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

All right. All right, guys, we're going to get started. Thank you, everyone, for joining. We are very excited to have Mike Milotich with us today. Mike has been the CFO of Marqeta since 2022. He's been serving in the interim CEO role since February. And this morning, Marqeta announced Mike's appointment as permanent CEO and the company's intention to search for a replacement CFO. Mike, thanks for joining us, and also congratulations on the announcement today.

Thank you. Appreciate it.

So look, we -- I think we -- a lot of us saw the news coming. So congratulations, again, on being named for -- CEO officially. Can you tell us where you're focused for the last 6 months and what your goals are for the rest of the year now that you've been kind of formally named official CEO?

Yes. No, thank you, and I'll probably be making some forward-looking statements. So please, look at our 10-K and 10-Q for risk factors. But I would say already before I took the interim CEO role, I was already very involved in the business, really almost all aspects of it. And so there wasn't any sort of change in strategic direction or anything. I was already very much on board and supportive and was involved in the creation of that plan. And so what I've really been focused on in the last 6 months is really execution and just making sure that we narrow down our priorities and then we deliver on those priorities, and we deliver them well. And so as I move now, I guess, into the permanent seat, it -- I've already been operating this way for 6 months, so not a lot changes. I would say the areas that I'm particularly focused in is, one, from a platform capability perspective, I've been digging in to make sure that we are expanding the capabilities of the platform and becoming more of a full stack with a lot of services around our core processing capability. We want to be able to move faster. So we want to be able to deliver new capabilities for customers quicker and onboard them faster. And we just want to make sure we're being -- the platform is just a lot more efficient and can be much faster. The second area that I'm particularly focused on is making sure we're easier for our customers to interact with. We are in a very complex business, and so a lot of times, there's a lot of complexity because you have a lot of cross-functional collaboration because you need a lot of expertise, both technical, compliance expertise, finance expertise, et cetera. And so what we've been really focused on is making sure that we can do that as effectively as possible. And so therefore, we can move faster for our customers. And then we're also leveraging a lot of AI tools to get more effective, for example.

Yes. You recently reported Q2 results that were ahead of expectations. Could you recap some of the puts and takes there and the overall implications for the rest of the year from the strong results?

Yes. I mean the results were really strong. Our TPV grew 29%, which was a 3-point acceleration, which we had not expected. And it was really strong across the board in our major use cases with lending and buy now, pay later being particularly strong, where we actually saw all 10 of our top 10 customers in that use case, their TPV growth accelerated from Q1 to Q2. And so a really strong outperformance there. Our gross profit grew 31%, which includes about 8.5 points of a change in accounting related to our network incentives. So on a normalized basis, a little over 22%, which was much stronger, mostly driven by the strong TPV growth, but also favorable business mix as all the TPV upside came from our non-Block business, so a little bit higher take rate on that business. And then our expenses, our adjusted expenses actually declined year-over-year by 7 points, which was -- or 7%, which is about 10 points better than we had expected. And half of that is timing related where we were just a little slower to onboard some new employees in the areas we're investing, and we pushed some marketing out of Q2 into the second half. So that was about half of the upside. But the other half was really just execution of optimization initiatives, we're really getting very good at sort of taking a lot of the waste out of the business. And so that led to record EBITDA quarter for us, both in terms of dollars and margin. So a really strong performance. In terms of how it affects the rest of the year, I would just note, I guess, 2 things that are important. One is that 8.5 point benefit we got in gross profit from the accounting change in incentives turns to a headwind in both Q3 and Q4. And so that's a little bit of a change. And then the second thing is that the TPV growth was a little bit unexpectedly strong and again, with a favorable mix. And so we don't expect or we haven't projected the TPV to remain that strong with that type of favorable mix for the rest of the year. We want to see the trend hold for a little while longer before we start including it in our forward-looking projections.

And I think one thing you mentioned was a change in the renewal timing expectation. Could you walk us through how that impacts or flows through the numbers?

Sure. At the beginning of the year, we talked a lot about we have 2 major renewals this year, sort of the last 2 we have for the last 3 years. We've renewed almost all of our business with revised economics, and these were the last 2. We, at the start of the year, said we thought they'd get done probably about midyear. And so therefore, in the second half, it would lower our gross profit growth by about 4 points, and therefore, lower our growth for the full year by about 2 points. As we've gotten into it and those discussions are ongoing, it's taking a little bit longer than that. We're still going to get them done long before the contracts expire, but the timing is shifting out a little bit. And so now we believe the impact of those renewals will start in Q4 with the full impact really not coming until 2026. And so as a result, that is going to be lifting our performance in 2025, which we have shared in our updated guidance, but without necessarily that carrying over into 2026 because it really has just delayed the timing of these impacts and how they will lower our gross profit.

Got it. Okay. And then I just want to level set on kind of your vision for Marqeta's longer-term growth ambitions. I guess how do you frame the longer-term opportunity, and then what are the 2 or 3 things that you expect to make the most impact over the next kind of 12 to 18 months?

Yes. I would say the growth path for our business is very clear. In my mind, there's sort of 2 ways that we look at it internally. One is just from a pure kind of market outside-in perspective, if you will, where, first, we've had a lot of success with our fintech customers over the years. And now they continue to expand both in their products and services they offer, but also geographically. We want to keep doing that. We've started to serve the embedded finance use case. So that is a business that's still relatively new on the issuing side. Again, a lot has happened on the merchant side. But on the issuing side of the business, it's early days, and that's sort of the next wave of growth for us. And then ultimately, we want to serve the big banks. But that's several years away. Another way that we look at the growth is more from an inside-out perspective where we've built -- all of our success has come for the most part in debit and prepaid. We're starting to build a credit business. And credit is half the market here in the U.S. It's a large portion of the market outside the U.S., and so that's a big growth area for us. The second area is geographic expansion. So our Europe business has been growing really quickly. TPV over 100%, and we recently did an acquisition to enhance our offering in Europe. But it's still -- that business is still relatively small. And so we think there's a lot of geographic expansion to be done. And then the last area is in more value-added services. So traditionally, our business and our growth was very tied to TPV because our program management was really done as a bundle, and we didn't have a lot of additional services surrounding it. But over the last couple of years, we've really built a lot of capabilities. And so whether it's risk or data services, banking and money movement capabilities, tokenization, all these things are now drivers of growth. And so if I was to focus on just sort of the next 12 to 18 months, I would say Europe and value-added services, bigger drivers of growth. The value-added services are still relatively small, but from a growth perspective, they can contribute and they tend to be higher margin as well. So they help the profitability. Credit, I would say, is probably more of a medium-term opportunity for it to really meaningfully impact the P&L.

I mean you've been talking more about the value-added services opportunity. I mean can you give us a sense for kind of like -- can you frame it in terms of an attach rate opportunity or like an ARPU opportunity with some of your existing clients and what that looks like when you successfully cross-sell?

Yes. I think that in some cases -- like we've said our risk services, for example, are getting a lot of adoption. We have over 40 customers that use them. But I also think that the fintechs prided themselves on saying, "This is my core business, so I'm going to combine best-of-breed services to create a really unique offering." And so they weren't necessarily as interested in buying a whole array of services from you because they were going to piece it together and maybe build some components themselves. I think as we move more into embedded finance, that changes a lot. The customers are not payment experts. And so it's actually quite the opposite. They want more of a full package that they want to get from one provider. And so I think a lot of what we've been gearing up towards is, sure, we will cross-sell to our existing customer base, and we have done so with some success, but we think the attach rate will be higher in the future as our customer base diversifies.

Got it. That makes sense. So maybe staying on the topic of longer-term growth. how do you think about the growth algorithm for gross profit growth in the business? And what level of growth rate do you think is a sustainable run rate over time?

Yes. I think the -- our gross profit growth is impacted by many factors in the last couple of years with sort of renewal activity and having to reprice some things, it's been a little bit choppy. But also, what's happening is as we -- our business matures, we're getting to a lot more economies of scale, and we're starting to really drive a lot of EBITDA. And what's challenging, I sort of referenced it a little bit earlier, that because of the complexity of our business, it's also a very long-cycle business. So when we make investments, it takes some time for the payoff to show up. And so the way we've actually been anchoring the business internally is really looking at a "Rule of 40" like metric where we're looking at gross profit growth combined with our EBITDA as a percentage of gross profit, which we feel like is the best way to really assess the profitability of our business. And we're getting -- we're starting to inch up pretty quickly towards a "Rule of 40" metric. But we think that metric captures the balancing act we're doing of driving growth, but also having to manage investment that really won't be a factor in our growth for a couple of years. And once we pass that 40% threshold, then we'll keep raising the bar.

And I guess you mentioned renewals on that. I mean one thing that stuck out over the last year or so was changes in the contracts, kind of lessons learned after the Block renewal to kind of make sure that there are enough kind of incentive tiers, the structures are accommodative of high-growth customers so that when these long-dated contracts come up for renewal, you don't experience this cliff activity. Can you just -- I guess, is the implication that the renewal impacts in any given year will be just a lot lower after you get through these last couple?

That's right. That's right. We've been pretty progressively resetting our contract base and setting it up. Our goal has been that renewals become nonevents in the future. And so we have these last couple to get done, but we expect it to be -- a lot of that noise to be gone from the business. There will still be renewal activity and customers want better pricing as they get bigger, but it won't be as significant as what we've experienced up until now.

Makes sense. So I guess on the Block relationship, the concentration with Block has continued to decrease over time. This quarter, it was relatively flat. It's a very strong partner, growing well. So just how do you think about changes to that relationship or just the longer-term view of the relationship significance to the company?

Yes. I think one of the big misconceptions about our business is that as our customers get bigger, they want less from us. And in some cases, customers have taken on some responsibility. But I would say that's pretty limited, and we have many, many examples where our bigger customers want us to deliver more. And as I mentioned earlier, we have really expanded the services that we offer from risk services, data services, tokenization, banking money movement. Now we're building an app for our customers to utilize. And so we have just a lot more to offer. And at the same time, traditionally, our program management was also sold with a bundle. And it -- but we've been working hard over the last couple of years to break that apart into more of an a la carte menu and allow our customers to pick and choose. So as this sort of portfolio or this menu of capabilities and services expands, we are increasingly selling some of these capabilities to our customers and in many cases, our largest customers, which would include Block. And when we sell these services, we can get incremental revenue and gross profit without a change in our TPV trajectory. And so that's really what you're seeing as the concentration slowed this quarter. And -- but that's something we think will be a little more common because, again, a few years ago, all of our growth was really driven by TPV. When you -- the second part of your question in terms of the -- how we think about the long-term relationship, we're very important parts of each other's businesses. So we're talking multiple times a week. So we're really in regular contact with one another and really have a very tight relationship. And we believe there's still many opportunities to drive growth for them on our platform between our, again, broadening capabilities that I've been talking about, our geographic reach and our expertise. We still think there's a lot of ways we can help Block grow, and we can drive growth for us. But at the same time, we also understand that our large customers also want to diversify providers, right? That has -- several of our large customers have done that. That's a very standard risk management approach in the business and not just in the payments business but in other businesses. And in payments, often what you see is, and some of our customers have done this, they may diversify, but you tend to keep -- have a primary provider that can -- that you keep the bulk of your volume with in order to maximize your economics, but then you -- for risk purposes, you do have a backup provider. And so I'm sure many of you saw The Bancorp 8-K a couple of months ago where they talked about establishing a relationship with Cash App. At this time, that's not something that we're participating in. So they -- in terms of diversifying like bank and processors, we recently added another bank on our platform for Cash App so that they can diversify bank partners within our stack. And they have had backup processors before. So this is nothing new, but this is not at least something for now that we're participating in. And our understanding is in order to diversify, they are going to start to do some new issuance at Bancorp starting in 2026. And whether that's a portion of new issuance or all new issuance, only time will tell. But the way that we've looked at it is even if starting on January 1, all their new issuance were to move to Bancorp, the impact on our 2026 gross profit would be in the sort of high single-digit millions of dollars, so would lower our 2026 growth by about 2 points. And as we think about our business, that's factored into our thinking. So on our last earnings call, we talked a lot about that as our business is changing, that our views of our 2026 gross profit dollars in terms of what we thought at the beginning of 2025 and our views at the time of our earnings call was that the dollars of 2026 hadn't really changed a whole lot, and even as things were changing in 2025. And as we incorporate all this information, that's all factored in. So we still believe that our views of what our P&L will look like in 2026 from a gross profit perspective is pretty consistent in dollar terms to what we thought at the beginning of the year. And we still believe that we can achieve GAAP breakeven. And so that's something that we're constantly refining our assumptions, and that's our interim view at this time. I would say that the -- one more important thing is that our relationship is quite strong, and we continue to work on new capabilities together. So it's a really constant, ongoing effort for us to figure out ways to help them drive value and growth for their user base.

Yes. No, that makes total sense. So I guess under the new construct, I guess, to the best of your understanding, is there a target mix of kind of processing that you and the new relationship at Block that you think that over time, the overall business will trend towards?

So that, we don't know. And so -- but again, this is not new for us, and we feel like we add a lot of value and have a lot of unique capabilities with them. And so we'll see how it goes. But our view is that not standard risk management and not very impactful to our P&L, at least in 2026.

Makes sense. Okay. Let's talk a little bit about the regulatory environment. Last year, you called out certain regulatory changes that were making go-lives more difficult, extending the time lines. You've also talked about adding new banks. You just mentioned adding new banks to add diversity to the platform in the prior conversation about Block. So can you update us on the progress on additional banks and just the overall regulatory environment in general?

Yes. So in the past, we wanted a number of banks to have enough options for customers. But at the same time, we want to maximize our economics for the benefit of our customers by getting scale with each bank. And so we -- there's sort of this balancing act we're doing between having a number of providers, but also not spreading the volume out too thin. But as the regulatory environment changed and some of the services and use cases we're targeting evolves, not every bank wants to do every type of use case and service, particularly as we talk about credit, which is even more specialized. So we determined last year that we wanted to bring on 2 additional bank partners. For one of them, the technical integration is almost complete. So we're like right on the verge of completion, and we already have a customer that we expect to go live in 2025. So that one is almost at the finish line. And then the second bank, we just recently signed the contract. And so the technical integration work has started so that we can support programs for customers in 2026.

Very good. Okay. And just the overall regulatory environment?

I would say not a lot has changed. So there's -- you read a lot about what's going on, but I would say that hasn't necessarily trickled down to the banks. Everyone is still operating sort of as usual. But the important thing to mention there, though, is that the bar, if you will, changed almost 2 years ago now. And so we are in a better rhythm and everyone has adjusted to that. It was pretty disruptive 12, 18 months ago, but now everyone's adjusted to that new level and things are working more efficiently.

Got it. Okay. This past quarter, I think one of the highlights was the outperformance across the lending and buy now, pay later space. I guess could you maybe just level set us how large that vertical is today in terms of volume or gross profit or both? And I was hoping you could talk about kind of where you see the BNPL industry headed over time, given that you work with most of the major players in that space.

Yes. So it's a big, fast-growing use case for us. I would say the last several quarters, lending and buy now, pay later has been sort of mid-teens percentage of our TPV. And typically, Q4 because of seasonality is much higher. So as we were highlighting, the business is growing much faster. So even in Q2 that we just had this year, it was actually slightly bigger from a percentage of TPV than Q4 was. So it is in the mid-teens, and it's growing very quickly. The growth is coming from a few different areas. So it's really the broadening of the use of buy now, pay later capabilities. So particularly, it's not as focused on sort of bigger purchases, like either very large purchases or something very small. It's really starting to be utilized more as a cash flow management tool. And so the diversity in the types of purchases that are being made is increasing. And then it also is just a much broader customer base. You see a lot more adoption. And it also used to be in more specific -- sort of specific geographies, and it's really becoming more broad-based and you're starting to see it in a lot more markets, which is part of what's fueling our growth. I think the biggest change, though, is that more and more of the BNPL providers are offering what we call a pay anywhere card, which is really our name for them offering their customers a card that says you can use this card anywhere that it -- cards are accepted, and you can be allowed to buy now, pay later with all those purchases. So it becomes a feature of the card itself. And so what that does is drive a lot more engagement. If you like look at -- we do a lot of consumer surveys and things and what they're saying is that I don't want to have multiple cards, multiple wallets. And so this allows a consumer to have the ability to sort of pay now or pay later in one product. And that's being also helped by the kind of introduction of flexible credentials from the network, which we were the first processor in the U.S. to deploy. And so I would say we see a big shift in the sort of adoption of that capability as well as, in general, just the use of buy now, pay later spreading to many more merchant categories and geographies. And just given the way the flexibility and the reach of our platform, that's what's really benefiting us from a growth perspective.

And should we be thinking about the growth in some of these -- the physical card issuance and the expansion of BNPL networks as the bigger driver of BNPL growth for Marqeta over time? Or will the kind of virtual cards and the plumbing of the transactions even in the online world continue to be a big part of the story?

We still think that will be a big part of the story. If you think about the tens and tens of millions of cardholders that are out there and hold cards, I'm sure our BNPL customers would love to say that all those people will have one of their cards. But even if they are wildly successful and drive a lot of growth, there will still be many, many customers who won't have one of those cards and will more opt to click on their mark in the checkout process.

Makes sense. I wanted to switch gears and talk a little bit about international expansion and the TransactPay acquisition. You've been talking about the pipeline in international deals for a while now. I was wondering if you could talk about what you're seeing on the ground in Europe compared to what we see in the U.S. today. And then maybe also hit on the TransactPay acquisition.

Sure. So our Europe business has really been performing well. The TPV growth has been over 100% for many quarters. And what's interesting about it, at least from my perspective, is that all our major use cases are growing over 100%. So it's not a particular part of the business, but financial services, lending and buy now, pay later, expense management are all growing over 100%. And so there's just a lot of opportunity there. I think the biggest difference in Europe from our perspective is that they're a little bit ahead of the U.S. from an embedded finance perspective. Because of the way the economics work in card in Europe, they are much further along in thinking about how to use financial services and card products, in particular, to drive engagement in their core business, which is really sort of the core tenet of the embedded finance use case. And so I would say they're a little bit further along. And because of that, that's really what sort of got us to act on the TransactPay acquisition because what happened before, our service in Europe was somewhat limited. Where we could offer processing, but because of the way the licensing works in Europe, you have providers who have this EMI license, which allows you to be the member of the network and own the bins. And that needed to be part of your solution together with the bank. And what a lot of large enterprise customers, which is most of the embedded finance market, were saying is, "I really want one provider who provides me processing, program management and the license. And if you don't have all 3, then I'm going to have to sign multiple contracts, and I'm not very interested." So that's really what drove the need for us to make that acquisition. We could have gone through the licensing process ourselves, but it would have taken a lot of time. And there's a lot of expertise involved. So we got both a huge acceleration in the time line as well as a lot of very capable people who know how to manage in that environment. And so not only will this open up deals that we really just weren't going to have access to, particularly on the high end of the market, the very -- larger deal, the bigger deals, but it also makes our service much more similar between North America and Europe. And so why we think that's important is because the fintechs are becoming these big businesses and expanding geographically. And embedded finance, almost all those companies are already multinational. So we wanted it to be very easy for a European customer to move to expand into the U.S. and have the service we provide be very similar and vice versa. U.S. customers expand to Europe and be able to offer a very similar service, which we weren't able to do before. But with the addition of TransactPay, we were able to do that going forward.

All right. I'm going to try to squeeze in a couple more topics here. On the spend management side, it's been another really high-growth area of the business. You partner with several of the kind of high-profile, high-growth players in the space like Bill and Ramp. How large is the vertical today? And just how do you think about the growth rate of the category over time?

Yes. So it's another big component of our business. The expense management, it's a little smaller than BNPL. So it's in the -- I guess, it's in the teens percentage of our TPV, but it's a little smaller than the lending and buy now, pay later use cases. And the growth is really being driven by kind of newer companies who are really utilizing modern technology, both that they build themselves as well as using modern processing technology that we provide to really offer a service that goes well beyond what the traditional players offer. So the growth has been -- this past quarter, our TPV growth in this area was over 30%, which has been pretty steady over the last several quarters. And it's really those businesses that are winning share. They just offer a much more compelling value proposition than the traditional players just in terms of its flexibility and the level of control that they offer and how seamless it can be sort of embedded into the rest of your business. And so they are having a lot of strong user acquisition, and that's helping drive the growth, and we are the beneficiary. I would say we're also enabling geographic expansion. So that's another area. Again, I would say is a consistent theme in our business is now that the fintech winners have been crowned, they are moving into new products and new geographies to continue to grow their business.

Got it. Makes sense. Okay. This summer was kind of dubbed the stablecoin summer. There's been a bunch of announcements from various players in the payments ecosystem. With summer ending, are we now in the fall of stablecoins? Is it over? Or are we still going to be talking about it?

I'm sure we'll still be talking about it. Our view is that the 2 primary benefits of stablecoin is you're either living in a country that has very high inflation and you're looking to protect yourself from that or it's more of a cross-border use case where you're looking for speed of that moving, the costs are fairly high. And so those being the 2 primary sources of value, neither of those are really a big part of our business today. So we don't see this as super disruptive to our business, at least for now. And I think what remains to be seen is if the stablecoin sort of wallets take off, what I think is still unclear is where are you really going to be? How often are you really going to be able to use that wallet to make purchases? And if that's not the case, then also, what is the cost to get the value out of that wallet into something that is more usable? And so I think until there's clarity on that, kind of adoption and usage is a little bit hard to project. In our view, we already have a solution that works best for this market, which we already do with Coinbase and Bitpanda and crypto and which obviously would apply in stablecoin where they offer their customers a card where you can transact in fiat in the ecosystem, so the rest of the ecosystem doesn't have to change or could evolve slowly over time, which is typically the case, and they're just drawing down on your balance of crypto or stablecoin. So we feel like we have a solution that very much works if the usage of these wallets takes off even if acceptance isn't there. And at the same time, we are engaged with several people about partnerships because that might be the case for the next several years, but thinking out further, we want to make sure we're positioned to support our customers if they want to go down that path.

Got it. Okay. I wanted to talk a little bit about conversations with large FIs. I know this is something you've always been focused on as a longer-term opportunity, but something you do want to address. Maybe you could touch on what the conversations with large FIs look like today and any updated thoughts around time lines?

Yes. I mean they're ongoing. We're in dialogue with them. I wouldn't say constantly, but from time to time with different FIs, we're in conversations. But one, they're thoughtful organizations. They also plan way ahead. So even if something were to happen tomorrow, it would probably be a few years before the volume would come on in a meaningful way. And I think for most banks, there's some investment in their infrastructure that has to be modernized in order to really take advantage of the kind of capabilities that we would offer. And so we still think it's several years away. For us, the focus is to sort of get our foot in the door with sort of a very specific use case where we have a lot of expertise and are highly differentiated. And then the other area where we think we're likely to get in earlier is in the commercial side of the business because of the success of the players we talked about earlier. For them to respond, they're going to have to upgrade their capabilities. And so we're just trying to get kind of our foot in the door, start building those relationships, and we don't expect the business to be significant in the next 3 to 5 years. But as we look out further, that's definitely the part of the market we want to target.

Got it. Well, Mike, I think we're just about out of time here, but thanks for being here today. Congratulations on the appointment, and I really appreciate you attending the conference.

Yes. No, thank you so much for having me.