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

[Audio Gap] At Wolfe Research. And we're kicking off. We're in the middle of now the day 2 of the Wolf Fintech Forum. Really happy to have Simon with us who's the new CEO of Marqeta. And I think this is probably your first appearance on a -- at least on a Wall Street Conference. So I really appreciate you being with us today.

Thanks for having me. It is my first appearance.

Great. Well, before we get into the weeds on the story, I mean, I think, Simon, a quick overview of your background, what led you to take this role at Marqeta? And maybe just a little bit more on the company, if you want to just give a quick one 30-second overview of the business, just to level set for anyone in the room that's a little less familiar.

Sure. Absolutely. Let me start with the company, and I'll back up on my experience [indiscernible]. So Marqeta started being the first modern core issuing platform. So if you look at a lot of the cards in the fintech space, most of them are coming from Marqeta, whether it's virtual or plastic. And we expanded the product set into banking and money movement and now within acquisition, we got into credit as well. So it's debit prepaid banking, money movement, credit and program management on top of that. So my background, it's my third decade. I've got 3 decades of the experience, mainly in -- I'm an entrepreneur but also a scaled operator, been in small companies that are just 4 people. And funded by myself, that went public. And also took scale positions at Verizon, at Yahoo! and lately at -- before coming to Marqeta at Twilio company, that's the communications API. So I ran the comms products there, about $3.6 billion in revenue. Well, Marqeta to me was, look, I always think of decades, sometimes Silicon Valley's accused of thinking in days. I think we've seen a decade where I'd say the first eater of the Internet is with instant access to information. You look at Yahoo! You could go to any library and find the information, but it wasn't an instant. The second decade with mobile, it's instant access to services. And I think the third decade, which we're going to see now is instant access to money, which is -- I mean, when working capital is not going to be free, so people need instant access to money. And I think Marqeta's at the core of that. So I was very excited about it, joined as Chief Product Officer in June, then I took over go-to-market, and I became CEO in about a couple of months ago.

Great. Thanks, Simon. I should also mention we have Mike Milotich, the CFO of the company here as well as well as Stacey, the Head of IR. So thank you guys all for joining us. Before we get into the company in too much more detail, I think it's probably appropriate, given the noise in the financial system over the past week or so, just to start with any exposure we should keep in mind around SVB for Marqeta? Or maybe just discuss how you see this impacting or not impacting your business, your customer base, now and in the future.

Sure. I mean let's start with Marqeta and maybe we can talk about the ecosystem. So we did use Silicon Valley Bank for as a primary account to pay our customers like interchange fees and also get payments out. So we did have exposure to Silicon Valley Bank, but it was not that half of our cash was there. So at any point in time, even if the bank went into prolonged receiving strip, we would not have missed a [indiscernible]. So -- and also before this all happened, we were in the process of actually moving our business to a much larger bank, we ran an RFP in the fall timeframe. So we were ready. I think by Friday 4:00 p.m., like from an operational perspective, we were ready. We're pleased with what the government has done. This is a good move, but there is no risk on Marqeta or its operations. Now moving into the broader ecosystem. There is -- to us, to Marqeta, this is a moment, and I always believe in moments. You got to seize the moment. There's going to be a flight to quality. And it's not just in the banking system. And there's going to be a flight to quality in fintech. People are going to look for who's stable, who's operating at scale, who's well capitalized? So we're going to benefit from that. The second thing is, as a team, we thought about the macroeconomical situations. And look, when interest rates were going in one direction for the last 15 years. And all of a sudden, they go in a different direction at an accelerated pace, something will break. I mean it's human nature, something will break. So we've had a lot of products in mind that will give our customers further stability. Now we have not shipped them because we're a platform, we don't operate in days. We operate in days and weeks. So there's quite a couple of products coming out in the Q2 timeframe that will help the ecosystem achieve stability between multiple banking networks.

Okay. But it sounds like business as usual.

It is business as usual, absolutely.

Right. Recent trends, if we can shift gears now and just touch on first of the last quarter and what you're seeing in the market. Maybe you could just give us a sense of what you're excited about, what you saw last quarter that really stood out?

Sure. So we're seeing something really big, which is a lot -- there is a lot of excitement in fintech. And honestly, there's a lot of money. So all the entrepreneurs look at fintech, and that's where the money is. But -- and Marqeta predominantly sold to fintech players. It was the platform for fintech. But we're seeing companies whose core business is not financial services, come and asking us for financial services. So that's -- we've seen an expansion in the market. And it's not happening like a single use case. It's happening in multiple use cases. I'll give you a couple of big examples. We're calling that embedded finance, but let's just like give you a couple of illustrations as examples. So the first one would be in payroll and wage disbursement and wage access. So if you look at our company, you've got payments; payments to suppliers, payment to employees, payments to contractors. So we're seeing a big move for employees, contractors that they want their money now. They want payroll to be streamed. So we think in the next 10 years, the concept of payroll is going to disappear. And you work, you're going to earn your wages, you're going to get paid immediately. So we're seeing demand from that. And we're very excited about it because that's kind of the early flow of money. You're capturing money as it is being produced. The second example is marketplaces. In marketplaces, there's need on both sides. On the consumer side or on the buyer side, there's new [ card ] co-brands. People want a co-branded card, but they don't want a piece of plastic. They want the card to be alive and integrated into the marketplace, so that it can modify consumer behavior. And they have sellers on the marketplace, and the sellers want a card, so that the seller can receive their proceeds immediately and part of it will be reinvested in the marketplace at [indiscernible]. So third one is point-of-sale financing. So a lot of retailers are looking at BNPL, which is buy now, pay later. And they're thinking about that as an example to put it in all their point of sale and not just BNPL, because you're actually underwriting a transaction, you're not underwriting a human. And so the risk is much lower. So all these 3 use cases -- and this is an example out of '20, right? We're seeing that the demand on Marqeta broadening it up. So it's very exciting because we're a platform, we can move in many directions with the platform we have.

One of the things that I still think is kind of underappreciated in the market is the vertical abilities you guys have, the differentiation out of service, whether it's on-demand delivery or it's BNPL or other categories. Can you just expand on that for a minute for further room here just, because I still don't think that's super well understood? You've been able to win a lot of that.

Sure. Absolutely. Yes. I mean we have a broad platform and also a global platform. I mean I've been in tech for 30 years and plus. And when you have the diversity in demand and the global nature of the demand, it's something that creates a powerful effect, because you're not a single trick pony. So -- and you are actually diversified in the demand and also diversified in the supply. Absolutely. I mean we've seen many use cases that have flourished in Marqeta. First one is new banking. We've talked about the relationship with CashApp, which is owned by Block. Then we moved into the on-demand delivery. That was a big space for us, then expense management, then early wage access, accelerated wage access, point-of-sale lending, all of these -- and BNPL, all of these were actually on the same platform. And that's the nice thing about us. So a lot of folks that thought that we had exposure to crypto, we actually did not have such a big exposure to crypto. So -- which was -- turned out to be a good thing. But yes, the diversity of what we can do is very excited. And thanks for bringing that up.

Yes, that makes a lot of sense. I think you also recently discussed the reorganization and your go-to-market effort. There's been a shift in embedded finance trends. Since you called that out, I mean, bookings, exiting fourth quarter were also pretty strong, as you guys talked about on your call. Maybe you could elaborate a little on this reorg a bit more what it entailed. What gives you confidence that these booking trends are going to stay strong through the year?

Sure. So I mean as I took over the go-to-market organization, it was clear to me that, that's the area where Marqeta could have done a better job, to be perfectly honest. We have great product market fit. We have -- I'll tell you, like I spend a lot of time talking to customers and every customer wants more of us, which is a great position to be in. But in go-to-market, we have great people doing great things. But we have actually 3 issues. The first one is our product is no longer a single product. It's a suite. So as you go in and you sell the first product, it's called the land and expand, you land with the first product and you expand. So that motion was actually not well institutionalized, so we addressed that. The second thing is we had a business development team focused on new sales. Once they close the sale, they toss it over to a different team to actually manage the count. So we brought that team together in order to create end-to-end account ownership. And the third thing, which is actually a very important nuance, the customers we actually engaged with and partnered with are changing. So the fintech folks are prescriptive. They know exactly what they want. At here, Marqeta, I want, for example, a car secured against this and this. We deliver it to them. Well, you look at the embedded finance folks, it's retailers, it's employers, they don't understand the financial market well. They want to come to us for solutions. So we had a solution being somewhere else as well. So we put those teams together in what we call the pod. And then we focused on the productivity. As long as the pod generates -- actually, it is gross profit divided by their cost is higher than 1.8, then you can keep growing. So we've done that. We delivered the focus, and in days and weeks, and we've seen the results. So in Q4, bookings -- and our bookings are not seasonal. Our business is seasonal, but our bookings are not. But Q4, we closed more deals than the last 3 quarters combined. So it's already paying all, and I'd say the first few weeks of this year has been strong. So that's why we're confident on bookings -- yes, yes, yes, bookings. So we actually set the goal in bookings, 70% higher than last year. So that's something that gives us the confidence that would underwrite that.

The vertical differentiation and the actual offering on embedded finance, obviously, it's resonating in terms of the bookings' trends. You do have obviously a bunch of customers that are in certain verticals that have same-store sales challenges, right? So that's really -- when we talk about bookings conversion, that's really something that's going to play out now over the next, what, 12 months, 24 months?

Yes, it does -- I mean there is a difference between a commercial program and a consumer program. So what's consumer credit card versus commercial credit card? So -- but on average, it takes us about, I'd say, 6 months to get a program going from the time we sign the service agreement with the customer. And then they start ramping up, and it takes about 6 months. So you're absolutely right. Between 9 months and 12 months, we're going to see the fruits of the booking.

Okay. Let's shift gears. I mean, Power Finance, Capital allocation is obviously, an important part of the story. And I know the acquisition was just recently announced with Power Finance, a modern API credit program management platform that I think complements your existing card issuer -- credit issuer processing solutions. If you could just talk about why you felt the need to also offer credit versus what you've obviously been very, very differentiated on, on the debit side for really for a long time. If you could just talk about some of the opportunities this brings you?

Sure. Absolutely. I mean, part of what we do is listen to customers. And we actually started last year engaging in credit programs but as a processor only. The actual credit solution, what is called in program management was coming from partners. So we've had moderate success with that, and we closed a couple of customers and more. But our customers wanted more from our credit, they do not want a traditional credit card, whether commercial or consumer. They want a credit card that integrates into their application, that changed consumer behavior. And they wanted Marqeta to have the whole stack, so -- which is credit, debit, prepaid, banking and money movement and the risk control suite around that and us acting as a program manager. So they wanted that from us. They were very clear, delivered through our APIs. So that's when we moved into power. And the great thing is that we have a pipeline. So this is not we have to wait until the integration to happen, then develop the pipeline, then train our salespeople. We've had a pipeline, we have dozens of deals that we're waiting for a solution like this one. So we felt very comfortable with us using our capital to...

That's great. Any opportunity for this now to turn into actual revenue and the implementation of this offering, this [indiscernible]?

Absolutely. We're targeting into June for the integrated solutions, and we're actively selling the product, yes. And that also extends the ticket size. I mean if you look at our product at Marqeta, net revenue retention is 144%. I mean that -- I mean [indiscernible] came from SaaS. That's like a huge number, right? So we're very -- so it tells you one thing that our customers are happy and they want more. I mean some of that is attributed to their own success, but some of them is attributed to us selling them more products. So that also reduced the cost of sale.

Okay. I mean all of this obviously lends the trend, the bookings trends. I mean, that looked pretty strong. I know there were nuances in the quarter results and the outlook, which incorporated things like some of the incentive changes from Visa and whatnot. But net-net, I mean, overall, it sounds like from your perspective, the underlying demand is still very strong for both, credit now, but even on the core business on the debit side.

Absolutely. I mean there's 2 things -- 2 trends. I mean, of course, like the new sales are not going to materialize till end of '23, early '24. But there's 2 things I look at, like that's kind of the dashboard that -- which is customers telling us we want more, and then the diversity and the expansion of the demand. Both of them are telling us that, look, there's something very powerful here. And I'd say the embedded finance space and the diversity and the size of some of those opportunities also give us a great confidence.

Is there -- maybe shifting gears now to a question I think everyone will not let us get away without asking is about Square/Block. When we think about the emphasis on delivering profitable growth at Square has now taken on, right? Obviously, it brings about questions on whether or not they're going to try to push anyone they have working with them in terms of cost and pricing and whatever they can. And so first, I guess, just what gives you the confidence that a renewal should be doable, even hopefully over the course of this year? I think the -- there's 3 different pieces of it up for next year, if I remember correctly.

Sure, sure. Yes. So I mean, first, I can -- every company should be thinking about operational efficiency. I mean I think over the last, what, 15 years, there's a lot of executives that weren't thinking about that. So I'm glad that blocking out and talk about that. So I don't see that being different for us. So I'd say that the success, the phenomenal success of Cash App and Square is not just a random event. There's very smart people that know what they're good at and they know how to leverage platform like ours, and we work with them. Like I just want to paint a picture that like a renewal is not like 3 people sitting on a chair and then 3 people sitting on a chair on -- every year and then negotiating. It's not like a peace agreement, right? We have daily engagements and weekly engagement with the folks there, adding things, thinking of product. I'd say since my arrival at the company, we've had -- I mean, I'm throwing a number like 8, 10, things like change orders or new products were adding to this.

Specifically for CashApp.

That's right. That's right. Or Square or [indiscernible]. So it's a very symbiotic relationship. So that kind of gives me the confidence. Now of course, they -- I mean, they're a good chunk of our revenue, and it is a priority for us to get that done as soon as we can.

Yes. Look, I mean, I think at the end of the day, it's a focus because of the magnitude and the concentration of it. But our understanding is that you guys really do work in lockstep, right, in terms of the implementation of the offerings. Is it fair to assume that -- and Jason and I have spoken about this before, but is it fair to assume that over time, you'd end up whatever you finalize and it will probably be something that's hopefully a longer-term contract that could put investors' minds at ease. And obviously, pricing will be a part of the discussion, too, but...

We're working on that. We're working on that.

Okay. So let's shift to profitability for you guys now, not a block, obviously. So when thinking about -- on your most recent call, you obviously discussed that the company should be able to innovate, grow and focus on economies of scale and efficiencies. How do you think this plays out? I mean do you -- what makes this possible?

Yes, absolutely. I mean that's part of my job. That's what scale operators do. Like you don't change the culture, you don't change the strategy. You just change the operations to make it more efficient. And it comes down to actually -- for basic things. I mean the first one is being completely obsessed with sustainable growth, but at the same time being efficient. I mean, translating that into numbers, you got to grow 30% year-over-year on a gross profit, and you got to pump 20% EBITDA. That's the first thing you do. The second thing is a clear organizational design. You don't organize it on people, you organize around the job, what needs to happen. Third thing is repeatable processes. And third thing is you don't fall victim to incrementalism. You actually continue to innovate, but your cost to innovate is lower. So you reach leverage in your cost structure. I mean all these things, coupled with a phenomenal market and expanding market and I'd say, strong customer base leads us to believe that we will get to the stage. Now we do have the plan we're looking at. But if we share that with you, the first thing you were going to ask what have you guys assumed for block, right? So that's why we need to get that wrapped up, so we can share that. But we're confident -- I mean, as a management team, I'm not the only scaled executive. We've got Mike here who's years at PayPal and Visa. He [indiscernible] the years of experience, thousands of employees at sales force and Microsoft, saw years of experience at Google, running scaled organization. We know how to do this. Like -- and the nice things like Marqeta has all the ingredients to get that done. So that's something that will happen.

Yes. And to put it in perspective, I mean, I know on the earnings call, we talked about hopefully hearing more about this, this year, right, at some point, right? Whether it's block and profitability. I mean, I know we can't put a pinpoint on the timing, but...

Absolutely, we're going to hear about that this year.

Okay. Competition is something -- in fact, we had a panel here yesterday with a couple of issuer processors, smaller than Marqeta, but nonetheless, trying to make a difference and evolve the industry. But at the same time, you also hear more about Stripe and Adyen and others trying to get into the industry. It seems a little bit slower on their side from what we can see. However, they're making still quite a bit of noise around it. And so what do you see from the competitive landscape in terms of the neo issuer processors, helping the more modern needs? And then maybe a quick word on some of the incumbents and the legacy processors that are already doing the banks.

Sure. Sure. Yes. First, I always think competition is healthy. It keeps everybody innovating. Like the way we think about ourselves, we went very deep in our stock, others went wide. So I'll give you an example. So we have now credit, debit, prepaid, banking, money movement, risk control and program management. On top of that, all package in an API modern stack in the cloud. So that's who we are. Now you have some competition who think they're modern, but they're not modern. So that is one dimension. You have folks that are newer, but they don't have the scale we have. And as the large embedded finance players look at that said, "No, no, this thing has got to scale." Like you're not going to get a card and not work at a retail store. That's a problem. So we look really good there. And then you have, I'd say, folks that went very, very wide. I mean they almost do everything in finance, but they don't do it well. So we look good there as well. And then you have folks that do not do credit, so they only do debit, and they don't do it on a global basis. So I think we feel very good from a competitive perspective. And I think that we've demonstrated that we can operate at scale. We've demonstrated we can operate globally. We demonstrate that we have been able to innovate despite reaching the scale we have reached. So I think we're looking good there.

It's interesting, yesterday's panel with these issuer processors said that they're just happy to get the call to be at the RFP. You guys always get the call, so you have that advantage. From your perspective, I mean do you still -- do you see any of these newer, younger, smaller companies? You guys are pretty relatively new and young, but not compared to some of the ones that I've just founded in the last couple of years. Do you see any of their capabilities starting to mirror yours? Or are you still further ahead of the pack?

Well, we're still -- I mean, look, I'm an entrepreneur at heart, and I always want more people coming to this space. It keeps us all honest. But I'd say that this is an industry in which you cannot take risks. Like it's very simple especially when you enter the Fortune 50, the Fortune 100, they cannot take risk on something that's not their core business, right? They want an established player that has the scale, the demonstrated scale and that can innovate and solution with them. So I think we're at a good place, because we're still young enough that we can innovate, but we're now big enough that we become a safe bet. And that's kind of the play that I think we're going to play in the next couple of years.

Right. I mean I think you still have a lot of the companies you're working with that. People say it's basically more of like job risk to switch issuer processors and someone that's not yet proven out. And I think you guys have obviously been able to prove yourselves out. What about the large banks? I mean we talked about this even pre-IPO as whether Marqeta would one day be the issuer processor, is that even need necessary? Or is there enough wood to chop without that? Or is that something you do want to go after?

So there's no question we want to go after that. The question is when. And then when do you seize the opportunity and because those are long sales cycles and some of them have contracts that do not expire for a few years. So we're getting invited to the [ dance, ] a lot more than not. So -- and -- but I would say that we're not expecting a lot of revenue over the next 2 years to come from the large financial institutions. But here's -- but as we grow everywhere, our size will start becoming something they cannot ignore. And they see the innovation. They see the consumer engagement. They see the loyalty that these new cards are driving to the brand. And that's something they cannot ignore. So I think there's many ways for us to work with a large financial institution, not just be their issuer. And that will probably happen before. But yes, that's the space, but I don't expect a lot of revenue.

Not near term. Right. All right. Well, I'm going to wrap up with one more, and then we'll take it one from the audience. But look, as you progress in your new position, if you could just help investors understand some of your expectations for the next few years, what do you hope to accomplish as the CEO now?

Sure. Yes. I mean I'd say that at our stage, you have 2 paths. Either you become bigger, or you become bigger and better. I intend to do the latter, which is focus on sustained growth, 30% and more gross profit year-over-year and then 20% EBITDA and continuously innovate. This is a platform. I've done it before, the team we have has done it before. And a few years down the road, we're going to look at this company and say, this is a phenomenal company that followed a clear disclosed run book and executed. This is an execution game. We don't have a market game. We don't have a product game. This is about execution, and we know how to execute. So I'm very happy with the team we have. We have all the ingredients. And honestly, you've got a huge shift in the market that we're going to take advantage of.

Right Excellent. Guys, I think we have time for maybe 1 or 2 quick questions if anyone has.

Yes. So my question here is kind of going back to your capital allocation priorities. We've seen you guys do buybacks at this point. We've seen you guys do M&A. But despite these initiatives, you guys still have about $1.2 billion of net cash on the balance sheet. Could you maybe just help us understand how you're thinking about capital allocation? And what are some of your main priorities to driving shareholder value?

Sure, sure. So the first priority here is get the -- this is our first integration. I've done 22 in my career, right? You can't mess up the first one. So our first order business: get the first acquisition integrated. We're well done our way, but that's the first one. The second thing is, so after we do that, we will look at any holes we have, and we'll be opportunistic in terms of M&A. In terms of stock buyback, we've done -- we've got the authorization for $100 million that we actually wrapped up beginning of 2023, and that's something we might consider in the future.

Any other questions, guys? Okay. Well, let's wrap it up there.

Thank you.