Bakkt Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Bakkt First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I'll now turn it over to Olivia Kivi, Senior Lead of Communications at Bakkt.

Operator

Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us on Bakkt's Q1 earnings call. Today's presentation, including the separate earnings call presentation that can be found at our Investor Relations website at www.investors. Bac.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 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 Bakkt's business, please refer to its filings with the Securities and Exchange Commission.

Speaker 1

During today's presentation, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we will refer to certain non GAAP financial measures. For more information on this, the basis of presentation for our financial results and our non GAAP measures, please refer to our earnings release, which was filed this afternoon with the SEC. Joining me on today's call are Andy Main, Bakkt's Chief Executive Officer and Karen Alexander, Chief Financial Officer. After our prepared remarks, we will answer questions we received from our investors through the SAI Technologies platform. After that, Andy and Karen will be available to answer questions from the analyst community.

Speaker 1

I'll now turn it over to Andy.

Speaker 2

Thank you, Olivia, and good afternoon, everyone. Thank you for joining Bakkt's earnings call. It's great to speak to you all again. I want to start today by recapping 3 key priorities that we laid out in detail on our last quarter call and provide an update on the progress that we've already made in the 1st few months of the year against these goals. So beginning on Slide 4, as we outlined last quarter, we are laser focused on 3 key strategic priorities in the year ahead.

Speaker 2

1st, growing our client network and deepening our existing client relationships secondly, expanding our product solutions and extending the BaaT ecosystem and third, realigning our costs and prudently managing expenses. So I'd like to provide a few highlights for each of our priorities. On the client side, I've had the opportunity to speak with a number of our clients over the past few weeks. For both our loyalty and crypto businesses, our focus on being our clients' partner in growth, combined with our robust solutions and winning client experience is resonating well. On the product side, we've continued to enhance our trading and custody platform, which caters to both institutional and retail clients.

Speaker 2

This broad market positioning combined with the rigor we apply to the complexities of security and compliance in crypto allows us to serve a diverse range of clients. Our appeal to the market is further enhanced by the trust clients have in us. This can be attributed to the discipline we apply to being a publicly traded crypto company and our NYDFS regulated custody platform. In terms of our expense realignment, we've also significantly reduced our operating expenses through company wide initiatives. Notably, we conducted a reduction in force on May 2 that will yield cost savings.

Speaker 2

This is in addition to the year over year expense reduction of 16% that is reflected in the Q1 2024 actuals. Although challenging, these decisions are crucial as we navigate towards profitability and to reallocate our strategic investments to growth areas. Overall, we believe these actions will strengthen our financial foundation as we move forward and optimize our goals to scale. Now, I'd like to turn to Slide 5 to discuss our Q1 financial update and operational update. This update demonstrates the success of the team's efforts.

Speaker 2

Q1 revenue net of crypto services revenue, crypto costs and execution and clearing and brokerage fees was at €17,000,000 up approximately 33% from Q1 last year. These results were driven by robust crypto trading activity across our platform with notional crypto volume up 94% compared to the same period last year. Further, OpEx excluding crypto costs and execution and clearing and brokerage fees decreased by 16% versus Q1 last year as a result of our cost restructuring initiatives over the past few quarters. The combination of higher revenues and driving down costs helped us improve our net loss by 53% year over year and our adjusted EBITDA loss by approximately 44% year over year. On the operational side of things, I'd like to call out the progress we're making towards the MVP launch of our Electronics Communication Network or ECM, an offering for institutional trading and custody.

Speaker 2

This will represent a significant milestone in expanding our client base potential and tapping into new market opportunities. Additionally, our strategic partnerships with Unchained and Swan Bitcoin have enhanced our collaborative custody and trading efforts. Our assets under custody at the end of the Q1 grew to a record $1,100,000,000 And finally, our loyalty business is performing consistently well for some of the largest credit card programs in the USA and incentive programs in Canada. This business is benefiting from the changing and growing interest from consumers and all things loyalty. The consumer trends driving this sector forward include maximizing the value of earned loyalty points through a broad range of services and products as well as leveraging alternative currencies in the market given the broader macroeconomic pressures on the value of cash.

Speaker 2

We remain excited about the loyalty business and the growth opportunities it presents for Bakkt and our clients. Moving to Slide 6. As evidenced in our trading volumes in Q1, we've begun to see positive green shoots in the market and the overall demand environment improving with more industry activity, higher coin prices and overall higher retail trading volume. Bakkt is taking advantage of this trend as we have experienced high volume driving through our platform. In Q1 2024, our notional traded volume was 3 24% higher than Q4 2023, while overall market activity was up 65%.

Speaker 2

In March 2024, volume on the BAT crypto platform has an all time high since we acquired it in April 2023 at $593,000,000 In April 2024, trading volume dipped slightly from March, but was still 134% higher than the 2023 average. Moving on to Slide 7, we are upping the pace on rightsizing our cost structure by intensifying our expense restructuring efforts. Notably, on May 2, we completed a workforce reduction of 28 employees that will take effect during the Q2 as part of our broader expense restructuring initiative. The total restructuring plan, which also includes future closure of certain open roles and optimization of Bakkt's contact center resources, is expected to reduce Bakkt's planned headcount by 20% at the end of 2024. These actions are estimated to yield $13,000,000 in cash savings on an annualized basis going forward, of which $7,000,000 will be realized in 2024, excluding any one time severance costs.

Speaker 2

This was not a decision taken lightly and was carefully planned so our team can continue executing on our key priorities and serving our clients effectively. This was in addition to the $9,500,000 lower year over year OpEx excluding crypto costs and execution and clearing and brokerage fees in Q1 2024. In addition to this headcount reduction, we will also continue to prioritize cost savings and look for ways to streamline our operations and cost structure, including reducing vendor and discretionary spend. Moving on to Slide number 8, I'd just like to say that the Board appointed me as CEO to scale the business and guide it towards profitability. The performance required will be achieved by working at the intersections of process and people, platform and products and with our partners.

Speaker 2

Using this framework, let's talk more about what the future holds for our business and what we have coming down the pipeline. So on Slide 9, I'd like to dive into what we see as a massive untapped market. The crypto trading industry has been built primarily for everyday retail investors who use a central limit order book trading structure. Meanwhile, institutional investors who are offering Bitcoin ETFs are increasingly finding that the retail central limit order book structure is not meeting their large scale needs. BAT has designed a groundbreaking solution to uniquely appeal to the needs of institutional investors.

Speaker 2

So moving on to Slide number 10, this is where our ECN, which we call BAT X comes in. Unlike a central limit order book, this platform will be a trading venue designed for institutional traders and market participants within our existing approved regulatory footprints. We believe BakktX will be a differentiated innovative platform to enable institutional crypto trading with high performance, low latency and low costs. The platform is expected to be an industry first, the first foreign exchange style ECN in the digital asset space that will offer institutional clients a reliable and low cost trading experience. The brokerage side of our business will be amongst the first clients.

Speaker 2

We believe this improvement in trading technology will harden our existing relationships and open the door to new clients that demand the most from their infrastructure providers. 2nd, when combined with our custody capabilities, we will shift from a pure custody provider to a partner that offers more complete solutions for our institutional clients. With a mature retail trading market, institutional investors are eager and ready for a trading venue tailor made for institutional requirements and we believe this is the opportune time to launch an innovative market solution serving our targeted high value segments. Moving on to Page number 11. Another key element in shaping VAC's progression is the vitality of the ecosystem in which we operate.

Speaker 2

We have a strong marketplace of relationships that enhance our solutions and processes, which continues to evolve as we innovate our offerings. As mentioned, we have many high value client segments including brokerages, trading desks, asset managers and crypto natives. In collaboration with our go to market technology providers, our capabilities allow us to deepen liquidity for our clients and enhance data and price aggregation and analytics. Our goal is to cultivate an ecosystem of solutions tailored to the needs of those diverse clients. The mission of the Bakkt ecosystem is to bring further value to our clients through comprehensive aggregation analytics, high performance execution, robust liquidity supporting tight spreads, secure clearing and settlement processes, upholding the integrity of each transaction and our New York Department of Financial Services regulated custody solution.

Speaker 2

This integrated approach with our partners ensures that Bakkt stands out as the comprehensive ecosystem that empowers our client network to trade confidently and successfully. So thank you for the time allowing me to share more about our current performance and further progress for 2024. Now I'll turn it over to Karen, who will speak to our financial results.

Speaker 3

Thanks, Andy. I will now walk you through our Q1 KPIs and financial results. A quick reminder that in accordance with GAAP, we present crypto services revenue and crypto costs and execution clearing and brokerage fees on a gross basis since we are a principal in the crypto services we provide our customers. By contrast, we are an agent in the loyalty redemption services that we provide our loyalty customers. So loyalty revenue is presented on a one line net basis.

Speaker 3

Crypto costs and execution clearing and brokerage fees, which we will refer to as crypto costs and ECB for the remainder of this call, drive gross crypto services revenue and the difference between these two line items represents Crypto Trading's contribution to margin. Please see the notes section of our earnings presentation for additional detail on crypto services revenue and related costs. Starting on Slide 13, we have our Q1 KPIs that we believe provide a snapshot to the health of the underlying trends that drive our business. As a reminder, we have included Bakktrypto in historical KPI figures on this slide for comparison purposes. We had 6,300,000 crypto enabled accounts at the end of the Q1, which reflects a steady increase over the past 12 months.

Speaker 3

Next, we have our transacting accounts, which we break out into crypto and loyalty accounts. There were 779,000 transacting accounts in the Q1, of which 484,000 were for loyalty redemption and 295,000 were crypto trades. While the number of crypto transacting accounts declined year over year, we saw an approximately 235 percent increase in the notional amount per trade year over year. This led to a year over year increase in the notional traded volume for crypto, which we will cover next. Total notional traded volume was $1041,000,000 of which $860,000,000 was from crypto and $181,000,000 was related to loyalty redemption.

Speaker 3

On this chart, we have also included the crypto industry trading volumes, which is the orange line. As depicted here, our crypto trading volumes were up 3 24% on a sequential basis, outperforming the overall industry, which was up only 65% sequentially. Meanwhile, loyalty redemption volume was down percent year over year due to lower redemption activity in travel and gift cards. While overall volumes were down, we did have some benefit related to the mix shift from lower margin products such as air travel to higher margin products such as hotels. At the end of Q1, our assets under custody increased 76% year over year to $1,233,200,000 on higher coin prices.

Speaker 3

On Slide 14, we show revenue for the company. Total revenue for the Q1 of 2024 was $854,600,000 Gross crypto services revenue for the quarter was $841,300,000 As Andy noted earlier, our Q1 2024 gross crypto notional traded volume increased 3 24% on a quarter over quarter basis, outperforming the 65% quarter over quarter increase in the overall market gross crypto notional traded volume. Our Q1 24 traded volume was the strongest in March where we saw particularly strong demand for certain meme coins. Net royalty revenues of $13,200,000 increased 3% year over year. This was driven by a 20% year over year increase in subscription and service revenues to $6,600,000 Approximately half of the increase was driven by an adjustment to the remaining life of 1 of our service contracts with the remaining increase driven by higher volume based service revenue.

Speaker 3

Transaction revenues of $6,600,000 were down 9% year over year, primarily due to lower redemption volume in travel and lower redemption margin in merchandise. Turning to Slide 15, we have a slide comparing Gross Crypto Services Revenue and Crypto Costs and ECB. Gross Crypto Services revenue of $841,300,000 increased 3 22 percent sequentially and was impacted by improving industry wide volumes. Crypto costs and ECB were $837,600,000 for the quarter. The difference between Crypto Services gross revenue and Crypto Cost and ECB represents the net revenue contribution of retail crypto trading services.

Speaker 3

On a percentage basis, the net revenue contribution for Q1 twenty twenty four of $3,700,000 is a take rate of approximately 44 basis points. This is lower than Backcrypto's take rate of 80 basis points in Q4 2023 due to the adjustment of the Weibo Pay revenue share agreement in Q3 2023. As I've commented in prior quarters, we had expected the take rate to revert back to the pre Q3 'twenty three historical take rate of approximately 30 to 40 basis points prior to Q3 2023 as Movable Pay activity levels increased. Turning to Slide 16, we have total operating expense. Total expense for the Q1 of $886,400,000 includes $837,600,000 of crypto costs and ECB.

Speaker 3

These costs are driven by crypto trading volumes. SG and A expense of $7,800,000 includes a $900,000 marketing expense associated with the strategic marketing agreement. Excluding this payment, SG and A expenses were roughly flat to Q1 2023. Total compensation expense of $24,500,000 declined 28% compared to the Q1 of 2023 due to lower headcount and a decrease in incentive bonuses and benefits. Note that the Q4 2023 compensation expense included reversals of $6,500,000 of incentive and non cash compensation expenses to adjust this growth to lower achievement of performance targets.

Speaker 3

Other expenses of $15,400,000 included $6,100,000 of non recurring restructuring expenses. Operating expenses excluding crypto costs and ECB and non cash goodwill, intangible asset and long lived asset impairment charges were $48,800,000 This represents a decrease of 16% year over year. This improvement is primarily due to a reduction in total compensation and benefits and acquisition related expenses and reflects our commitment to maintaining disciplined expense management. We're pleased with the continued progress we have been making in reducing our expense base through our disciplined approach towards allocating capital. As Andy noted, this will remain a key focus for us as we look ahead to the remainder of the year and we are committed to continuing this trend as I will describe further when I address our updated outlook for 20 24.

Speaker 3

We have our EBITDA and adjusted EBITDA for the Q1 of 2024. Adjusted EBITDA reflects adjustments for non cash, restructuring and acquisition related items that impacted the period. EBITDA and adjusted EBITDA for the quarter were losses of $22,000,000 $16,300,000 respectively. As Andy noted earlier, our adjusted EBITDA loss has narrowed significantly over the last 12 months, reflecting our expense management efforts. Turning to Slide 18, we have our Q1 2024 Condensed Financial Statements.

Speaker 3

I've already covered revenue and operating expenses on the previous slides, so I'll just jump to the bottom line items. Net loss for the quarter was $21,300,000 which resulted in a diluted loss of $1.86 per share on an average diluted share base of 4,400,000 shares. Net loss allocated to the non controlling interest in the operating company was $13,100,000 resulting in an $8,200,000 loss attributable to Back Holdings Inc. Or a net loss of $1.86 per share and an average basic share count of 4,400,000 shares. Following our recent capital raise and after giving effect to our 1 to 25 reverse stock split that occurred on April 26, 2024, our total share count as of May 3rd is 13,400,000 shares.

Speaker 3

Following the capital raise, ICE still remains our largest shareholder as they own 56% of our aggregate shares. Note that their percent ownership is down due to new Class A share issuances and not due to the sale of shares by ICE. Turning to Slide 19, we have our condensed balance sheet as of March 31, 2024. We ended the quarter with $74,600,000 of cash, cash equivalents and available for sale securities. After giving effect to the registered direct offering proceeds, our cash usage for the Q1 was $33,700,000 Our cash usage from quarter to quarter may include contractual payments, where the timing is not always consistent, as well as normal operating expenses.

Speaker 3

Cash usage for the Q1 2024 included a $4,900,000 increase to surety bond's lateral and a $7,000,000 transfer of available cash to restricted cash related to our purchasing card facility. Excluding some of these lumpier items, we are continuing to see improvements in our cash usage run rate from a lower operating expense base, which I will cover more in the guidance slide. Before moving on to our guidance, I would like to address the material weakness in our internal controls as noted in our 10 Q filed this afternoon. The issue stems from an error made by a Big 4 third party valuation specialist in the fair value measurement of our Class 1 and Class 2 warrants that were issued in the March register direct offering. Generally accepted accounting principles require that we recognize these warrants as liabilities and measure them at fair value every reporting period.

Speaker 3

The valuation of these warrants requires the use of a complex valuation model with a number of sensitive assumptions that must be made from the perspective of a market participant. This issue is solely related to our Class 1 and Class 2 warrants and is non cash in nature. We have resolved the valuation issue specific to our Class 1 and Class 2 warrants in the financial position and results of operations presented today and reported in our Q1 10 Q. We are actively addressing the identified material weakness in our internal controls to make sure such discrepancies are identified and managed more effectively in the future. Moving on to Slide 20, we have updated our 2024 full year outlook.

Speaker 3

Since our Q4 2023 earnings release, we've had a few months of client activity and engagement metrics to fine tune the wide range that we provided in March. Accordingly, we are updating our expected outlook for 2024. We expect total revenues to be in the range of $3,002,000,000 to $4,447,000 This range includes gross crypto revenue of $2,949,000 to $4,390,000,000 There are several factors that influence that wide range. 1st, we consider a range of potential trading engagement metrics based on observed trading engagement in Q1 2024 as well as longer term historical trading engagement metrics, with the Q3 2023 being a low point for both our platform as well as the broader market. As we mentioned earlier, we saw improved trading activity so far in the Q1 of 2024 with March volume being exceptionally strong.

Speaker 3

Our expected revenue range for the full year 2024 considers a reversion to 2023 engagement metrics at the low end of the range and steady improvement engagement metrics at the high end of the range. It does not assume that the exceptional trading volume we observed in March will continue for the rest of the year. Secondly, we have updated our range of possible scenarios for the activation of new clients currently in our pipeline. The range of assumed timing and conversion rate of those pipeline opportunities is reflected in the range of expected gross crypto revenue in 2024. One metric we have considered is the increase in crypto enabled accounts from new clients.

Speaker 3

We are expecting our crypto trading accounts to grow by approximately 1 to 3 times with a significant portion of that growth coming from new clients. Based on our current view of pipeline and current client growth, we have reduced our expectation for crypto trading account growth relative to the guidance I provided in March, while maintaining the general expectation of continued growth in crypto trading accounts. 3rd, we continue to expect that crypto coin pairs will be activated in the second half of twenty twenty four to support high demand by international retail traders. Finally, our expected gross crypto revenue range assumes the addition of institutional clients beginning in the Q2 of 2024 with steady ramp up in AUC from those clients in the second half of twenty twenty four. We have not adjusted our expectation for net loyalty revenue of $53,000,000 to $57,000,000 consistent with the performance of that business in 2023.

Speaker 3

We expect crypto costs in ECB of $2,934,000,000 to $4,365,000,000 driven by the range of expected gross crypto revenue. We expect total operating expenses of $155,000,000 to $165,000,000 updated to reflect the May 2024 restructuring actions. This guidance does not anticipate any acquisition or inorganic transaction expenses, like the acquisition expenses we incurred in 2023 related to the acquisition of Backcrypto. The net of operating expenses and non cash expenses represents our expected cash operating expenses for 2024. Expected operating cash flow usage of $58,000,000 to $72,000,000 reflects both expected revenue and expense ranges that I have walked through.

Speaker 3

Free cash flow, which is a non GAAP metric, is expected to be a usage of between $64,000,000 to $78,000,000 We expect to end the year with $42,000,000 to $57,000,000 of available cash, cash equivalents and available for sale securities. This range reflects both the $7,000,000 cash savings from the May restructuring action as well as the $5,000,000 reduction in the net revenue contribution from crypto trading. It also reflects our updated expectations for capital efficiencies, driven from legal entity integration of our regulated entities, including a $9,000,000 reduction of restricted cash as we eliminate duplicate surety bond requirements. We continue to believe we have sufficient cash to fund our operations in 2024. As you will note from this range, we expect our cash utilization to reduce over the course of 2024 as we achieve our revenue growth and expense reduction curve.

Speaker 3

I'll now pass it back to Andy for his closing remarks.

Speaker 2

Thank you, Karen for taking us through the financials. Between our ongoing focus on providing the winning client experience, the strategic broadening of our product offering and prudent management of our expenses, I believe we are positioned to scale and take advantage of a turning market. I look forward to sharing more about our progress in the months to come. Thank you everyone for your ongoing interest in Bant. I will now turn it over to Olivia to manage the Q and A.

Speaker 1

Thanks, Andy. 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 SAI Technology, ranked by number of votes. We have consolidated some of the questions that address similar themes. After that, we'll turn to live questions from the analyst community.

Speaker 1

Our first question from the investor community comes from Syed H. And William I. Somewhat the same question, but combined here for time. As the United States embarked on a new era of Bitcoin and cryptocurrency advancements, how is Bakkt positioning itself at the forefront of this movement, particularly with the support of the intercontinental exchange and ultimately restoring confidence to shareholders. Andy, can you share your perspective here?

Speaker 2

Thank you, Sahid and William for your question and being fellow stockholders of that. Just like we mentioned, we are laser focused on our 3 key priorities. Firstly, expanding our client network. Secondly, broadening our product offerings within the Bak ecosystem, primarily our anticipated institutional BAC X ECN offering. And thirdly, enhancing our cost management strategies.

Speaker 2

Having ICE in our corner for support has been a huge help as we leverage their established infrastructure and market presence. We believe the support in implementing these priorities in due time will bring this company to the forefront of the ever evolving crypto landscape. We're always looking forward and pursuing ways to stay ahead of the curve and ultimately deliver value to our stockholders like you.

Speaker 1

Next question is from Jeffrey C. Jeffrey asked, why did you pursue the reverse split so quickly after shareholder approval when you had several months to regain good standing on the New York Stock Exchange? Karen, can you take this one?

Speaker 3

Of course. Our primary goal was to promptly address the compliance issues with the New York Stock Exchange's minimum price requirements, ensuring the stability and continued listing of our stock. Acting quickly on the reverse split allowed us to minimize uncertainty for our investors and stabilize the market perception of Bakkt's financial health, including opening new doors for institutional investors who may have minimum price requirements for their investments. This action is part of our broader strategy to secure our company's financial foundation and improve investor confidence.

Speaker 1

Next question is from Working P. Working asks, has your company explored the possibility of collaborating with ICE to secure cryptocurrency custody business from the top 4 to 5 ETF providers. Additionally, what steps must BaaS undertake to successfully acquire business in this sector? Andy, can you provide your thoughts here?

Speaker 2

Thank you. Yes. Indeed, we've been and will continue to leverage ICE's established infrastructure and market presence. We aim to develop robust custody solutions that meet the complex needs of these institutional players. To successfully acquire business in the sector, we are focusing on enhancing our technological capabilities, ensuring compliance with regulatory standards and building a product suite that aligns with the specific requirements of these large institutional clients.

Speaker 2

Our ongoing product development and strategic partnerships are geared towards creating a compelling value proposition in the institutional crypto market and securing a large portion of the available market share.

Speaker 1

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.

Operator

Our first question is from John Roy with Water Tower Research. Your line is now open.

Speaker 4

Thank you. So Karen, on this increase in the estimate for the end of the year cash, you're going to $42,000,000 to $57,000,000 Is that mainly savings in OpEx and expense management? Or is there some non OpEx factors that are going on?

Speaker 3

Yes. Hi, John. Thanks so much for the question. Obviously, as you could tell from Q1 so far, there's a lot of things going on with our available cash that are beyond just what we're seeing from operations with the ins and outs of what we have to hold as restricted cash. So thinking about where we are so far, as you mentioned, we ended the quarter with $74,600,000 of available cash.

Speaker 3

If you think about the burn rate that's inherent in that number, given after giving effect to the RDO. We burned about $33,700,000 of cash during the quarter. But there's definitely some one timers in there that I mentioned on the call. So if you think about the increases that we had to set aside for surety bond and collateral for our purchasing card facility, that's over $10,000,000 of that usage. So I certainly would do not want to give investors the impression that that $33,700,000 is can just be divided by 3 and that would be a monthly run rate.

Speaker 3

As you can see from the numbers, our run rate is going to come down pretty significantly. So between the 74.6 that we ended Q4 with or sorry Q1 with and then if I maybe take that down to roughly $49,500,000 which is the midpoint of my guidance range, That's a change of $25,000,000 approximately. Included in there, as I mentioned, is about $10,000,000 of restricted cash release that we've built into the expectation of the cash balance, given the fact that we are now able to get some of the efficiencies from being able to integrate our regulated entities. So when you factor that in to something that looks more like a roughly $35,000,000 $36,000,000 cash utilization from operations for the rest of the year, That's more like a $4,000,000 run rate on a monthly basis for the rest of the year. Keep in mind also though that our cash usage is not straight line.

Speaker 3

So you could certainly see it in the Q1 where we had more cash utilization. The $4,000,000 is it's a simplified straight line number, but what we'll see is it vary from quarter to quarter, which is why I wanted to give the end of year balance as a better indication of what we would utilize for the rest of the year.

Speaker 4

Great. That really does kind of clear things up. Thanks Karen.

Operator

Our next question is from Trevor Williams with Jefferies. Your line is now open.

Speaker 5

Thanks. Hey, good afternoon. Andy, maybe a bigger picture question just on the regulatory backdrop and being in an election year. Maybe just give us a sense for kind of how you see State of the Union on the regulatory side, how you're expecting things to evolve over the next 6, 12, 24 months and just how you guys are positioning the business for kind of a different range of outcomes on the regulatory front? Thank you.

Speaker 2

Yes, Trevor. Thanks so much for the question. So Bakkt being a publicly traded crypto company, we are just extremely focused on the regulatory front, particularly with the NYDFS and certainly complying to the SEC regulations. And clearly with the election coming up, we certainly are proceeding on the basis that the U. S.

Speaker 2

Government will certainly support the current crypto regulations and will be in a position to support additional licensees for entrants coming into this market. So we're fairly buoyant on the fact that the government, SEC in particular, will support its current crypto position to help this part of the economy develop and flourish. So that's very much the position we're taking as we go forward here.

Operator

We have no further questions at this time. So I'll pass the call back to the management team for any closing remarks.

Speaker 1

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

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Key Takeaways

  • Strategic priorities: Management remains laser-focused on growing its client network, expanding the BaaT product ecosystem (including loyalty and crypto services), and realigning costs through disciplined expense management.
  • Strong Q1 financials: Net revenue (excluding crypto costs and related fees) rose 33% year-over-year to $17 million, driven by a 94% surge in crypto trading volume, while net loss narrowed 53% and adjusted EBITDA loss improved 44%.
  • Institutional ECN launch: Progress continues toward the MVP launch of “BakktX,” a low-latency, FX-style electronic communication network designed to meet institutional crypto trading and custody needs within approved regulatory frameworks.
  • Cost reduction efforts: Operating expenses (ex-crypto costs) decreased 16% year-over-year, and a recent workforce reduction plus ongoing restructuring is expected to cut headcount by 20% and yield $13 million in annualized cash savings.
  • Growing assets and loyalty business: Assets under custody hit a record $1.1 billion, and the loyalty segment continues to perform well as consumers seek to maximize point value and alternative currencies amid macroeconomic pressures.
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Earnings Conference Call
Bakkt Q1 2024
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