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3Q23 Earnings Show Solid Execution in a Challenging Environment

Bakkt reported a 3Q23 loss of $0.19/share on net revenue of $14.6 million, slightly below our estimates of a loss of $0.18/share loss on net revenue of $15.5 million (consensus was for a loss of $0.17/share on $16.1 million). The crypto environment continues to be challenging. President and CEO Gavin Michael said the quarter “clearly demonstrated our ability to execute” in a tough market. Michael also highlighted the company’s push and significant progress in expanding outside the US, which is in need of clarifying legislation. See our notes here and here. Bakkt is taking steps that it expects will allow it to grow, while the crypto market stabilizes. Given that (1) the industry’s crypto trading volumes were down 23% sequentially, (2) the US continues to not have regulatory clarity, and (3) investors are awaiting the upcoming crypto ETFs, the company has taken a number of steps including (a) accelerating international expansion, (b) activating new clients quickly, (c) focusing on custody, (b) expense control, and (e) reducing revenue volatility with a shift to subscription-based. Management highlighted a number of new clients as well as its focus on executing to onboard and activate existing clients this quarter. These include OpenNode, 3.0verse, and Legend Trading as new trading clients, and EDXM, Unchained, and LeboBTC as new custody clients. With the faster activation, Bakkt has nearly completed the integration for OpenNode, while onboarding Invstr, IBEX, and Sparrow. Newly live clients include Webull Pay, Blockchain.com, LeboBTC, Hapi, and Finequities. Bakkt laid out extensive guidance for FY23 and FY24, including revenues, net revenues, operating cash flow usage, and non-GAAP FCF usage. For FY23, midpoint revenue guidance is $1,009 million (crypto $956 million and loyalty $53 million). For FY24, midpoint revenue guidance is $6,266 million (crypto $6,213 million and loyalty $53 million). Non-GAAP FCF midpoints are for $100 million usage in FY23 and $53 million usage in FY24, with the improvement driven by cost control actions already taken and more than 40% Sparrow net revenue growth in 2024. Bakkt is building a significant backlog of client activity, which it clearly demonstrated this quarter. This should directly translate to strong revenue growth in 2024. The company reiterated that it still expects to be approximately breakeven on an adjusted EBITDA basis by the end of 2024. In our net revenue 4Q23 model, we estimate a $0.19 EPS loss on net revenue of $16.5 million. For FY24, we estimate net revenue of $84.4 million, up 45% from 2023, with a diluted EPS loss of $0.57. Bakkt is trading at a significantly lower P/S than comps. Bakkt’s comparables include digital wallet and crypto companies. The comps have a median forward P/S of 5.0x, while Bakkt trades at 3.6x, a 27% discount. We will be hosting a fireside chat with CEO Gavin Michael and CFO Karen Alexander on Thursday, November 16, 2023, at 1:00 pm ET. Registration link in our full report.