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

Excellent. We're just about to get started. So welcome, everybody, to the Marqeta fireside chat at the Goldman Sachs Communacopia and Technology and Internet Conference. I have the privilege of introducing Simon Khalaf, CEO of Marqeta. My name is Mike Ng. I cover Marqeta and fintech here at Goldman. Simon has served as CEO of Marqeta since January 2023 after joining the company in June of 2022 as Chief Product Officer. Prior to joining Marqeta, Simon was CEO of Flurry and held senior executive positions at Twilio, Verizon and Yahoo! to name a few. We have about 35 minutes for today's presentation, inclusive of audience Q&A. So if you have a question towards the end of the session, just raise your hand, and we'll get a mic runner over to you. So first, Simon, thank you so much for participating in this conference and being on stage with us here today.

Thanks for having me.

So since taking over as CEO earlier this year, you've talked a lot publicly about Marqeta's opportunity in embedded finance. For starters, what is embedded finance? How does Marqeta's positioning in modern card issuance and processing position Marqeta to succeed in embedded finance? And why is it important that you go after this opportunity?

First, I think we should define what embedded finance is because there's a lot of confusion. I'd say the simplest way to think about it is when the entities or products that are nonfinancial services products or companies offering financial services product. If I want to explain that to my daughter, it's like you don't have to go to the bank, the bank comes to you. So it's as simple as that. We are very excited about this space. First, I'd say it is very culturally accepted. Having some fun here. Actually embedded finance preceded banking. 5,000 years ago, in Mesopotamia, they used to barter which is marketplace, you come in, like you bring 3 sheep, I'll bring like what -- a mule and then we trade. And they invented currency with respect to the marketplace and you cannot use that currency anywhere else other than the marketplace. So that is what embedded finance is all about. And 5,000 years later, things are starting to make sense again. So it's very culturally accepted. Now the first thing is like, why now? And I would say that fintech products demonstrated the art of possible, as in this is what you can do but they were limited in distribution. You've got the banks, have great audiences, tech companies have great audiences, retailers have great customers, but fintech built awesome products, lack distribution. Embedded finance adds that magic to an amazing product, which is distribution. And then when you -- that's when you get the real distribution of fintech products. So I think that's what's happening now. Now in terms of Marqeta, honestly, like Marqeta started enabling all these embedded finance use cases, whether it's on-demand delivery, whether it's accelerated wage access through our partnership with Branch and Uber in expense management, many other embedded finance use cases. So when people started talking about embedded finance, they're describing Marqeta. So that's why it kind of makes sense for us to kind of like carry that flag and then move forward with it.

Great. That's a fantastic overview. I do want to hit on your recent contract extension with Cash App. There's a lot to dig into there. It's a 4-year deal, but could you just start by talking about what this renewal means for visibility into the long-term growth for Marqeta? How does that visibility allow you to focus on other important strategic initiatives?

Sure. So Cash App in particular and Square in general, is the big customer of Marqeta, used to account for about 75% of our revenues. And it's very important for the predictability of revenues, so that contract be renewed. And that's exactly what happened. And we're very excited about it because what we've witnessed over the last 4 years is phenomenal growth by Cash App. It is actually the runaway success fintech company. Because you've got kind of PayPal established between them and Yahoo! Finance. It's the 2 oldest fintech products ever built. And then you have Apple Cash and then the third one is Cash App. That's like massively adopted products. So we've seen phenomenal adoption. We've seen a great symbiotic relationship between us and Cash. But what happened is Cash kind of like outgrew the contract we had with them. No one had predicted the growth of the contract. So -- and our pricing model as the more volume you process, the rates will drop. But no one added as many tiers as was needed to accommodate the growth. So Cash was stuck and kind of we were stuck. We needed to re-baseline, and I think the new contract gives us the opportunity to do so. So we're very excited about it. In terms of -- does it change the day today, it does not. What we're doing with Cash App is exactly the same thing, focusing on their growth, focusing on supporting them, building innovative use cases so they can grow their audience. So it doesn't change much. In terms of our own strategy, it actually, other than adding predictability of our revenue and predictability of our growth and re-baselining the company and give stakeholders and shareholders the predictability, it doesn't do much more, but it's an important thing to have predictable revenue stream. And last but not least, I say our priorities are the same. Number 1 is to get credit going so that we increase the ticket size of everything we sell. It's something that our customers have been asking us for. Grow internationally, whether we have existing customers in the U.S. that want to expand in the EU or outside the EU in Latin America as well or growing outside the United States. And last but not least, strengthening our program management capabilities because a lot of the embedded finance customers do not want to bother with compliance, anti-money laundering and then compliance rules. So by delivering that part of our service, we will become even better positioned for this space.

That's a really good overview, and I do want to hit on all those strategic priorities. But before I leave the discussion on Cash App, I was just wondering if you could talk a little bit more about some of the changes in pricing on the new contract and also the impact on Marqeta's gross profit take rates?

Sure. So -- I mean getting through the -- quickly through the chase. So the contract includes 2 things that are important. One is a reduction of our gross profit take rate by about 40% and the second one is Square taking over the relationship with a major network that was running through our [ books ]. So let's talk about the first one. So the first one, like I mentioned, Cash App was going so fast. They were hitting tiers. They hit the last tier 2 years ago, and they're stuck. So I would say that the discount we have given them is something they would have earned if the contract we built in 2021 had envisioned such growth. So by renewing the contract, we've given them that discount, which is 40% in our gross profit take rate. But we built, I'd say, enough tiers that now has baked in the phenomenal success with some downside protection. So I think that the maturity of our team and the maturity of their team, right, has changed to the better. So I think we have planned this one better. And the second one, I think we'll talk about it more. It honestly does not have any impact on our gross profit, but would impact our revenue, but no impact on our gross profit.

Okay. Great. And I was just wondering if you could expand a little bit about Cash App taking responsibility for the primary network relationship. Why did this happen? And maybe you can talk a little bit more around the accounting impacts of that switch. And then similarly, I think Marqeta reported losing some card network incentives in the first quarter. Was that a related thing or different?

Let's start with the last one. They're absolutely not related. So we have never received incentives for the Cash App program. So that is not related. What we reported this year, and it impacted our growth negatively and honestly, it was a bit of a surprise, and we apologize. We were surprised as well that we had lost some incentives for a couple of programs in which we thought we were receiving incentives. okay? Not a problem. It won't happen again. So the -- but not related to Cash App. Now, why would -- what would change when they take primary responsibility for the network. So from a day-to-day perspective, nothing, other than Cash App will kind of choose what kind of program they have with the network and some network products. But from a financial perspective, there are network fees that Cash App would pay Marqeta because Marqeta is the principal, and then Marqeta will turn around and pay the network the exact same fees. So as far as our P&L is concerned, they were empty calories. So money in, money out. So it does not benefit our -- it makes Marqeta's revenue look oversized, but our gross profit would continue to decline. So by -- so it was kind of like -- it's not -- it was not our call. It was our accountant's call, but it was something that we welcomed as a management team because it actually sets up a much better baseline for the company. So it doesn't have any impact on our day-to-day work, and it does not have any impact whatsoever on our gross profit. So we're very excited about that change.

Great. That's very clear. Why don't we switch gears a little bit and just talk about the momentum Marqeta is seeing in booking trends more broadly. Bookings over the last 3 quarters were up 150% year-over-year. So first, maybe you can just talk about that strength and momentum, what's changed from a go-to-market or product perspective that's been able to drive this tremendous growth? Is this new customers or expansion of the existing contracts and ultimately, what do you see the opportunity being for long term?

Sure. I'd say you haven't seen anything yet. So we -- there's many things that have contributed to this. The first one is we've reorganized our sales organization. So we used to have a team that is focused on existing accounts. They are non-sellers, they're account managers. They're very good, but they're not compensated on selling. So every company dreams about the land-and-expand strategy. You go to a customer, you sell him something, you partner and you sell them more things. That motion was broken because of a compensation structure and the type of people that we have managing these accounts. And then we have the hunters, which is their focus on net new accounts but the moment they get these accounts, they have to hand them over to a delivery team and hand them over to an account team. So as the sales rep, you work so hard to work on an account and then you lose at the moment you win. So we got that construct. We changed the leadership. We merged the teams that are sellers, whether you're selling into an existing customers or net new, it's a sales motion. So -- and then we put them in a pod as in a group with the account managers, and we have pod leaders that have a quota for both expansion into existing customers and selling to new customers. That's a material change. The second thing we've done is we've organized the sales force around size of customers with growth, mid-market, enterprise and strategic because what they did before, they're organized around use cases. So the kick ass team that actually was working on ODD, ran out of things to sell. There's only Uber, DoorDash, Instacart and a couple more. So okay, what are they going to do next? So by organizing around size of customer, we're able to cross-pollinate the team and offer mobility. So that's the second thing we've done. And the third thing I'd say is focus on solution selling, which is every company that witnesses -- it's not my first -- every company that witnesses hyper growth, they keep selling products while customers want to buy solutions. So expanding the product set into solutions. You don't need to buy a modern car and issuing from us and then going and getting your banking solutions from somebody else, getting your risk from a third party. Let's focus on what are you trying to achieve? If you want to accelerate wage access, awesome, we bring you card issuing, we bring you treasury, we bring you money movement, we bring you GPR accounts, we bring you risk. And then we put it together, we put program management on top, so you don't have to worry about it. So I think -- sorry for the long-winded details, but that made a huge difference, like we jumped 150% year-over-year. It's more kind of like, I'd say, doing things in a scalable manner.

Right. That's fantastic. And this is a related question, but Marqeta mentioned about 1/3 of deals signed last quarter were flip deals where you replaced an incumbent provider and perhaps the answer is a lot of the things that you just mentioned, but how is Marqeta coming to these deals differently than the incumbent and which incumbents do you find yourself winning the most business?

Great question. So what's different? Why are we winning something we've lost. So actually, there is -- I'd say 3 main reasons for that. The first one is a lot of folks made the decision based on a year of visibility, which is they want a program in the U.S., excellent, they made it. Now they want to expand internationally, they were stuck, while Marqeta can support them in 40 countries. So that's angle #1. And a lot of folks also wanted to have -- to start with the debit program and later start a credit program. And they started with debit, they wanted to move to credit, they were stuck. Marqeta does have credit support. And last but not least, it's price. Marqeta is not cheap if you don't have scale. So if you're like a startup that has almost no users, our rates are high. But as you achieve scale, we're very, very competitive. So those folks achieve scale. So while they wanted Marqeta at a cheaper price, they actually graduated into the Marqeta academy, and they were able to get the price that they were seeking. And that's why it made sense for them to switch.

And you mentioned earlier in our discussion that one of the key priorities was expanding internationally. So I want to talk about Marqeta's opportunity to serve those embedded finance use cases abroad. One of the recent partnerships that you announced was with FitBank in Brazil, the largest -- one of the largest fintech markets in Latin America. How should we think about the size of the opportunity in international markets? And what is Marqeta's product and customer road map look like there?

Sure. We see we see massive opportunity outside the U.S. First, there are 6 billion people on the planet, only 300 million live here. So yes, we do have the largest GDP. But like add the all others, they add up to something important. So there's many paths for us to gain international growth. And I'll mention a couple of growth numbers. Our bookings, about 30% to 40% usually in the quarter is outside the U.S., and our growth on the outside the U.S. is faster than our growth inside U.S. It's 78% in the EU and close to [ 58% ] on an international basis. So what is driving this? First one is U.S. companies want to go to the EU and the U.K. So that's one angle. And the beauty is they're integrated with us. We have a data center -- we're hosted in a data center here, a data center in Europe. So we comply with all the fun, European regulations. So it's a very smooth transition for them to launch in a country outside the U.S. if they're on Marqeta. So that's angle number one. So the angle number 2 is we do have -- we staffed up our European team, and they are working with European customers who want to start in Europe and eventually expand to the U.S. So they're thinking locally and acting globally, and we support that. And then the third thing is Latin America, especially Brazil, has been on our radar for a while, given that it is kind of like the -- in terms of mobile adoption, it's at 75%. It is the #1 fintech country in Latin America, the 6th in the world. So we have a lot of hope and then with Pix which is the real-time payment network in Brazil gaining traction, there's so much opportunity that we think very highly of our relationship with FitBank and our ability to gain market share in Brazil as well.

Great. One of the other key priorities that you mentioned earlier on was credit. Earlier this year, you acquired Power Finance to strengthen your credit card capabilities and maintain your leadership in modern card issuing processing. So how is that integration with power playing out? What success have you seen in credit solutions among your existing customer base to date?

So we bought credit -- sorry, we bought Power in the, I think, early February. And I'm very happy to say that we're done with the integration as of June. We have cards in the wild issued by -- on the new stack fully integrated, would open for business, we're selling. So in 5 months of operation, so integrated the team, integrated the product, integrated the tax, integrated the bank, cards in the wild. So very excited about that. It speaks to the nature of our M&A process. This is the first acquisition we do, so we have to make sure we don't botch it. So at least we got that right. Now in terms of -- we have a large pipeline from existing customers and new customers for credit. I'm very confident we will close a few in Q3 for launch in H1 2024. So we have built the pipeline, and it's ripe for closing. One thing I have to say that I was actually surprised about the demand in commercial credit. So we were -- we had done good market research build-up pipeline for consumer credit. The moment we announced the Power deal, we had a lot of interest in commercial credit in seller financing, in SMB credit, in -- I'd say, aggregators that support marketplaces, whether it's for law firms, whether it's for construction management, whether it is for a blue collar SMBs, like plumbers, so on and so forth. That one access to credit, and they cannot receive it because they do not have the sophistication to provide the financials or even understand the covenants at some of the big 6 in the U.S. have. And then most of those were done by regional banks that are -- that have tightened the credit box so much on the local SMBs given the exposure to commercial real estate, it's a perfect market for us to go chase. So I'd say that's a positive surprise from the whole thing. And I'm confident we'll be able to get some really important deals done this year with the launch early in 2024.

Great. And just as a follow-up to that, I was just wondering if you could talk a little bit about how a typical credit deal might look like, especially relative to what you do in debit. Are the mechanics very similar?

They're similar. I mean on the consumer side, they're very similar. The choice of bank would be different because I mean, credit is a business in which you almost make no money until people revolve on the consumer side. So customers have to demonstrate that the revenue comes from loyalty. So if you issue a co-brand then there is a tail effect in which consumers will buy more from your brand, the retention is higher, so on and so forth, because not everybody revolves. Now if people revolve, yes, there is a new revenue line that will come in. The second thing is, as you think from a global perspective, the interchange is regulated. So the interchange on credit is 40 basis points. That's not strong enough to support the rewards and generate revenue. So I think it's an interesting play but focus more on the loyalty, which is easy to prove, by the way. I mean if you look at -- by far the most successful program in the U.S. is the United Card MileagePlus cards. So you demonstrated that. And co-brands are something that are very strong from a credit perspective.

Really interesting. I do want to save some time for audience questions. Why don't I just sneak 1 or 2 more in before I see if there are any questions from the group. On financials, Marqeta's latest guidance calls for positive EBITDA by the end of 2024. Maybe you can talk a little bit about how the Cash App renewal impacts the path to profitability and also talk about some of the operational efficiencies that you're focusing on to get there?

Yes. So we stand by that guidance. We feel very comfortable about it, that we will exit 2024 EBITDA positive. So we could have achieved it sooner, but we actually, in our minds, have baked in the renewal of the Cash App. So our confidence is driven from 3 things. One is we've got the bookings. That will translate into growth from a revenue and gross profit perspective in 2024. We've done a lot of work on reducing costs. Fortunately, that we conducted arrest. And then the third thing is managing a lot of the third-party costs in hosting and computing and we're bringing that down. So and the last thing I'd say is we are opening development centers in Eastern Europe, in which -- because right now, most of our development is in Tier 1 markets. So expensive headcount. So we're doing all these. That gives us really good confidence that we will exit 2024 EBITDA positive. And then not that far later, we'll hopefully discuss it soon is full profitability on a GAAP basis.

Great. Why don't I see if there are any questions in the audience?

David Alvarado from Goldman Sachs. I wanted to go back to something you said at the very start around the theme of embedded finance and some of the issues that we see in Fintech around distribution. Just curious if you could take out your crystal ball and look a few years ahead, how are you seeing sort of banks, fintech and what I would say is kind of consumer brands or marketplaces, interacting in the world of finance and is it shaping your kind of longer-term strategy in terms of go-to-market and things like that?

Yes. Thank you for the question. Look, I mean, I've been a founder, an entrepreneur, 3 times. We see things somehow. And we get the idea right, we get the decade wrong. And we learn, and everything we're talking about or doing right now, I have envisioned and documented and blogged about 10 years ago. I'm not going to brown-nose and talk about the Apple, Goldman Sachs. That's what everything is going to look like. I mean, people love the Apple brand. Apple doesn't know how to do banking. I mean they can learn it, Goldman knows. I know there's a lot of press that maybe it might not going right, going well, it doesn't matter. It's happening. We got 11 million credit cards out there in how many months? Let's talk about that. There is savings accounts with Apple and how many months? Nothing. No marketing campaign by any bank could have landed that growth. So you're seeing the future. And it's no different than the opportunity you have with Walmart and moves like wildfire. The users are there, the value propositions are there. And I mean, let's face it. Commercial banking has lost the concept of customer service because they don't measure how many times a user returns to the bank. I mean, I was on the other side, like the most important thing is the customer visit. That's when it's called the daily active user. You celebrate when somebody touches your property. On the banking side, "Oh my God, you look at it. It's a service call. It's going to cost me x number of dollars, and I'm losing because my BPO cost is higher than the in-service." See how like they are very different. I think you're seeing the future. I'm willing to predict that a majority of the volume, a majority of the volume within the next decade will be in co-brands, will be integrated into retail marketplaces like an Amazon. It will be integrated into like a creator marketplaces like a TikTok or Google or what have you. I would say most seller financing will happen by the marketplace. They have the data to tell you they can predict what revenue these folks are going to get. So they can underwrite it. They could create in software the covenants that -- honestly, I mean once you get a loan and you get a covenant, you put it in the drawer and none of the small businesses understand what a covenant mean anyway. So I'm willing to predict, sorry for the long-winded answer, I'm willing to predict that all of it is going to happen this way. At least 50% in the next decade, the volume is going to come from embedded finance.

Great. Maybe you can follow up on something that you said earlier about Power Finance and credit and the good pipeline and momentum that you're making on some of those deals there. Maybe you could just talk a little bit more about some of the nature of those prospective deals? Are they similar to what you just mentioned just now?

Yes. I mean, the predominant demand right now for credit is, I'd say, embedded finance. Actually, I'm not aware of a non-embedded finance credit deal that we are working on, and we believe that is ripe for closing in between Q3 and Q4. So I can speak in general terms. So they are mainly entities servicing the supply side of the marketplace. So let's say you have a -- I'm just going to give you an example, you have a marketplace that you can recruit plumbers. So you go in and you source a plumber and they come and they do the job, you pay the marketplace, they settle with the plumber. Well, the plumber has to buy goods. They need an expense management card. They need supplier cards. So the marketplace knows the demand. So they will actually help with underwriting that. So it is supplier payments, seller financing that are -- I'm just giving you an example, that are, I'd say, the top 2 to 3 deals. Now, we have a couple of co-brands, that's consumer-driven that they want the card itself to integrate with the marketplace to integrate with the product. Like rather than having, "Oh, 1x like cash back." No, they want that to integrate into the basket, into the shopping. Imagine that you have 3 things that you're trying to buy, and all of a sudden, you get a pop-up saying, "Look, you're going to get 3x the rewards on this item if you act in the next 2 to 3 hours." That will automatically change the transaction. So the credit card is coming alive. It's part of a product. It's not something you have in your wallet. So it is something that is altering consumer behavior versus capturing consumer behavior. And that will change the dynamic. So we're very excited about that use case as well. And then last but not least, on credit is supplier payments. So we've done a very good job on expense management and most of that is NetSuite. I mean, very little is evolving. But once you look at supplier payments, and the ability of a supplier to take cards, right? Now that working capital is prime plus 1.5%, now the interchange seems very small compared to that. So -- and once interest rates are no longer free, there's a lot of supplier payments that will go through the virtual credit card with the ability to revolve if -- let's say, you are tight on working capital.

Great. Any other questions from the audience? Well, we've just got a couple of minutes here. So maybe in closing, you could talk a little bit about what you're most excited about over the next few years? Perhaps you can give us a little bit of a teaser of what to expect from the Investor Day this fall.

Sure. So I mean I'm very excited, as you can tell, about the embedded finance market. Like I said, it's culturally accepted. It makes sense for consumers. It makes sense for the financial institutions. No one knows the customers better than the entity that is interfacing with the customers. So that's very big for us. In terms of the Investor Day, I think that we haven't been in front of the shareholders since the IPO. A lot has changed since. You have the regional bank issues, you have the phenomenal growth we're seeing in embedded finance. We have the addition of credit. So Marqeta is no longer single -- like single pony show. It is a story that is extremely nice to tell and it's kind of like our coming out story. And what we'll share, I'd say is, number one, the market opportunity. So people can size it and see what it really means. They can understand the demand from the customers themselves and what -- why it makes sense, why market has differentiated? Because, look -- there's a lot of money. So a lot of players are going to come in that direction, but we feel very strong about our moat. And then last but not least, how you can translate these bookings and these wins in embedded finance into predictable revenue stream over the next 5 to 6 years with the ability to see that our total processing volume and our take rate will be stable versus face another Cash App moment because we had not predicted growth and what that gross profit take rate would be. So this time, our unit economics, we will show the unit economics going forward 5 to 6 years and how people can think about the equity and what the return they can get from the equity.

Great. That's an excellent way to wrap up the session. So Simon, thank you so much for being here and for all your thoughts and wisdom, really appreciate it, and thank you so much.

Thank you for having me. Really appreciate it. Thank you.