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

Good morning, everyone, and thank you all for being here. I'm Ashwin Shirvaikar. I'm Citi's Global Head of FinTech Research. And it's my pleasure to next welcome Marqeta. And from Marqeta, we have Mike Milotich, who is the CFO. Mike, thank you for being here.

Good morning. Thank you.

Yes, absolutely. But just always like to start with the quick level set for people that are new to the story. If you could kind of go over who is Marqeta and why is Marqeta?

Sure. So Marqeta we, I guess, consider ourselves the founding father of modern card issuing. And the question is, what does that mean? And really, what that is, is using open APIs. We have hundreds of open APIs that we give the power of that technology to do issuer processing to our customer, and we move the bank to the background. So that was really a revolution because the legacy processors, they're very constrained by how the -- that technology was architected decades ago with the limitations that the bank provide. And we removed all that and gave our customers a great deal of flexibility. And in the background, we're managing the compliance and everything else to make sure everything is done properly and according to the rules. And so that's really what modern card issuing is. The opportunity that we see why we think it's a very unique space that's in its very early days in terms of the size of the opportunity is there's really 3 trends that are going on that we think play to our strengths and the need that we provide our customers. So one is the shift to sort of disruptive commerce experiences. So so far, we've had on-demand delivery, buy now pay later expense management in the corporate card area. So these are newer commerce use cases where our technology, the flexibility we provide our customers uniquely suits those use cases, and we think there are many more of those to come. The second is embedded finance. The trend towards sort of neobanking in general, where there's lots of nonbanks providing financial services. And so in the past, that would have been very constrained by the legacy architecture of the technology. But with our platform, we give all that power to those players. And so as that business grows, we think we're uniquely positioned. And then finally, the banks are also investing a lot in the modernization of technology. And so as they move to the cloud and make other modern investments, then we also think we're well positioned for that. So we see the business as in it's very early stages of growth.

Okay, okay. And we'll get into some of the details there. But before we head in this -- the 2 most different questions, I get, on Marqeta. The first one is your revenue concentration with your largest client.

That's weird. I never get that question.

You never get? That's strange. I must be speaking with the wrong people, I don't know. The -- so -- and it's been 65%, 70% in general this particular quarter was a little bit greater than that. How do you get an investor comfortable with that?

Yes. So I mean first is we obviously want Block to be as successful as possible. So we consider ourselves fortunate to have our largest customer growing at that kind of rate and continuing to do new business with us as they expand into new areas. So it's sort of a good problem to have, although it does create revenue concentration challenges. I think the way we would like investors to view it and get comfortable with it is, one, we provide really critical technology and infrastructure for Block in a myriad of ways. They use multiple aspects of our platform. And it's really important to how they drive their business and what drives their valuation from investors. So -- and what we provide is not easy to replicate. It would be very difficult for them to build themselves or to get the combination of our capability at the scale which we operate from another more modern player. And so we are uniquely positioned to help them. We also have been -- had a very close partnership now for 5-plus years. And so we really are working sort of hand in glove on a day-to-day basis with touch points across many, many functions across the company. We have many dedicated resources to their business. So just a level of responsiveness and innovation, the way we can help them with when they wanted to have someone be able to use the Cash App card more quickly. We can help them with instant issuance. When they close the Afterpay deal, we helped enable Afterpay to be accepted at all Block acceptance locations, right, where Square was accepted. So there's lots of ways because we've been working so closely together for many years that makes us an integral partner. So we're valuable to each other. I think the other thing that's important, though, is that we do have a great business outside of Block, and we know investors are always trying to understand and estimate our non-Block revenue trajectory. And particularly in this most -- these last couple of quarters, the only thing I guess I would caution against. You just have to remember that Afterpay was not in Block last year. So when you're looking at our revenue concentration that we disclosed, last year would have had Afterpay as non-Block, now it has obviously, Block includes Afterpay, and that's creating -- distorting some of the numbers. So if you include Afterpay in all periods, then our non-Block business would have grown in the mid- to high-30s in this most recent quarter. So the rest of the business is also growing quite strong, and we continue to diversify it.

Okay. Okay. And then, obviously, that relationship that you have is 3-part relationships with contracts expire at different times. How are you thinking in terms of renewal? Obviously, investors would like longer term renewal, but how are you thinking about it?

Yes. I mean, certainly, we would like a longer-term deal as well. Yes, all the contracts are up sometime in 2024. The Cash App and Afterpay contracts are up in April, and the seller card is up in, I think, September or October, later -- about 6 months later. So they're all up around the same time, whether they will be put all into one large contract or kept separate, will really be up to their preferences. If they would like to keep them separate, we're fine doing that. If they would like to kind of consolidate the relationship into one contract, we're also okay with that.

Right. Right. And typically, when you do renewals, they -- do they go until the date of? Or do you try to do it before? Typical, this is not necessarily a Block question.

Yes. Well -- I mean, yes, you try not to cut it too close, right? I mean you -- so I think yes, you'd like to do it a couple of quarters early, if you can just so that there's no -- you can ensure continuity and people don't get stressed out as you go down to the finish line. So yes, you'd like to do it a little bit early, if you can. And that gives us that continuity we're looking for and it maybe gives them a little bit better economics sooner since that typically is what happens when you're renewing a contract in the payments business.

Right. And in this particular earnings you've provided, I think, for the first time an indication of profit contribution, right? So you could back into what the profit contribution is and sort of the level of gross margins. I guess, why now? Why did you do that now? And at least our take was certainly what we had believed before, it seemed to support that Block is already getting in relative terms, good economics as a large client should. So is that the right conclusion? And how should we...

Yes. So -- I mean, we wanted to provide as much, I guess, clarity as we can because we know this is sort of top of mind for every investor. So that was the -- but we have to do what our customers will also allow us to share with our investors. So that was sort of the limitation in the past. But Block was okay with us sharing that. So we wanted to provide more detail. And specifically, what we said was that Block was 72.5% of our revenue but their share of our gross profit is more than 15 points lower than that. And it really has to do with a few things actually. So one is just they're a large customer of ours. They have better economics. We think we have a fair deal for the amount of value that we provide to their business. The second thing is that they -- the way their business works, particularly in Cash App, it has much lower transaction sizes than most of the rest of our business. And why that low transaction size matters is because when you look at the fixed versus variable components of interchange and network fees, what you see is that as ticket sizes go down because of the fixed component, the margins get squeezed. So as the -- because they have a low ticket size, that means it's going to just generally drive lower margins compared to expense management or buy now pay later, for example, that are going to have much higher ticket sizes. Also, just the mix of their business, they're capturing a lot more everyday spending, whether it's grocery or rent payments and things like that, that are going to come also with lower interchange. They also have a lot of physical in-store spend that could get routed to PIN networks. So there's many factors. And then the last thing when you're comparing the economics as well for the other customers is the way the network incentives can work is also going to be quite different on a customer-by-customer basis. So all those things combined are what make the gross profit that we make on Block lower than the rest of the business.

Great. Great. On that last point, the network incentives. Why is that?

It's because the networks are very careful about who they're paying and for what. So if they have an established relationship with a customer for a long time, then they won't necessarily pay us the level of incentives that we would receive if we have the relationship with the customer, and we're bringing the business to the network. So the incentives are designed in a way to incentivize us to bring business to them. There are instances where they need -- might meet with a customer through their relationships. And when that customer tells them what they want to try to accomplish on the issuing space, the network might say, "Oh, well, if that's what you really want to do, then you really need to go talk to Marqeta, they're going to be the best positioned to serve you." And so when they're kind of giving us that referral, then the incentive structure is obviously going to be quite different than when we're bringing the business to them.

Okay. Understood. So the second leading question I get and admittedly, the frequency of it has gone down a bit is with regards to Jason. And in the middle of the 2Q call, obviously, Jason said, he longer wants to be CEO. So again, I guess, what's the plan? He is obviously going to stay involved. What is he going to do versus a new CEO? What might be the motivation for someone to come in if you have a former CEO and founder kind of looking over your shoulder. Can you talk about some of those things?

Yes. So I think that -- I think Jason deserves a lot of credit. He has been very clear that he's an entrepreneur, and he built a great business, but the business is growing in complexity, right? We're expanding our product set. We're moving into new geographies. The technology has been homegrown to this point, and we're becoming more and more active in M&A. And we're trying to grow the business while also getting a lot more operationally efficient and effective and established processes. So it's just time for sort of a changing of the guard, if you will. Jason is still going to be very involved in the business as the Executive Chairman. So from a product vision perspective, he used to be involved in that. He's very much in touch with what's going on in the payment space and definitely has points of view. Also on the customer side, particularly, I mean, he has relationships with almost every fintech CEO out there as well as a lot of the major banks. And so that's something he'll continue to be involved in. But we still feel like we can attract a great CEO to run the business, really operate the business on a day-to-day basis. So the CEO will still be in charge and Jason has been very clear, he will be in service to them, helping with product and customers and with sort of the culture of the company that he has established that's very unique but he understands he won't be operating the business. And so we think the opportunities that we have ahead of us will allow us to attract very good candidates. And so far, we're talking to a lot of very impressive people with diverse backgrounds and we're trying to move with urgency, but at the same time, we want to make sure we get the best candidate possible so...

Cool. Okay. Should we talk about the business? .

Let's do that.

Okay. So look, I mean I view Marqeta as sort of a really important fintech enabler if you will in terms of all the innovation that has come out that you enabled. And even people who are negative on the stock kind of gave me that in terms of yes. And Marqeta has achieved a lot. The question that does come up is what's the moat in terms of just thinking about the future? And can you keep maintaining that advantage? So can you talk about the moat?

Yes. We think the moat is intact and actually growing. The -- because our platform has really the best capabilities. And I think that's pretty widely accepted that our platform, just the configurability and the flexibility and just the pure array of capabilities is really unmatched. And when you combine that with the scale that we've achieved, it really makes it formidable because if you're -- particularly, like if you want to talk about an embedded finance player, like ONE Financial, the win we just announced last week on earnings, which is backed by Walmart, a business like that in terms of what they think they can accomplish, they're thinking pretty big, and they want a modern platform but that can support them as they get to that size, that we're uniquely positioned to do that. So I mean, that's one of the, I would say, the biggest factors in our moat. The second thing is what we do to enable this innovation, it requires quite a bit of expertise. And so we now have 12 years' experience, which is probably double when any other player has. And so that's a huge asset as well because it very rarely do customers come to us and say, "You know what, Ashwin, I want to do something very disruptive, and I've done all my homework, all my research. I know exactly what I want to do. I just need you to help me execute." That's very unusual. Normally, they're really relying on our expertise over the years. We've learned a lot of hard lessons and our customers today benefit from those. And those are things that some of our competitors may not have even learned yet. And then we also continue to grow the moat by expanding the capabilities. So if you think about a modern card issuer, what we've achieved and the scale we've achieved and then you put credit and you put banking capabilities together, now that becomes a very unique and sticky platform. And so we think by adding those additional capabilities and continuing to grow like we are, then we're actually widening the gap between ourselves and the competition.

Okay. Okay. And just kind of spending a moment on fintech itself, given what's happened to valuations, primarily public but also tripping into private valuations and some of the headlines we see around that. Given that you enable fintech innovation, right? I mean are you seeing fewer innovators now just out there because of what's happened to valuations? Or is your pipeline kind of continuing to be healthy?

Yes. We're not concerned about the pipeline for the business, but where the innovation may come could be different. So the past several years, there was a lot of companies being funded with an array of ideas and we, of course, were happy to support them. And there'll still be people who are getting funding, but just maybe to a lesser degree than what we've seen in the recent past but there will also be people who have already got a business going and have achieved scale and they may be the source of the innovation. So the companies who are already established in the space, we support the market leader, often the leader in the #2 and the #3 player in the verticals that we focus on. So we sort of support all the leading players and the innovation may come from there. We also think the innovation, again, going back to embedded finance may come from retailers or tech companies, people who are in other business who want to move into financial services and can provide a lot of innovation, almost how Block went from a merchant-focused business of saying we're going to start Cash App, and we're going to grow that business and that's provided a lot of innovation and neobanking. So we think that there'll still be a lot of innovation and disruption using our capabilities. It just might be from different customers.

Got it. Okay. And in terms of sort of the approaches to market, right? I mean there is a powered by, there's managed by. Could you talk about the different dynamics there, relative growth rates, take rate, profitability? And if you're heading into a downturn, would that affect the approach people take?

Yes. So the powered by Marqeta business is where we purely serve as an issuer processor, and we don't provide any of the program management capabilities. We call that managed by Marqeta. And so the -- if you kind of just work down the P&L, the TPV, our volume, there's no different. The take rate is much different in powered by, it's lower because we're providing a lot less value. But it also doesn't have any gross sort of cost of revenue. So it doesn't have network and bank costs. So the gross profit that we get from powered by is similar to what we make in managed by in a number of our large verticals. So -- and that's looking at the gross profit take rate. So taking gross profit divided by volume, that can be similar. So the profitability is quite good. That being said, I mean, the -- in total, the managed by Marqeta profitability is a little bit better. We're providing a lot more value. And as we scale, then we should be able to do that even more efficiently on our side in order to drive incremental profit. Some of that we can share with our customers, which will make us even more difficult to compete with. But some of that we will take for ourselves. But at the same time, in the powered by Marqeta business, which is growing very fast. We said our volumes are growing well over 200% even this most recent quarter, it can also scale much faster, right? It doesn't have nearly the operational complexity or effort that's required on our side. So it can go really fast and it comes with almost 100% gross margins. And so it's a good balance in the portfolio to have from our point of view, and it makes us largely indifferent to how a customer what path they choose to go down. In terms of whether that decision could be impacted in a downturn? We don't think so. If anything, it might make the managed by Marqeta even more attractive because if a customer is going to go down the powered by path, then there's a lot of investment they need to make. They need to put a lot of people in place with a lot of expertise. And again, we're providing this service to many customers. So we're doing it at a scale and with a level of kind of accuracy and effectiveness that would be very hard for someone else to replicate at the price that we're charging. And so in a time where people might be cutting back on investment, we think managed by Marqeta will still be a very good option.

Okay. Okay. And as we think of possible downturn scenarios here, I guess, that leads to a few different types of questions. One is, how are you thinking about it? And how can you manage your own cost is one part of it. The other part of it is within your business, are there aspects that are perhaps more or less economically sensitive?

Yes. So in terms of our own cost structure, we're -- about 70% of our costs are people driven. So hiring is a big lever for us. We are still hiring, but we're definitely being more selective and cautious right now, and I think that will continue for the first few months of the year until we maybe have a little bit of a better view on what the macroeconomic picture is. So we are being cautious, but we still have some very large opportunities that we want to pursue, and we still will invest in the business, but we're committed to doing it thoughtfully and improving on our path to profitability. So making progress on our adjusted EBITDA margins. We're also then for things outside of our people costs, we are looking for a lot of efficiencies. Just in the last few months, we've changed the way we sort of operate with our cloud provider that's created a lot of efficiency. We've looked at different costs that come from us being a public company, insurance being a big one, and we've sort of optimized that and renegotiated. So just those 2 things alone, for example, have -- are saving us about $7 million on an annualized basis. And those are things we've just implemented in the last few months. So -- and we're still looking for more. So we're going to try to manage our non-headcount costs as much as possible and then moderate hiring depending on what happens from a macroeconomic perspective. On the business side, we don't have a lot of exposure to discretionary spending, only about 1/6 of our spending is in highly discretionary categories. So -- and we feel like many of the businesses that we support are really displacing other types of spend. It's not necessarily new areas of spend. So whether people are using buy now pay later instead of using their typical revolving credit expense management. It's really just displacing more corporate card spend or maybe things that are done more manually. Neobanks are really just taking share from traditional banks or maybe gaining in the unbanked population and displacing more cash. And so we think that also should help us maybe if there is a storm coming, weather it better than us.

Okay. Yes. Can we -- as I think of sort of the functional elements of what you do, right, if you could give us some thoughts with regards to how you think of the opportunity that remains as well as any risks or function-specific competition, say, for example, online delivery, BNPL, logistics, the big areas that you do. If you kind of walk through that.

Sure. In the on-demand delivery continues to perform well. I mean, it's growing well into the double digits. And it's our most mature vertical. But our customers are finding new areas to expand. So they're targeting new merchant categories, if you will, and that's fueling a lot of growth. And we're still seeing strong consumer demand. So that business, I would say, is stable but still growing at a nice clip. Buy now pay later, we definitely are seeing some of the effects of our customers tightening their credit criteria and -- but it's still growing very healthy. Again, our overall payment volume grew in the 50s and buy now pay later this quarter, only grew a little slower than that. So it's still growing very fast. And the shift that we think is also going to help us that we power the Affirm Debit+, the Klarna card. So as some of the buy now pay later companies also shift to offering a card product that just delivers the value proposition to any merchant that accepts Visa and Mastercard, we think that's a huge benefit because it also will solve the physical point of sale from we're right now, buy now pay later, not -- doesn't capture much of that. That enables them to capture that. And so that's also sort of another leg of growth that we think is still yet to come in that space. The expense management business, I mean, that is growing incredibly fast. And it's becoming very disruptive and much more efficient. So in these times where customers might be looking to -- its businesses may be looking to have more control over their costs, better visibility than the solution that many of our customers are providing is a very good option. And that's why we're seeing that business grow. It's our fastest-growing vertical by far.

Okay. Okay. And something like crypto. How do you view that? Because obviously, you have a number of good signings, but the end market and crypto winter and all that kind of stuff.

Yes.

Is that more or less a placeholder? Or should investors be concerned about sort of comp?

Yes. I mean, I guess there's no real comp impact because it wasn't really even remotely meaningful to our business until Q4 of last year. So maybe heading into this quarter, we're starting to lap it, but there really isn't a big business that we're losing. It was more future growth that we were expecting that maybe will take longer for us to realize. . We still think there's a value proposition for it. The programs that we do have out there they're not adding new customers, so they're not acquiring new users maybe as fast as we would have thought 6, 9 months ago. But the users that they do have are spending quite a bit and are engaged. So there clearly is a market for it. It might take a little bit longer for it to become a bigger business for us than we were thinking again at the beginning of the year. But we still think there's a lot of potential there for -- and think of it as not just for helping someone spend at the point of sale and maybe using crypto assets, think of it more as an embedded finance play, right? So a lot of these whether they're in exchange or some other player in crypto, what they're really saying is, I want to support my customers on a more broad basis. So if I can help them keep their deposits here, right, do some trading. They can do some spending. So it's not just purely I want to go spend crypto, it could be just a broader neobank offering that happens to be provided by someone who's in the crypto space.

Okay. And you're already working with neobanks as well as traditional banks for some of their digital offerings. You announced this Marqeta for banking. So how is that different? What else does that add to what you're doing?

Yes. So we really enhanced a few things and added some additional services, things like bill payment, for example, is a new capability we didn't offer before. In terms of the sort of early access to a deposit that may be coming in, that was something that we provided, but we've enhanced it. So what's unique about what we just launched is that typically, the way it works now, and there are many people who provide this, right? Your paychecks coming in they give you access to those 2 days in advance but it's really a decision that's made on you being Ashwin. What our platform is now allowing is also to do it on a per transaction basis. So your neobank might say, well, your tax refund that's coming in from the government, I'm going to give you that access -- I'm giving you access to that 2 days earlier because I know that money is going to come in. But deposit you just got from your employer, maybe I'm unsure. I've never heard of that company, well, Citi, that wouldn't be a problem. But for many other people, I don't necessarily know who that company is. I don't know if I want to give access to that funds early. And maybe over time, with a lot of history of seeing those come in and maybe they could relax that constraint, but it allows for that customization. So that's what we've added. And we're going to continue to add more. And we think this is just going to make our platform even more attractive because today, there are instances where we talk to prospective customers who say, I really want those kind of banking features. And I really love your issuing technology, but I want to only have one partner and one technology stack. And so we want to sort of take that off the table and provide a more holistic solution for customers so that, that can't be something that they hold against us and we can capture the business. A lot of these banking services, they do have high margins, but they're -- it's not a great business unto itself, in our view. It's really designed to enhance our business, to improve our win rate so that when we are going after new business, we have that comprehensive package that a customer could want. And then once we have that customer, then it does allow us to offer a few additional services that can have attractive margins that are just purely incremental, so it can be accretive. So that's really the way we're looking at it as a sort of a supplement to our great issuing business.

Okay. Okay. I was going to ask about credit, but getting hand signals here that your time might be almost up. So let me ask you a question on path to profitability. How are you, first of all, thinking of it? Many of the companies that became public in the last 12 to 18 months, have adapted to the new environment and kind of thinking more actively about profitability. What about you?

Yes. So it's definitely a priority for us. And I mean there's 2 ways I feel that you have to deal with it. One, you have to be ruthless in your prioritization. So we need to really -- and we're in the thick of 2023 planning right now. So really thinking through with the existing resources we have, what could we accomplish or where do we need additional expertise where we might need to hire it? And then what is the -- what are our customers telling us? What are the ROI? What's the size of some of these opportunities? And you really have to be very disciplined to go through that process. So that's something that we're doing. The second thing is that you have to remain flexible. So you have to make sure you don't get a little bit overextended and you need to be proactive. So even at the start of this year, for example, in sort of the late February, early March time frame, we adjusted our plan for 2022. We saw the kind of macro warning signs, and we said, "Hey, let's dial back our plan." And then if things end up being okay, we can always invest more in the second half of the year, but let's be cautious for now. And we think that's been a huge benefit for us, where a lot of our fellow fintechs and other tech companies have been doing layoffs and freezes, we feel like we got ahead of that and we adjusted our plan early. And then that has given us more flexibility, and we didn't have to walk anything back or lay off people, which you never want to do. And so that's really what our approach is. We want to make progress on our adjusted EBITDA margin, and we also want to share more with investors, but there's sort of, I guess, what you kicked off this session with. There's 2 things that constantly come up with investors that at least are delaying us maybe saying more, which is if we were to share something now then everyone's first question would be, what have you assumed for Block going forward? So we need to kind of clear that up. And then the next question we get is, well, how do we know this plan holds if you're looking for a CEO. So we need to get those 2 things done. And then I think we'll be much more forthcoming with investors. But you should all know that we are committed to that, and we are committed to make progress, and that's what we plan to do.

Awesome. I think all of us like things that come full circle. So let's leave it there. Thank you very much.

Yes. Thank you, Ashwin.

Yes. Absolutely. Thanks.