million was related to loyalty redemption.
On this chart. We have also included crypto industry trading volumes, which is the orange lines.
As depicted here, our trading volumes were down 25% sequentially, our business outperformed the overall crypto market industry, which was down over 40%. During the same time period. Meanwhile, loyalty redemption volume was down 3% year over year, driven by lumber hotel rental car and merchandise.
Redemption activity.
Our assets under custody of $660 million declined 8% sequentially due to a reduction in certain client pricing.
Turning to slide 19, we have our condensed balance sheet.
Ended the second quarter with $99 $4 million of cash cash equivalents and available for sale Securities and.
In the second quarter, we had cash usage of $18 $2 million.
Second quarter cash usage included 5.0, a million dollars for acquisition related expenses, a $2 7 million dollar marketing partnership payment and $1 $8 million of insurance costs on slide 20, we have updated our full year 2023 outlook, our updated guidance reflects the impact from the.
Acquisition of apex, crypto, taking into consideration the disclosure of revenues on a gross basis and associates crypto trading costs as well as the current market environment.
For the full year 2023, we expect revenues to be in the range of approximately 2000 132 million to 3770 $5 million. This includes gross crypto revenues of approximately 2000 77 million to 3000 $716 million.
Which includes the impact from apex crept up.
Our revised forecast also reflects the solid progress we have made signing up new clients and international expansion as well as the recent industry wide slowdown we've seen in crypto market volume.
We expect full year 2023 crypto trading costs to be in the range at 260.
69 million to 3000 $702 million. This is in line with our expectations for breast crypto revenues.
Our full year 2023 outlets for loyalty net revenues is expected to be around $55 million we.
We expect loyalty transaction revenue to be relatively flat coming off a strong 2022 husky brand rebound.
This contrasts with our expectations for the loyalty business at the beginning of the year. When we expected continued growth in transaction volumes from 2022 levels.
We have seen so far this year is durability of the 2022 royalty transaction volume, which effectively reset post COVID-19.
We've also updated our royalty revenue outlook to reflect the lower royalty service volume as we've experienced in recent quarters.
As a reminder, the guidance you gave earlier this year for net revenue by $60 million to $72 million. If you net out crypto costs against breast crypto services revenue.
Ask that to net royalty revenues the expected contribution to margin is $64 million to $70 million.
For the full year 2023, we expect net cash used in operating activities to be 78 million to $84 million.
You'll recall that the guidance, we provided earlier in the year with operating cash usage of $100 billion to $110 billion. So a significant improvement here due to we're focused on disciplined expense management.
Free cash flow usage is expected to be 90 million to $96 million. This compares to our prior guidance of free cash flow usage.
<unk> 5 million to $115 million.
This reflects a 70% to 80% reduction in free cash flow usage for the second half of the year versus the first half as we continue to focus on prudently managing our expense base.
I'll now pass it back to Gavin for his closing remarks.
Thanks, Karen just a few Faneuil hall.
We've made substantial progress this past quarter and we're building momentum for future growth, we were at a pivotal moment at the beginning of the quarter, having just closed our acquisition of Hi, Tec Crypto, but April 1st we've been off to the races, and integrating apex crypto launching new capabilities.
Pending internationally, signing new client relationships and building, new strategic alliances with leading brands such as Plaid and firewall.
I'm proud of our teams who've worked tirelessly to make this progress happen in such a short amount of time.
There's still so much more to come we built a platform that's really ready to take off and grow we've made many of our big investments and we're now leveraging the capabilities to scale our business.
We will continue to work hard every day to deliver strong results to our clients our partners and our shareholders I'm optimistic about our future I can't wait to share more as we continue to execute and we thank you for joining us today I'll turn it over to add tremendous Q&A.
Thanks, Kevin lets move over to questions from the Investor community, leading into a Q&A session will start by answering the tough questions, who say ranked by number of boats.
After that we will turn to live questions from the analyst community. Our first question comes from working P, who would like an update on the progress we've made I'm previously announced the partnership.
He knows that crypto market conditions have improved in the last quarter significantly and wants to know what this means for our partnerships.
Kevin can you take this question, yes, sure I'm happy to thanks for the question we discussed in detail during our prepared remarks with substantial progress you've seen us make recently building out our client base. Unfortunately, you'd collaborations with industry leaders such as pad imply books.
We're really pleased with the momentum that we're building and it's really is a proof point of our acquisition of apex crypto could not have happened at a better time, our ability to expand into the rapidly growing fintech space, having to international markets is even more compelling right now.
Although we see some more activity in the U S around regulation for crypto.
We're still not where we need to be.
The lack of regulatory clarity for Christa has kept the activation of I'll try to find partners on Poles.
Long since completed most of the integration and go to market without trying to find partners and will be ready to go when the time is right to enter the market.
We're making good progress with our non trends like one with phases, we're actively engaged in executing with them towards crypto rewards.
Cross functional teams, including engineering sales marketing and design are collaborating closely to activate these capabilities.
Stay tuned as we anticipate providing additional announcements on this before not too long.
Thanks, Kevin.
Next we have another question from working P, who would like to know why back was not selected to provide custom solutions for any of the recently announced that point spot Etfs. Despite our complaints first approach carrying can you take this one sure happy to take that question actually has always been a very important part of our business are secure and reliable platform.
Is trusted by clients and it's the backbone of our company that said historically, we have focused much of our sales and marketing efforts on the more scalable go to market opportunities through our b to B to C approach.
Judy has always been an important part of the platform given our focus on b to B to C. We're not always aggressively marketing our cachet capabilities to win new business with unfortunate that our clients are proactively reaching out to us with interest in our secure trusted institutional grade custody platform. This influx of client into.
This has been even more pronounced following recent disruptive events in the crypto markets, which I've highlighted the difficulty in storing digital asset safely and the need for multi custodian access secure self custodial functionality.
We have been successfully signing up new clients for our custody product and we are focused on building on this momentum to continue expanding our client base and to speed capabilities.
Thanks, Karen.
A few people have asked about international expansion and a status update around when we expect to watch I think we answered. This in the prepared remarks that Gavin please add any additional thoughts you might have here.
We mentioned earlier in the prepared remarks that we've signed an agreement with IMAX dwarf the crypto trading for Latin America, which we expect to launch in the fourth quarter of this year, we're working closely with our existing clients to bring our capabilities into the United Kingdom, and European Union, Hong Kong and Australia.
While we are making solid progress on these efforts and hope to be launched soon.
Everything we do we're being thorough and careful to ensure that we're following all the rules and regulations in these markets.
Our compliance first focused approach is what differentiates us and we do not make compromises with it we think that were getting close with expansion into additional markets.
I hope to share more with you soon.
Thanks for that Kevin.
Final question from the same platform will be from Jonathan P, who I spoke back be a company that investors will look back on and be proud of having invested their hard earned money into carrying this one's for you.
We're happy to take care of them.
Hopefully you've gathered from our strategic highlights for the quarter, great amount of progress that we've made and the momentum that we're building we're taking the top notch platform that we've worked tirelessly to build and leveraging it to scale like room, we've done the heavy lifting already with the investments and the infrastructure build and the product development.
And now it's our time to scantling Brown I truly believe that fact is well positioned to succeed and win in our teams worked day and night to make that happen I'm extremely proud to be a part of this organization and with it our shareholders, we'll look back and be proud of all that we've accomplished.
Being an investor in our stock has not always been an easy journey and I. Thank you for sticking with us.
While we cant control all of the market and economic factors that have negatively impacted our stock we will continue to control what we can't drive positive shareholder value.
That includes a disciplined expense management balanced with strategic capital allocation and areas, where there is a clear path to profitability things, Karen 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.
Thank you and if you'd like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two when the parent to ask a question. Please ensure your devices unneeded lately.
Our first question today comes from Trevor Williams from Jefferies. Please go ahead.
Great. Thanks, Good morning, guys, maybe to start Gavin just would love your perspective on the regulatory.
Our environment all the moving pieces I know, it's a very fluid month to month situation, but just maybe kind of the state of the union of how you guys view the regulatory environment, what you're expecting to come out of Congress if anything over the next six to 12 months, how some of the recent FCC acts.
<unk> Court cases, how any of that affects you guys. So would just love to kind of your broader perspective on it. Thanks so much.
Hey, good morning, gentlemen, and thanks for the question.
I think.
When you when you look overall.
I think it still is tayo.
The us versus what's happening outside of the U S. In the U S. Obviously, the ripple decision has.
A.
Yes, it's sort of a setback to VLCC with respect to some of the enforcement actions that we've seen against industry participants looking at unregistered securities.
Bob.
When you look at it as a whole I think it will act as a catalyst for where we're going with Congress and we'll start to see some movement.
But when we think about it overall.
Inc.
The lack of clarity on how crypto it should be regulated is still apparent with where we are while I am hopeful that Congress is paying attention to this and I'm encouraged by the progress that we've seen I think the market structure Bill in the house is a good example.
There's a long way to go before before it or any of the other bills coming into law.
We continue to make our voice heard on Capitol Hill to sort of encourage phone gross to resolve.
The lack of clarity quickly.
I think when we look outside of the U S. I think we're seeing clarity come into some of the markets that we've spoken about.
Prepared remarks once it we're excited about and we see the entry, but I think here in the U S. We're still seeing that ambiguity and it's that lack of clarity that as move forward.
Some of the participants to still sit back and continue to watch what's happening.
With that landscape because without the clarity they are unsure about what their entry strategy should be.
Got it. Thank you that's helpful and then.
Maybe for both you and Karen it's nice to see the cash burn coming down but.
Just a little bit maybe.
Maybe give us a sense for.
Kind of where some of the reallocated priorities have been just within kind of your investment spend framework, where maybe you've kind of de emphasize or reemphasize with it.
The updated outlook for our expenses. Thanks, so much.
Yeah, I can take that from travelers, saying I'm glad that you noticed that I think we're making a lot of great progress in terms of reducing cash burn and really being prudent with expenses.
Yeah, the trend that you see for the second quarter and asking nationally continue where our free cash flow burn for the second half of the year, it's going to be 70% to 80% less than what we had at the beginning of the year.
A lot of that came through some very tough decisions that we had to make earlier in the year in terms of.
Head count reduction.
We're also at the point now where.
We built a lot of the infrastructure and technology that we need to go to market. We are still investing in the crypto business, but we're really you know being.
Being prudent in those additional investments making sure that.
We're putting them where are theirs.
Immediate product market that so one of the things that we talked about earlier in the presentation was custody. That's a great example of where the market is actually coming to us recognizing what we can contribute with our with our platform with our compliance fresh approach put the math of our pump by custodian.
So kind of today is one of those areas, where we are.
We're allocating capital because we see the return there and then we also continue to see the return and the opportunities on the crypto trading piece, yeah, not only with our international opportunities, but as Gavin mentioned, we do see demand increase for the B out rails that back historically has been able to provide.
So that's another area, where you'll see us continue to add capital, but at this point I think you know with the actions that we took you know so you've heard me talk about before you have those actions reset the operating expenses by $29 million in 2023 with an additional $7 million a protection in 2020 for them. So we're really looking to do.
Have this reset expense base driving future growth.
Thanks I appreciate it.
The next question on the line is from Andrew Bond from Rosenblatt Securities. Please go ahead.
Yes.
Hey, Thanks, good morning.
It looks like you guys are definitely starting to make strong progress across the board here with.
With regards to custody just thinking from a modeling perspective, when do you think new customer growth should begin to translate.
Revenue there.
Yeah, Andrew it's Karen so in terms of what we've given as the outlook for 2023.
We haven't broken that out between custody and training them and I can just give you a little bit of color in terms of how we price those services. So typically you know youre looking at a pricing model that has that's based on assets under custody with them with a minimum and then you're also looking for income looking at Incrementals.
Our transactional revenue and withdraws and deposit activity.
As Gavin mentioned is.
We're operating more than just traditional custody. So for instance, the the backup key work that we're doing that is something that is actually a platform base you know kind of almost like a subscription based model. So you're going to see a combination of both of those things as we ramp that up into 'twenty 'twenty four.
Yeah.
Got it.
Okay. Thank you.
You mentioned kind of outperformance is trading relative to the broader market.
And there was some noted share shift during the quarter amongst some of your competitors. I mean can you talk about how you guys are looking at market share dynamic in the way that stands out for back broadly or you know, particularly within some of the different customer segments. I mean, you guys have.
Okay.
I think one of the things when we look at our trading activity.
Yeah.
Come here to what we've seen in the broader market.
We have a customer base through the acquisition of apex that on.
That is based in Fintech they are active.
Equity traders and we see a strong correlation there between investors who are active domestic equity traders and.
Their propensity to trademark name as well, so I think compared to the broader market.
Think we have an investor base that is probably.
More active as they see market volatility.
So I think that's one.
One of the reasons that we would see a little bit more durability or did not go as long as the market in general and then we were able to rebound quickly separate because you probably know may was probably the worst month of the second corner I think everybody had a bad made by army was not nearly as bad as everybody else in that.
Importantly, our June rebounded faster than the market in general.
Yeah.
Okay.
Lastly on.
In terms of the partnerships with rewards.
Under those asked before just thinking about actually be.
Cross sell opportunities to some of your legacy apex clients is that kind of.
Did any progress there and have you seen some interest from some of the clients that came over from apex and you reward solutions.
I will tell you that we will make good morning.
Yes.
We certainly see it in terms of the discussions that we're having I mean, there's interest around the engagement that these platforms won't be able to create with that was that customers, obviously that they're highly engaged platforms because of the trading activity. What they are looking to do is to look at other ways in which they can potentially diversify the revenue stream.
This will bring people back Jim to the.
Rod to their environments on a more frequent basis and we think some of the rewards propositions, particularly on the crypto Woodside has the ability to do that so that is definitely being strong.
Discussions with some of those clients and we're hoping to see it turn into opportunities, but right now the focus is on <unk>.
Dressing and ensuring that the trading businesses.
Yes.
Match raws.
Sure.
Okay. Thanks, Kevin.
Thanks, Andrew.
The next question on the line is from John Roy for more to tell research. Please go ahead.
Great. Thank you so.
Given that apex, just closed this quarter, how should we be thinking about the take rate on the crypto transactions there.
And this is Karen that that's a great question, yeah, especially because with this material increase in crypto revenue.
Our income statement is now showing a lot of big numbers on a gross basis, So I guess maybe.
Maybe when it's most helpful in Dubai.
You say the statement of operations and in how.
How should we think you know what we're seeing is take rate and what drives it.
So when you think about the gross crypto services revenue that we have be Mitch the vast majority of that is from the.
Trading volume that we have with our customers about.
But that is not the only thing that's in there. So there are platform minimums in fees that also come into play with that line item.
Crypto costs, just really the cost of providing the crypto.
Suddenly after the spread that we charge.
And that we have execution clearing and brokerage fees, which is really if you think about how we partner with our.
Partners are really serving as introduced our gross to us and so that's the Rev share that became.
So if you think about all those things together as I mentioned in the call.
Gross kryptos services revenue less the crypto cost and execution clearing and brokerage fees really represents the net contribution of crypto training to our to our operations and so if you do the math you know for instance for the second quarter Youre seeing a take rate of.
About 38 that and so again, that's really the it's the spread in the minimums that we get off of trading.
Les what we share to our partners, which is really a byproduct of our b to B to C approach, which is what do we think is a very efficient way to get access to all these customers and so as we go forward I think it would be talking about how that that take rate again against that the difference between a three line items changes over time in the <unk>.
The drivers because every partner is different in terms of how they want to stop the spread and then we have different arrangements with different tiers of profit sharing so that is going to be somewhat dynamic over time that we've been seeing it in the high Thirty's ranked for some time.
Great. Thanks, now obviously, there's been a lot of discussion on Opex. So it seems to me if you adjust for acquisition expense in crypto costs. Your opex seem to be coming down. So what do you want to think about a run rate for opex going forward and any kind of color you can give me on that.
Noncash accrual for acquisition stuff.
That would be helpful as well.
Yep Yep.
Opex I think you know obviously one of the biggest component is our compensation and benefit expense. So hopefully the guidance that we provided earlier in terms of the impact of the decisions that we have to make earlier in the year. You know it is coming down in the second half and then you'll see additional declines in Opex expense in 2024.
Sure when you get the full year impact.
Just a chance.
About $7 million.
As it relates to the accrual that is in the acquisition expense.
Yeah. It is probably a little bit unusual, but you have to think back to the structure that we put in place. When we bought Apacs said there was if you recall a cash component of the purchase price and then there were stock earn outs that were dependent on revenue performance over certain periods and so what youre seeing there in that.
10, 4 million noncash accrual is GAAP requires us every quarter to fair value that contingent consideration that stock contingent consideration that will be paid out through 'twenty, four and 'twenty five based on our expected outlook.
Oh, the contribution that apex cryptos customer base has two or our net revenue.
Oh, yeah, the path that we have an accrual.
Certainly not the whole 100 million potential stock compensation that they could get over 'twenty, three and 'twenty four performance, yet, but we are seeing.
Albert Some you know based on what we see now we see scenarios, where some of that stock comp can get.
<unk> paid out so that's what we're incurring for them, but that's going to change every corner and it's really just have to wait till year end 'twenty three and you're on 24, where we actually expensive house and again I would remind you that that is not a cash expense that is all stock or not.
Great. Thanks, Karen.
As a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
It appears we have no further questions I'd like to hand back to conclude.
Yeah.
Okay. Thank you everyone for attending our earnings call. This morning, we look forward to connecting with you again soon take care.
Ladies and gentlemen. This concludes our event you may now disconnect.
Goodbye.
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