Q3 2024 Bakkt Holdings Inc Earnings Call
Speaker Change: Greetings, and welcome to the BACT Third Quarter 2024 EARNEYS Conference Call.
Speaker Change: Further in addition to discussing results that are calculated in accordance with generally accepted accounting principles. We also make reference to certain non-GAAP financial measures for more detailed information on our non-GAAP financial disclosures. Please refer to our earnings release, which can be found on our Investor Relations website.
Speaker Change: Thank you and I'll now turn the call over to Andy.
Thank you Cody and good afternoon, everyone.
Andy: Thanks for joining bank's third quarter 2024 earnings call.
Andy: And it's great to connect with you all again.
Andy: With me today is current Alexander <unk>, our Chief Financial Officer.
Andy: Before I jump into our third quarter results.
Andy: I'd like to begin today by discussing <unk> strategic direction.
Andy: And acknowledging the favorable market conditions and increased trading volumes.
Andy: In the broader market I have seen since the U S presidential election on November five.
Andy: As you will see on page three of our presentation.
An example is the prospects for trading services co related to the higher crypto prices.
Andy: We saw a steady ramp up and Thats notional trading volume over the past three months.
Andy: Then in November leading up to the election, and especially following the election.
Andy: Our notional trading volumes dramatically increased.
Andy: If you look at november's volumes by day, we saw this increase in reaction to the election results on November 5th.
Andy: And then trading volume went even higher these later along with the broader crypto prices and a new all time high for bitcoin.
Andy: As of November 12, we have already treated 279 million notional volume already exceeding October total volume by $114 million.
Andy: Compared to the broader market, we've achieved 169% of our total October volume in just the first 12 days of November.
Speaker Change: Market as a whole has only reached 78% office at tuber totaled.
Speaker Change: Demonstrating our potential for strong performance.
Speaker Change: While we cannot predict future trading volumes, especially in the current environment. We believe the U S presidential election results and provided a meaningful tailwind to the industry that excluded.
Speaker Change: Turning now to page four let's jump into the highlights of our Q3 financial performance, which Kern, who will give more detail later on.
Speaker Change: Q3, Q2, and loyalty services revenue net of trip to costs and execution.
Speaker Change: Clearing and brokerage fees was $13 4 million down approximately eight 8% from Q3 last year.
Speaker Change: This primarily happened as a result of the third and fourth quarter 2023, benefiting from a onetime adjustment to a revenue share agreement with we will pay that resulted in a temporary higher take rates, which became normalized at the start of this year.
Note that this dynamic will also impact our Q4 2024 year over year comps.
Speaker Change: Sequentially, our results were down nine 5%.
Speaker Change: And reflected softer trading activities, which we're seeing across the broader market, but its.
Speaker Change: As previously noted we have seen and expect to continue to see trading volumes improvement in Q4.
Speaker Change: Okay.
Speaker Change: Q3, operating expenditures, excluding <unk> cost and execution and clearing and brokerage fees were $40 7 million.
Speaker Change: And was 39, 7% lower year over year, driven by our cost reduction initiatives.
Speaker Change: These actions helped reduce our Q3 operating loss by 48, 2%.
Speaker Change: Peer to Q3 last year.
Speaker Change: In October we completed another reduction in force as part of our continued cost improvement initiatives.
Speaker Change: Moving on to our two business operations. Most of 2024 has been a challenging execution environment.
Speaker Change: That said with the clarity from the recent election results. We are encouraged that the work we have done positions us well in the new environment.
Speaker Change: We achieved several milestones during the third quarter that broadened our client network and product offerings for the tailwind we are seeing in the markets.
Now I'll introduce these accomplishments before diving deeper into our commercial operations.
Starting with backpacks are institutional electronic communication network.
Speaker Change: This past quarter, we successfully commenced trading on the <unk> X platform with back Crypto solutions backs retail facing crypto brokerage business I was wondering if initial institutional trading clients.
Speaker Change: This represents the beginning of a broader rollout strategy to institutional clients.
Speaker Change: This rollout aims to combine the strengths of our strategic partners and the bank X ecosystem, namely bag security and compliance expertise crossover markets high performance technology, and sub 10 microsecond matching latency.
Speaker Change: Hidden roads global credit network for institutions, and real time risk management and operational support.
Speaker Change: And our new partner coin rates, who will provide our clients with the best in class trading interface and algorithms.
Speaker Change: We remain confident back X will be a significant growth driver for the company.
Speaker Change: And we look forward to sharing updates in the near future.
Speaker Change: Further we are excited to announce that we recently on boarded block wire.
Speaker Change: Onto our brokerage infrastructure solution.
Speaker Change: The acquired is an AI driven crypto fintech infrastructure platform.
Speaker Change: Banking custody and payment solutions for BCB, and B to B to C customers.
That will provide end to end trip to brokerage infrastructure for block choirs spot crypto stable coin payments platform <unk>.
Speaker Change: Including liquidity and execution custody services via management and potential future joint product expansions.
Speaker Change: This new brokerage client is another demonstration of companies choosing back as their partner in growth using our preferreds trusted platform for buying and selling crypto.
Speaker Change: Okay.
Speaker Change: As we stated in our Q2 earnings.
Speaker Change: Recalibrated our go to market approach to focus our resources on targeting companies already established in the U S.
Speaker Change: And international players coming into the U S, who may benefit from back scalable trading capabilities.
Speaker Change: We are seeing very good results from this recalibration with an expanding sales opportunity pipeline for potential new clients with many such opportunities in advanced stages of the sales process.
Speaker Change: Okay.
In August we successfully introduced nine new coins to our back crypto solutions platform.
Speaker Change: The response from our clients has been very positive and many have begun integrating the new coins into their platforms and then Q3, the new coins contributed a notable improvement in our trading volumes for the quarter.
Speaker Change: We also just launched.
Speaker Change: Additional coins in November.
Speaker Change: And we plan on bringing more coins to market in the future.
Speaker Change: Furthermore, I'd like to give an update on our back trust and custody operations.
Speaker Change: In October 2024, you began investigating a possible weinstein and dissolution of bank trust due to its lack of market traction and high cost of capital.
Speaker Change: <unk> regulatory requirements.
Speaker Change: As this process has progressed we have also worked to find strategic alternatives for <unk> Trust.
Speaker Change: This decision was carefully considered and represents the next stage of our strategic initiative to focus on our brokerage and institutional trading services, where we believe we have unique competitive advantages for sustainable long term growth.
Speaker Change: Our decision was timely.
Speaker Change: We kept the macro environment the custody space in general has seen significant margin compression, particularly over the past several quarters, along with increased competition from new players and further regulatory reform.
Speaker Change: This move allows us to focus on our core strengths while also.
Speaker Change: So achieving an expected reduction in operating expenses.
Speaker Change: Additionally, we anticipate a lower regulatory capital requirement during this process.
Speaker Change: Which would free up significant working capital issue is another example of our ultimate goal maximizing shareholder value.
Speaker Change: A key point to make this decision is that our brokerage clients will continue to benefit.
Speaker Change: As they do today from a custody offering enabled by our custody solutions partners. So.
Speaker Change: So it's business as usual and there is no impact to our brokerage clients.
We evaluate strategic alternatives to that trust.
Speaker Change: Finally, as you know.
Speaker Change: That operates across several complementary yet distinct business areas.
Speaker Change: Both management and the board are continually exploring strategic alternatives to maximize shareholder value, while advancing our 'twenty 'twenty four priorities back trust being a Prime example.
Speaker Change: Yeah.
Speaker Change: Turning to slide five next I would like to review some key regulatory and macro developments that we believe are strong indications that crypto is maturing as an asset class and provides a favorable tailwind for back going forwards.
Speaker Change: On the regulatory front, we've seen meaningful progress this year.
Speaker Change: Notably faster adoption of fair value accounting of crypto assets was a pivotal shift in reporting standards for public companies.
Speaker Change: As I mentioned on previous calls the launch of Bitcoin and ethereum spot Etfs.
Speaker Change: Driven record adoption and capital flows and a very short amount of time.
And more recently, the Sec's approval of options trading for Black drops IBD Etfs.
Speaker Change: And on the nicely as further reinforced triptans growing presence in the U S capital markets.
Speaker Change: Meanwhile, we are now seeing that bipartisan support for crypto continues to improve.
Speaker Change: With Donald Trump as the President elect we expect the merits of encrypted to improve even further.
Speaker Change: He has advocated for a more positive.
Speaker Change: The regulatory environment.
On the monetary front, the federal reserves 50 basis point rate cut in September following 11 consecutive hikes.
Speaker Change: The additional 25 basis point cut last Thursday.
Speaker Change: A significant shift in monetary policy.
Speaker Change: These reductions in the U S. Federal interest rates have historically served as positive catalysts for risk assets such as crypto.
Taken together these policy shifts create a highly favorable environment for banks reinforcing our confidence in the company's strategic direction.
Speaker Change: Yeah.
Speaker Change: Turning to slide six.
Our strategy of building a robust ecosystem of partners to address the institutional market has positioned us to capitalize on the growing opportunities that drive long term growth.
Speaker Change: We have put together, what we believe to be a unique combination of strengths to launch about ex namely box advanced infrastructure with crossover markets high performance technology.
Speaker Change: Coin rates trading interface and algorithms and once we have a definitive agreement with them hidden rose global credit network for institutions.
This combination delivers the unique value proposition for institutions, giving them high performance sub 10 microsecond latency custom.
Speaker Change: Customizable liquidity streams and reduce trading costs.
The strength of this ecosystem deliver solutions for institutions that are highly competitive against existing crypto trading venues.
Speaker Change: To wrap up we are executing and making significant progress on the three strategic priorities that really started the year.
Speaker Change: First we are growing our client network and deepening our existing client relationships.
Speaker Change: On the brokerage side.
Speaker Change: Thrilled to have block wire as a new client and our brokerage infrastructure solution.
Speaker Change: Additionally, we continue to build momentum with hidden road crossover markets and our new partner return rates, which demonstrates our commitment to growing our institutional client base.
Deepening relationships with existing partners.
Speaker Change: We believe these collaborations enhance our offerings and position back as a critical player in the broader digital asset ecosystem.
Speaker Change: Secondly, we are expanding our product solutions and extending the <unk> ecosystem.
Speaker Change: With the upcoming rollout of backpacks, we are finalizing our high performance platform to cater to the needs of institutional investors.
This is demonstrated through our partnership with <unk> using our end to end infrastructure for their trip to payment processing and brokerage services.
Speaker Change: These milestones reflect our ongoing commitment to innovation and creating best in class solutions that meet market demands.
Speaker Change: Lastly, we continue to improve our cost structure, ensuring that we operate efficiently scaling our business.
Speaker Change: The integration of new strategic partnerships and our disciplined approach to cost management.
Speaker Change: Already yielding improved results without compromising the high level of service and innovation, we deliver for our clients.
Speaker Change: Thank you for your time, it's been a pleasure to update you on back from both a high level of financial and operational perspective, I will now hand, it over to our CFO Karen.
We will review our financial performance for the third quarter in more detail Caren.
Karen: Thank you Andy I will now walk you through our third quarter financial results as a reminder, in accordance with GAAP, we prevented crypto services revenue and crypto cost and execution clearing and brokerage fees on a gross basis as we are a principal in the crypto services, we provide our customers.
Karen: Contrast, where an agent in the loyalty redemption services provider loyalty customers. Therefore royalty revenue is presented on a one line net basis.
Karen: Starting on slide nine we have our Q3 kpis, let's provide a snapshot of the underlying trends driving our business. We ended the third quarter was $6 5 million crypto enabled accounts, reflecting a steady increase over the past 12 months.
Karen: This growth further underscores the increasing adoption and trust in our platform.
Karen: Next we have are transacting accounts broken down into crypto and loyalty accounts. There were 610568 transacting accounts in the third quarter.
Karen: Of which 417000 related to loyalty redemption, and 193000 related to crypto trading.
Karen: Total national trading volume with $476 $5 million with $314 $9 million attributed to crypto and $161 $6 million attributed to loyalty redemption crypto notional traded volume was down 36, 2% sequentially, but up 64, 9%.
Speaker Change: We're here as Andy mentioned at the beginning of the call. We saw a 56, 3% increase in notional volume month over month from September to October this year, surpassing the market average by 48% and have already achieved what had been 69% <unk> volume in the first 12 days of November.
Speaker Change: We hope to see this trend continue as market sentiment prescript that becomes more positive.
Speaker Change: As Andy also highlighted earlier during the quarter, we enabled 90 tokens for trading at our brokerage platform for our clients. These new tokens demonstrated strong trading activity immediately and contributed approximately 10% tourists September overall trading volume.
Speaker Change: We also added an additional six coins in November and believe our expanded listings that our clients customers can trade increases and user engagement improved liquidity and attract more customers onto our clients' platforms.
Speaker Change: And lastly assets under custody at our custodian partner for our brokerage business were $938 $7 million down from the previous quarter of $975 million driven by slightly lower corn prices.
Speaker Change: On slide category share of total revenue broken out between our crypto and loyalty products.
Speaker Change: Total revenue for the third quarter of 2024 with $328 $4 million.
Chris Crypto: Chris Cryptos services revenue for the quarter was $316 $3 million, an increase of 65% from the same quarter last year.
Chris Crypto: This growth trended with the overall market around crypto interest has increased since last year.
Chris Crypto: Our crypto services revenue.
Speaker Change: Scepter cost and execution clearing brokers fees totaled $1 $3 million, reflecting a 28, 9% decrease compared to the same period last year as Andy mentioned earlier. This decline was primarily due to the second half of 2023 benefiting from the temporary one time adjustment.
Speaker Change: Our revenue share agreement with Weibo that resulted in a higher than normal take rate, which reverted back to normal rates at the beginning of 2024.
Speaker Change: Our net royalty revenues were $12 $1 million down seven 2% year over year.
Speaker Change: This $12 1 million loyalty transaction revenues were $6 $1 million in subscription and services revenues were $6 $1 million. The majority of the decline in net royalty revenue was driven by a decline in transaction revenue.
Speaker Change: Moving on to Slide 11, we have our total operating expenses total expenses for the quarter were $355 $8 million.
Speaker Change: $315 million of crypto cost and execution clearing and brokerage fees driven by higher trading volumes SGS.
Speaker Change: SG&A expenses were $8 $5 million up 14% from Q3, 2023, and 54, 6% sequentially to $12 $1 million settlement payment made in July of 2024 to terminate our five year strategic marketing agreement entered into in 2023.
Speaker Change: What about payment release does from future obligations under the agreement.
Speaker Change: Total compensation expense was $21 $1 billion down 14, 3% from last year due to lower head count and incentive bonuses.
Speaker Change: We continue to prioritize cost savings initiatives.
Speaker Change: Significant strides in optimizing our expense structure.
Speaker Change: On slide 12, we have our EBITDA and adjusted EBITDA for the third quarter of 2024, adjusted EBITDA reflects adjustments for noncash restructuring and acquisition related items that impacted the period.
Speaker Change: EBITDA and adjusted EBITDA for Q3, 2024 were losses of $7 3 million and $23 $7 million respectively.
Speaker Change: Adjusted EBITDA loss for Q3, 2024 increased by $2 $1 million or nine 8% compared to Q3 last year, primarily as a result of the temporary higher take rate from <unk> in the second half of 2023 and lower royalty revenue.
Speaker Change: Turning to slide 13, we present, our condensed profit and loss statement net loss for the quarter was $6 $3 million of which $3 $4 million was attributable to the noncontrolling interest in the operating company and $2 $9 million was attributable to <unk> holdings, resulting in a diluted loss of <unk>.
Speaker Change: <unk> 45 per share on an average diluted share base.
Speaker Change: 1 million shares for both basic and diluted.
Speaker Change: On slide 14, we have our condensed balance sheet as of September 32024, we ended the quarter with $35 $7 million in cash cash equivalents and available for sale securities and $35 $3 million in restricted cash.
Utilized 25.0 million of available cash in the third quarter of 2024.
The third quarter included several annual and onetime payments, including $3 8 million for annual insurance premiums and a $1 $1 billion settlement payment associated with the termination of a strategic marketing agreement that I referred to earlier. Additionally.
Speaker Change: Additionally, $1 million with used to increased restricted cash driven by reserves needed to support higher trading volume.
Speaker Change: Moving on to slide 15, we have an adjustment to our full year 2024 outlets in the previous quarter.
Speaker Change: We are seeing a lower forecasted royalty revenue range of $49 million to $50 million missing at the lower end of our range by $4 million.
Speaker Change: The higher end of our range by $7 million.
We've seen a downward trend in the royalty business. This year, which is primarily driven by lower transaction volume.
Speaker Change: We now expect the crypto now revenue contribution to be at the low end of the range of $10 million to $15 million, which provided last quarter.
Speaker Change: This does not include an expectation of material revenue from bad debts in 2024.
Speaker Change: Our cash utilization for the remainder of the year will be higher than previously guided due to the production of expected revenue and higher expenses, we expect to end the year with $34 million to $39 million available cash cash equivalents and available for sale securities. After consideration of the possible wind down and the solution of that trust.
And the lower regulatory capital requirements, we expect.
Our end of your expectation for available cash cash equivalents and available for sale Securities considers our lower revenue expectations for 2024, as well as higher professional services expenses.
Speaker Change: Everyone that now concludes the prepared section of our Q3 2024 earnings call I'll now pass it back to Tony for the Q&A session.
Tony: Thank you Karen next we will move over to a couple of questions from the Investor community.
Tony: Our first question from the Investor community comes from Cyan H well.
Cyan H: What is back doing to bring its products to the market there seems to be no enthusiasm from the company itself and nothing as far as announcements. So how can obviously you're excited about you on your products.
Andy: Andy can you share your perspective here.
Speaker Change: Thank you for your question and for being a valued stockholder.
Speaker Change: I appreciate the opportunity to address this.
Speaker Change: But back to our policy. This year has been clear delivering innovative high quality products that meet market demand.
Speaker Change: Specifically, we've concentrated on bad eggs positioning ourselves to capitalize on the growing institutional interest in crypto trading.
Speaker Change: We've been working diligently to refine our current offerings such as the recently announced coin listings as well as introducing back X as an entirely new offering.
While much of this work happens behind the scenes is all geared towards creating long term value for our shareholders and establishing bags as a leader in the evolving ecosystem.
Speaker Change: We understand the desire for more frequent updates, but we are committed to only announcing developments when they are finalized.
Speaker Change: Rest assured we are truly focused on building momentum and driving profitability and we appreciate your continued confidence in our efforts.
Speaker Change: Thank you Andy.
Speaker Change: Our next question comes from Jefferies.
Speaker Change: It is the long term vision for the company what unique value come back to offer its customers the competitors cannot match.
Speaker Change: And then could you also take this one.
Speaker Change: Thank you <unk> and thank you Geoffrey for the question.
Speaker Change: But our long term vision is clear to.
To establish ourselves as a leader in the rapidly evolving ecosystem.
Speaker Change: We're laser focused on areas, where we can deliver the most value.
Speaker Change: Specifically through our best in class retail crypto trading platform and back X a groundbreaking solution tailored for the institutional credit trading market.
We believe the future of <unk> and <unk> brands.
And our goal is to provide a seamless secure entry points and crypto trading platform for brokerages and institutions venturing into the space.
Speaker Change: Our collaboration with industry leaders like hidden roads.
Speaker Change: Most of our markets coin rates and Borgwarner demonstrates a shared commitment to driving innovation and long term value in this dynamic market.
What sets <unk> apart is our unmatched security and compliance expertise.
Speaker Change: Our strong network of partnerships across the industry and our commitment to operational efficiency as we've discussed today.
Speaker Change: These pillars reinforce our mission.
Speaker Change: To deliver sustained value to our shareholders in this burgeoning markets.
Speaker Change: Thank you Andy and thank you everyone for attending our earnings call. This morning, we look forward to connecting with you again soon.
Speaker Change: Ladies and gentlemen, this concludes our event and you may now disconnect.