Earnings Call: Q1 2021

May 7, 2021

Good morning and welcome to this presentation for Arkane's Q1 report. This is actually our first quarterly report as a listed company. I'm really happy to be the one presenting this report to you. My name is Torbjorn Burgljenssen, and I'm the CEO of Arkane Crypto. Here in Arkane Crypto, we are working towards becoming the leading full service digital finance platform in Europe. And we have a particular focus on how cryptocurrencies can be leveraged to revolutionize payments, not only niche payments denominated in Bitcoin and other cryptocurrencies, but traditional payments that can benefit from leveraging cryptocurrencies as a technology and as a platform, and I will come back to that. During our Q1 this year and our Q1 as a listed entity, a lot has happened. At the start of the year, we listed Arkane through the reverse acquisition of what was then called Vertical Ventures. We switched the name to Arkane Crypto and started trading under the Arkane ticker on the 5th February. Shortly after, we increased our ownership in one of our portfolio companies, pure digital to a 37.5 percent ownership rate. We raised capital around €50,000,000 or almost €50,000,000 from a US hedge fund called the Sand Capital and KleinInvest. And we completed the acquisition of Taobank Crypto, a Norwegian cryptocurrency broker with a registration from the Norwegian FSA. After the end of the period, we have entered into 2 investment agreements: one to increase our ownership in LN Markets, a derivatives market, leveraging the Bitcoin Lightning Network for instant deposit and withdrawals of collateral. So we've increased our ownership there from 7% to 16%. And we've entered into a share purchase agreement to acquire all the outstanding shares or the remaining shares of Trio, a Swedish retail exchange regulated by the Swedish FSA. In this presentation, since it is our first quarterly presentation. I'll start with an introduction to Arkane for those of you who don't know the company too well from before. So there's some overlap with the presentation I did earlier this year. Then I'll talk about our sector, the main trends we're seeing and the main development during the Q1, before I look more thoroughly at our folio, our key figures for the quarter and key operational updates, before I round off with a summary and open up for questions. Feel free to ask questions on the platform during the presentation, and then we'll answer some of those after the presentation. So Arkane crypto, as the name tells, is a company operating in the cryptocurrency sector or cryptocurrency market. And this is one of, if not the fastest growing sectors in the world today. And we see that on all fronts. In this market, Arkane has taken a strong position. We've built an internationally recognized brand, working with some of the biggest industry players globally. We are offering services that are inherently scalable, targeting the main financial use cases of public blockchains and digital assets, payments, asset management, trading. We also offer leading market research. Strategically, Arkane has always had a focus on M and A, on building a portfolio and then executing on a buy and build strategy. That's a key reason why we listed the company, to increase our toolbox, and it's also a key reason how we got to where we are today. Because today we are a group of 8 different business units, but this is just the start. The cryptocurrency sector is very fragmented. There's a lot of interesting companies out there, but that are standing a little bit too alone and could benefit from being a part of a larger family of companies to benefit from synergies and returns to scale. And in that gain, Arkane intends to take a leading role and consolidates parts of the industry in Europe. If you look at our sector, we are looking at a young market, but a maturing market. We now see that there are large institutions coming in. This is no longer a market for the nerds or niche traders. This is a market for some of the biggest financial players in the world. And this is now reflected in trading volumes. Bitcoin trading alone has become a $1,000,000,000 market on a daily basis in terms of trading volumes. The technology is improving fast. Open source allows for free and permissionless innovation, which we see in countless iterations and improvements all across the board. And where there used to be a lot of regulatory uncertainty around how Bitcoin and other cryptocurrencies should be dealt with from a tax perspective, reporting perspective, Those uncertainties are now being removed. Regulations tailored to cryptocurrencies are being put in place. The 5th AML directive is live in Europe already regulating exchanges and new regulation is coming, really paving the way for traditional finance to be able to interact with this sector. If you look more specifically at the Q1, We've seen that, of course, as many have probably noticed, that prices of cryptocurrencies has exploded. Bitcoin doubled in value. Ether more than doubled, increased to 160%. And the trading volume, if you look at the real trading volume, so the trading volume for Bitcoin where we correct for wash trading all the misreporting has reached levels north of $10,000,000,000 on daily trading volumes. And this means that this market is now large enough to really attract the interest of some of the biggest financial players there is. And we've seen that by several large investment banks, announcing different ways in which they are planning or already engaging with the cryptocurrency space. Bonnie Mellon has said that they will roll out digital asset custody. Goldman Sachs has relaunched its trading desk development, which it shut down in 2018. And Morgan Stanley has started to offer wealthy clients access to Bitcoin funds. These banks are coming into the sector of course because their underlying clients, institutions and the corporations are piling into Bitcoin. Rothschilds, BlackRock, Harvard, Yale, Tesla, ARkit, companies and funds alike are taking positions in Bitcoin. I mean moving towards a world where having, say, a 1% to 2% part of a well diversified portfolio allocated to Bitcoin. It's about to become a rule of thumb. What is particularly interesting from the development the last quarter, fervor, is that in addition to all of the focus on Bitcoin as an asset for investment, we start to see more and more interest coming from what is more traditionally payment companies. Companies like PayPal, where you now can use cryptocurrency when you pay for your goods and services when you check out using PayPal. Venmo that will also support buying, storing and use of cryptocurrencies. And Mastercard that has announced that they will allow for settlement of cryptocurrencies over their network. This is all very interesting. This shows how traditional payment rails are now integrating with cryptocurrency payment rails to enable the spending of Bitcoin over the traditional rails. However, in Arkane, what we are looking at doing, and the future we find particularly interesting, It's the opposite, where we can take traditional fiat currencies and settle them and transfer them over the Bitcoin blockchain and over the Lightning Network, this scaling solution built for instantaneous Bitcoin transactions, where you can leverage the fact that Bitcoin is a digital bearer asset, not a claim on anybody, which means that you can buy Bitcoin, say, in Norway, Send that to the U. S. And have final settlement. And if you send that Bitcoin over lightning, you'll have final settlement within a second. I cannot send money from my Vipps account to my U. S. Friend using Cash App, but I can go to Kjopang, or if I were in Sweden, to the Trio, buy Bitcoin and send to my U. S. Friend using Cash App. And I can do that on a Sunday, and the money will come into this account and settle right away. This is truly transformational. And this is where we see the next frontier year for Bitcoin adoption. Right now, all of the focus is on the investment case, how digital scarcity at the time when the money printer or where central banks are printing money at a higher speed than ever before. All of the focus is there. But under the radar, we start to see more and more companies like Arkane seeing a future where we can leverage Bitcoin as a payment rail for traditionally kind of national currency denominated transfers. And that does not only give increased speed and reduced cost, it also gives interoperability, where different service providers CAN interact, where you get away from the closed networks that has been dominating in the fintech space, and where you can get the same level of interoperability that we take for granted for instance when we send email, where I can use ProtonMail, someone else can use Yahoo! And a third person can use Gmail, and we can still all send money to each other. In light of this, it's particularly interesting to see companies like Cash App with native support for Bitcoin. Companies like Revolut that for a long time allowed its users to hold Bitcoin as an investment, but are now actually opening up for depositing and withdrawing Bitcoin, meaning that Bitcoin can become a part of their payment rail. And it's likely that PayPal and others will follow, because the benefits are massive. And disrupting global payments is a really, really big opportunity. There are really big frictions, and especially if you look at the digital space and cross border. McKinsey estimates that around $2,000,000,000,000 a year are kind of paid in or becoming revenue and basically frictions that are paid to those who are processing payments. And these are frictions that Bitcoin can help alleviate. In a world that is ever more digital and ever more global and completely borderless, we need a settlement system and payment rail that has the same characteristics, that it's fully digital, that is open every day in the week, every week in the year, and that it's truly borderless digitally native. However, It's not likely that we'll switch to a world where everyone starts denominating their prices in Bitcoin, where everyone becomes a cryptocurrency expert, know how to store their own cryptocurrencies, take care of their passwords and one to hold massive amounts of cryptocurrency on their balance sheet. What we are working towards in Arkane It's rather to bridge the gap between the traditional world and these cryptocurrency payment rails by combining things like open banking and APIs so that users and companies can still rely on their local bank, but pairing that with efficient exchanging in and out of cryptocurrency, so that they can still get the benefit of using the new payment rails, but without having to deal with all the complexities, with having all the complexities pushed down into the back end. So this is really where we see that Arkane can add value, both for payments, but also more generally, making the world of cryptocurrencies more easily acceptable and accessible to traditional players. So how do we do that? Well, we've taken an ecosystem approach and they built a company spanning the value chain for financial services in the sector. If you look at other cryptocurrency companies, they are typically focused on one task and one task only. This is in stark contrast to what we see in traditional finance, where if you look at the bank, you'll typically find a one stop shop where you can have asset management services, market research, payments, trading, all under the same roof. The reason you find all these services under the same roof in traditional finance is because there are strong returns to scale. Strong synergies of having these different and complementary services in the same setup. And this is the approach we've taken in Arkane. And additional benefit of course by kind of building this portfolio is that we get diversification. We get a more robust exposure to the activity within the sector, because we have more baskets to have eggs in. And then looking at these different businesses, as I mentioned in my previous company presentation, All of them have different models. All of them have different markets they're going after. But what has been key when we've decided what parts of the value chain to go after has been the possibility of having a scalable business model. And if you look across our portfolio, almost all of the revenue will be generated either as a fee on a payment volume, a spread on a trading volume or a fee on a trading volume, which means that Once those volumes really start growing, 10x, 100x, 1000x, the revenue grows in line with that. What does not grow at the same rate, however, is the cost base. And this is the kind of the fundamental dynamics, which will allow us to have a super profitable growth if we are able to execute well on these business opportunities. So what is the status? Well, we're still a very young company. We're still at the starting, at the start of our journey. And we have kind of brought the products from ideas to live products and starting to see the first revenue streams. But we are also kind of at the very starting point and most of our growth is ahead of us. That said, we're already seeing strong growth percentage wise in our revenue. In Q1, we almost doubled our revenue compared to Q4 last year. We have made as much in Q1 this year as we did all of last year. Bear in mind also that this is revenue coming only from Arkane Research and Arkane Assets. Our portfolio companies, our associate companies, their revenue is not consolidated into our P and L. Kiaopan Crypto, which we acquired at the very end of the quarter, will be consolidated, but only from Q2 and onwards. And for Tesla coil, the payment software, we are still pre revenue. So the total revenue in Q1 was around a little more than SEK 2,000,000. And we had reported operating expenses of SEK 13,000,000 However, SEK 7,500,000 of this is one time costs link to different particular events and legal costs that will not be recurring going forward. We ended the quarter with around SEK 54,000,000 in cash and a reported reported result for the group with a loss of SEK 136,000,000. However, it's important when reading that number to bear in mind that the main reason for this reported loss has nothing to do with our actual operation, but rather how the reverse acquisition is accounted for. So due to accounting rules, and I will not go into the details of those, but it's kind of purely a technical accounting matter. We had to kind of book a cost of SEK 127,000,000 almost related to the listing. Aside from that, the result ended up with a loss of SEK 9,000,000 which was in line with what we expected and kind of really where we saw everything going. So if you then look more deeply at the different business units, Arkane Assets has had a great year last year, and especially now in Q1. We have reached more than SEK 170,000,000 or almost SEK 170,000,000 under management. That is still a small fund, but it is also just the very start of the growth rate for Arkane Assets. We've seen lots of interest for the fund. The fund has outperformed both Bitcoin and other cryptocurrency hedge funds as measured by the Eureka Fund Index. And to strengthen the team and accelerate the growth going forward, we have brought in 2 new people to the team who will really help fuel the growth of Arkane assets going forward. Looking at Arkane Research, they doubled or more than doubled their revenue, yes, from low levels, but also with working by working with some of the biggest and most recognized brands in the industry. Arkane Research, for instance, published a 70 page report on Bitcoin as collateral asset together with Bitstamp. It's working with LMAX both on consultancy agreement and producing industry reports and have entered into a partnership with BlockFi. Blokwei is an industry leader and what we will do with Arkane Research is to produce biweekly or as in twice per month, every second week, institutional reports that they will distribute to their underlying clients, securing a recurring revenue stream for Arkane Research. In addition to these, B2B sales from Arkane Research, we have our weekly market report that we are selling on a subscription basis. And that report has seen strong growth, and we expect that to accelerate going forward as we are now planning to spend more marketing resources on really driving that forward. Moving over to Arkane Technology, the business unit that develops Tesla coil. I'm now happy to announce that we actually have live external clients. We have an instance running for Kjellpang. So we have licensed the software to Kjellpang. And through Kjellpang, there are now several small web shop sponsor and a fundraising platforms that are using Tesla Coil to be able to accept Bitcoin over Lightning as a payment method, but they end up with Norwegian kroner at the end of the day. This is, of course, just the very start and almost like a pilot phase, where the intention is to use all of the learning points we are getting from these clients to really develop Tesla Coil into a Lightning as a Service software that we can sell B2B to many other cryptocurrency players lai Kaupang. And we see that during the quarter, the fees for doing on chain transactions in Bitcoin has really exploded and really validated the use case of Lightning, which circumvents or kind of avoids the high fees and inefficiencies of relying on traditional Bitcoin payments. Regarding some of the dialogues with the really large clients where we are seeing a lot of interest, there's been some challenges. For many of those, having a very smooth on ramp or off ramp, in other words, a way for their end clients to easily go straight from a bank counter credit card into Bitcoin, has been key to their willingness to kind of go with this. However, working with external on ramp companies during a market in complete fire has turned out to be a little bit challenging because this on ramp company has been focused very much on keeping up with the growing trading volumes rather than exploring payments. We expect, however, that as either these companies get accustomed to the increased volumes before the market cools down again, the interest to work on exploring payments will come back. But also we're not sitting here and waiting for that to happen. There's a reason why we are in the process of acquiring Trio. There's a reason why we acquired Kurbang in the 1st place, and there is a reason why we've implemented Tesla coil on behalf of or for Kaopang. That's because these exchanges, Kaopang and Trio, They are also on ramps. So we can build our own on ramp. Kjellpang is using Open Banking APIs today, and we are in the process of building deeper integration so that users on Kvaerpang actually will be able to spend Bitcoin over Lightning straight from their bank account. In addition, during the quarter, we have signed up 2 really strong new resources who will join the team. They have a background from, amongst other companies, Telenor, where they successfully developed and set up a multi tenant cloud based solution for telco distribution. We are going to replicate that setup for Tesla coil and build that integrated with Kaipan, so that we can have a setup where we have one instance running, but where we can serve many different clients. That's the multi tenant part. It means that we can have many different clients and brands running on the same instance and really make us more able to scale and push this product efficiently. Moving over to Kaipan and Trio. Kaipan, we went into an agreement to acquire last autumn and finalized that during the Q1. For JOR, we entered into an agreement to acquire all the outstanding shares just after the quarter. Both of these companies have seen strong growth in trading volume. Trio had a good trajectory all the way until the end of December last year, when their payment provider abruptly shut them down. That gave Trio.0 a setback. However, Trio is now back live up again, supporting both SEPA transfers and credit cards and are seeing the growth picking up. Kjellpang launched a new front end during this quarter and has really kind of started focusing more and more on OTC. Being a broker, Kalkang is in a unique position to offer deep liquidity to those who want to do larger trades, but also a wider variety of coins depending on what the different users want. The long term plan here is to merge the operation of the 2 companies, to bring them on the same platform, to really leverage the returns to scale, to leverage the fact that they are using some of the same service providers and continue to build the exchange service and really capture that market, but also doing this deep integration with Tesla Coil, really enabling the payment flow and using these regulated entities as the bridge between the fiat world and the cryptocurrency world. Moving over to some of our portfolio companies, Peel Markets, the company where we increased our ownership to 37.5% during the quarter, had some really great news they could publish as well. They announced that State Street, one of the largest banks in the world, are exploring trading on Pure. But not only that, that the subsidiary of the State Street, Konex, will actually be providing the technology to the platform and help building out the interbank market that Pure is building. During the quarter, Pure has seen a lot of interest from many different investment banks and are in far coming processes with several banks that are getting closer to either announce that they have signed LOIs with Pure or signed these LOIs. Going forward, expect the news flow of some of these banks going out, being public about engaging with Pure. And what is so unique about Pure is that it's the last missing piece in terms of trading infrastructure. We have platforms for retail, we have platforms for institutional traders, but we don't have platforms for banks. And where the banks now are coming into the sector, they are looking for infrastructure that is replicating the way they're trading FX, which is bilaterally, so that they can choose with whom they're willing to be matched, but also use credit lines on each other. And that is exactly what Pure is building and seeing the interest and seeing how the big banks are now finally kind of coming into this market, it makes me extremely optimistic on the future for PEO. On the other end of the spectrum, almost, we have LN Markets. This derivatives market that is using the Lightning Network for instant deposit and withdrawal of collateral, meaning that you can open a margin position straight from your phone, have it open and then make money or lose money and then have the collateral coming straight back to your phone instantly afterwards. We increased our ownership because the team has really executed well and the market opportunity here is enormous. Even though the product is still in many ways in an alpha stage and was only launched a little less than a year ago. They've seen really strong growth and reached €800,000,000 in turnover during Q1. And with the development, and the roadmap they have, we expect that this can really accelerate going forward. So if I take one large step back and look at where Arkane is headed. In the previous presentation, I talked about where we could potentially be in 2025. And there's nothing in the updates here that makes this less likely. If anything, I'm more optimistic that we'll be able to reach this than before. And what we're then looking at is a future where I can easily see that across the Group, we would process around SEK 55,000,000,000 a year in trading volume in relation to exchange volume. On that volume, we expect to be able to squeeze out somewhere between 1% and 2% in margins. You might say, hey, wait, hold on a second, isn't 1% and 2% really high? Doesn't exchange just only take half a percent. How can you take out so much? Well, actually here is where some of the beauty of working with payments come in. Because it's correct that exchanges are taking out only 0.5% as the kind of the market norm. But if you look at payments, the standard is typically 3%. And then if in addition you're doing a cross border payment, so there's FX, there's at least another percentage, which means that the competition we're up against for payment flows is typically 4%. The other reason why we expect that we will be able to take out a higher margin is because we are going after a broker model rather than a pure exchange. When you as a user trade on an exchange, You don't only pay the fee that the exchange is taking. You're also crossing the spread. And looking at some of the Nordic exchanges, We typically see spreads of 1.5% to 3%. This is a cost of the user, but not a return or a revenue for the exchange. As a broker, however, being the counterpart to the trade, you can capitalize on that spread and take out a higher margin without the user actually paying more. If you look at the Fund and kind of the assets and management we think will be achievable, I can easily see a future where We can reach, say, a SEK 10,000,000,000 size of the fund. And our Fund is unactively managed, which means that we can take out a 2% management fee, but hopefully also some success fee. So that will give the return from the Fund, in terms of revenue, somewhere between €200,000,000 €300,000,000 a year. So combine this, and we will be looking at a total of around or a little north of SEK 1,000,000,000 a year. And the big question is, of course, what type of margin do we expect to be able to take out from this? Well, here comes the beauty of having scalable business models, which is that we can easily do well north of 50% on this type of flow. These numbers might seem large compared to where we are. At the same time, if you look at industry peers, company after company has proof that in this sector it is possible to deliver on this type of explosive growth. And if you look at the traction and development we've seen during Q1, It's something that seems likely. I said that the mission for Arkane crypto is to become the leading full service digital finance platform in Europe. And these numbers would be nothing near that. The day we have that position, these numbers would be way higher. That means that what I'm kind of talking about here would merely be a stepping stone on a larger, longer trajectory. I don't know if we reach these goals in 2024 or 2026, but that is not too important. The real important part is that once we reach these, it will not be where we stop. And I also want to highlight, of course, that part of this will come from growing and scaling the businesses we have. But parts will also come from M and A and acquisitions and our intention to take a role consolidating parts of the industry going forward. So to summarize, Arkane has in only 3 years been able to build a portfolio, a group of companies spanning the value chain financial services. We've listed this company and we've brought several of the companies to a phase where we're really starting to see accelerating growth and we expect this type of growth to continue going forward. We have strengthened our balance sheet, so we have money to to really accelerate our development, and I'm extremely optimistic when looking towards the future. Thank you so much. And then we can open for questions. Yes. First question. What are the key competitors and eventually their market share in the intersection between crypto trading and payment provider. Is there any, like, main competitor out there? So there are different types of competitors. You have competitors that are operating in the stablecoin space, where USDC, Coinbase Stablecoin, is targeting payments and working on that. That's a competitor. You have a U. S. Company called Strike or the company is called Satyr, service is called Strike, which is one of the leading when it comes to combining the exchanging payment and Lightning. And there's a couple of others doing the same. I think, as I mentioned earlier, that all of these are competitors. But at the same time, this is a network market. We're at a very early stage, where the more success a company like Strike has, the more success we will have. You can think of it as a phone selling company. Yes, if you are producing Nokia, Samsung would be competitor view. But at the very start of the adoption of mobile phones or phones in general, the more success your competitor has, the more users there are out there that can receive phone calls. And it's the same here. The interoperability that Bitcoin creates as the payment trail. It's what also brings us away from the win and take all dynamic, which we have seen in the past, where some players have been able to corner the markets. And it gives us much more of the symbiotic and mutually beneficial competition, which we've seen for so many of the kind of Internet services. How is the cooperation with State Street going on implementing Kure Next with Pure is a success? Question mark. And how can this contribute to a positive cash flow? So I cannot share too much detail on the exact how the collaboration is going. In terms of the technology and implementation there, that's going well and according to plan. And test environment is up. And as I mentioned, there's also another bank that has signed an LOI and is engaged with Pure, but that has not been ready to announce that engagement yet. So test trades and kind of testing environment It's up and running. In terms of cash flow, Pure will generate cash flow once trading go live and take a fee on that trading volume. Into Arkane, the value would most likely accrue as appreciation as the value of Pure increases or in the future potentially dividends. Is the mining industry something that you or Arkane has considered to enter into? So mining is a very interesting business that we are constantly looking at. We're not in a hurry. We see that Norway has very good conditions for doing mining, cold climate, low electricity cost, a little bit challenging political climate. It's an industry we find interesting and are following closely, but not somewhere like not something we have kind of acted on yet. What about DeFi products? Will you be able to stake ITER in the Kaupang or TIO? At some point. So when it comes to staking, We will of course add support for that once that really becomes the market standard. However, there's a lot of other product development which we will focus on in the short term, making the user experience even smoother, adding volume functionality to Kaipan, increasing kind of the ease of use and reducing the frictions and the cost. And as payments is our main use case and as most of the traders are, for instance, interested in Bitcoin, staking is not high on the agenda as the market looks now. Yes, so we're on to exchanges. Is there any reason why Kaupang has better volume than TEO? I think that OTC is more limited due to the nature of opening hours. So the main reason is the setback that Trio kind of was hit by when their payment provider decided to stop serving cryptocurrency companies. And we had to go kind of dark for a period, find a new payment provider, a new bank ID provider and get back up again. That said, there's tremendous potential in the OTCE model. And although the opening hours are limited now, our intention is to build out, and we are in the process of doing that, and new back end, which will be fully automated and operational 20 fourseven with a wallet as well. So the OTC part is rather the fact that Kurbank can easily handle a large order of 10 bitcoin, 100 bitcoin and just those types of orders with large clients. Do Do you give any guidance on the rest of the 2021 year in terms of top and bottom line estimates? So we have not we are not giving any guidance as of now. Yes. Okay. Last question. What is your opinion on Dogecoin? So on the one hand, Dogecoin is a great example of the type of energy and enthusiasm you see in the sector. On the other hand, it's obvious that its pricing is ridiculous, that it is a pump caused by kind of social media taking over. And it's also an example of a project and a type of dynamic that makes it makes the whole sector look a bit more dogy for outsiders. I think what is really important is to differentiated development you see around Bitcoin from projects like Doge. And if you're an investor, you should be very careful with Doge. Thank you.