Earnings Call: Q1 2023

Jun 9, 2023

We're joined by a few of the crypto industry's leading figures. And of course, we're going to talk about our carriers report. But in particular, we're going to talk about a deep dive into the 33 Business Unit. With no further ado, let's turn to our first guest, Chairman, Michael Jackson. Welcome. Thank you. Well, it's been over a year since you joined our CarU Board. There's been a lot happening in the company. In the last reports, there were it's about the strategic merger, for example. Perhaps you want to start there? What happened? Yes, sure. At the back end of last year, as we announced, we started strategic merger discussions with a company called Kova. Kova is a much larger company than Arcario, we figured it might be an idea to merge together and see what could happen. We spoke to them for a long time and we got to the conclusion that we weren't going to do a strategic merger, we're going to do a corporation. And there's a couple of reasons for that. I think it's worth maybe going into some of the reasons for it for everybody. The thing is, if you put a little company together with a big company, it becomes a big company. And a big company can only grow as much as a big company can grow, maybe 2 or 3 times or something like that. And we feel that for the shareholders of Arcario, it was much better to be a small company that can grow much, much bigger. Right. And that was the main reason for that. But we continue with them. We have we build a great relationship through this process. They have mining activities in Norway. They have an asset management license in Europe, and they have a venture portfolio like us. So we've gone into a strategic cooperation with them, we're going to continue to work together, and hopefully, it'll bring great things. Yes. So good things came out of that anyway. So that's good to know. And since you joined Arcario and then formerly Arkane Crypto, you've changed the business model quite a lot. Do you want to go through some of that? Yes, sure. There are a few things we changed that we saw as the market develops. So the market has developed a lot over the last 5 years, but it's also developed a lot over the last couple of years. And the one thing we really can see is that the retail side of crypto token sales, crypto trading it's getting really, really difficult. There are very, very big players coming along. You see the Binance's, you see the crypto.com advertising on the Formula 1 and all of that kind of thing. I mean, a small local organization can't compete with that. We don't have the cost base. We don't have the organizational structure, and we don't have the customer base to be able to do that. So we pulled out of that. We sold Trio, came out of that market completely and focused over into the areas that we really know what we're doing in with our Institutional trading, you're going to hear about that later, I think. And then we'll talk about that and the venture portfolio. Okay. So I mean that's part of being a growing company, right? So things change. What are the key drivers now for the shareholders going forward, what is the business case like? How are you making money? Yes, sure. Well, what we've done is we went over all the operations in our carryover and we split it into 2. We we were doing operational activities, running businesses, 3 businesses, 4 businesses, and then we were running some investments. Running an investment is just totally different to running businesses, right? You have a small participation in existing business is one thing, but you don't do much with it day to day, whereas the operational businesses, you're in them 24 hours a day. So but what we also saw within the operational businesses was they weren't really connected with each other. We had a massive research organization, which is doing great reports and lots of customers. But these customers weren't really being fed over into our trading operations, for example. So by joining all of these together into one business unit, which focuses on 20 For our operations and servicing customers, we can have concentration of effort in one side and then concentration of effort on the other side. And I think that's going to give us hope it's going to give us a much better basis for the future. Okay. Well, thank you for that, Michael. We're going to come back to that later, and we're going to come back to you later. Now I want to welcome up CEO, Torbjorn Boljanssen. And Torbjorn, before we jump into our in the news. I know our viewers appreciate that. So this week, for example, SEC and the U. S. Biggest crypto exchanges Coinbase and Binance are heading head to head. There's some regulation issues. Do you want to let us in on what's going on from your perspective? Yes, sure. So it's actually been kind of shocking news in a way. The SEC, the financial regulator in the U. S, has decided to sue not only Binance, whichever on those kind of was a bit Regulatory flexible, to put it that way. Yes. But also Coinbase as not only the largest exchange for cryptocurrencies in the U. S, but also one of the largest globally. And what the SSE is suing these exchanges for is for having allowed the trading of tokens, which the SEC believes to be securities. So the conclusions from these court cases will be very important for the industry in the U. S. Because it will not only affect Coinbase, but it will help clarify where the kind of line between a security and a non security digital asset lies. That said, however, there's nothing about this kind of conflict that changes the fact that the industry is here to stay. What it changes, however, is the role that the U. S. Is playing because right now we're seeing the chaos in the U. S. Regulatory landscape. And while the U. S. Crypto industry used to be ahead, we now see a lot of the players in the U. S. Actually looking abroad So, locate to other jurisdictions, in particular Europe, where in stark contrast to the U. S, the European Union has joined forces and made a clear regulatory framework called the MICA regulatory framework, which was passed kind of earlier this year and will come into effect next year. So I anticipate a shift of gravity from the U. S. Over to Europe, at least for the Westend kind of digital asset industry. Okay. That's interesting. And another thing that I also know that our viewers are interested in is your take on the Bitcoin price. And in 2023, although it's been in some ways a very shaky market, it's been a really good market for Bitcoin. What's your take on that? There's actually been a great market. So first of all, 2022 was a crap market for the industry. And it really served as a cleansing year where a lot of bad practices, a lot of leverage, a lot of kind of businesses that didn't have what it needed to kind of live long term was kind of washed away. So we've seen a recovery from kind of the bottoms marked by the collapse of FTX. But in addition, we've seen bank runs and fragilities in the traditional financial system in the U. S, which has made relevant again the whole narrative of the digital asset industry as a hedge against the traditional financial system. Right. Because it's shown that the established system isn't fail safe. It isn't kind of given that it will serve clients well. And in that landscape, so to speak, cryptocurrencies and Bitcoin in particular have benefited double. 1, the fragilities in the banking system has led to a more relaxed monetary policy, which is kind of positive for Bitcoin and other digital assets as a risk on asset, but it also strengthened the hedge narrative. Right. Yes, there's so much going on in this market, which kind of benefits your research business too, since you need to be educated about this market to be able to do well, I guess. But we're going to come back to that later. But let's dive into our cardio and your Q1. We've heard from your Chairman a little bit, but do you want to give us your take on some of the major developments during the Q1? Yes. So I think Q1 really is the concluding quarter for Process that Mikael helped bring about when he came in a year ago. Right. So it's been great working together with Mikael because he has a lot of experience, much more than that I have, especially when it comes to running businesses. And what some of the things that he really helped us identify was kind of the conflicting focus between the Investment Management and Operational Businesses. And the outcome of that has now been fulfilled by having Arcario as the investment firm K33 as the operational firm. During the quarter, a lot of focus has been kind of on finalizing that process because this is not just a renaming exercise. This is a deep exercise in kind of optimizing our operations, which means that we've invested a lot in developing both our cargo and K33. I mean for K33 specifically we launched a new research application. We switched to business model to subscription model. We've built most of the components we need for the new markets application, which will come shortly. And a result of this has been that we've deliberately decided to not pursue short term sales. Right. Also we have decided to not focus on retail anymore. It's an overcrowded trade, which means that during the quarter rather than chasing volume from retail, we've taken a hit on our kind of top line and revenue, but to position the company for future growth in the quarters ahead. So you mentioned there's a dip in your revenue in Q1. Is that temporary? Yes. So I mean, kind of I shouldn't comment too much on like 1 quarter to 1 quarter because there's a lot of factors, market factors that impact that. But I very much believe that it's temporary in the sense that it's a cost of changing business and the benefit and the Cumulative effect of having done those changes, having done that restructuring will come in the quarters and years ahead. So yes, I don't believe that's lost. As for next quarter and 1 quarter at a time, that will be kind of influenced by market activity as well. Okay. Well, on that note, it seems like things are falling into place, but we also have your CFO joining us here to dive into the numbers. So thank you, Torbjorn, and let's welcome up Linnus. You're the CFO, fairly new. Can you elaborate a little bit on the financials during Q1 that and the dip in revenue that Torbjorn just mentioned? Absolutely, just like Torbjorn touched upon, the Q1 of 'twenty three was very much a focus where we had an internal focus. A lot of resources went into this merger, our legacy business units, onto the K33 platform. That happened to us, to some extent, at the cost of pursuing sales. And I mean, if we're looking at the trading results, we can see that the top line is actually dropping compared to the 4th quarter, revenues down SEK 6,500,000 mainly driven by K33 Markets seeing slightly lower trading volumes. Were also impacted in our Green Data unit. High electricity prices have restricted our ability to maximize mining at some points. That's also resulting in somewhat lower revenue. And we are in the process of changing our business model in the research unit going into a subscription based model that generates recurring revenues. But it takes even though we're off to a great start it does take some time to build up momentum in that business. But if we are looking further down the P and L, we're actually having some positive news. So gross margin is actually up over SEK 1,000,000 compared to the Q4. And that's us seeing the positive impact of higher Bitcoin prices that directly gives a positive impact in K33 assets and also gives us a better margin in the green data unit. And if we go further down the P and L and look at the EBITDA or maybe the adjusted EBITDA, which is a good approximation of our cash flow, that's actually improving SEK 3,000,000 compared to the 4th quarter. Not only are we seeing the higher gross margin, we're also realizing OpEx reductions of SEK 1,900,000. Just one last thing I'd like to comment on is that in the financial expenses, we have a SEK 13,500,000 charge related to FX, which is an internal charge and it's not associated with a cash out. Right. So this has been a quarter of restructuring then, I guess, for the business. But for shareholders and other interested parties looking at analyzing the company going forward. You mentioned a few key figures, gross margin, EBITDA and also, of course, total revenues. Are those the numbers to look at in the future as well? Yes. I think those are the good the best metrics to look at our business actually. Okay. Great. Well, thank you so much, Linus. And let's welcome back Torbjorn and Michael here again. Michael, there's been some major changes to the company here. And some of it is restructuring. And from what I understand, you are now Arcario is the main mother company, so to speak, of the whole company. And the 2 business units are K33, which is research and trading and so other and other things. And then there is the second part, do you want to talk a little bit about that? Yes, sure, absolutely. So K33 is the research and trading side of the business. Right. And the rest of the operations that we've had in Arcario until then, they fall under the Arcario side. So what we're going to do within Arcario going forward is become much more of build a company, a little bit what we've been doing already, but much more aggressively, going after opportunities that are in the market today. In a very weak market, you can say there's a lot of money has disappeared from crypto investing from the larger firms. Right. So we're going to take advantage of that. It'd be a nice place where people can come and grow their businesses at Arkaria. And we've seen some good deals already. So that's K33 then there is Green Data, which is the mining business, right? Sure. And we have Green Data. Green Data continues. The Bitcoin price, as know the Green Data business has been up and down over the last year, quite a lot. A year ago, it wasn't a great business at all because of the pricing, the electricity pricing and the low Coin price, operational cost. At the moment, with a very low electricity price, a better Bitcoin price, it's a good business. So we continue doing that and taking advantage of our Green operations in Northern Norway. Right. We've got other companies within that as well where we hold participations, hold shares. We have LN Markets on the Lightning Network on Bitcoin. Again, it's an area which has got a lot more interest in the last year. LN Market, the leading platform Trading derivative trading on the Bitcoin market. Right. And Pure Digital, interbank market For Bitcoin, again, as the larger banks come into the space, maybe because they need to fill the space that the Crypto companies who are getting attacked by the regulators are finding difficult. The big banks are going to want to come into a much more regulated and Proper way of doing things and Pure helps them do that. So we've already got activities there and we're going to be bringing on some more. Yes. And if I could just quickly add to that, What I find very interesting that L. M. Markets, they are specializing in enabling trading with kind of custody minimization. You keep the money with yourself until you open a position, then you wire in only your collateral and the second you close your position, you get the money back. And this really like benefit of this model has become very clear after the collapse of FTX, after it become very evident that there is big issues related to trusting the marketplace to also be your custodian. This is in many ways mirrored in what Pure Digital is doing, But of course, they are doing it with a kind of Tier 1 investment banks that have built up trustworthy custodians, but who lack the infrastructure for their end clients to trade and exchange risk leveraging those custodians. So what is making me extremely optimistic on especially those 2 kind of portfolio companies is to see that the maturation of the trading ecosystem very much speaks to the benefits of both business models. Okay. So Michael, I know that we have Torbjorn is going to do a little bit of a deep dive into K33 3 in a minute. But I just want to ask you one last question before that. Given this rapidly evolving landscape of Web3 and the digital assets. How just very quickly are you adopting your investment approach based on that? Yes. So Web 3 and digital assets is evolving. It's no longer Bitcoin and currency trading or token trading and these sort of things. We're seeing the growth of Web3 everywhere at the moment, every company in the world is getting involved with it. So we're able to use our experience we have, use our ecosystem that we have around us to get into these investment opportunities at an early stage with entrepreneurs who value working with a company who's been in this space for a really long understands it, appreciates it, understands the challenges and we believe can genuinely help them. Come on and we think that's going to give us a great position to get get some good investments in some great companies. Okay. Well, thank you, Mikael. And now I'm going to leave the stage to you, Torbjorn, because this is almost like a mini Capital Markets Day, but it's been so much happening within the company. So we figured it today, but it's been so much happening within the company. So we figured it might be good for you to just deliver kind of a short rundown of what K33, which is kind of the main company now within Arcario is doing. So the stage is yours. Yes. No, thank you so much. And I think, as you said, it's a good opportunity to be very clear with the shareholders exactly what K33 is. So to those who've followed us for a while, a lot of what I'm going to present now might be familiar. And some of you might have heard some of these points when I talked about the arcane platform. But that said, I think working with Michael, working through this process of strategically splitting the company, it's become not only clear, but crystal clear what we should focus on K33 and where we have a great market opportunity. So concretely, what we're building is a wealth management platform for digital assets. And the problem that we're solving is actually a very interesting one. High net worth individuals and family offices are starting to get an appetite for digital assets for investing in these investments or investment opportunities to learn about it, either directly or you're going to invest through fund structures. And a lot of these clients call their wealth manager, which can't help them. And this is well documented by large firms like Fidelity, Goldman Sachs, KPMG, BCG. So what happens is that they call their banker and their banker neither has the insight about the industry, nor the products. So in many cases, the bank will say, oh, couldn't you invest in something else? Some bankers, however, help their clients in a WhatsApp group. So they do it kind of off record. They send them to platforms like ours. So we have some clients that come in that way and we have some clients that come directly themselves because they know what they want. So the problem that these banks face is that they don't know how to to solve their clients' need and they don't know how to deal with the regulatory risks of moving into the digital asset space. The way that we are solving this is by building this wealth management platform for digital assets. We are currently serving the high net worth individuals and family offices directly. And the main reason for that is that it enables us to learn. Longer term, however, our goal is to work with the wealth managers, the private banks, the UBSs of the world out there to offer our services to them so that they can serve their clients. But we can't build for that directly because if we did that it would be putting ourselves in the back seat. A lot of these traditional financial players are not ready to offer these services yet. And I don't want to wait for the day when they're ready. Because if I wait, first of all, I don't know when we can go. 2nd of all, I wouldn't be ready. So by working directly with the end clients today, we can tailor our products, we can optimize them, we can figure out exactly what the underlying client wants and we can come together with some of these clients to the wealth manager and a large client can tell its wealth manager, please give me this in the joint portfolio that you guys are offering me. And a great value proposition here as well for the traditional players like the wealth managers is that we can add an extra revenue stream. We are not in competition with what they're doing. So by adding our services, we can have a profit split with these players so that they can make an extra revenue and they can help solve their clients' problems of getting access to digital assets through partnership with us. So what is our product mix? Well, one of our strongest products is research And I think that is absolutely key. It's an important brand builder. It gives us ton of visibility. We get quoted all over the traditional financial media on a weekly basis, Financial Times, Bloomberg, Reuters, Forbes, that is great for visibility. It's also great for credibility. It gives trust in our brand. But as importantly, when traditional investors are going to move into this space, they will need reliable market insights to base their decisions on. And if you look at what most others are producing in terms of crypto research is biased sales material for pumping a shitcoin. We're taking a much more honest approach. If we think a project is bad, even if we would make money on brokering that coin, we will tell our clients that we don't recommend this. The client is free to trade it if they want, but we will be honest. In addition to our research, we offered a brokerage solution. I mean right now in the process of launching a completely new trading stack and a tech stack for our brokerage. We are testing it in beta and anticipate full launch over the summer. This platform comes with a seamless digital onboarding, both for individuals and corporate clients and eventually also financial institutions. It comes with advanced access management controls so that an accountant can have a view right, so that an auditor can check that everything adds up without having access to the funds. These are functions that you would take for granted on a traditional trading platform, but is severely lacking on most of the crypto trading platforms out there. Complementing this, we're also offering asset management services. Currently, we have a hedge fund that's been running for several years systematically outperforming Bitcoin. We launched an index, a reference index and are in the process of developing and exploring different financial products on the back of that index. So why are we doing this? Well, of course, because we believe it's a great business. The question is, of course, how great is this business? Well, if we take one big step back and look at Wealth Management globally, the estimate is that it generates a revenue of a total of 1.5 $1,000,000,000,000 Then the question is, of course, how much of this is relevant for the digital asset wealth management? Well, if you take a conservative estimate and assumes that around 4% of private wealth AUM will be allocated digital assets in line with, say, gold, but way below a lot of the estimates from companies like APNG. We are looking at a global revenue potential of around SEK 100,000,000,000, assuming kind of management fees in line with what we see for other alternative asset classes. So we anticipate that over the few kind of next coming years, we're looking at a market which is going to go from probably around SEK 10,000,000,000 today to SEK 100,000,000,000 in annual revenue for Wealth Management, 4 digital assets. Our core focus is on the European market for regulatory reasons. And if you look at the kind of market share of Europe versus the rest of the world for Wealth Management in general, we will be looking at the SEK 25,000,000,000 market. And this is a market which we believe that we can help drive, help accelerate and take a meaningful chunk of in the years ahead. So where are we today? Well, we have around 35,000 users on the K33 platform that we distribute our content to that we can reach directly. We have around $100,000,000 that's been invested by clients, and we have around 100 high net worth clients. So all of these are kind of rookie numbers. These are tiny numbers. What is important, however, is that these are real numbers. These are real clients that are happy about the service, that referred a friend that I can sit down with and ask why was it that you referred your friend. That valuable insight from working with real clients get the real learning of what problems we're solving rather than just assuming is what puts us ahead of our competitors, gives us the insight that you don't have when you start from scratch. And in addition, we have the license. We have the banking relationships. We have the FX trading to optimize the execution of smaller currencies into dollar, which you have to do if you want to have a good execution of smaller currencies into dollar, which you have to do if you want to have a good execution of small currency all the way to cryptocurrency. They have multiple exchange cryptocurrency exchange setups. We have a hedge fund for several years of track history and we have a live index. If you were to replicate this, let's say you buy my kind of thesis that this is really a lucrative market and you would start today. It will take you from 1 half year to probably a full year to get the license. You wouldn't get any bank accounts before you have the license. So that would take you another half year to a full year to get the bank accounts. Well, now we have the bank accounts. Now you need to open the trading accounts another half year And then you don't have any relationship. You don't have any history. So you don't have any credit lines. Your trading is really inefficient. Another half year or a year. In other words, if you were to start from scratch today, you would be 2, 3 years behind us. So the fact that we in the past have been working with real estate clients, that we've been present in the industry for a long time really gives us a head start when we now focus all our efforts on the Private Wealth segment. And as I said we have a unique advantage in our research. It's globally recognized as one of the leading research brands for digital assets. And we are distributing through Bloomberg where we have a partnership. We are approved by Bloomberg. We were approved by Refinitiv, I mean in the Nordics distributing through Refinitiv, sorry, in front. All of this means that we can reach our clients where they are. And this head start really puts us ahead of our competitors because they don't even have the research. They don't have the brand. The journalists wouldn't call them because they don't have those relationships that we already have established. And these are all the brand building benefits, which comes in addition to building a base of solid recurring revenue, which brings me to the business model. Our business model is dead simple. There's no selling a coin, pumping, selling more, getting sued by the SEC. No, we take a simple pro subscription model for our research and access to the platform. We currently charge $50 a month. We're going to increase that to $100 a month as we improve and strengthen the research offering during the rest of the year. In addition, with charge a management fee on the investments that people hold with us and the special custody solutions that we offer in the range of 1% to 3% depending on the product, maybe down to 0.5% for some of the customer setups. And I may charge a trading fee. For the next year or so, I anticipate research to be the main driver because it's the fastest business line to grow. There's no compliance requirements. Longer term, however, I expect that our AUM based model will make up 50% to 75% of their revenue base. And then it will be a fifty-fifty between revenue generated from trading fees and from subscriptions. The good thing, however, which is important to notice is that both the AUM model and the subscription model generates recurring revenue, which will give us resilience in a very turbulent market. And then lastly, one of the things that makes me so excited is our unique positioning in this sector. If you look at other players targeting private wealth, they are doing so with a banking license. They are doing so as a competitor to the traditional Wealth Managers, which means that they are not a great partner. We on the other hand fully pursue the partnership model. We are not going to become a bank ourselves. We are not going to compete with the UBSs of the world out there. We're going to work with UBSs, enabling them to offer digital assets to their clients. I'm certain that every financial institution will have a digital asset offering in the future, but they'll not build it in house and they'll not be out competed by the new kind of crypto players, Which means that we'll have to have a partner. And when it comes to the private wealth segment of those partnerships, we are there to serve those. And on that front, we are actually fairly uniquely positioned. Thank you so much, Torbjorn. Let's welcome back Michael again too, for this last segment, we have received some questions to the Investor Relations inbox. And let's address those before we move on. I think we have time for a few questions at least. Let's see, we have a question here about how your competitors, Gubit and Safelo, have lost their bank payment options. How is that affecting Arcario perhaps? To be honest, I can take that one. Well, so first of all, when you say competitors, I'd say well, we're not really competitors. In the past, we were in the retail space as well and therefore more of a competitor. But for us, we completely left the retail space where So we see it more as a part of the same industry rather than competitors. And also related to that, what they've lost is kind of retail important payment rails like Swiss. Whereas for the clientele and client base we work with, we are not dependent on retail payment rails. Also we have strong banking relationships both in Norway, but also across Europe. So I'm not very worried about our position in that regard. It's more an issue for Sweden specifically, whereas Swedish FSR has been very harsh on the crypto industry, hampering some of the local players. Okay. Michael, we got another question here. It's kind of related, how is regulatory issues that Binance is having in the U. S. Affecting our cardio? Are you worried? I think not at all. I'm actually I won't say I'm excited about it or enthused about it, but within the U. S, they've got this terribly uncertain regulatory framework. All the different agencies are fighting with each other for jurisdiction. Nobody knows what they do. If you show up with your business, they don't know what They won't answer the door. They won't talk to you or anything like that. Europe is totally different. Thanks to the You can say the foresight. It's very rarely you say the foresight of the European Union politicians and things, but I'm going to congratulate them on this occasion. They put a framework together, which maps into the existing financial framework and allows you to operate in a very safe and regular way to protect the customers, of course, that's their the main goal. But it also gives us as a business the certainty of what we have to do. It also tells us what we must do, But we know that, and that's fine. And as long as we do it and we do a good job, we won't have any trouble at all. Okay. We got another question here that comes up a lot here in Sweden. How is energy prices affecting your mining operations? Yes, I can take it. Yes, so in our case, it affects it kind of very directly, very nicely just now because it's been several occasion recently with negative energy prices, where actually we've been paid for using energy. But we have decided to not hedge our energy because the cost of that in our kind of calculations hasn't outweighed the benefits or hasn't kind of justified the benefits. So energy is the main kind of operational cost for mining. So in Q1, when energy prices were elevated, our margins or our kind of revenue dropped a bit. We ran the machines in the low power mode with higher energy efficiency, but then lower top line. Now when energy prices are very low and we expect them to remain low at least through the summer, we benefit substantially from that. Okay. We have one last question here that we have time for today. I guess this is someone who has also read the news coming out of the U. S. And the regulatory issues there. Are you marketing our Cario shares actively towards U. S. Investors looking to get into this space because of the mess over there. So we're not marketing the shares directly over there. The shares are traded On the Stockholm Exchange as well, you know. So that's fine. But we do see a lot of interest from the U. S. Into our Cairo, into our research. Most of our or a large percentage of our readers are from the United States. So the interest in us and our products is definitely there. The business itself, the K33 business, as Torbjorn explained, is very much European focused for the next stage at least. But our investment business will take opportunities from everywhere. All right. Thank you. Well, that's really all the time we have today. This has very clarifying, at least to me. Thank you, Michael. Thank you, Torbjorn. Thank you, Linus, for being here and thank you all for watching. We'll see you next time.