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

All right. Welcome, everyone, to the 26th Annual Credit Suisse Technology Conference. I'm very, very happy to be here with the team from Marqeta. On stage with us, we have Mike Milotich, who is the CFO. And also here at the conference, we have Head of IR, Stacey Finerman. So thank you both for being here.

Thanks for having us.

All right, great. We have a good list of topics here, and we'll probably have a little bit of time at the end for maybe 1 or 2 questions from the audience. But let's get rolling with it. We want to hit it off with macro-related. So BNPL, lots of headlines over the weekend in terms of how BNPL was doing. It's an area of exposure that you have as part of your volume. Maybe you could just recap that exposure and just maybe talk a little bit about how BNPL is looking into Q4 and what it means in terms of seasonality for your business?

Yes. When we look at the seasonality, it really depends by vertical. So particularly when you look at Q4, so on-demand delivery and expense management generally do not have seasonality to them. So you don't see the big lift in Q4 during the holiday season that you might see in some other spend categories. But within financial services, sort of our neo-banking vertical as well as, as you mentioned, Buy Now Pay Later, we do see a pretty significant tick up in spend all in discretionary categories, as you would imagine. And it's mostly from about mid-November to mid-December. You see a noticeable lift in the amount of spending and volume and just general activity. We typically had not seen a lot of seasonality until last year. If you went back to 2020 and before because of BNPL was, one, not a big vertical for us then, as well as a lot of the neo-banking players have been much better at getting consumers to use those platforms as their everyday, sort of, bank account and everyday spending, with a lot more deposits coming in, that's where we really start to see then the spending lift in the holiday season. So far, I guess, what we're seeing is about as we had expected. So we're -- it's a strong season so far, but not as good as last year, which is about as we expected.

Perfect. Mike, a quick just mechanical follow-up there for people. So it's not that you're exposed to overall BNPL. It's specifically the virtual card component. Could you just maybe just talk about the distinction there?

Yes. So the part we play in Buy Now Pay Later is where the merchant hasn't directly integrated into the Buy Now Pay Later platform, which is quite common because if you think about the scaling of the Buy Now Pay Later business, one of the big challenges with it was getting all the merchants to do all the work to connect directly to their platform. Our virtual card solved that. Whereas a consumer, you -- it feels like you're going through the checkout flow of the Buy Now Pay Later company. But really behind the scenes, there's been very little technology work. And the money gets paid to the merchant via a virtual card on our platform. And we work with all the major Buy Now Pay Later players to do this.

All right. Perfect. Thank you, Mike. Okay. Great. So the next one we just want to hit it on the head. This was a headline a few weeks ago, a lot of incoming questions from investors, we'll just tackle this one. So there was a headline around Square launching their Stellar credit card, the work and i2c was listed as powering it, meaning the issuer processor. This is a credit card. Can you just talk about -- if you had any involvement bidding for this, why you may or may not have, and just the general topic of the i2c headline.

Yes, sure. So this is not new news in the sense that this -- this partnership was struck a couple of years ago before we had credit capabilities. So if that type of situation would occur today, then we would feel very good about capturing that business given the relationship that we have with Block and just the variety of areas that we helped their business. But at the time this decision was made, it was a couple of years ago, we did not have credit processing capabilities. And that's why you saw that headline. I think the key is how much is -- are they really going to push that product versus the sort of lending program they already have for their sellers. And I think that's what still remains to be seen.

Excellent. All right, great. Thanks for clarifying that. Sounds like the ball was in motion before you even had the capability. So it was sort of not applicable or not addressable at the time.

Correct.

All right, great. All right. The next one we want to tackle is competition from 2 competitors that have a little bit of a different angle. So Stripe issuing and Adyen issuing, what they have is a unique aspect to their offering or business, I guess, from a competitive standpoint is that they have lots of platform partners. Specifically Stripe, who has literally thousands of them. Maybe just talk about the offerings and how you might be different from them, and how you think about competition with those that have the, call it, the pole position with a large number of platforms.

Yes. So I mean, both Adyen and Stripe are great companies, great platforms. They've had a lot of success. So we have a lot of respect for their capabilities. I think the key aspect of that I would highlight is that, in our view, issuing is not a part-time job. And it's -- there's a lot more intricacies, there's a lot more detail required to do it really well on a broad basis, serving lots of different use cases. And so -- although we, of course, respect our competitors, we feel like we have significant advantages. So I think when it comes to serving larger players, they're going to choose best-in-class technology. So the whole idea of the bundle, if you will, because they're connected to other platforms, becomes less applicable with a larger company who's looking to do issuing because they're sophisticated, they're going to choose best-in-class technology. It may be a little bit more effective on the longer-tail business who may be more inclined to not have to do additional tech work. But I think even there, a lot of those players require a level of support and service, right? We don't really do off-the-shelf issuing typically. It's going to be highly customized, highly differentiated, generally disruptive. Which means there's usually a lot of servicing involved, which is also not necessarily the strengths of some of these players. Also, they will be limited in their offering in terms of only supporting commercial, for example, and not doing consumer. And why is that? Well, because the regulatory and compliance lift and the level of support is just significantly greater for the consumer business, which we support, and several of these companies do not. So we still feel like we have significant advantages, both in our capabilities as well as our service levels and our scale. And so we continue to -- we intend to continue to maintain that lead.

Excellent. Thank you, Mike. Points well taken on the differences between the large platforms and some of the smaller ones. Point well taken. Okay. Let's talk about a topic that came up on the last earnings call. We talked about -- it was actually a question we asked on the earnings call as well, a few folks did, Marqeta for banking. So the good news is this does help with your relationships with some of the more neobank or digital bank-type customers, it's higher gross margin. Maybe you could just expand upon this offering and what it means for your relationship with your customers?

Yes. I think the idea is what we're seeing more and more from our customers is everybody has some neo-bank like aspect to their strategy. So this is -- you should think of Marqeta for banking, it's not for neobanks. It's more for any vertical or any customer who wants to have some aspect of banking as part of their value proposition. And so -- and what we've really done is make it in a very Marqeta way, highly configurable, highly flexible. So our customers can really pick and choose what they want. This is not a banking in a box. You get the whole thing as a bundled offering. It's always going to be consumable on a per API basis, which allows them to put the mix of services that they want together in an offering. For us, this trend towards everyone as an aspect of neo-banking is really what embedded finance -- I think, is really what the embedded finance trend is all about. And we just think we're incredibly well positioned to offer modern processing, credit and banking on one platform. And the -- if you look at the way, sort of the embedded finance trend is happening, everybody -- the economics related to card spending is generally how everyone is monetizing. And so -- and that is where we are most differentiated. So we have the best capabilities in that area, which then means if we build other services around it in terms of expanding our credit offering and our banking capabilities, then we think it's -- you combine that with our scale, it just is going to make us very difficult to compete with given the combination of all those assets. And so that's really what the strategy is. And as I mentioned on the call when we discussed it, it's not as much about it being a business unto itself. Like obviously, it would be additional revenue for the customers that we have, and that's great. But we don't see it as becoming a big business. We feel like it's much more important as a complementary capability to improve our win rate and capture the business that we're going for on the processing side, which is really where the economics are.

Perfect, Mike. Related to that, so we've talked about this a little bit in the past. So if there was a customer that had a neobank like offering, there's maybe 20-plus things that they might need to procure from a provider such as yourself. In the past, you said Marqeta had a good handful of them. It seems like you expanded that list a little bit. Can you just talk about how far down that list you are and maybe some of the others that could be added to the product road map longer term?

Yes. So I would say we're fairly far along, but there's still a lot more to do. maybe we're -- I don't even know if I'd say we're halfway if you look at our product road map for the next couple of years. So there's still a lot of areas that we would like to expand. So one is -- there's a few different aspects to it. So what I would say, first is, money in and money out capabilities. So areas like how do we turn the point of sale into an ATM? How do you turn the point of sale into a place where you can make deposits, for example? So just different ways to get money in and out of a-- an account. Another area would be rail. So multiple rails. So Fed now is going to be launching relatively soon. You've got Swift, you've got push and pull from cards. So there's money -- a number of different rails that we also want to connect to that are on the road map. And then the third area, I would say, major area is account types. So we support sort of a fairly typical deposit account but we want to be doing small business accounts, different lending accounts, different account structures. And that's -- so those are the kinds of things that are still on our road map. Many of those things we're building, but then this is also an area that we've mentioned, we are quite active from an M&A perspective. There are a lot of good companies out there who have these kind of capabilities and if we could acquire them at a reasonable price as valuations come down, then that is something we're interested in is accelerating our product road map.

All right. Excellent. So wrapping it up on Marqeta for banking. It sounds like a nice business to help with existing customer relationships, expand them. We shouldn't think about the business in and of itself as being too large. But the incremental revenue that you will see will be higher gross margin.

Correct.

Okay. Great. Speaking of higher gross margin type products, maybe we should move on to the topic of managed by versus powered by. So powered by is now roughly low to mid-teens in terms of its mix of your volume. Maybe you could just talk a little bit about the difference in those 2 businesses in terms of unit economics. If we viewed it as gross profit divided by TPV.

Yes. So the -- so just to, I guess, step back for a minute, just for people who may be newer to Marqeta, we have 2 offerings, what we call Powered by Marqeta, managed by Marqeta. And a powered by Marqeta relationship. We're really just providing issuer processing, similar to what other sort of legacy issuer processors would provide. And our Managed by Marqeta, we're bringing a lot more managing the bank relationship, the network relationships, a lot of the compliance involved with running the issuing program. And that's the difference. It tends -- the powered by business will tend to have a lower take rate, so looking at revenue divided by volume. But if you look at the gross profit take rate, as you mentioned, Tim, that is where it can be similar to many of our other verticals. I would say on -- in aggregate, it is a little bit lower than the managed by business as we're obviously just providing a lot more services and capabilities. So there's more economics for us to manage by. But it's not nearly the drop off that I think many investors might think compared to some of our larger verticals when it comes to the gross profit take rate.

Okay. Excellent. So the last 2 topics, we talked a little bit related to gross margins, take rates. Why don't we just directly get at gross margin. So on 3Q call when you gave some of the splits between block share of gross profit versus the rest of the customer base, it does imply that the block gross margins are more, sort of, in the low 30s, low to mid-30s versus sort of 65% or so for some of the other customers. Can you just talk about some of the mechanics that drive, that gross profit margin difference and the gross profit mix difference relative to revenue?

Sure. So there's a few components. I mean, one, the simple one is just the large you are the generally, the better economics you're going to get from us. And so Block, obviously, being a very large customer and by far our largest, they have favorable economics from us. The second area that can be a big factor is the ticket size. So the -- when you look at how -- particularly with a customer like Block who is on a net interchange structure, and the way net interchange works is -- you put the interchange into a bucket essentially with the bank fees and the network fees, and then we just decide how to determine how we're going to split that pie, if you will. And when you look at the way network fees on a per transaction versus bps on volume, compares to the way interchange works, the networks take a large portion of the per transaction interchange economics. And so -- and they leave a lot more on the bps on volume. And so what happens in a much smaller ticket size program as your margin gets squeezed a little bit, your network fees are higher. And so that is also a big factor with an everyday spend program like Block, which is going to have much lower ticket sizes than BNPL or, in particular, expense management and even on-demand delivery. It has, by far, the lowest ticket size of any of our verticals. So that's another factor. The third is what's happening with network incentives. So the networks are trying to be very careful about who they pay what incentives to and not having too much overlap. And so Block is an area where we don't really get meaningful network incentives. And so that's another area that compresses the gross margin, compared to some of our other programs where they're much higher ticket size they're smaller, and we may be getting network incentives.

Well-said. I really like that summary at the end there. Thank you. I want to hit a little bit again the network fees part though. So when we look at that number, it's about 22 basis points or so of volume, which at face value seems pretty high. And it would appear that there's room for leverage there longer term as you continue to scale. Could you talk a little bit about how the networks are viewing Marqeta's volume, the incentives that you're getting credit for, if you will, and how Block is not a part of that. And therefore, you still have more scaling ahead in terms of essentially reducing the COGS and therefore, increasing your gross margins?

Yes. I think the role that -- or the value that we add to the networks is that a lot of innovative disruptive companies are coming to Marqeta to do issuing, right? So they haven't made a brand decision yet. They're coming to our platform because we're the ones who can innovate for them and drive their business and their business objectives. And so we very much influenced the brand decision. And that's ultimately what -- why the networks look to pay us incentives is to help, I guess, align our interest with theirs in terms of which network is going to get the business for any given customer that we sign up. So that's really how the relationship is structured. In terms of looking at the network cost, though, I would say it goes far beyond just what -- if we're getting incentives or not. So there are many other factors that would drive our network costs. So we talked a little bit about powered by versus managed by. So in a power by structure, the network fees are not our costs. And so as you compare network cost to volume, you just need to make sure that you've accounted for that. You also have the ticket size dynamics that I described earlier. You would have things like how much is someone doing domestic versus cross-border. So as cross-border has come back in a big way in the last 6 to 9 months as people start traveling again, that comes with higher network fees. And so as cross-border has gained share of overall spending, that will generally increase the -- our network fees. You also have PIN versus signature dynamics, right? So as more people are going doing in-store purchases, that's going to generally lend itself to more pin transactions, which also has different network costs. So there's a lot of different variables in there that can drive that overall blended number that you might see in our disclosures.

Perfect. Thank you for going over those mechanics, Mike. Last point here on the network fees. So again, the number is roughly in the low 20s as a percentage of volume. You talked about some of the things we should consider as we model in terms of powered by, managed by. What's a reasonable glide path for thinking about where that number could go longer term? Are we talking about it getting down to 10 basis points, 15? Any way you cut it, it seems like there is a reasonable amount of upside there.

We would like to think so. I think if you -- certainly, the growth of the powered by business, we'll do that on an overall aggregate level, looking at our total business, because we do think the powered by business is -- has a lot of room for growth. If you look at the areas where we intend to -- where we see a lot of growth opportunity, a lot of it plays into a powered by relationship with customers. So whether -- as we have more and more success processing for financial institutions, all that will be done on a powered by structure. Also, our international business, we do very limited amounts of managed by outside of the U.S. And so if you think about our powered by business, about 1/3 of the volume is outside the U.S. And that is very different than the managed by business, which is very U.S.-centric. And so as we expand more internationally, as we have success with financial institutions, we think that powered by business will grow and that will make our network costs look a little lower.

Perfect. Thank you, Mike. Out of the interest of time, I'm going to try and combine these next 2 around operating expenses and profitability. So we've talked a little bit about some of the mix shifts to a few higher gross margin revenue streams. We've talked about the network fees. In terms of hiring, you said this year that you're looking to see sort of a similar increase in the total of the number of employees that you added in 2021. Maybe you could combine these and just give us a few thoughts on hiring plans, early thoughts for 2023 and the overall path to profitability?

Yes. So I would say -- the first thing that's important is in late February, early March, we redid our plan. So we're originally looking to hire more people when we built the plan sort of in late 2021. But by the time we got into the first couple of months of 2022, there were very clear warning signs that the macro environment was changing, both in terms of Russia which had already invaded Ukraine, inflation was already quite high, and we started to scale back our hiring plans accordingly to make them more in line with what we did in 2021, which was adding about 280 people. I would say, as we've gone through the year, we have further calibrated back, just given the way the environment is changing. So we now would expect to hire about 20% to 25% fewer people than we did last year. So it'll be a little over 200 as opposed to something closer to 300. And that's just really a recognition of what's -- how the environment is changing. But also as we're getting a little bit more efficient and effective, I would say, we've spent a lot of time this year really looking at where can we become more structured, more process-oriented and do things just more effectively and efficiently than we have in the past where that wasn't as much of a consideration in previous years. In terms of as we go forward, we're definitely planning on being cautious in the early part of 2023 until we have a better sense for what kind of macro hand we've been dealt. And so right now, we're proceeding with caution, hiring critical roles because we're still running the business for the medium term, where there's still a lot of growth opportunities and we need key people. And I would say also as the competitive dynamics in the marketplace for talent has changed, right? It was much harder to get talented people at a reasonable price, if you will, in the spring time compared to now. And so I think we also want to take advantage of that. And if there are a lot of good people out there who are looking for work and want to work an innovative payments company, then we're a great landing spot. And we're happy to have them.

Okay. Excellent. All right. We have about 7 minutes left. I want to make sure we tackle an important topic on Block, and then we'll leave room for maybe one question at the end. . So on Block, I think this is an important one for investors to understand, which is that if you look at our model and you look at the take rate that we model on a revenue basis for Block, it's a healthy take rate, right? And it's partially due to the fact that you're doing a lot more for this customer. It is a consumer program. There are additional services, there's direct deposit. There's chargeback and disputes. Maybe you could expand upon that to just give a better sense of the breadth of services that you're providing for Block maybe relative to some of your other customers?

Sure. So I would say, first, our relationship with Cash App goes back to 2016, so we were there from the beginning. And it started as they wanted to do instant issuance. So they didn't want consumers -- when they sign up, they wanted them to be able to spend right away. And it's funny to think, but 6 years ago, that was very unique and cutting-edge. In 2017, that extended into the physical card. I think in 2018 or 2019, we started doing the seller card for them. We also started -- we enabled all the direct deposit capabilities. And then in 2021, we started doing the Team card. They -- at the beginning of 2022, acquired Afterpay, who is already a customer of ours. So we really are touching almost every aspect of their business when it comes to card payment and facilitating issuing. We do provide direct deposit. We do help with a lot of risk and other services like that. So it's a pretty significant relationship in terms of the amount that they rely on our platform to facilitate their business, particularly with Cash App. There are many things that they don't like us to talk about. So that's pretty much the extent that I can share.

Okay. I will skip my follow-up question then. All right. So on that, I think we can go to the audience for a question if anyone would like to grab the microphone. Okay. If someone would like to jump in, please just raise your hand. If not, we'll keep rolling. So I want to take it back and just wrap on the credit offering. So we touched about this a little bit when we kicked off and we talked about i2c. You did not have a credit offering then, but you do now. So maybe just talk a little bit about your partners there, your role in this versus the partner's role and some of the marquee clients that you've already signed, including Greenlight.

Yes. So at this point, we are really -- our credit platform is ready to do powered by structured but not do managed services as part of credit issuing. And so we do have partners like FNBO and Deserve, who we use for the program management aspects of our credit offering. So that's one key difference. I think the differentiation that we see from our platform, again, comes down to the configurability that we always bring to processing, the ability to do very detailed rewards kind of value propositions, also to have the bank in the background is also a very important differentiator. If you look at pretty much all the major co-brand programs out there, the consumer goes to the bank app to manage that card program, that's not necessary on our platform. The customer can come directly to your app to manage their card preferences and their card needs. And so that's really where we're differentiated. We see huge opportunities for growth in this area because the economics also tend to be better for the issuer. So there's more people, both with disruptors as well as financial institutions who want to innovate in this space and want that flexibility and configurability that our platform provides. We do intend to have program management capabilities over time. So that will be something that we'll be looking to add both organically or maybe inorganically as well. That's an area that we're also interested from an M&A perspective. And once we do that, then it allows us to just take a bigger share of the economics, because there is a lot more work to do on the program management side and credit. That's why we haven't done it yet. It's more complicated than debit. You have a lot more reward structures and things that have to be managed. You have different APRs and different balances that have to be managed. So there's a lot more ledger work involved as well. So we intend to get there and that will make our value proposition even more powerful.

Perfect. Thank you, Mike. I do want to squeeze one more in if we can, so the ONE Card. So this was a big customer that was announced in the last earnings call. And when this first hit it struck me as, okay, I'm sure that anything associated with Walmart, it's probably a pretty rigorous vendor evaluation type of process. So maybe just talk about how you won that business and what it means for Marqeta's positioning with -- for other RFPs?

Yes. So you're right. It's -- they are very thorough in their vendor decisions or their partner decisions. I guess we would rather think of it that way as a partnership. But I think there's really 2 unique things that come together when we're talking about a partner like ONE and Walmart, which is -- or the innovation and flexibility that our platform provides, combined with scale. There really is not another option. We think we're highly differentiated when it comes to cutting-edge capabilities and the experience operating very large programs at a very large scale. And so that's really what we think differentiates us for someone like Walmart and other embedded finance players to come, who already have scale in their business overall and are looking to add more financial services to that business. Just that combination of our platform capabilities and the scale with which we operate is just unmatched. And that's what gives us a unique advantage, and we think played a big role in our win with ONE.

Well, congratulations on that win. And on behalf of everyone at Credit Suisse, I want to say thank you to both Mike and Stacey for making the trip here to be at our conference. It's a pleasure having you both here.

Thanks so much, Tim.