Earnings Call Transcript
Bakkt, Inc. (BKKT)
Earnings Call Transcript - BKKT Q1 2023
Operator, Operator
Greetings, and welcome to the Bakkt First Quarter 2023 Earnings Conference Call. I would now like to turn the conference call over to our host, Ann DeVries, Head of Investor Relations at Bakkt. Please go ahead.
Ann DeVries, Head of Investor Relations
Good morning, and thank you for joining us for Bakkt's first quarter earnings call. Today's presentation, including the separate earnings call presentation that can be found on our Investor Relations website, will contain certain forward-looking statements. These statements are based on management's current expectations and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in such forward-looking statements. For a more complete discussion of forward-looking statements and the risks and uncertainties related to Bakkt's business, please refer to its filings with the Securities and Exchange Commission. 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 morning with the SEC. 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 received from our investors through the Say Technologies platform. After that, Gavin and Karen will be available to answer questions from the analyst community.
Gavin Michael, CEO
Thank you, Ann. Good morning, everyone, and thanks for joining. Our differentiated platform is positioned to win in this environment. Through the combination of our premier, secure custody solution and Apex Crypto's advanced trading capabilities, we are poised to be the crypto infrastructure provider of choice. In this current environment, clients are seeking a trusted partner, and our regulatory and compliance-first approach sets us apart. We separate the entities facilitating crypto trading and custody functions, and we've built a broad network that provides scale, reaching millions of users across client verticals, including the fast-growing fintech industry. Our priorities for this year will further strengthen our competitive moat. We're investing in our crypto capabilities, including custody. We're building upon this core capability to enhance and expand flexibility. We are seeing significant inbound interest for our custody offering. Our SOC 1 and SOC 2 certification, along with our separate trust entity structure and overall secure approach, are really setting us apart in those conversations. We're also investing in our crypto trading capabilities to expand into new international markets alongside our existing clients while strategically investing to enhance our capabilities. We remain committed to activating and broadening our already robust network. This means continuing to collaborate with existing clients to drive trading volumes and partnering with these same clients to collectively bring new platform capabilities to market. I also wanted to highlight our disciplined approach to strategically allocating capital. We are opportunistically deploying capital and remain highly focused on managing expenses. We apply rigorous analysis to inform capital allocation decisions across the organization, intentionally investing in the areas that have the most growth potential for our organization and being prudent across other aspects, leveraging the resources we already have in place. Moving to our acquisition of Apex Crypto, which we are really pleased to say closed on the first day of the second quarter. As we've shared, Apex Crypto is transformational for our crypto capabilities. The powerful combination of our secure custody and Apex's advanced trading capabilities holistically positions Bakkt to be the crypto infrastructure provider of choice for a broad spectrum of businesses. This acquisition provides immediate scale to our platform with more than 5.8 million crypto-enabled accounts, along with significant expansion of distribution opportunities to new markets and new customer segments. It fast-tracks our approach to bring new crypto capabilities to market and bolsters our path to profitability while adding a pool of extraordinarily talented employees across product, engineering, and operations to our team. We're focused on executing the integration seamlessly to ensure that we realize the full potential of the acquisition and capitalize on new opportunities, which includes making thoughtful decisions about our offerings. Following the closing of our acquisition, we conducted a detailed analysis of the coins against our listing policy and made the decision to delist a number of coins on the platform. Our clients and their customers' best interests are our core commitment, and our review process ensures that those interests are best served when we contemplate the most up-to-date regulatory environment. We are also working to expand into international markets through our client base, many of which have operations internationally today. The regions that we're most excited about and focused on in the near term are the UK, EU, and Southeast Asia. We'll continue to make investments in capabilities that have near-term growth opportunities while working with Apex Fintech Solutions as part of our commercial agreement to provide new services to their client base. Our acquisition significantly broadens our client reach to include fintechs, neobanks, trading platforms, and wealth managers, in addition to our clients in TradFi, travel, entertainment, and merchants. This group represents an attractive addressable market, and it's noteworthy that we're now serving the rapidly growing fintech industry. Fintech firms are much more agile. They have shorter activation time lines and serve attractive customer demographics, including younger, more tech-savvy individuals who are more likely to understand and trade crypto. With the Apex Crypto acquisition closed, we also have a big opportunity to deepen relationships with the current roster of clients. We're serving some amazing clients in Webull, Stash, Public.com, M1 Finance, and many more. We're actively exploring how we can collaborate more closely to elevate crypto trading capabilities and increase platform volumes. We know from our research that customers are looking to get their crypto from the companies they already know and trust for ease and simplification. Our latest crypto research study shows that consumers believe purchasing crypto through an investing or personal finance provider is more trustworthy than through a traditional crypto exchange. Consumers who primarily purchased crypto through a fintech provider have fewer concerns about safety and regulation than those who purchased crypto through a traditional exchange. Furthermore, we are seeing that clients we serve, like fintechs, are looking for new ways to increase how they serve their customers, creating more opportunities to drive engagement and power revenue growth through new offerings like crypto. The Apex platform is complementary to our offerings and accelerates our ability to offer advanced capabilities to our clients. Now, let's look more deeply at what we're able to offer now that the acquisition is complete. By partnering with several top liquidity providers, we're able to provide unparalleled liquidity and price quality. Customers receive deep, tight, and transparent pricing as well as redundant markets that enable 100% uptime. Clients integrate seamlessly with a rich set of APIs that allow them to be in production on the platform in about 45 days. We enable clients to offer investing in multiple asset classes from the same platform and a broad range of account types, along with instant fund settlement for customers with no prefunding required. The ability for customers to seamlessly invest and settle between multiple asset classes is a significant competitive advantage and provides a strong opportunity to deepen relationships and drive activity with these clients and their end users. Additionally, failover protection ensures customers can access our platform 24/7, just as the crypto markets operate all the time. A full spectrum of order types with broad execution capabilities including quantity order denominations, block trading and allocations, and multiple fee structures such as customizable trade fees, cost base services, gifting, and coin transfers with sending and receiving of Bitcoin, Litecoin, and Bitcoin cash, with more coming soon. We remain committed to the U.S. market, but we also recognize there are compelling growth opportunities internationally. We're already seeing demand from our clients to expand into new markets together. Based on those conversations, we see the greatest interest in the EU, the UK, and Southeast Asia. Not only are these markets appealing to our clients, but we've seen enhanced regulatory clarity. For example, the European Parliament's progress with MiCA, the UK introducing legislation to position itself as a hub for crypto, Hong Kong unveiling a proposed set of rules to regulate crypto activities, and South Korean lawmakers recently approving an initial review of a comprehensive crypto regulation bill. These regions also boast positive consumer sentiment towards crypto with impressive levels of transaction volumes and advancing consumer adoption. Now turning to Apex Crypto key performance indicators. This quarter, we're showing historical performance of the Apex Crypto platform, but going forward, we'll be reporting the company's combined key performance indicators. As you can see, the number of crypto-enabled accounts has continued to grow throughout the past several months even when there was volatility across the crypto market, reinforcing the attractiveness of the market segment served by Apex Crypto. When you look at the active accounts, we see the figures hold steady, but we expect to see these numbers increase as we see green shoots begin to emerge in crypto markets. Within the notional traded crypto volume, it's clear that this metric aligns with the pullback that we saw in the broader crypto market at the end of last year and the beginning of positive momentum in the first quarter. You can also see a positive trend reflected in the first quarter assets under custody, where a lift can be attributed to an increase in crypto prices with a specific emphasis on Bitcoin. Following the fallout from last year, as many direct crypto exchanges went out of business, we benefit from the flight to quality in the industry, with retail customers utilizing their existing relationships with fintechs and trading apps to buy and trade crypto. As the crypto winter turns to spring, we're seeing signs of life. While it takes time to translate this into tangible revenue, Apex Crypto continues to win new business as clients seek to do more to drive engagement and growth with their customers. We are poised to capture increasing market share, both domestically and internationally, as the market improves. Now, I'll hand it over to Karen to guide us through our expected outlook for Apex Crypto and the rest of our financial results.
Karen Alexander, CFO
Thank you, Gavin, and good morning, everyone. Let's turn to Apex Crypto's recent financial performance in 2022 and a preliminary look at the expected outlook for 2023. In accordance with GAAP reporting, we showed two line items here. Gross revenue captures all revenue associated with transactions, assets under management, and fees on a gross basis. The gross revenue presentation aligns with Apex Crypto's role as a principal in trade with customers. We also show crypto cost and execution clearing and brokerage fees associated with trading activity, which captures the cost of crypto, partner revenue share, and other fees. Crypto costs and fees will generally follow the same trend as gross revenue. Netting these two line items will provide the profit contribution from creating activity, which is a non-GAAP figure. Let's move on to the numbers. You can see here that 2022 was a story of two halves. The first half of the year was very strong, with customer transaction activity driving $2.2 billion in gross revenue. Then the crypto market turmoil stalled activity levels for the overall industry, and we saw second half gross revenue decline by over 50% to $899 million, consistent with the broader total crypto market volume as illustrated on the prior slide. We evaluated the 2023 expected gross revenue performance in light of where the markets ended in the second half of 2022. We saw Q1 2023 volume start to rebound from Q4 2022 levels, consistent with industry trends, and we expect similar volumes in the second quarter. Accordingly, our outlook for the first half of 2023 is similar to what we saw in the second half of 2022. We expect crypto market activity levels to recover as 2023 progresses, and our second half 2023 outlook reflects that. This outlook also includes an estimate of the impact of the coin delisting actions Gavin described earlier. Taking all of these factors into account, our gross revenue outlook for the full year is in the range of approximately $1.9 billion to $2.4 billion. We expect crypto costs to be proportionate with these revenue levels, which you can see on this slide. Apex Crypto provides a strong lift to our revenue base even in a tough environment for the crypto market. We're excited about the positive impact it will have on our path to profitability as the environment continues to recover. Moving to the next page. I will now walk you through the first quarter financial results. A quick reminder that since our acquisition of Apex Crypto closed on April 1, 2023, their results are not reflected in the financials I'm going to discuss. Apex Crypto will be included in our financial results beginning with second quarter 2023 earnings. Turning to Slide 12, we have our first quarter 2023 financial results. We had net revenue for the quarter of $13.0 million, which increased by $500,000 or 4% compared to the first quarter of 2022, primarily driven by transaction activity from loyalty redemptions. Operating expenses amounted to $58.4 million in the period, which is down $2.6 million or 4% year-over-year. The current quarter operating expense includes a nonrecurring restructuring expense of $4.3 million related to our actions earlier this year around headcount reduction. Excluding this nonrecurring restructuring expense, expenses were down 11% year-over-year, driving strong improvement in our operating margin as revenue growth, coupled with efficiencies in our expense base, improved margins. The net loss for the quarter was $44.9 million, resulting in a diluted loss of $0.17 per share on an average diluted share base of 81.9 million shares. The net loss allocated to the non-controlling interest in the operating company was $30.9 million, leaving a $14.0 million loss attributable to Bakkt Holdings, Inc., or a net loss of $0.17 per share at an average basic share count of 81.9 million shares. Our total share count as of March 31 was 265.9 million shares. ICE remains our largest shareholder with ownership at 66% of aggregate shares, which has remained relatively consistent with their shareholding as of December 31, 2022. On Slide 13, we have our EBITDA and adjusted EBITDA for the first quarter of 2023. Adjusted EBITDA reflects adjustments for non-cash and acquisition-related items that impacted the period. EBITDA and adjusted EBITDA for the quarter were losses of $43.4 million and $28.9 million, respectively. The adjusted EBITDA loss was unchanged versus the prior year period, primarily due to higher non-share-based and unit-based compensation costs related to higher headcount as we grew the company in the earlier part of the year, offset by lower marketing costs and professional service fees. On Slide 14, we show net revenue broken out between subscription and service revenue and transaction revenue. The total net revenue in the first quarter of 2023 was $13.0 million, which is up 4% year-over-year. Transaction revenues of $7.5 million increased 15% year-over-year. The first quarter typically experiences strong seasonality for travel bookings, which is reflected in the significant increase you saw in air travel volume. However, this was partially offset by lower hotel and car booking volumes, which have remained under pressure since the latter half of 2022. Subscription and service revenues of $5.5 million declined 8% year-over-year, primarily due to a reduction in 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 done on behalf of our clients. Subscription revenue increased slightly in the year-over-year period. Turning to Slide 15, we have total operating expense. Total expense for the first quarter of $58.4 million decreased 4% year-over-year. Excluding the $4.3 million salary restructuring expense we took this quarter, operating expenses were down 11% year-over-year. The year-over-year decline in operating expenses was primarily driven by a decrease in depreciation and amortization and SG&A expenses as marketing expenses declined. Total compensation expense of $34.1 million declined 3% compared to the first quarter of 2022 due to a decrease in non-cash compensation expense. Other expenses of $17.6 million increased 7% year-over-year and included the $4.3 million restructuring expense related to our recent actions around headcount reduction. Looking ahead, we expect to recognize $6 million to $7 million acquisition-related deal expenses in the second quarter of 2023. We expect our compensation expense to decline for the remaining quarters of this year as the impact from our recent headcount reductions become fully reflected in our financials starting in the second quarter. As a reminder, we expect the impact from the restructuring actions in 2023 to be $29 million in expense savings, and an incremental $7 million of expense savings is expected in 2024. On Slide 16, we have our key performance indicators. These KPIs reflect the breadth of how our capabilities are accessed across both partner and Bakkt experiences and across crypto and loyalty experiences. Transacting accounts across the Bakkt platform were 690,000. Digital asset conversions are a dollar-weighted measure and more directly aligned to revenue growth. Volume of $193 million was up 6% year-over-year. Activity levels reflect strong year-over-year growth in air travel volume, while hotel and car bookings were down. As a reminder, the first quarter is generally strong for travel volumes, so while volumes reflected this to some degree, the year-over-year growth rates in the first quarter were more muted than what we experienced in 2022 when we had a strong rebound coming out of the pandemic. A quick reminder that our fourth quarter is seasonally strong due to the holiday season, which is why there is a quarter-on-quarter decline in these metrics. We continue to see strong interest in our platform from consumers, with a 10% increase year-over-year in website visitors to our platform. Gavin shared with you earlier on the call the key performance indicators related to Apex Crypto that we expect to report going forward. As a result of our acquisition, starting next quarter, the KPIs that we report will change to reflect the metrics for the combined company. Turning to Slide 17, we have our condensed balance sheet. We ended the first quarter with $117.6 million in cash, cash equivalents, and available-for-sale securities. In the first quarter, we had several significant nonrecurring items, which resulted in cash usage of $121.8 million. These nonrecurring uses of cash included $67.2 million of cash moved into an escrow account for the closing of the Apex Crypto transaction, which consisted of a $55 million cash purchase price and $12 million for Apex Crypto's cash. First quarter cash usage also reflected $13.6 million of seasonally high payable settlements, which included $4.1 million of acquisition-related expenses. This is consistent with the fourth quarter being seasonally higher for redemption volume, driving settlements with suppliers and purchasing facilities. First quarter cash usage also included $4.3 million of cash severance costs related to the fourth quarter '22 and first quarter '23 restructuring, along with $2.8 million of cash that was moved into restricted cash as collateral for surety bonds. During the quarter, we also used $1.4 million of cash to settle withholding taxes on vested stock awards. I wanted to highlight that although we don't have an official stock buyback program, using cash to cover taxes actually reduces shareholder dilution from the shares that would have otherwise been released to the market. Excluding these items, our cash usage for the quarter was approximately $33 million. Regarding Apex Crypto, we will recognize the impact from their operations in our results starting in the second quarter. Excluding deal costs, we expect the inclusion of Apex Crypto's operations for the remainder of 2023 to be approximately free cash flow breakeven. I will now pass it back to Gavin for his closing remarks.
Gavin Michael, CEO
Thanks, Karen. Just a few final thoughts. We are really well positioned for improving crypto market conditions. We brought together a winning combination of industry-leading crypto custody solutions and advanced trading capabilities. Coupled with our regulatory and compliance-focused approach, our platform is truly differentiated in the current market, and our company is built for sustainable growth. Our key priorities for 2023 are highly focused on areas that will drive near-term results while building for a long-term future. This includes initiatives to significantly expand our network of clients both in the U.S. and internationally. We have a great opportunity to collaborate with our existing client base and meet their needs to expand internationally, especially in markets that are providing regulatory clarity. We're continuing to have active conversations with prospects across the board. Although there remains some ongoing caution regarding the regulatory environment in the U.S., we are seeing some pockets of green shoots. We continue to strategically allocate capital to further strengthen our business, and we'll evaluate growth opportunities while driving efficiencies in expense management and maintaining disciplined decisions around capital deployment. This is a pivotal moment for our growth. We are confident in our positioning, and as the environment improves, we are prepared to take off. Thank you for joining us today. I'll now turn it over to Ann to manage our Q&A.
Ann DeVries, Head of Investor Relations
Thanks, Gavin. Let's move on to questions from the investor community. Our first question comes from Rajeev S. who asks if it's possible for Bakkt to be acquired by a larger company. Gavin, can you address this question?
Gavin Michael, CEO
Yes. Happy to take the question. We've built a great platform with a really strong value proposition that's attractive to many companies. We're always monitoring the markets and evaluating opportunities that provide maximum value to our shareholders. We are approached about a lot of things leading to actions like our acquisition of Apex Crypto. That said, our team is really committed to building our business, and we're excited about the path ahead with Apex Crypto in the fall.
Ann DeVries, Head of Investor Relations
Next question is from someone who would like an update on our Mastercard partnership. Gavin, can you provide an update?
Gavin Michael, CEO
Yes. No trouble. We are continuing to work with Mastercard on our crypto rewards offering. We remain highly committed to this and making it successful. Unfortunately, we've seen that the regulatory environment in the U.S. around crypto has slowed down the activation of many of our TradFi partners. Much of the integration and go-to-market work with our TradFi partners has been completed, and many are now waiting for the right time to enter the market. Given these headwinds facing TradFi, the timing of our acquisition of Apex Crypto could not have happened better. Our ability to expand into fintech verticals and internationally through our existing client base is especially compelling right now.
Ann DeVries, Head of Investor Relations
Next question is from someone who asks, when will XRP be a part of your platform and why isn't it listed? Karen, can you answer this one?
Karen Alexander, CFO
Yes, I can take the question. Bakkt has a rigorous listing policy that considers several factors to determine if a coin is suitable and safe for listing through our partners and for their users. One of the primary factors is regulatory status. Bakkt is committed to complying with the relevant laws and regulations in the markets we serve, and there is currently limited guidance on the legal status of a number of coins. Given these factors, we are taking a prudent approach to the crypto tokens that we offer on our platform at this time. We will continue to monitor the regulatory environment as it evolves and will make potential changes to the coins that we list if and when appropriate.
Ann DeVries, Head of Investor Relations
Our next question is from someone who wants to know what are your tangible plans to drive revenue? Pay with crypto, Bitcoin custody internationally while we await regulatory clarity in the U.S.? Karen, can you jump in here?
Karen Alexander, CFO
Yes. First, I want to reiterate that we are absolutely committed to staying in the U.S. That said, as the question alludes to, there are jurisdictions around the world that have progressed further than the U.S. with regard to crypto regulation. It's the right time to pursue these markets given the clear regulatory environment and strong demand from our existing clients to offer our capabilities there. This is an incredible opportunity to bring our secure crypto capabilities, like crypto trading, into these new markets. While I won't provide specific timing on this right now, I will say that this is something we've focused on and are actively engaged in trying to launch before July. Just like we did in the U.S. when we built our business, we ensure that everything we do is secure, compliant, and well thought out. Our regulatory and compliance-first approach is part of our DNA and is at the forefront of decisions and actions we take as we look to expand.
Ann DeVries, Head of Investor Relations
Great. Our final question from the Say Platform is from someone asking if you are considering the dilutive impact of issuing an additional 26 million shares to employees. While I understand the business needs to compensate adequately, are you enforcing accountability for delivering tangible business impact? Karen, can you take this one?
Karen Alexander, CFO
Sure, happy to. First, I want to clarify that the pool of 26 million shares would cover equity grants over a three-year period. Our firm's equity compensation program is tied to performance goals for our overall company, as well as teams and individual employees. Our company's ability to execute against these concrete goals determines the available pool of equity awards for our employees. We will not pay out these equity awards if we do not deliver on metrics including revenue and cash expense targets, among others. Our compensation program is subject to our rigorous process and is governed by the Compensation Committee of the Board.
Ann DeVries, Head of Investor Relations
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, Operator
Our first question comes from Andrew Bond of Rosenblatt Securities.
Andrew Bond, Analyst
Gavin, Karen, and Ann. Just a couple on Apex. You've always discussed growth outside the U.S. as an opportunity down the road for Apex, but this now seems to be a greater priority and just understanding there is demand from customers. To what extent has the regulatory environment in the U.S. been a driver here as you're looking to grow in other countries? Speaking with other industry participants, it seems that the regulators in the current administration are doing their best to make it more difficult for brokers to allow crypto trading on their platform. Are you experiencing this post-acquisition and receiving more feedback like this from clients or potential clients in the U.S.?
Gavin Michael, CEO
Andrew, it's Gavin. Let me take that. When we talk about the change in focus with respect to accelerating growth internationally, it's coming for a couple of reasons. Firstly, we're getting strong demand from the existing client base to enter these markets as we see legislation in other markets that favors crypto, which provides us with an opportunity. We've spoken about the UK, the EU, and Southeast Asia. We're still committed to the U.S., seeing potential and growth there. But we aim to maximize our growth efficiently and effectively in the short term, focusing our near-term progress on engaging actively with the client base to move into these new markets quickly while being thoughtful. We've realized that post-Apex, we have a route into those markets with a low barrier to entry, combined with the fact that those markets are becoming more crypto-friendly while being led by our client base into those spaces.
Andrew Bond, Analyst
Okay, great. As a follow-up on custody, you spoke to a significant increase in inbound for your custody solution, particularly following the banking crisis. So, is this starting to translate to wins for the business? What's the timeline look like to convert more of this pipeline and interest?
Gavin Michael, CEO
Yes, we're certainly seeing continued traction in those discussions. We're differentiating ourselves through the way we run our custody solution. Our SOC 1 and SOC 2 certifications, along with a separate trust entity structure and overall secure approach, are really appealing to many crypto firms that want to store their assets with a provider like us. There's strong traction in those discussions, and we expect to see momentum through the second half of the year. As we've said, we continue to invest in our custody solution to broaden the basic structure and also expand into how custody operates. We're very excited about the custody space; it's been a core competency since our founding and continues to serve as an anchor product when we discuss starting this pathway with companies.
Operator, Operator
Our next question comes from the line of Trevor Williams of Jefferies.
Trevor Williams, Analyst
Gavin, maybe to start kind of higher level on the regulatory environment. I know you're mentioning this might be a bit of a change in tone around the international markets that have been providing more regulatory clarity. But focusing on the U.S., where do you see the state of the union? On the legislative side, is there anything you expect to progress at all through the rest of this year? There's been noise from enforcement actions recently. How do you see the regulatory environment today compared to 3 or 6 months ago here in the U.S.?
Gavin Michael, CEO
Trevor, we're pleased to see that Congress and federal regulators have certainly stepped up their attention on the crypto space. Following last year's high-profile failures, it's logical that a federal regulatory framework is needed to restore confidence for everyone—investors, consumers, and partners. We support enforcement actions against bad actors but believe a good, comprehensive regulatory framework should clearly outline how responsible operators can conduct their business in a compliant manner while also allowing for innovation to bring benefits to market safely and transparently. We're directly involved in conversations with relevant regulators and believe it's critical to get this right. I'm hopeful that through 2023, we'll see clarity in the space, especially with encouraging signals like stablecoin discussions. It’s essential we protect U.S. consumers while also ensuring innovation happens here and isn't driven offshore. We're looking at markets where regulatory clarity is evolving, which can serve as a template for discussions here.
Trevor Williams, Analyst
Okay, that's helpful. Karen, regarding your previous revenue outlook, I don't believe we heard anything incrementally on that for 2023. Should we still assume the $62 million to $72 million range for revenue? Also, is Apex expected to contribute $6 million to $8 million to full-year net revenue post-close, or is that the full-year number?
Karen Alexander, CFO
Happy to answer. In terms of guidance from last quarter, which excluded Apex Crypto, we did not provide an update. Typically, we will do our midyear update during our second quarter review, which will allow us to reassess and update guidance for a combined company basis now that we have closed on Apex. The $6 million to $8 million figures you're seeing are full-year contributions; we will start recognizing their revenues in the second quarter. For Q1 2023, the Apex net gross margin or net contribution was $1.3 million.
Operator, Operator
Our next question comes from the line of Peter Christiansen of Citigroup.
Peter Christiansen, Analyst
Just a couple on Apex. It looks like the net take rate has been shifting from mid- to high 20s last year to around low 30s, like 33, 34 basis points. Can you talk about what's driving this? Is it due to the underlying client mix or token mix activity-wise? And then I have a follow-up.
Karen Alexander, CFO
I'd be happy to take that. Every Apex client has an agreed-upon spread that we add to crypto purchases, so it varies client by client. Additionally, beyond just the cost of billing and purchasing crypto, we have what’s termed a correspondence fee, which is a revenue share with clients and again varies by client. So if you're seeing changes there, it's driven by client trading volume and their underlying customer mix.
Peter Christiansen, Analyst
That's helpful. Looking at the outlook for Apex, if they're expected to be free cash flow breakeven, assuming current crypto prices, if we were to test that scenario analysis maybe plus or minus 10% for crypto values, would that have a free cash flow impact of single millions of dollars? Is that the right way to think about it?
Karen Alexander, CFO
Gross revenue will certainly rise as crypto prices increase, but at the same time, the costs for the crypto we provide and the revenue share will also rise proportionally. I would consider the take rate to remain consistent, based on gross volume influenced by both crypto prices and the actual volume of coins being actively traded.
Operator, Operator
Our next question comes from the line of Jeff Cantwell of Wells Fargo.
Jeffrey Cantwell, Analyst
Congrats on closing Apex Crypto. I wanted to ask about your assumptions for the back half of this year for Apex Crypto gross revenue. What are the underlying assumptions that could drive it to improve sequentially versus the front half of the year? I'm trying to understand the drivers in terms of active accounts, assets under custody and crypto-enabled accounts, and so forth. What are your assumptions?
Karen Alexander, CFO
Certainly. Our revenue involves several factors, starting with access to accounts. We acquired over 5.5 million active accounts upon closing the deal. The percentage of those accounts actively trading, along with the transaction volume, are significant behavioral drivers we monitor. Even without picking up new client relationships, we monitor those activity levels over time to predict transaction behavior. Additionally, the Apex acquisition brought us a great pipeline of additional client opportunities—we're actively engaged with signed ones, some in the process of activation, while others are headed to the signing phase.
Jeffrey Cantwell, Analyst
Great. To follow up on Trevor's question about your prior guidance for the full year, while you aren't providing numbers today it sounds like you're still evaluating how the business will play out compared to three months ago. Could you provide any context on that?
Karen Alexander, CFO
Yes. When we talked last quarter, we mentioned a steady-state long history with our loyalty business providing a range. We also indicated potential from the crypto contribution pre-Apex. We're constantly assessing momentum in activating traditional finance clients. Currently, we continue to see softness among TradFi firms wanting to estimate due to uncertainty in the U.S. regulatory environment. We will pivot resources quickly to focus on opportunities with immediate expansion potential, now that Apex is part of the combined company.
Operator, Operator
Our next question comes from the line of John Roy of Water Tower Research.
John Roy, Analyst
Karen, there's been a lot of discussion about Apex. Have you thought about or can you provide insight on any new metrics or line items we might see when you start doing disclosures across the combined company? That would be helpful.
Karen Alexander, CFO
Great question, John. One thing to note is that we will be presenting gross revenue for Apex Crypto, which is different from the net revenue basis presented for our legacy loyalty business. This is due to accounting rules regarding how we report the crypto activity relative to fulfilling buy/sell orders. We are considered the principal in these transactions, so every gross dollar sold becomes revenue, and we must separately identify costs like cost of goods sold and correspondent fees to arrive at the net contribution. We look forward to presenting these figures on a combined basis, so investors can understand our reach in terms of customers and active clients every quarter. Key performance indicators, including the dollar value of transactions for both sides of our business, will be shown, along with the number of crypto-enabled accounts we're acquiring, as well as notional crypto volumes to show performance against industry trends.
John Roy, Analyst
Great. On the expense management side, you've taken several actions this quarter and previously. I wonder whether the cash burn of about $33 million this quarter is likely to continue? Can you provide any color there?
Karen Alexander, CFO
That's likely to decrease. You'll see a notable decline in our compensation expenses in the second quarter due to the headcount decisions made in March. The true impact will reflect in the compensation expenses from Q2 onward. Additionally, we'll have some one-time costs in the second quarter relating to Apex Crypto deal costs, but generally, Q1 will be the highest cash burn quarter moving forward, and we expect expenses to continue to decline.
Operator, Operator
As there are no additional questions waiting at this time, I'd like to hand the conference back over to the management team for closing remarks.
Ann DeVries, Head of Investor Relations
Thank you, everyone, for attending our earnings call this morning. We look forward to connecting with you again soon. Have a good day.
Operator, Operator
Ladies and gentlemen, this concludes our event. You may now disconnect your lines.