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

All right. Great. I think I get the thumbs up, so we can get started. Happy to kick off the day with Marqeta. Simon Khalaf is here, CEO. We have a lot to talk about. I've taken a lot of questions from the investment community. So I'll go through that through the fireside chat, but we'll take questions as well and through the portal. So Simon, welcome. Thank you for being here.

Thanks for having me. Appreciate it.

No. I'm excited for the conversation. So yes, I start out with the obligatory sort of question or statement around you taking over the lead for just over a quarter now. I believe, right? So talk to us about the transition and maybe rehash some of your priorities as you've taken over the seat.

Sure. So it does actually help that I was in the insider. So I didn't just join as CEO, I came in to look after product then took over go-to-market. So it was kind of like try before you buy. So I did actually get a good perspective on where the company is. And very pleased with a phenomenal product market fit, great customer base and immediately identified go-to-market as an area where we need to be much better at. So in terms of priorities, I'd say the first one is strategic. So to be able to expand Marqeta's customer base and market from fintech into a broader market, which is embedded finance and probably we can talk about that later. And then the others are operational. First one is go to market, which is the ability to reorganize in terms of pods, which have done that in my career, so to give end-to-end control to smaller teams that have autonomy, and they can work much, much closer with the customers. Then we did the Powered acquisition, so a focus on bringing credits in to complete our solutions to -- because in embedded finance, you want to provide a full solution versus a point solution, which was the case in the pure fintech. And then last but not least, I say, operational efficiency. That's code name for you got to be profitable because that's the name of the game. It should have been the name of the game over the last 15 years, but I think we opted not to do that as a -- not as a company as an industry. So I think we're back into the good fundamentals. So putting the company on a path to profitability is, I'd say, the fourth priority.

Good. So I know a lot of new CEOs come in. We've seen a lot of new CEOs come into the sector over the last 3 years or so. They like to make change for the sake of change. I'd say it's probably too early to ask you that. But I'm curious sort of your stamp on the company of Marqeta or your legacy to preview that, I know you're still trying to organize your thoughts but what do you think that might be?

Yes. I mean I'd say, I always think of brand affinity which is what are you known for? Like, I mean, when you think of Google, no matter what Google does, it's a search company. You think of Oracle, it's a database like the brand affinity of Marqeta has to become the operating system of embedded finance. And that clarifies everything you do because there is a playbook for operating system. Example, when I think the new CEO of Uber took over, he said, I'm going to be your operating system of your daily life. And people did not understand what he meant, but it's actually a playbook. It's not that he's going to ship an OS to compete with Apple and Microsoft, but it's more of the playbook, which is you go win the large accounts, you improve your solution, you go to the mid-market, then you go after developers and you win -- you basically build the long tail. So that's kind of the -- I think, the [ stem ] that I like to put on the company.

Okay. No, good. I like it. So we've seen and learned a lot in the last couple of years. We heard from Jamie Dimon. He's been -- I went through the last 2, 3 years, and it was fun to hear it in his way. But with fintech valuations coming in and now there's a lot of stress in the banking system, you're talking a lot about embedded finance, right? You just mentioned it, Simon. So tell us what does that mean exactly? And why is now the right time to bet on embedded finance? .

Sure. Yes, there is -- I mean, when I guess, the fiscal policies or interest rates were going in one direction for 15 years, you stop and you go on 180 degrees at the same speed something will break. I mean it's natural, of course, it's physics actually. So there is a lot of stress on fintech. But I'd say, independent of that, fintech will actually do very, very well. I mean it's showing to everybody they are not possible. But to us, and it's something that as a human as a person, I've been thinking about for the last decade, which is taking everything that financial services firms have done really, really well and embed them into daily workflows. I mean as a kid, I mean I can tell from my accent, I didn't grow up in the States. And we had -- I mean, we lived for a while in Paris. And the local grocery store was my first lender. So you go to the local grocery store. They know you. I mean, you pick up like chocolate bars and whatever, and then he has this tiny notebook. He writes down and then my dad would come on a weekly basis and settle with them. Well, that's my first BNPL, basically, buy now, pay later. So -- and it was embedded. It's local knowledge. They know you. They know who you are. You're not going and getting cash. So you take that concept and you look at it for thousands of years, right, finance was actually embedded. The concept of going to the bank is kind of newish. So the bank comes to you has always happened. So that's -- we define embedded finance as organizations that move a lot of money, a lot of money, but they're not financial institutions. And we're getting a lot of traction in that. I'd say -- I mean, I give a couple of examples to simply anchor this. You look at our U.S. GDP, U.S. GDP is $23 trillion, I think, this year. 46% of that is wages and compensation. So that's $10 trillion, out of which $3.7 trillion is shift and gig work. And we have a phenomenal, accelerated wage access that is unique. So $3.7 trillion is not a small number. Then you move into marketplaces as another example, we're getting traction. So much money is moving between supply and demand between buyers and sellers. And just the 3 online marketplaces moved $3.25 trillion of flow between buyers and sellers. And people think it's just Amazon or Etsy and whatever. There's a lot more in B2B marketplaces. So a lot of that money is -- can stay in the marketplace. We can actually do marketplace financing, cellular financing, co-brands. So -- and that's like a second market would focus on in embedded finance. And the third one, I'm going to call them Neo ERP systems. I mean you're rebuilding the entire corporate stack, whether it's rippling or ramp or many of these companies. I mean, they've vertically integrated the operations, the analytics, the human workflow, company workflow all the way down to the banking layer. And that's another segment that we're focused on.

Okay. Good. Look, we agree. I think we've been talking about this concept that everyone wants to bank their users, right? So whether it's a consumer platform or a merchant platform, the opportunity to provide making services there. And it feels like Marqeta is surely going to benefit from that. So I like the way you described that. So maybe just to rank it for all of us here. And I'd like to think Marqeta helped to invent a lot of the back end around on-demand delivery. You've mentioned buy now pay later now embedded finance. How would this rank in terms of some of the other, let's say, segments or verticals that have come out of Marqeta?

Yes. So I mean, again, I think fintech has demonstrated the [indiscernible] possible. So venture funded very smart people. They understand the banking system. They understand payments with a lot of people say it's complicated. It's actually not that complicated, but it's not. And they build phenomenal technologies that should be, in some cases, embedded into other flow. So the way we think about it, fintech is almost like ISVs or resellers of Marqeta solutions that go into large companies and deliver something really good. Example in our relationship with Uber, there's a great partner called Branch, who build actually the Uber card that the Uber drivers can get instant payment on those cards, and that's powered by Marqeta. So in terms of priorities, I'd say the -- we -- since with a platform, our solution is very diverse, but we got to focus. So go into a segment, do a great job, move to the second one. I'd say accelerated wage access is something we're seeing great traction on. And we've made a couple of announcements around that. I mean, Walmart being one of them, we made another -- a couple of other smaller marketplaces. We will do more of that. And the traditional, I'd say, retail marketplaces through co-brands, point-of-sale funding as well as seller financing is an area where we expect to see a lot of traction in.

Okay, good. So I know the bookings have been quite strong. So you've had some good success there right out the gate. What's driving that? I know you made some changes in the sales motion and the sales org. Can you walk through that? Is there more to do?

Sure. Yes. There's always more to do in sales, yes. So if I look at my early view on Marqeta is like great product market fit. I love the product, and you talk to our customers, they love the product. 144% net retention rate is dollar based. So that's a really good metric. I mean usually 125% and higher is solid. So -- and I'm like, why don't we have more customers. So we reorganized the sales organizations and on pods. That's something I've done in my previous -- in my career, Google does that Salesforce. So we created those pods, and we put together account managers and account executives and solutions engineers together and they roll up to a segment leader. And then we created a, let's say, leverage compensation plan that actually rewards when, let's say a partnership is established, but also leaves some of the reward to when the programs launch. So -- and then from there, it's kind of rinse and repeat. . And we moved from a hunter-based approach that delivers the farmer approach to one team that's doing the land and expand, start small and expand with the customer. So that has worked, I'd say this is 2 quarters of very solid bookings. We exceeded our numbers. But at the same time, the leading indicators did not drop. So the pipeline grew 80% in the U.S. since Q4. It's 40% in the EU since Q4. And we've taken 20 days out of the sales cycle. That's 32% in 6 months. So I think I'm happy where things are. There's always room for more to improve. And we are definitely looking at many ways where we can add more talent like kind of your traditional SaaS sales that maybe did not come from the industry, but can pick up the industry fast.

All right. Good. So I know you're close to the numbers you just went through some of that. So I think of these new deals, 2/3 of them were expansion of existing. And so this land and expand. So just maybe you can elaborate on that. We get a lot of questions around ARPU or how much more product or where can you attach to existing clients? How do you generally think about that potential?

Sure. Yes. I mean I always say your best next customer is the one you already have. So you -- there's no question that the land-and-expand strategy has worked across all the industries. So why try something new? I always look at it, you find a formula that works, whether you're making potato chips or computer chips or cards, chips on cards. -- if the model works, you follow it. And in terms of growing the wallet size, I think we have customers, I'd say, 3 of our top 5 has expanded geographically with us. We have many others that have added our risks, products and banking and money movement products. And I'd say most of our thinking right now is around solution selling, which is we don't think product lines anymore. I do believe that companies go into stages. As a start-up, you're selling your technology as a mature, I'd say, [ series D ] company, you're selling products. And when you are truly scaled, you start selling solutions. And I think we're making that transition quite successfully at this stage.

Good. So let's transition a little bit. I know you monetized through spend on a lot of your portfolio. We heard some updates from some of the companies, including Block yesterday, made trends a little bit better than April, but what's -- can you generally talk about what kind of behavior you're seeing on the spend side across your base?

Yes. I mean we started seeing kind of a shift in spend in the Q4 time frame in which most -- I hate to say most of the paychecks -- sorry, the majority of the paycheck is going to nondiscretionary or low discretionary items. So there is a little bit of contraction in the high discretionary items. I mean, it is kind of obvious, but the data is starting to show it. Honestly, it's not as bad as I thought it was going be. I mean I thought kind of the retail -- I mean, you hear all the scare. The retail is going to come to a grinding halt, the debt stack is going to increase. It's not that bad. . But we've seen, I think, some in the March, April time frame, we've seen a reduction in the ATV, which means more money is being spent on nondiscretionary items. The May, early May trends are actually better. So we don't know if this is seasonal or if people are -- they're doing revenge travel, it's what it's called now, and they basically keeping all their money because they want to spend it on vacation. But yes, we did see that, right.

Yes. No, look, that's what we've been hearing. That sounds consistent, and we'll learn a little bit more as the months play out here. But would you say that Marqeta is more weighted towards discretionary versus nondiscretionary. You mentioned it -- I know there's been -- there's on-demand delivery. I'm curious how you thought about it.

So it's a mix. I mean, one of the things that I was actually surprised by when we announced the Power acquisition is the demand in commercial credit. So I expected the demand to come from consumer credit and that is there. But commercial credit is an area I was not expecting it. And you think about it, it does make sense because working capital is now very expensive and not as abundant as it used to be. So commercial credit in which you can be surgical in how you offer lending kind of like the NPL for our business, you're underwriting a transaction versus an entity. So that's growing for us. And that balances, I'd say, between consumer and commercial. And then within the consumer, I think we have a mixture of, I'd say, the everyday spend that you see in some consumer program, but also BNPL is more travel and retail and ODD is food delivery, I guess, restaurants and services.

Perfect. So let's go into the results a little bit. I think the quota itself ahead of your outlook on a lot of KPIs, but I know the gross profit outlook and how that landed was a sticking point to the quarter. So tell us what's driving some of the surprises or the slowdown there?

Sure. So yes, Q2, I mean, from our plan, we knew Q2 was going to be tough. I mean there's many, many factors there. The first one is how the incentives work. They kind of reset every -- I think, they reset in April. So you have to build your way up in order to get the incentives from the network. So that's something that was planned. And then in Q2 -- sorry, in Q3, we would lapse the loss of one of our large customers, volume or partial volume, which is Klarna. And then the third -- so those were things that we expected. And then the third thing is renewals. We've done a lot of renewals in what I would call for overnight sensations in which, like when we closed those deals, they were, let's say, they're doing tens of millions. Now they're doing hundreds of millions if not billions of TPV. So of course, because whether they jumped the renewals have put them in terms of different take rate on us. Well, those are pretty much done. And then the thing that actually changed as we started the year is that ATV, the reduction in the ATV. Although the consumer is spending more but our costs are a little bit higher. I give you an example. If let's say, last year, you wanted to go fill your car with gas. You do a one time and you spend $60 full tank of gas. This time I was like, oh, I can't afford to put all the $60. So you do it $40 and then 2 weeks later, you do another $20. So you spend $60 million, but you do 2 transactions, the cost to Marqeta is higher so that takes some of our gross profit. Now the good thing is we do believe and we're comfortable that Q3 is going to be in the mid-teens and then Q4 is going to be back to the low 20s. So that's kind of what gives us comfort about the balance of the year.

Okay. Good. And I know, Simon, there's always this question with these renewals in the fear that on subsequent renewals, that you'll see another markdown or a surprise on the gross profit margin? What's your reaction to that?

So I'd say that will continue in the overnight sensations like -- but if you look -- I mean, most if -- this is kind of the nature of the business, like as your customers grow and grow and grow as a cohort, they are going to drive gross profit pressure. But then you fill with the mid-market that is not that, I'd say, sensitive to gross profit because of the volume they drive. . Now they don't have, I'd say, collaborative negotiating power when they come as a cohort. We negotiate with all of them. So I'd say that the -- for the overnight sensations and we're extremely happy. I mean when your customers do well, we're happy and we're happy with that gross profit contraction -- sorry, reduction. But I wouldn't say it's the norm. I mean, we've had like the folks that like a ramp, like affirm like a Klarna and many others, they grew so fast and they did demand reduction and they deserve it because that's the tier they've had. I don't expect that, I'd say the renewals we did in Q1 did not take any of the gross profit down.