CarParts.com Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Bakkt Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded.

Speaker 1

I would now like to turn

Operator

it over to Anne de Vries, Head of Investor Relations at Bakkt. Please go ahead.

Speaker 1

Good morning, and thank you for joining us for Bakkt's 2nd quarter earnings call. Today's presentation, including a separate earnings call presentation that can be found on our Investor Relations website at www.investors.fact.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 results to differ 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 Bakkt's business, Please refer to its filing with the Securities and Exchange Commission. During today's presentation, in addition to discussing results that are calculated in Please refer to our earnings release, which was filed this morning with the SEC.

Speaker 1

Joining me on today's call are Gavin Michael, Chief Executive Officer and Karen Alexander, Chief Financial Officer. After our prepared remarks, we will answer questions we will receive from our investors through the SA Technologies platform. After that, Gavin and Karen will be available to answer questions from the analyst community. I'll now turn it over to Gavin.

Speaker 2

Thank you, Anne. Good morning, everyone, and thanks for joining. We're making meaningful progress executing on the key priorities we set out at the beginning of the year. We expanded our crypto platform through the acquisition and integration of Apex Crypto, while activating and broadening our client network, and we're being prudent with capital allocation. We're winning new custody and crypto trading clients and building strategic alliances With prominent players as our capabilities and best in class infrastructure resonates with the market.

Speaker 2

We're expanding into new international markets alongside our clients with Latin America expected to launch in the 4th quarter And other markets such as the UK, European Union, Hong Kong and Australia to follow. We're focused on delivering solid results Our existing loyalty clients as we work together to grow transaction volume. Lastly, we continue to prudently manage expenses, resulting in improved gross profit margin. We're also updating our full year 2023 operating cash flow outlook and expect to improve approximately 20% from our prior guidance. Our platform provides end to end crypto capabilities from advanced trading and secured custody to fiat onramp.

Speaker 2

We offer secured custody of assets founded in traditional finance and built to uphold the shifting regulatory standards Regulated by the NYDFS as a limited purpose trust company, that custody has reliable infrastructure With multi layered security for streamlined management and disaster recovery services to help ensure customer funds are safe and recoverable. We offer curated, secure and regulated crypto trading with API and UI options to activate trading responsibly. This includes unparalleled liquidity and price quality with 100% uptime and seamless integration and customer experience, which enables clients to integrate in less than 45 days with instant fund settlement and failover protection. Capabilities also include coin transfer and advanced order management system and multiple fee structures. As part of crypto trading, our clients are increasingly utilizing Bakkt Fiat on rent via ACH, debit or wire transfer for a smoother end to end customer experience.

Speaker 2

And we continue to offer 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 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 architecture with cloud capabilities. Through our B2B2C approach, we have a broad client reach in high growth sectors that provide efficient scalability. This network is looking to expand their relationship with their millions of customers and crypto presents an opportunity to differentiate their services, Drive engagement and revenue growth.

Speaker 2

And for Bakkt, 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 onboarding, 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 rebrand of Apex crypto to VAC crypto 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. Through our client led model, we're always working with our key clients to grow their business.

Speaker 2

Our work with WeBull is a prime example of our ability to successfully execute, bringing together the combined strength of legacy backed And Apex Crypto. We've all approached us to develop a new innovative app with ACH funding rails for their crypto customers. Our teams mobilized quickly, bringing together Apex crypto trading and backed funding capabilities to launch WeBull Pay in less than 40 days. In solving for this, we also built ACH funding functionality, which provides a competitive advantage and we're seeing significant interest from other clients and prospects in utilizing feared on ramps. Additionally, I'm pleased to share that Bakkt will be one of Plaid's crypto solution partners for its customers who are interested in offering crypto solutions to their end users.

Speaker 2

This is particularly exciting since Plaid has an extensive network of over 8,000 FinTechs Using their platform today. Through the Plaid and Bakkt partnership, those fintechs will be able to easily and safely explore Offering crypto solutions to their users. We're pleased 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, actively 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.

Speaker 2

S, a relationship sourced through our commercial agreement with Apex Fintech Solutions. We're also working with Swan Bitcoin to provide end to end Bitcoin trading, feared on ramps and qualified custody. We also signed blockchain.com, one of the 1st and largest crypto wallet providers in the world, along with Zadim and CryptoMum to provide end to end crypto trading. On the international front, we signed an agreement with the Ibex to offer crypto trading for Latin America. These recent wins are a strong testament to the product fit of our capabilities and the continued focus on growing our core crypto solution.

Speaker 2

Recent market events have highlighted the difficulty in storing digital assets 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 assets. It utilizes multi layered technology and the latest breakthroughs in MPC cryptography With hardware isolation, ensuring that customer funds are protected from the various threats, including cyber attacks, Internal collusion and human error. Given this backdrop, we continue to see an increase in new client activity. We've successfully signed new clients and are in late stage negotiations with multiple prospects in mining, family offices, Registered Investment Advisors and Corporate Treasury Industries.

Speaker 2

Qualified sales opportunities are up 10 times in the first half of twenty twenty three versus the second half of twenty twenty two. The custody platform generates stable recurring platform fees as well as assets under custody based revenue, further diversifying our revenue. Bakkt's institutional grade custody platform offers the security and licensing clients are looking for, including qualified custodian status with the New York Department of Financial Services, comprehensive security controls, regulatory compliance and streamlines 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 upgrade throughout the remainder of this year.

Speaker 2

In this enhanced offering, we'll maintain all of the elements that make back to custody exceptional. It will continue to offer a compliance first focused approach with multiple layers 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 on those networks, Retail open loop and institutional staking, which adds yield generating opportunities for our institutional clients. We have a new multifaceted strategic agreement with Fireblocks. As part of this agreement, Bakkt will provide disaster recovery services to Fireblocks' off exchange customers and we will join the Fireblocks qualified custodian network.

Speaker 2

The Fireblocks off exchange solution allows participants to maintain control of their private keys without sacrificing the convenience and speed of trading on centralized exchanges. This has become a high focus product for the market as recent misappropriation of customer funds by exchanges Has led to the demand for safe trading solutions. We're also integrating Fireblocks technology to fortify our custody offerings. For disaster recovery services, we will leverage our secure infrastructure to provide backup storage to ensure customer funds Safe and recoverable. Every off exchange customer will require a disaster recovery package.

Speaker 2

So there's tremendous opportunity for that in safeguarding these assets. By joining the Fireblocks qualified custodian network, We'll be connected to the thousands of organizations across the crypto ecosystem who use the network every day, including exchanges, liquidity providers and custodians. There's only a select group of qualified in this network and we're proud that our differentiated secure and compliance 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 solutions. We'll continue working with Fireblocks to jointly deliver additional use cases and capabilities to the market through the strategic alliance.

Speaker 2

With that, I'll turn it over to Karen to discuss our financial and operating results for this quarter.

Speaker 1

Thanks Gavin. I will now walk you through our Q2 financial results. A quick reminder that this quarter includes the results of Apex Crypto, which we acquired on April 1, 2023. Apyx Crypto materially increases our crypto service revenue such that we now present crypto services revenue as a distinct component of our revenue. In accordance with GAAP, we are presenting crypto service revenue As well as crypto cost and execution, clearing and brokerage fees on a gross basis since we are a principal By contrast, we are an agent in the loyalty redemption services we provide our loyalty customers.

Speaker 1

So loyalty revenue is presented on a one line net basis. Crypto costs and execution, clearing and brokerage fees, which we will refer to as crypto costs and ECB for the remainder of this call, will drive crypto services revenue and the difference between these two line items represents Crypto Trading's contribution to margins. Please see the notes section of our earnings presentation for additional detail on crypto services revenue and related costs. Turning to slide 13, we have our Q2 2023 financial results. We had total revenues of $347,600,000 of which $335,300,000 was gross crypto services revenue, which increased significantly due to our acquisition of Apex Crypto.

Speaker 1

We had $12,300,000 of net loyalty services revenue. Operating expenses were 390 $8,700,000 in the period, which reflects a significant increase in crypto costs and ECB, driven by the related crypto services activity. During the quarter, we had $17,000,000 of acquisition related expenses. Dollars 10,400,000 of this with a non cash accrual related to the estimated fair value of the contingent stock earnout associated with our acquisition of Apex Crypto through 2025. We will update the estimated fair value of the contingent stock earn out on a quarterly basis based on the forecasted gross crypto revenue plus crypto cost and ECB associated with the Apex crypto relationships.

Speaker 1

As such, the accrued stock earnout as of June 30th is subject to change as our revenue forecast changes. The 2023 2024 earnings will be finalized as part of our 2023 2024 year end reporting. Operating expenses, excluding crypto costs in ECB were $64,700,000 Excluding acquisition related expenses, operating expenses were $47,700,000 which represents a decrease of 16% year over year, primarily due to a reduction in total compensation and benefits as we are starting to The net loss for the quarter was $50,500,000 which resulted in a diluted net loss of $0.19 per share on an average diluted share base of 89,800,000 shares. Net loss allocated to the non controlling interest in the operating company was $33,700,000 leaving a $16,800,000 loss attributable to Bakkt Holdings Inc. Or a net loss of $0.19 per share and an average basic Share count of 89,800,000 shares.

Speaker 1

Our total share count as of June 30th was 274,600,000 shares. ICE remains our largest shareholder as they own 64% of our aggregate shares, which has remained relatively consistent with their shareholding in prior periods. Note that the percentage ownership is down slightly from prior periods due to new Class A share issuances and not due to the sale of shares by ICE. On slide 14, we have our EBITDA and adjusted EBITDA for the Q2 of 2023. Adjusted EBITDA reflects adjustments for non cash and acquisition related items that impacted the period.

Speaker 1

EBITDA and adjusted EBITDA for the quarter For losses of $47,200,000 $24,500,000 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 Crypto, we are now presenting revenue broken out between crypto and loyalty revenue. In addition to the revenue detail for subscription and service revenue and transaction revenue, total revenue in the Q2 of 2023 $347,600,000 As I noted earlier, crypto services revenue is reported on a gross basis.

Speaker 1

For the Q2, gross crypto services revenue was $335,300,000 which was the result of the increased crypto transaction volumes from our acquisition of Apex Crypto. Net loyalty revenues of $12,300,000 were down 8% year over year. This was driven by a decline in subscription and service revenues, which were $5,000,000 for the quarter, down 23% year over year. The reduction we saw here was primarily due to lower volume based service revenue. Service revenue has a variable component and is driven by activity levels at our customer call centers and technology development work on behalf of our clients.

Speaker 1

Low fee transaction revenues of $7,300,000 increased 6% year over year due to an increase in air travel volume. However, this was partially offset by lower hoteling car booking volumes, which remained under pressure since the latter half of twenty twenty two. Turning to slide 16, we have total operating expense. Total expense for the Q2 of $398,700,000 includes $334,000,000 of crypto costs and ECB. These costs are to define crypto trading value.

Speaker 1

SG and A expenses of $7,600,000 were down 23% year over year due to a reduction in marketing expenses. Total compensation expense of $27,100,000 declined 21% to the Q2 of 2022 due to lower headcount and a decrease in non cash compensation expense. Other expenses of $30,100,000 Included $17,000,000 of acquisition related expenses, of which $10,400,000 is the non cash accrual That's Apex stock contingent burnout as noted previously. We are pleased that we are starting to see the benefits in our gross margins from our prudent As a reminder, we expect the impact from earlier restructuring actions in 2023 to be $29,000,000 of expense savings and an incremental $7,000,000 of expense savings is expected in 2024. Turning to Slide 17, we have a new slide comparing gross crypto services revenue and crypto costs and ECB at a quarterly basis.

Speaker 1

You can see on this chart how crypto cost and ECB drive gross crypto services revenue. The gap in the two columns for a given time period Depicts the net contribution to margin from crypto trading activities. Gross crypto services revenue of $335,300,000 was impacted by lower industry wide activity levels in May, as you will see in our key performance indicators on the next slide. Crypto costs and ECB of $334,000,000 were in line with revenue levels. On Slide 18, we have our key performance indicators.

Speaker 1

We have made updates to our KPI disclosures to provide additional details on volume activity for legacy Apex Crypto. Although our acquisition of Apex Crypto closed on April 1, 2023, we have included Apex Crypto in the historical KPI figures on this slide for comparison The KPIs we will now be disclosing are crypto enabled accounts, transacting accounts, Notional traded volume and assets under custody. For more information on how we define these metrics, please see the notes section of our earnings presentation. We had 6,000,000 crypto enabled accounts at the end of the second quarter, which reflects steady increase over time. Next, we have our transacting accounts, which we break out into crypto and loyalty accounts.

Speaker 1

There were 1,200,000 transacting accounts in the 2nd quarter, of which 740,000 were for loyalty reduction and 441,000 were crypto free. Loyalty redemption 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 May. Notional traded volume is also broken out between crypto and loyalty reduction. Total notional traded volume was $531,000,000 Of which $334,000,000 was from crypto and $198,000,000 was related to loyalty redemption.

Speaker 1

On this chart, we have also included crypto industry trading volumes, which is the orange line. As to be good here, While 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, royalty redemption volume was down 3% year over year, driven by Limerick Hotel, Rental Car and Merchandise Redemption Activity. Our assets under custody of $660,000,000 declined 8% sequentially due to a reduction in certain coin prices. Turning to Slide 19, we have our condensed balance sheet.

Speaker 1

We ended the Q2 with $99,400,000 of cash, cash equivalents and available for sale securities. In the Q2, we had cash usage of $18,200,000 Second quarter cash usage included $5,000,000 for acquisition related expenses, a $2,700,000 marketing partnership payment and $1,800,000 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 associated 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 $2,132,000,000 to $3,771,000 This includes gross crypto revenues of approximately $2,077,000,000 to $3,716,000,000 which includes the impact from Apex Crypto.

Speaker 1

Our revised forecast also reflects the solid progress we have made signing up new clients international expansion as well as the region industry wide slowdown we've seen in crypto market volume. We expect full year 2023 crypto trading costs to be in the range of $2,069,000,000 to $3,702,000 This is in line with our expectations for gross crypto revenues. Our full year 2023 outlook for loyalty net revenues is expected to be around $55,000,000 We expect loyalty transaction revenue This contrasts with our expectations The loyalty business at the beginning of the year, where we expected continued growth in transaction volumes from 2022 levels. What we have seen so far this year is durability of the 2022 loyalty transaction volume, which effectively reset post COVID. We've also updated our loyalty revenue outlook to reflect the lower loyalty service volumes we've experienced in the recent quarters.

Speaker 1

As a reminder, the guidance we gave earlier this year for net revenue was $62,000,000 to $72,000,000 If you net our crypto costs against gross crypto services revenue and add that to net loyalty revenues, The expected contribution to margin is $64,000,000 to $70,000,000 For the full year 2023, We expect net cash used in operating activities to be $78,000,000 to $84,000,000 You'll recall that the guidance we provided earlier in year with operating cash usage of $100,000,000 to $110,000,000,000 so a significant improvement here due to our focus at disciplined expense management. Free cash flow usage is expected to be $90,000,000 to $96,000,000 This compares to our prior guidance of free cash flow usage of $105,000,000 to $115,000,000 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.

Speaker 2

Thanks, Karen. Just a few final thoughts. 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 Apex Crypto on April 1st. We've been off to the races since integrating Apex crypto, launching new capabilities, expanding internationally, signing new client relationships and building new strategic alliances with leading brands such as Plaid and Firewall.

Speaker 2

I'm proud of our teams who have worked tirelessly to make this progress happen in such a short amount of time. There's still so much more to come. We've 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 I'm optimistic about our future.

Speaker 2

I can't wait to share more as we continue to execute Thank you for joining us today. I'll turn it over to Anne to manage Q and A.

Speaker 1

Thanks Gavin. Let's move over to questions from the investor community. Leading into our Q and A session, we'll start by answering the top questions from Faye ranked by number of votes. After that, we'll 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 on previously announced partnerships.

Speaker 1

They know that crypto market conditions have improved in the last Order significantly and wants to know what this means for our partnership. Gavin, can you take the question?

Speaker 2

Yes, sure. Look, I'm happy to. Look, thanks for the question. We discussed in detail during our prepared remarks the substantial progress you've seen us make recently building out our client base and forging new collaborations with industry leaders such as Plaid and Fireblocks. But we're really pleased with the momentum that we're building and it really is a proof point

Speaker 3

of how our

Speaker 2

acquisition of Apex Crypto could not have happened at a better time. Our ability to expand into The rapidly growing FinTech space adding to international markets is even more compelling right now. Although we're seeing some more activity In the U. S. Around regulation for crypto, we're somewhat where we need to be.

Speaker 2

The lack of regulatory clarity for crypto has kept the activation of our Transfib partners on pause. We've long since completed most of the integration and go to market work with our Transfib partners and we'll be ready to go when the time is right to enter the market. We're making good progress with our non TransFly client. With Caesars, we're actively engaged and executing with them to launch crypto rewards. Our cross functional teams, including engineering, sales, marketing and design are collaborating closely to activate these capabilities.

Speaker 2

Stay tuned As we anticipate providing additional announcements on this before not too long.

Speaker 1

Thanks, Gavin. Next, we have another question from Working P, who would like to know why Bakkt was not selected to provide custody solutions for any of the recently announced Bitcoin spot ETFs despite our compliance first approach. Carrie, can you take this one? Sure. Happy to take that question.

Speaker 1

Custody has always been a very important part of our business. Our secured and reliable platform is trusted by clients and is the backbone of our company. That said, historically, we have focused much of our sales and marketing efforts on the more Go to market opportunities through our B2B2C approach. While custody has always been an important part of the platform, Given our focus on B2B2C, we were not always aggressively marketing our custody capabilities to win new business. We have been fortunate that our clients are proactively reaching out to us with interest in our secure, trusted, institutional grade custody platform.

Speaker 1

This influx of client interest has been even more pronounced following recent disruptive events in the crypto markets, which have highlighted the difficulty in storing digital assets safely and the need for multi custodian access and 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 customer capabilities. Thanks, Karen. Next, a few people have asked about international expansion and a status update around when we expect to launch. I think we answered this in the prepared remarks.

Speaker 1

Gavin, please add any additional thoughts you might have here.

Speaker 2

We mentioned earlier in the prepared remarks that we've signed an agreement with Ibex to offer crypto trading for Latin America, which we expect to launch in the Q4 of this year. We're working closely with our existing clients Bring our capabilities into the United Kingdom, European Union, Hong Kong and Australia. While we're making solid progress on these efforts and hope to be live soon. As everything we do, we're being thorough and careful to ensure that we're following all of the rules and regulations in Our compliance first focused approach is what differentiates it and we do not make compromises with it. We think that we're getting close with expansion into additional markets and I hope to share more with you soon.

Speaker 1

Thanks for that Gavin. Our final question from the SAVE platform will be from Jonathan Teague, who asks, will Bakkt be a company that investors will look back on and be Proud of having invested their hard earned money into. Karen, this one's for you. Sure. Happy to take that one.

Speaker 1

Hopefully, you've gathered from our strategic highlights for the quarter the 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 and grow. We've done the heavy lifting already with the investments and the infrastructure build and the product development. Now it's our time to scale and grow. I truly believe that Bakkt is well positioned to succeed and win, and our teams work day and night to make that happen.

Speaker 1

I'm extremely proud to be a part of this organization. I believe that our shareholders will look back and be proud of all that we've accomplished. I know being an investor in our stock has not always been an easy journey, And I thank you for sticking with us. While we can't control all of the market and economic factors that have negatively impacted We will continue to control what we can to drive positive shareholder value. That includes disciplined expense management Thanks, Karen.

Speaker 1

And with that, I would now like to turn the

Operator

Our first question today comes from Trevor Williams from Jefferies. Please go ahead.

Speaker 4

Great. Thanks. Good morning, guys. Maybe to start, Gavin, just would love your perspective on the regulatory 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 6 to 12 months, how some of the recent SEC actions in court cases, how any of that affects you guys.

Speaker 4

So would just love kind of your broader perspective on it.

Speaker 2

Yes. Good morning, Trevor. Thanks for the question. I think When you look overall, I think it still is a tale of the U. S.

Speaker 2

Versus What's happening outside of the U. S? In the U. S, obviously, the Ripple decision has been a Yes, sort of a setback to the SEC with respect to some of the enforcement actions that we've seen against industry participants looking at unregistered securities. But 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.

Speaker 2

But when we think about it overall, I think the lack of clarity on how cryptos should be regulated is still Apparent with where we are. While I'm 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 It's a good example. As I said, there's a long way to go before it or any of the other bills come into law. We continue to make our voice heard on Capitol Hill to sort of encourage Congress to resolve the lack of clarity quickly. I think when we look outside of the U.

Speaker 2

S, I think we're seeing clarity coming to some of the markets that we've spoken about in our prepared remarks and ones that we're excited 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 has moved Forcing some of the participants to still sit back and continue to watch what's happening With that landscape, because without the clarity, they're unsure about what their entry strategy should be.

Speaker 4

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 just A little bit. 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 deemphasized or reemphasized within kind of the updated outlook for expenses?

Speaker 4

Thanks so much.

Speaker 1

Yes. I can take that from Trevor. So again, I'm glad that you noticed that. I think we're making a lot of great progress in in terms of reducing cash burn and really being prudent with expenses. So the trend that you See, for the Q2, that's going to actually continue.

Speaker 1

Our free cash flow burn for the second half of the year is 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, headcount reduction. But we're also at the point now where, we've built a lot of the infrastructure and technology that we need Go to market. We are still investing in the crypto business, but we're really Yes. Being prudent in those additional investments, making sure that, we're putting them where, there's Immediate product market.

Speaker 1

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 coming to us, recognizing what we can contribute with our platform, with our compliance approach with the fact that we're a qualified custodian. So custody 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 in the opportunities, the crypto trading piece, not only with our international opportunities, but as Gavin mentioned, We do see demand increase for the Fiat rails that, Bak historically has been able to provide. So that's another area where you'll see us continue to add capital.

Speaker 1

But at this point, I think with the actions that we took, as you've heard me talk about before, Yes. Those actions reset the operating expenses by $29,000,000 in 2023 with an additional $7,000,000 reduction in 2024. So we're really looking to have this reset expense base drive future growth.

Speaker 4

Thanks. Appreciate it.

Operator

The next Question on the line is from Andrew Bond from Rosenblatt Securities. Please go ahead.

Speaker 5

Hey, thanks. Good morning. So it Looks like you guys are definitely starting to make some strong progress across the board here. With regards to custody, just taking from a modeling Perspective, when do you think new customer growth should begin to translate meaningful revenue there?

Speaker 1

Yes. Hey, Andrew, it's Karen. So in terms of what we've given as the outlook for 2023, we haven't broken that up between I can just give you a little bit of color in terms of how we price those services. So typically, you're looking at a pricing model that has that's based on assets under custody with a minimum. And then you're also We're looking at incremental, transactional revenue, withdrawals and deposit activity.

Speaker 1

But as Gavin mentioned, it's We're offering more than just traditional custody. So for instance, the backup key work that we're doing, that is something that is Actually a platform based 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 in 2024.

Speaker 5

Got it. Okay. Karen, You mentioned kind of outperformance in trading relative to the broader market, and there was some noted share shift during the quarter among So I mean, can you talk about how you guys are looking at market share dynamic and if anything stands out for Bakkt broadly or Particularly within some of the different Apex customer segments, you guys have.

Speaker 1

I think one of the things when we look at our trading activity, we can't compare to what we've seen in the broader market, we Have a customer base through the acquisition of Apex that is based in Fintech. They are active Equity traders and we see a strong correlation there between investors who are active Equity traders and their propensity to trade more crypto as well. So I think compared to the broader market, I think we have an investor base That is probably, more active as they see market volatility. So I think that's one of the reasons We would see a little bit more durability. Our lows did not go as low as the market in general.

Speaker 1

And then we were able to rebound quickly. So I think as you probably know, May was probably the worst month of the Q2. I think everybody had a bad May, but our May was not Nearly as bad as everybody else, and that's importantly our June rebounded faster than the market in general.

Speaker 5

Okay. And just lastly, in terms of the partnerships with Rewards, I know those guys before, just thinking about Actually, the cross sell opportunities to some of your the legacy Apex clients, has that kind of Been any progress there? And have you seen some interest from some of the clients that came over from Apex in your award solutions?

Speaker 2

Andrew, I'll take that one, mate. Good morning. We are certainly seeing it in terms of the discussions that we're having. I mean, there's interest Around the engagement that these platforms want to be able to create with their customers. Obviously, they're highly engaged platforms because of Trading activity, what they're looking to do is to look at other ways in which they can potentially diversify the revenue streams or bring people back in to their environment on a more frequent basis.

Speaker 2

And we think some of the rewards propositions, particularly on the crypto rewards side, Have the ability to do that. So there's definitely been strong discussions with some of those clients. And we're hoping to see it turn into opportunity. But right now, their focus is on Addressing and ensuring that the trading businesses are working in the current macro.

Speaker 5

Okay. Thanks, Gavin and Karen.

Speaker 2

Thanks. Thanks, Andrew.

Operator

The next question on the line is from John Roy from Water Tower Research. Please go ahead.

Speaker 3

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.

Speaker 1

This is Karen. That's a great question, Yes. 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 maybe what's most helpful is if I take you through the statement of operations and so And how we think what we're seeing is take rate and what drives it. So when you think about the gross crypto services revenue that we have, The vast majority of that is from the gross trading volume that we have with our customers.

Speaker 1

But that is not the only thing that's in there. So there are platform minimums and fees that also come into play with that line item. Crypto cost is really the cost of providing the crypto, basically after the spread that we charge. And then we have execution clearing and brokerage fees, which is really the if you think about how we partner with our Partners, they're really serving as introducing brokers to us, and so that's the rev share that we give them. So if you think about all those things together, as I mentioned in the call, The gross crypto services revenue less the crypto cost and execution clearing and brokerage fees Really represents the net contribution of crypto trading to our operations.

Speaker 1

And so if you do the math, for instance, for the Q2, you're seeing a take rate of about 38 bps. And so again, that's really the it's the spread in the minimums that we get on the trading, less What we share to our partners, which is really a byproduct of our B2B2C approach, which is what we think is a very efficient way to get access to all these So as we go forward, I think we'll be talking about how that take rate against the difference between those Three line items changes over time in the key drivers because every your partners are different in terms of how they want to set the Spread, and that we have different arrangements with different tiers of profit sharing. So that is going to be somewhat dynamic over time. We've been seeing it in the high 30s rate for some time.

Speaker 3

Great. Thanks. Now, obviously, there's been a lot of discussion on OpEx. So it seems to be if you adjust for acquisition expense and crypto cost, Your OpEx seems to be coming down. So what do we want to think about a run rate for OpEx going forward?

Speaker 3

And any kind of color you can give me on the non cash accrual for acquisition stuff, that would be helpful as well.

Speaker 1

Yes, yes, yes. So in terms of OpEx, I think, obviously, one of the biggest component is our compensation and benefit So hopefully the guidance that we provided earlier in terms of the impact of the decisions that we had to make earlier in the year, it is coming down in In the second half and then you'll see additional declines in that OpEx expense in 2024 when you get the full year impact of those decisions of about $7,000,000 As it relates to the accrual that is in the acquisition It is probably a little bit unusual, but you have to think back to the structure that we put in place when we bought Apex. So 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 you're seeing there in that $10,400,000 non cash accrual is GAAP requires us every quarter to fair value that contingent consideration, that stock contingent consideration that will be paid out through 2024 and 2025 based on our expected outlook of the contribution that Apex Crypto's customer base has to our net revenue.

Speaker 1

So Yes. The fact that we have Negril, it's certainly not the whole $100,000,000 potential stock compensation that they could get over 20 3 in 24 performance yet, but we are seeing, based on what we see now, we see Scenarios where some of that stock comp can get paid out. So that's what we're occurring for, but that's going to change every quarter. And it's really just having to wait till year end 'twenty three and year end 'twenty four where we actually fix those amounts. And again, I would Remind you that that is not a cash expense.

Speaker 1

That is all stock or no.

Speaker 3

Great. Thanks, Karen.

Speaker 2

Now.

Operator

It appears we have no further questions. I'd like to hand back to Anne to conclude.

Speaker 1

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

Operator

Ladies and gentlemen, this concludes our event. You may now disconnect.

Speaker 1

Goodbye.

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Earnings Conference Call
CarParts.com Q2 2023
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