Bakkt (BKKT) Q3 2023: Take Rate Jumps to 80bps Amid International Crypto Expansion
Bakkt’s Q3 saw a sharp rise in crypto trading take rate to 80bps, fueled by a revised Webull Pay agreement and a decisive pivot toward international markets and subscription models. Management is betting on global regulatory clarity and recurring revenue to offset US crypto headwinds, while disciplined cost controls underpin the path to breakeven in 2024. Investors should watch execution on international activation and the real-world stickiness of Bakkt’s new custody and Lightning Network offerings as the business model transitions.
Summary
- Take Rate Surge: Crypto trading take rate spiked to 80bps, reflecting improved economics from revised Webull Pay terms.
- International Activation: Nine new markets targeted for crypto platform expansion, shifting focus from US regulatory bottlenecks.
- Subscription Revenue Shift: Recurring revenue models and custody growth set to stabilize future cash flows.
Business Overview
Bakkt is a digital asset platform specializing in crypto trading, custody, and loyalty redemption solutions. The company generates revenue primarily through crypto trading services (where Bakkt acts as principal), custody services (safekeeping digital assets for clients), and loyalty redemption (enabling clients to redeem points for digital assets or travel). Its business is split between crypto services and loyalty, with recent emphasis on expanding crypto offerings and recurring revenue streams, both domestically and internationally.
Performance Analysis
Bakkt’s Q3 results were defined by a pronounced increase in crypto trading take rate, rising to 80bps from a historical 30-40bps range, due to a revised revenue share agreement with Webull Pay amid a migration disruption. While gross crypto services revenue was pressured by lower industry volumes and Webull-related activity softness, the higher take rate partially offset the top-line decline, providing a margin lift in an otherwise challenging environment.
Loyalty net revenue grew modestly (2% YoY), driven by increased transaction revenue, though loyalty redemption transacting accounts declined 13% YoY, reflecting continued softness in hotel, rental car, and gift card activity. Operating expenses, excluding crypto costs and impairment, fell 26% YoY as cost actions and integration synergies flowed through. An impairment charge on loyalty intangibles signaled a strategic de-emphasis on this segment, with management lowering long-term growth expectations for loyalty.
- Take Rate Upswing: The 80bps crypto take rate is temporary, driven by a Webull Pay agreement adjustment, expected to normalize in 2024.
- Cost Discipline: Core operating expenses fell sharply, aided by lower compensation and ongoing integration of Apex Crypto.
- Revenue Mix Evolution: Subscription and custody revenues are expected to comprise a larger share, reducing exposure to trading volatility.
Despite lower crypto trading volumes and a sequential drop in assets under custody, Bakkt’s pivot to international markets and recurring revenue models is designed to buffer against ongoing US regulatory and volume headwinds.
Executive Commentary
"We've made substantial progress this past quarter, and we're building momentum for future growth and success. This was another consecutive quarter where we clearly demonstrated our ability to execute and leverage our industry-leading platform, made stronger from our acquisition of Apex Crypto to win new clients and deliver results for our existing ones."
Gavin Michael, Chief Executive Officer
"We are closely monitoring our stock price, and should we receive a delisting notice, we would take necessary action to remediate, such as a reverse stock split. We are committed to our shareholders and to remaining a public company. Ultimately, we believe the best way to allocate our capital to generate higher returns for our shareholders is to invest in the business, deliver on milestones, and accelerate our path to profitability."
Karen Alexander, Chief Financial Officer
Strategic Positioning
1. International Market Expansion
Bakkt is aggressively pursuing international markets—with crypto trading now live in Spain and several Latin American countries, and launches planned in the UK, EU, Australia, Singapore, and Hong Kong by year-end. This “land and expand” strategy targets regulatory clarity and sizable addressable markets, aiming to diversify revenue away from the volatile US environment.
2. Recurring Revenue and Subscription Model
Management is prioritizing the shift to subscription-based annual recurring revenue (ARR), particularly with international clients. These contracts, often with flat fees up to a trading tier, provide more predictable cash flows and reduce reliance on trading volumes. The company expects crypto ARR to increase 25-50% in 2024, with loyalty subscription revenue remaining stable.
3. Custody Platform Relaunch and Value-Added Services
Bakkt relaunched its custody platform with expanded coin support and value-added services such as segregated wallets, flexible policy engines, and disaster recovery, aiming to capture institutional and family office clients. Partnerships with Unchained and EDX Markets position Bakkt as a qualified custodian, leveraging regulatory trust and infrastructure strength.
4. Lightning Network and Payment Innovation
Investments in the Lightning Network and partnerships with IBEX and LightSpark are designed to unlock new use cases for cross-border remittance, B2B settlement, and instant deposits, moving crypto from speculative trading toward everyday utility and interoperability.
5. Cost Rationalization and Capital Allocation
Expense management remains a core focus, with headcount and SG&A reductions driving improved operating leverage. Management is clear that capital will be allocated to initiatives with a clear path to profitability, rather than loyalty or non-core ventures.
Key Considerations
This quarter marks a decisive shift in Bakkt’s business model and geographic focus, as management leans into international markets, recurring revenue, and institutional-grade custody to offset persistent US crypto headwinds and loyalty segment stagnation.
Key Considerations:
- International Revenue Ramp: Execution risk remains as Bakkt activates nine new markets, with international crypto revenue expected to comprise up to half of 2024’s crypto net revenue.
- Subscription Model Maturity: The transition to ARR is still nascent; real-world client stickiness and churn will determine its stabilizing effect on cash flow.
- Custody Differentiation: Success in institutional custody will depend on Bakkt’s ability to monetize value-added services and maintain pricing power in a competitive, fee-compressed environment.
- US Regulatory Uncertainty: Ongoing lack of clarity continues to freeze potential partnerships (e.g., with MasterCard), delaying meaningful US-based growth.
- Expense Control Sustainability: Further reductions are expected, but the ability to maintain service levels and innovation under a leaner cost structure is a key watchpoint.
Risks
Bakkt faces significant execution and market risks as it pivots internationally and shifts its revenue model. Delays in activating new international clients or lower-than-expected trading volumes could undermine revenue growth. US regulatory inertia may continue to limit domestic expansion and partnership activation, while fee compression in custody and slow adoption of Lightning Network services could cap upside. The company’s cash position is stable for now, but a capital raise may be needed if break-even is delayed or macro conditions worsen.
Forward Outlook
For Q4 2023, Bakkt guided to:
- International retail crypto clients beginning to contribute to revenue late in the quarter.
- Continued elevated crypto take rate through year-end as Webull Pay agreement persists.
For full-year 2023, management lowered guidance:
- Net loyalty and crypto revenue activity contribution: $57 to $60 million (down from prior $64 to $70 million).
- Free cash flow utilization: approximately $100 million.
2024 preliminary outlook calls for:
- Gross crypto revenues: $3.4 to $9.0 billion.
- Net loyalty revenues: ~$55 million.
- Free cash utilization: $43 to $63 million, with a path to breakeven on adjusted EBITDA at the high end of the range.
Management highlighted:
- International and institutional client ramp as primary revenue drivers.
- Subscription and custody revenue mix to increase, reducing volatility from trading volumes.
Takeaways
Bakkt’s Q3 underscores a business in transition, with near-term margin gains from a unique take rate event, but the real story is the strategic shift to international markets and recurring revenue. Investors should track activation pace, international client onboarding, and ARR growth to gauge if Bakkt can deliver on its breakeven and growth ambitions.
- Margin Inflection: The 80bps take rate is a temporary margin boost, not a structural change; normalization is expected next year.
- Strategic Realignment: Management is decisively reallocating resources away from US trading and loyalty toward international and recurring revenue, signaling a new growth thesis.
- Execution Watch: The true test will be Bakkt’s ability to rapidly activate new international clients and convert pipeline into sustainable, subscription-driven revenue.
Conclusion
Bakkt’s Q3 was less about headline revenue and more about the underlying pivot to international markets, cost discipline, and a new subscription-driven model. The business is positioned for a more stable, diversified revenue mix, but investors will need to watch closely for proof of execution and real-world ARR traction in 2024.
Industry Read-Through
Bakkt’s international push and pivot toward recurring revenue reflect a broader digital asset industry trend: US regulatory uncertainty is forcing platforms to seek growth in more favorable jurisdictions and to de-risk revenue models away from pure trading. Custody differentiation and value-added services are becoming table stakes as institutional clients demand security and compliance. Competitors and adjacent fintechs should note the rising importance of subscription models and global regulatory arbitrage. Partnerships with payment networks and TradFi remain on ice until US clarity emerges, suggesting that cross-sector crypto adoption will remain muted domestically in the near term.