Bakkt Holdings, Inc. (BKKT) is a leading provider of innovative, multi-faceted solutions that connect the digital economy. The company's platform enables clients to deliver new opportunities to their customers through software as a service (SaaS) and API solutions that unlock crypto and drive loyalty, powering engagement and performance.

Founded in 2018, Bakkt has established itself as a trusted partner in the rapidly evolving crypto market. The company's institutional-grade platform, born out of its former parent company, Intercontinental Exchange, Inc. (ICE), supports "know your customer" (KYC), anti-money laundering (AML), and other anti-fraud measures to combat financial crime.

Business Overview

Bakkt operates in two key segments: Crypto and Loyalty. In the Crypto segment, the company provides custody, trading, and other services to enable clients to offer their customers the ability to buy, sell, and store crypto assets. Bakkt's Loyalty segment offers a full spectrum of supplier content through configurable, white-label e-commerce storefronts that end users can acquire via redemption of loyalty points.

The company's platform is uniquely positioned to power commerce by enabling consumers, brands, and financial institutions to better manage, transact with, and monetize crypto in exciting new ways. Bakkt's institutional-grade platform supports a wide range of crypto assets, including Bitcoin, Ethereum, Dogecoin, and Shiba Inu, among others.

Bakkt's Crypto segment has experienced significant growth, with the company reporting $841.3 million in gross crypto services revenue for the first quarter of 2024, a 322% sequential increase. This growth was driven by a 324% quarter-over-quarter increase in the company's notional traded volume, which outpaced the overall industry's 65% increase.

The company's Loyalty segment has also performed consistently well, generating $13.2 million in net revenue for the first quarter of 2024, a 3.6% year-over-year increase. This was driven by a 20% year-over-year increase in subscription and service revenues, partially offset by a 9% decline in transaction revenues due to lower redemption volume in travel and lower redemption margin in merchandise.

Financials

For the full year 2023, Bakkt reported annual revenue of $780.1 million and a net loss of $74.9 million. The company's annual operating cash flow was -$60.7 million, and its annual free cash flow was -$70.1 million.

In the first quarter of 2024, Bakkt reported total revenue of $854.6 million, with gross crypto services revenue of $841.3 million and net loyalty services revenue of $13.2 million. The company's net loss for the quarter was $21.3 million, with a net loss per share of $1.86.

Bakkt's operating expenses, excluding crypto costs and execution, clearing, and brokerage fees, decreased by 16% year-over-year in the first quarter of 2024, reflecting the company's focus on cost management. The company's adjusted EBITDA loss for the quarter was $16.3 million, a 43.6% improvement compared to the same period in the prior year.

Liquidity

As of March 31, 2024, Bakkt had $56.6 million in cash and cash equivalents and $44.0 million in restricted cash. The company also had $18.0 million in available-for-sale securities that mature over the next one to seven months.

In March 2024, Bakkt completed a registered direct offering, raising net proceeds of approximately $36.9 million. The company plans to use these funds, along with its existing cash and proceeds from the maturity of available-for-sale debt securities, primarily to fund its day-to-day operations, including regulatory capital requirements, compensating balance arrangements, and other similar commitments.

Bakkt's management believes the expected impact on the company's liquidity and cash flows, including the integration of its regulated entities and operational initiatives, are sufficient to enable it to meet its obligations for at least the next 12 months. However, the company has identified a material weakness in its internal control over financial reporting related to the oversight and review of the work performed by a third-party valuation specialist, which could impact its ability to accurately report its financial results.

Guidance and Outlook

For the full year 2024, Bakkt expects total revenue to be in the range of $3,002 million to $4,447 million, including gross crypto revenue of $2,949 million to $4,390 million. The company expects crypto costs and execution, clearing, and brokerage fees to be in the range of $2,934 million to $4,365 million, and total operating expenses to be between $155 million and $165 million.

Bakkt's management expects the company's operating cash flow usage to be between $58 million and $72 million, and its free cash flow usage to be between $64 million and $78 million for the full year 2024. The company expects to end the year with $42 million to $57 million in available cash, cash equivalents, and available-for-sale securities.

Key Priorities and Initiatives

Bakkt is laser-focused on three key strategic priorities in the year ahead: growing its client network and deepening existing client relationships, expanding its product solutions and extending the Bakkt ecosystem, and realigning its costs and prudently managing expenses.

One of the company's key initiatives is the development of its Electronic Communication Network (ECN), called BakktX, which is designed to cater to the needs of institutional investors. BakktX is expected to be an industry-first, foreign exchange-style ECN in the digital asset space, offering institutional clients a reliable and low-cost trading experience.

Bakkt is also enhancing its trading and custody platform to serve both institutional and retail clients, leveraging its NYDFS-regulated custody solution and the trust clients have in the company as a publicly-traded crypto company.

Additionally, the company is intensifying its expense restructuring efforts, including a workforce reduction of 28 employees and the optimization of its contact center resources. These actions are expected to yield $13 million in cash savings on an annualized basis, with $7 million to be realized in 2024, excluding any one-time severance costs.

Risks and Challenges

Bakkt operates in a highly competitive and rapidly evolving crypto market, which exposes the company to various risks and challenges. The company is subject to complex and uncertain local, state, and federal laws and regulations governing its operations, which could evolve in unpredictable ways.

The company's ability to continue as a going concern is also a concern, as it has historically relied on its existing cash and available-for-sale securities portfolio to fund operations. Bakkt's management has taken steps to alleviate substantial doubt about the company's ability to continue as a going concern, including the recent registered direct offering and cost-cutting measures, but there is significant uncertainty associated with the company's expansion plans and revenue growth.

Additionally, the material weakness identified in Bakkt's internal control over financial reporting could impact the company's ability to accurately report its financial results, which could have broader implications for investor confidence and the company's reputation.

Conclusion

Bakkt is navigating the rapidly evolving crypto landscape with its institutional-grade solutions and a focus on expanding its client network, enhancing its product offerings, and prudently managing its expenses. The company's performance in the first quarter of 2024, marked by strong growth in its Crypto segment and consistent performance in its Loyalty segment, demonstrates its ability to capitalize on the increasing demand for crypto-related services.

However, Bakkt faces significant risks and challenges, including regulatory uncertainty, liquidity concerns, and internal control weaknesses. The company's success will depend on its ability to execute on its strategic priorities, address its operational and financial challenges, and maintain the trust of its clients and investors.