Marqeta, Inc. (MQ) Earnings Call Transcript & Summary

Welcome back, everybody. We are very pleased today to have Mike Milotich, CFO of Marqeta joining us today. Mike, so glad you could be here. Thank you so much.

Thank you so much for having me.

Given you are somewhat new to the company, I'm sure pretty much everybody in the audience is familiar with you in another call from another context. Tell us about the process that you went through to decide to move over to Marqeta? What did you see, that sort of attracted you to the seat and to the opportunity?

Yes. So I would say -- I mean the first thing is even, I guess, before I have even been engaged with the company, just being in around payments for about the last 15 years, the number of times in the last, say, 5 years that I've heard former colleagues of mine who really know a lot about payments speak very positively about the company, like that's happened many, many times. So I think the people who really know payments really appreciate what the value in some of the capabilities that Marqeta is providing customers. So I think that was my first kind of impression going in. I also think that although the company has accomplished a lot, there's still just so much huge opportunity ahead of it because I think commerce is evolving much more rapidly post pandemic in terms of the shift to digital and new times of commerce experiences. And we're really in the early innings of that, in my view, and Marqeta is at the forefront of a lot of that, really behind a lot of those new commerce use cases. I also think the other trend that's very early and it's, I guess, tenure is this consumers being more and more comfortable getting financial services from nonfinancial institutions, sort of the -- this entire new banking phenomenon and just, I guess, fintech in general. And again, this is an area where Marqeta has big advantages and serves a lot of those players. And then -- so there are 2 areas where I think Marqeta is most strong, I think, are in the very early stages in terms of their development and their maturation in terms of the way the business could evolve. And I also believe that the FIs are not going to just stand still either, right? So as the innovation continues to happen, they're going to start to react and want to do innovative new things, which also should benefit Marqeta. So those are really the things that I saw going in. I obviously met a lot of people in the process that I was very impressed with. And now that I've been in the seat about 3 months, I would say what I'm most impressed by is the people in the organization, a lot of very experienced, skilled people, very motivated and energized by the opportunities that are ahead of the company. So that's been great. And obviously, just starting to work from the inside on all the solutions for customers that we're coming up with to help grow the business.

That's terrific. It feels like Marqeta is sort of in the right place at the right time with the right people, the right solutions to empower a lot of the broader kind of fintech ecosystem. And you guys have developed some important new verticals, you have some historical verticals that are obviously, you do quite well in as well. But I wanted to talk about some of the new ones. So expense management is the new one. Can you talk about the -- what's going on in that vertical for you guys? Maybe comment on the pipeline? What are you helping your customers with expense management tool?

Yes. I mean it's a very rapidly growing vertical for us. It's now over 10% of our TPV. The volume tripled year-over-year in the most recent quarter. And we have 7 customers who are growing at least 100% in this space on a year-over-year basis. So it's incredibly high growth area for us. And if you kind of step back and again, think about it from our customers' perspective, what are they trying to solve, right? They want real-time spending where they have a lot of control. So they can allow the flexibility for spending that's dynamic, but they have a lot of control. They want the data to be easily tracked and reconciled. They want to manage fraud, and they want it to be easy for their employees who are either making purchases or traveling whatever the use case may be. And so what we're providing is our platform is sort of so flexible and configurable, it allows for a lot of different use cases so -- that we're delivering for each of these expense management customers. So if you think about we have multiple card types. So we are provisioning physical cards for that employees can carry when they travel, for example, like a very typical corporate card that you would have received in the past from an employer. We'll also do a virtual card that we can give you, Ramsey, just for your next trip. So that card will only be valid for the next 3 days for your specific trip in that way, again, it's managed much more tightly. And then we can also do a onetime card -- a onetime virtual card that's for a very specific purchase. So we're delivering all those types of, I guess, card solutions depending on the various use case that they want to provide their customers. And then on top of that, we provide a lot of controls for them to manage. So we use our JIT technology, right, to allow the easy funding of that credential to make it useful. And then be able to be very specific in terms of what MCCs you wanted to be leveraged in, geolocation, so where in the world you want it to be available, right? You can have caps in terms of the amount that can be spent. So you can put a lot of parameters in place for each card and it's something that a nontechnical person can do. So there's a very easy interface that again, gives these customers a lot of control without having inconfigurability, if you will, without having to engage their tech team. And then, of course, all of this allows you to just manage fraud a lot better. And so those are all the different ways we're helping our customers. And then what's fun about it for us is that we don't have to come up with all the good ideas, like a great example that I think is really interesting is we have a customer who's using -- creating -- pre-issuing a lot of virtual cards to try to, I guess, be successful when a company who has like scarcity of their product does a drop. So like think of this as a company who's releasing a new exclusive shoe or a concert that from a very big band, that's going to be very hard to get those tickets. There are businesses that are using our virtual card technology to try to be very effective by getting a lot of those while -- when there's a very small window to get them and then provide it to their customers. So it's just like an example where people can use our platform in ways that we sort of never intended, but it meets their needs.

Interesting. Interesting. Mike, a similar question on crypto. That's another one of these verticals that we had a crypto and blockchain conference 2, 3 months ago and pretty much every company, organization at the conference was issuing -- was talking about issuing a card. And of course, I thought of you guys. So talk about crypto as a vertical for you? I mean how is that, again, pipeline longer-term opportunity, what are you providing there?

Yes. So it's still very early days for us. We -- I mean we do have revenue sort of in the millions of dollars each quarter now versus last year, it would have been essentially nothing. So we have made good progress, but it's still relatively small. The value that we bring is another -- sort of another use case for our Just-in-Time funding or our JIT funding. So what we do, you combine JIT with our open APIs and essentially, it allows these card providers to essentially allow that card to be transacting in fiat, at the point of sale or online from their crypto wallet, but it's really drawing down on a crypto balance. And all that can be done in real time with our JIT platform. So it's -- that's really the core feature that we enable. But then we're also enabling interesting like reward programs that are tied to cryptocurrency as well with our platform. And we're doing this for people like Coinbase and Bakkt and Fold and Shakepay. So we have a number of customers and they're using this use case. I think the longer opportunity that we see is kind of twofold. One is that a lot of these crypto providers may try to engage with consumers more broadly on their store balances. So now don't necessarily just spend your -- quite your cryptocurrency, but you -- from -- in your trading account, you have -- you just maybe sold some stock or something else and you have a balance, we can provide sort of neobanking-like services to you. So that allow you to use that balance in other ways with your card product. So we think they're going to try to expand more broadly and engage with their consumers. So you don't have to be just spending crypto, you could also just be have fiat balance and you want to spend in fiat and earn a crypto reward as an example. The second sort of piece of this also is that the customer set might also become a lot more broader. So as crypto becomes more and more mainstream, assuming you believe it's going to continue to have more and more utility and be used in new ways, then it won't just be crypto companies who are going to be wanting to do this, but it might be more traditional issuers. And again, we have that experience and the flexibility to support those use cases as it becomes more mainstream and more and more customers want sort of -- some crypto component to a card offering.

I see, I see. Also on the product side, give us an update on the credit product. That's something that's come up recently. Talk about the credit product, what's going on there?

Yes. So we're making really good progress. We're launching several new programs this year. So we've been developing this, and now we have programs going live, which is really exciting. So actually, even just I think earlier today, the Greenlight announced a new credit card offering as part of this. So this is a credit card designed to help parents save for their kids' college and for the family's future, essentially, so the rewards are geared toward saving for the benefit of your kids' future. And it's a brand-new credit card that's launched, and they're using Marqeta in partnership with our -- with FNBO to provide that. And so this is just again, a great example of they're using our kind of API-based credit stock and all our -- and our partnership with FNBO which brings a lot of credit program management capabilities, and we put that together so that Greenlight can come up with this very innovative value proposition. So I think for -- this is just an example of the kinds of things that are going to be coming to market this year. So I think we've been talking a lot about credit in the past in terms of something we're working on. And I think what we're excited about in 2022 is some of those value propositions and customers are actually going to be going to market and you're going to be seeing cards out there that we're powering as we continue to also just enhance our platform in new ways.

And another thing I wanted to ask you to help us understand and maybe clarify a little bit is something that came up on the earnings call, I believe. Can you talk about the Managed by and Powered by business? Explain the difference between those 2 things.

Yes. So -- sure. And this is something I think we've been wanting to help investors understand a lot more of the different parts of our business. So I think Managed by Marqeta, as we call, is when -- this represents the vast majority of our business, and I think this is what most people associate with Marqeta. So this is where our customer relies on us to manage all the complexity associated with the card program. So we manage the relationship with the network and making sure we're compliant with the rules. We have the bank partnership. We help them with navigating the sort of legal requirements, regulatory requirements, we will help provision the cards for them. So think of it as we really bring all the capabilities you would need to have a card program. And they rely on our expertise to do that, and they just focus on what's my value proposition, what's my user experience, right, and sort of leave all the aspects of actually running a card program to us. So it really allows our customers to leverage our deep payments experience because, as you know, it's not the simplest space, right? There's -- it's quite complex in terms of all the rules and regulations that you have to manage. And so it really takes that burden off of them and we pick that up. And it allows for lots of new things, like one of the things that was mentioned on the earnings call is a buy now, pay later customer of ours wanted to launch a new virtual card essentially that could be used for multiple purchases at multiple merchants. But in like in a specific window of time, and that's something that we'd actually be -- it's quite complex to launch that in a bespoke way, but because we already manage their program and do another card offering for them, we're able to turn that around very quickly and help them get that into market. And so that's really the big benefit for our customers when we do that. Our Powered by business is then where we only have a processing relationship. So I would say this is -- our Powered by business is more what you would associate with most other issuer processors. So the customer is managing the network, they're managing the bank relationship, they are doing all the chargeback processing, they're really owning the program, and we're purely providing issuer processing. So -- and some customers want this approach, particularly as if we make progress and make more progress expanding with large FIs, for example, this would be sort of the natural way they would leverage our platform. And so this business has been growing really fast for us. I mentioned on the call, we've been growing -- our revenue has been growing well over 100% year-over-year for many quarters. So this is becoming -- starting to become a bigger part of our business, a little over 10% of our volume. And what's important about it, too, in terms of how it manifests itself in our P&L is it's going to have a lower take rate as we're providing less, right? So our price, if you will, in terms of revenue, will be lower because the number of services we're delivering is much more narrow. And we're not bringing a lot of those other capabilities we do in a Managed by solution. But at the same time, because we're not managing the bank or the networks, we don't have a lot of those costs either. So our gross profit is very similar to other aspects of our business on a bps sort of basis as a percentage of volume. The gross profit is very similar because almost all that revenue essentially drops to gross profit. And so we think it's great that we have both of these solutions depending on where the customer is in terms of their maturity, their adoption, how much they want to take on. We can offer either solution to best meet their needs. And it works for us, investment-wise and P&L-wise, because our marginal cost tend to be pretty low as a platform business. And so we can service both use cases quite well.

I see. That's super clear. You mentioned banks, and that's in the Marqeta bull case, eventually, as time passes, you guys will be able to bring your value proposition to larger FIs. You obviously have your foot, your toe in the door, at least, with a couple of them already. What is -- how do you think of that, especially someone who comes from not the banking industry, obviously, but might have a viewpoint there, like how easy will that be to accomplish? How should we think about it in terms of timing?

Yes. I mean I think calling in our foot in the door is absolutely the way we think about it. I think the big win we've had with some of our, I guess, large FI partners, at this point, is that they done the work to connect to the platform. And for a very specific sort of small use case, which may not generate a lot of revenue in and of itself, but just getting the platform connectivity is a huge step to get that foot in the door as you said. Because once the platform work has been done, now they can consider our platform when they want to do something innovative. So what we -- we don't think how our business is going to evolve with the FIs is that they're not just going to 1 day just cut over a bunch of business like a traditional migration might happen. We think it's going to be more happen in the area of they want to do an innovative product, right? They've seen how maybe we've done it for other more disruptors, and that's how they know there's demand from consumers for that capability, and they are looking for someone to provide that. And the -- their legacy provider who does most of their core business today doesn't have that capability or it's very difficult for them to configure the platform to make it happen. And so that's kind of how we believe we'll be successful with large FIs. So we'll start with something innovative and we'll support that. And then the next new product they want to do also be innovative and will be more modern and we'll help them with that. And then eventually, we start growing our business from within. And so it's -- a lot of it is the value of time-to-market and the configurability of our platform also really lowers the total cost of ownership, it's on that -- for the large FIs, they'll tell you if they want to launch a new product, given the way the technology works today, it's incredibly expensive for them to stand it up. It takes a lot of investment. And so what we bring is this very high API-based, cloud-based, highly configurable platform that allows them to be much more nimble and at a lower sort of upfront cost to get the program launched. And so that's really our strategy is to gain their trust, prove that we can help and will sort of chip away slowly and slowly and then eventually, hopefully, thinking out many years at tips, a little bit and then we could start having the majority of their business would obviously be the outcome we're looking for.

Interesting. So is their product needs to evolve, you're better positioned to basically help them with innovation and help them with more sophisticated value propositions, and then that's where the foot in the door becomes a leg and then maybe more?

That's right. That's right.

I want to ask you about competition. It's a question that I get sometimes from investors. How should we think about the moat? How should we think about what -- let me reposition the question. What differentiates you from others in the marketplace that are potentially trying to offer similar solutions?

Yes. I mean I would say I think there are kind of 2 types of competitors, right? They're sort of the established legacy players and then there's the more modern companies who are maybe we, I guess, invented modern card issuing, we were the first player and now there's others who see the opportunity that we see. So I would say the legacy providers, for the most part, we don't really see us competing head-to-head, right? They are customer base and what they do is quite different. As we just talked about with large FIs, we hope to kind of pick up pieces of business as we go, but we typically are not competing with them directly. The modern players like Stripe, Radian, Hino, and Lithic. These companies are more modern in architecture. I think that -- the ways that we are successful or differentiate ourselves is on a couple of fronts. So I think our solution from a developer perspective is quite simple, right? We have very well-defined APIs that break down all the ISO messages. We have translated the complex aspect of payments into very intuitive kind of developer-friendly user experiences with really good documentation and toolboxes of things that makes it easy for them to launch new programs. So that's one. We bring this very valuable bundle, as we talked about earlier in our Managed by where we'll bring it -- as a program manager, we'll bring the bank and the network and all the tools that you need to manage the card program. So we make it sort of easy to bring that full solution both for if you want to have a commercial program, you want to have a consumer program, we can support all those different use cases. Well, our platform is highly configurable. So as I've mentioned a few times, so just that ability to serve multiple use cases and make it very easy for our clients to be adjusting on the fly. So this just really improves time-to-market. So we -- like another example in the BNPL space is we had the BNPL customer, not this past holiday season, but the year before, so almost 18 months ago now. We wanted to stand up a very large retailer and it was getting close to the holidays. And as you know, no one really wants to touch their tech and retail close to holidays. And we got that enabled for them to accept this BNPL player within a week -- in a week's time. Like so just that ability to make alterations and get things up and running quite quickly is a huge area of, I guess, a differentiation for us. And then the last 2, I would say, are particularly important. We are already operating at scale. So the fact that last year, we did well over $100 billion of volume and we've said on the call, for example, the number of customers we have that now do more than $500 million of TPV in a quarter just doubled this year versus the first quarter last year. So customers are looking at if I'm going to -- I'm going to be very successful. And of course, hey, they all think they will be, then this is a platform that can handle my ramp and has already proven that they operate at scale because our volumes grew more than 4x in the 2 years of the pandemic, right? And we were able to manage that well. So that scale we bring is unique and differentiated in the space because we were first, we have that. And then the second thing that comes with being first is all the experience that we bring. We've been at this for 12 years. So -- and that really can't be underestimated. So we've learned what works, what doesn't work, right? We've learned from mistakes that we've made in the past. And we've built a variety of things for customers that they -- that other people can then leverage. So all that experience that we bring is quite valuable to our customers. And so those are the ways we tend to win against the more modern platforms.

And how sticky -- how difficult is a migration? At the end of the day, when I look at the legacy kind of card-issuing processing business around banks. There's not a lot of customers changing hands very frequently because it's a heavy lift. It's card reissuance potentially. There's a lot of integration work like that. Is it fair to say that once you're -- you have a customer, it's a pretty -- there's somewhat of a moat from just the complexity of the integration and the depth of the integrations?

That's right. I mean it's just -- switching is very disruptive. So it's -- so you're right, it's very sticky. And it's -- I mean we have fast-growing customers, but one of the reasons why like last year or -- our net revenue retention in 2021 was 175% is because not only are they fast-growing, but they really keep their business with us, and that's one of the ways we accomplished that. And the disruption comes from, if you have to change, you have to reissue physical cards. So if you have any kind of physical cards in circulation, that's pretty disruptive. You might have to hit a different bank. And then you might have to do a new deal with card networks and everything else that comes along with it. So it's quite disruptive. The more services we provide, obviously, the stickier it is. So we've provided a lot of other risk services and maybe we help them get there all their card and card fulfillment and everything, then that also makes it pretty sticky. And it's not that it can't be overcome, right? Like we have flipped business, for example, Divvy, is a very large, fast-growing customer for us, obviously now as part of a larger entity. But we didn't have that business initially, but they came to us because their previous provider wasn't able to support all the things they had in their product road map and the things they wanted. And so they did make the change, and we were able to win that business. So I'd say just like a lot of the payment space, the changes are relatively uncommon because of the stickiness, but it does happen if you don't meet the needs of your customer.

Fair enough. I want to ask you a couple of questions about your largest customer block. One question that I get from investors sometimes is the degree to which you may or may not benefit from Square, Afterpay deal synergies. It seems like you've got -- and I'm not asking you got to comment on their business, but just logic would tell you there's a lot of Cash App customers that could be cross-sold in one direction and what have you. Customers could be across the [indiscernible] is that something that we should think about as a potential? If they're successful there, that would flow down to you?

Absolutely. We're excited to help them. I mean, obviously, both Block and Afterpay are big customers of ours. So we already worked with both of them, and we're excited to help them in any way they need to maximize the value that they want to generate by bringing the companies together. And as Jason even said on our earnings call last week, right, our customer success is what -- is our success. So we're -- we are excited about how those things can be merged in all the different ways that we obviously support Block in many more ways than we do together with Afterpay. So there's lots of new ways that we can support the Afterpay part of the business and really -- and then we also work with Afterpay in many other geographies also that we may -- are not supporting blocking. So there's a lot of ways that we can help kind of bring synergies for them and make it easier for them to get the most out of that combination.

Another one on Block is you guys have a renewal. They're big customers, obviously, the biggest and you have a renewal coming up in a couple of years, I think. Is there any way to help us sort of frame up timeline or process or scenarios that we might think through? Or -- any color you could provide on.

It's tough. Yes. I mean there's not much I can share. I mean prior to the we did renegotiate long-term agreements with, I guess, Square at that time. So the Cash App and seller card, the contracts are up in 2024. And just as a coincidence, our Afterpay agreement is also up in 2024 separately. So we have 2 years or so. So I mean I think that we'll engage when it makes sense for both sides, and we'll obviously keep you apprised if and when that happens.

Fair enough. Mike, unfortunately, we're out of time, but a great conversation. I appreciate you being here today. Thanks so much.

Thanks so much, Ramsey.