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

All right. Let's do that again. We'll restart that, reboot. So good morning, everybody. Thanks for being here. I'm Bryan Keane. I head up the fintech practice here at Citi, and we're excited to have Mike Milotich, who's the CEO of Marqeta. I will run through a list of questions here with Mike. And then if anybody has any questions, just feel free to raise your hand. So for the second time, Mike, thanks for being here.

Thank you for having me.

I want to ask you, Marqeta, obviously reported impressive third quarter metrics. TPV was up 33%; net revenue, up 28%; gross profit, 27%. So all great metrics, 19% EBITDA margin was really impressive. But before we get into the numbers, the one question I keep thinking to myself is you're now running 2 jobs as CEO and CFO. So you had the whole quarterly call by yourself. And I kept thinking like, poor Mike, you need some help. So I hope you're getting paid 2 salaries, but I was hoping you can maybe update us first on the CFO search.

The search is going well. So when I was named CEO in September, we started the search, and we have a firm that's helping us. So I'm starting to meet a lot of great candidates. So we're trying to move quickly so that I can have a partner to help capture the incredible opportunity that's ahead of Marqeta. I'm mostly looking for, obviously, a great finance professional, but also someone with very high business acumen because we do have this just incredible market opportunity ahead of us and having someone who can help us drive growth but also do it in a sustainably profitable way is what we're looking for.

And the hope is the next 3 months, 6 months, 9 months?

I mean the -- I'm hoping sooner rather than later, but you need to find a candidate. So that's what's most important.

All right. All right. Good. Wanted to dive in on some of the business segments. Obviously, the one that stands out is BNPL growth. And I wanted to talk about that, in particular, I think it was growing double the company average. What's -- how do you see the outlook in the BNPL business going forward? And how does Marqeta differentiate itself in this market?

Yes. Our lending Buy Now -- which we include Buy Now, Pay Later, that use case, as you said, it's growing over 60% and the growth -- the TPV growth accelerated 10 points from last quarter. So clearly, it's performing very well. I would say the easiest way to talk about what's causing that very strong performance is to compare it to our growth in Q1 of this year and most of 2024, this use case was growing in the 30s, right? So the growth has accelerated by roughly 30 points since that run rate of where we were for several quarters prior to Q2 of this year. And that 30-point acceleration is really driven by 3 factors that are all roughly the same in terms of weighting. So the first is the launch of the Visa Flexible Credential a little over a year ago. This allows in Buy Now, Pay Later for them to offer what we call a Pay Anywhere card. So rather than the value proposition in Buy Now, Pay Later being driven by the merchant where you see the checkout button, the Buy Now, Pay Later customers of ours are providing a card that allows you to pay in full or Buy Now, Pay Later anywhere that Visa is accepted. And we were the first processor to enable this capability in the U.S. And to our knowledge, we're still the only processor who has a program live. And so we have two customers who have launched and that's driving quite a bit of growth. That's one component. The second is, again, still in the U.S., but outside of the flexible credential. We are seeing really there's two factors. So one is the Buy Now, Pay Later customers we have are getting increased distribution through wallets. And so that is driving more volume to our customers, which then in turn comes to our platform. And then the second factor is also that we -- several of our customers in this area have diversified providers over time. One of our customers did some diversification in 2024. And so we're starting to lap that. And so that is accelerating our growth as we -- the year-over-year comparisons get a little easier. And then the third component that's driving this acceleration is in Europe. So there's a few factors that are going on there. One is we migrated 3 or really 5 programs in 3 countries for Klarna last October. And so -- that is not in our base yet. So that's fueling a lot of growth. Same as in the U.S., increased distribution through wallets is another factor. And then also in Europe, there's -- we have a couple of customers in the SMB lending space that use our product and their businesses are thriving and they're doing quite well. So those are all the factors that are driving the incredible acceleration. And our view is that this growth will remain elevated, maybe not quite at these levels for the next several quarters, but it will continue to grow much faster than the overall company because a lot of these advantages are sustainable. So there will be other processors who will support flexible credentials, but we have a significant lead, and it does require some expertise and experience, which we now have and others won't. Our ability also to support people in a multinational way with one platform is a unique advantage. So not just for flexible credential, where we're doing both credit and debit, but being able to support over 40 countries on one platform makes it just very easy for our customers to expand geographically. And that is a huge factor in many of our use cases in terms of our growth.

Yes. I want to ask about the -- when you say BNPL increased distribution through the wallets, what are you exactly talking about there?

So there are a couple of very large wallet players, one in particular that used to offer their own Buy Now, Pay Later, and they decided to stop doing it themselves and instead offer the Buy Now, Pay Later companies as the option. So they got out of the business of doing it directly and leveraging the companies that are dedicated to that space.

Yes. Yes. We know who that is. And then -- so what is the -- is there a same-store sales growth to think about because some of that business is new volume that you're getting landing from, especially in Europe?

Yes, I would say on a same-store sales basis, it still would be growing, I don't know, well over 50%. There's still a lot of new growth that's coming. It's hard for us to exactly discern how much -- like, for example, when it comes to wallet distribution, is there even incremental usage because customers are accustomed to using the Buy Now, Pay Later company that they have a good relationship with. So it's hard to know exactly for us from our perspective. But a lot of this elevated growth, we feel can sustain at least for several quarters.

Got it. I want to turn to expense management. I think that's growing faster also than the corporate average in the third quarter. What are the prospects for growth there?

Sure. That -- the growth in Expense Management has been very consistent. It's been growing in the 30s for many, many quarters and consistently is growing a few points faster than the overall company. So it's been a real area of strength for us. The real factor in expense management is that our customers are leveraging the flexibility of our platform to offer capability that just the traditional providers don't. And so our customers continue to gain share. And so that is fueling a lot of our growth. So this is in areas like AP automation and in corporate card issuance. One of the things that's very unique about our platform is not only do we operate at incredible scale with -- this quarter, we approached sort of $100 billion in quarterly TPV, but it's incredibly flexible. And so in these use cases where the card controls come into play where our customers can extend the capability to their users to really control and configure the card very specifically so that it minimizes fraud. It really controls spend. And then because it's all done with card, it really eases the reconciliation on the back end. So their value proposition is quite valuable, and it's driving a lot of growth, and that's then in turn fueling growth for us. We think this use case will continue to grow faster because also as we -- which I'm sure we'll talk about in a little while, this is one of the natural areas of growth in embedded finance. So we're starting to talk to a lot of companies who are outside of financial services, but have a platform business and they want to start offering Expense Management like capabilities within their platform. So this quarter on our call, we talked about a Fortune 500 company that supports the SMB space, and they want to start embedding more of this sort of AP automation and Expense Management capabilities into their platform. And again, that scale and flexibility that our platform allows is very attractive to our customer base and this customer who just launched with us. This is also another area that as we go forward in several years into the future, which again, we'll probably talk about. But as we work to break into banks and start supporting banks directly, this is also an area that again, we think is maybe one of the use cases they would use us for sooner rather than later because of the impact on their commercial card business is probably suffering a little bit at the expense of these more modern players who are growing really quickly.

Got it. Got it. On-demand delivery growth, double digits in the third quarter. So maybe a little slower than the overall -- the company average. Maybe you can talk about that growth rate.

Sure. The growth rate doubled. So that has been growing in the single digits for many quarters. And in this quarter, it doubled, and it's now in the double digits, which is great. The -- what's really driving that is the -- our customers are expanding both into new merchant categories and they're expanding geographically. So those are the 2 things that are really fueling the growth for their business and then in turn ours. We feel that in Q4, we might be able to stay in the double digits, but from a kind of medium- to long-term perspective, this is our most mature use case and we think it will probably grow in the single digits as you look further out. But for the meantime, there is good growth here, and we're happy to enable it.

Got it. I want to talk -- we'll talk about Block in a second, but the non-Block business, ex Block, when you look at that financial service segment, how is that growing? And how is the progress in expansion?

So the growth is strong. It's growing about twice the overall company, our financial service use case, excluding Block. So this is really our neobanking use case, and this is driven by both U.S. and European customers, in particular. So both sides and -- of the Atlantic. And with the financial services, it's really the quintessential embedded finance use case right now where most of our fast-growing customers are not -- financial services is not their core business. So they are looking to either bank the consumers who use their platforms or support the small businesses that may be also on their platform. And so -- that is what is fueling the growth. So they're looking for increased engagement from those users, offering them some capabilities that might either through rewards or spending capabilities drives engagement in their core business, which is what they're after. Wage Access is another tool that is used to drive adoption. And so that is something that we think we're still in the pretty early days. What we're seeing as a trend is the -- there are very large companies out there that have this big base of users, and they want to drive engagement. And offering sort of banking-like services and a card product is a very good way to do that.

International and -- International volumes, I think, are now high teens as a percentage of volume. I think that was up 5 points as a percentage year-over-year. Your volume has grown almost 100% and now you guys bring in TransactPay to unlock even more. Can you talk a little bit about expansion. Why is international going so well? And bringing in TransactPay into the fold, what does it mean for the overall growth of the business and the take rates?

Sure. Yes, Europe is continuing to grow over 100%, and it has for many quarters. We're having a lot of success there. The capabilities, again, of our platform, I would say, stand out even more so in Europe, just the combination of the scale and flexibility we provide is more unique in that market than it is in the U.S., where we have a few competitors who are solely U.S. based. So that's certainly helpful. The other thing that is quite helpful is there are many customers who want to be both in Europe and North America. So we have many customers who are on both sides of the Atlantic, and our platform enables them to do that versus there are many competitors in the U.S. or in Europe who really only operate in those geographies, so they don't allow that geographic expansion that our platform does. The addition of TransactPay is significant for us because it allows us to offer program management in Europe with the help of our EMI licenses to help us support both the U.K. and the EU. And why that is so significant is because in the past, even though our -- we are a single stack platform for processing, if a customer of ours was in the U.S. and wanted to go to Europe, we could help them with processing, but we'd have to tell them for all the other aspects of program management, we do for you here in the U.S., you're going to have to find someone else to do that for you in Europe. We can't support you. And so what this allows is a much more seamless transition from people going from the U.S. to Europe or Europe to the U.S. And in fact, this quarter, we announced a long-standing U.S. customer of ours in expense management is now expanding into Europe because it's going to be much easier for them. They can essentially utilize the same service we provide them in the U.S., we can now translate to Europe, and it just makes that expansion much less work on their part. The second value of TransactPay besides that ease of expansion is that in Europe, the largest players are looking for one company to provide processing, program management and the EMI license that's required. So the real high end of the market wants a single partner. And so we were really kept out of that segment of the market, which, of course, is the portion of the market we would most want to be and where the largest players are and the most volume is available. And so that's the second part of the TransactPay acquisition. That's quite important. It opens up the market to us to support the very largest opportunities. And this is something that -- we even consistently heard from the networks who are often a source of referrals for us that this was something that would significantly increase our chances of winning some big pieces of business. The last thing I'd say about TransactPay, that's important is that in Europe, traditionally, our gross profit take rates were much lower than the overall company because we only provided processing. And so what TransactPay allows us to do is offer program management and offer the EMI license. Those are both sources of value that we can monetize, and it should significantly improve the gross profit take rates in Europe. And then in addition to that, we've been, over the last year or 2 really rolling out our value-added services. And in Europe, we're seeing, again, a strong degree of uptake because in Europe and just like in the U.S., the customers ideally don't want to connect to lots of different parties for services. So if you have an attractive offering and they already use us for processing, it just makes it much easier for them to adopt a fraud tool, for example, from us. And so we're starting to get good traction in Europe from that as well.

So given that -- I don't know about 100% growth, but what is the outlook for International expansion for comparatively? I assume it's going to grow way above company average.

It will. I mean we can't sustain 100% forever. Like it's still over 100%, but it's ticking down as the rising base is quickly catching up with us. So yes, we won't grow 100% forever, that will likely maybe stop in the next quarter or two, but it's still going to grow meaningfully faster than the overall company as there's just a lot of momentum. And with the acquisition of TransactPay, also, our pipeline really reflects what we expected, which is -- there are a lot of people interested, much bigger opportunities are coming our way. And so we do feel that the very elevated growth in Europe is sustainable for some time.

So BNPL expense management on-demand delivery now doing even better the Financial Services segment, the non-Block business and International, all really carrying a lot of growth for the company. So -- there's always the flip side. So let's figure out what's holding back even growth from going further. There were a couple of drags that you called out on the earnings call. One of them was two renewals, one is expected in the fourth quarter and the other, let's call it, in the first quarter '26. I mean they're not too material, but I think there are about two points each maybe to gross profit growth. How do you think about renewals in general at Marqeta being a drag for growth rates every year? And how -- I know we made some changes to the pricing model. So renewals will have less of an impact going forward because -- what we don't want or at least when you don't want the investors to think about it is there's always a renewal coming and there's always pricing pressure, these aren't that material, but at least it kind of holds people back that there are renewals and there are some drags. So a long-winded way of saying, how do we think about the renewal process in these particular two clients?

Sure. These are 2 of our top 10 customers. So they are more significant customers than they're the last 2 that we have to do in terms of resetting the level of pricing that we had sort of coming out of the pandemic. You may remember, in '22 and '23 in those 2-year period, we renewed about 80% of our volume. So that was where we took on an initiative to really sort of reset our pricing in the market. And then there was a little bit of a lull there and these are the last two that need to be done. So -- going forward, we don't expect there to be in renewals, there'll always be -- you typically will have to give a little bit on price. That's sort of the way the market works. And you try to offset that by offering additional services like value-added services, but more meaningful resetting of pricing. These are the last two for us. Both these customers have -- their business has more than doubled since the last time we did a renewal, so they're significantly bigger. Our approach since we started embarking on this effort in 2022 has been to make sure there are aspirational tiers in all of our contracts. So what we mean by that is that we want there to still be a couple of tiers left in their pricing at the time their contract expires. So that when we're in the renewal, the next time it comes, it really becomes a non-event because we've already agreed to pricing at volume levels that are far higher than where they already are 4, 5 years down the road when we're renewing again. So -- that's the way we've tried to manage it going forward, which we think will really stabilize things and make it much more stable. The other thing that we've done in a lot of these renewals is -- as we've mentioned before, most of our top 10 customers now are in more than one geography with us. So -- and by geography, I mean, sort of U.S., Canada, Europe, Australia. So most of our customers are multinationals. And what we've started to do is offer global price tiering. So our pricing by program might be different because it -- the use case may be different or the degree to which we're offering program management or U.S. versus Europe, like the dynamics and the pricing going to be different in each case. But we will aggregate their volume to set the price tier. And really what that does is encourage our customers to keep expanding on our platform. So not only do we -- does our technology make that easy, but we're giving them a financial incentive also to grow with us. And we've seen that, that is -- has been effective in enabling our customers to expand in a way that's a win-win for both companies.

But it sounds like the likelihood that we -- in further years that we need to call out particularly renewal drag, it's probably just going to be more normal course of business.

Correct. Correct. You're unlikely to hear a lot about renewals besides just normal course of business after the midpoint of next year.

Yes. Great. And then the other obvious headwind was the Block relationship. I think it's now 44% of revenue in the third quarter. And I think they're moving to new issuance for Cash App to a different bank. Can you talk us a little bit about their diversification and what it means for Marqeta?

Sure. Their desire to diversify is very understandable and is a standard risk management approach in our industry and in many other industries. So most of our largest customers, if you looked at our top 10 customers, for example, most of them utilize more than one processing platform or they use more than one bank or both. So this is a very typical approach that's completely understandable from our perspective. The potential impact to us is that if they were to do all new issuance on another platform in 2026, what we've said is that would likely impact our gross profit in the high single-digit millions, so about 2 points of growth. And that's what they have told us to potentially expect. So -- we'll see how that goes. We have a very strong relationship. The two of us are very important parts of each other's businesses, and so we're communicating on a very regular basis. And I would also say that we are continuing to do new things together. So we continue to explore new business opportunities. And so just like our other customers who have diversified, our goal is really to be the primary provider. So typically, when people diversify, they still keep the bulk of their business with one provider to maximize their economics. And so again, we fully understand that Block would want to diversify, but we would -- our goal would be to maintain their primary provider and then enable their growth, right? Like we -- Cash App is still only U.S.-based. So we think on our platform, we could make geographic expansion easier. They do -- are doing transactional lending and a lot of lending, but they haven't done a true like revolving card yet, that could also something we could help them with in the future. So -- there's still a lot of opportunity for us to help their business and enable growth for the two of us.

So it doesn't feel like or sound like then this will be a headwind -- a multiple year headwind on this diversification?

Well, we'll see. That would be our objective, and we'll have to see how it goes. Yes.

Embedded finance, you talked a little bit about expense management there. But obviously, the use cases are expanding. Can you talk a little bit about that pipeline?

Sure. The pipeline is really rich. The way I always think about expense management is that the fintech companies showed the art of the possible of what nonbanks can do in financial services. So they -- what's happening is what made challenging for fintechs is they had to grow the user base, right? So they had very high acquisition costs. So what we're seeing now is a trend in the market is very established companies that are often digital-first or digitally native businesses that have -- may have tens of millions of users already on their platforms. They're saying, well, I could insert a card product into that user base at a very low cost of acquisition. But in turn, in doing that, I'm creating new revenue streams for myself on increasing engagement and stickiness with that customer, which drives other sources of value for me. And so we're seeing that across all our different use cases. The two most significant are expense management and then a neobanking like use case are the two that we're seeing, but there's quite a bit of opportunity there, and we think this is going to be a growth engine for us for several years going forward.

Got it. How is the credit offering resonating with clients?

Credit, it's going well. So we now have -- the key is in credit, we want to move relatively slowly because when you rush in credit, sort of unintended consequences can happen. So we're being fairly deliberate. We have both consumer and commercial programs live on our platform now. So we are getting the experience. I mean it's off a small base, but just as an example, our September credit payment volume was about 4x what it was in January at the start of the year. So it's a small base, but we're growing pretty quickly. We're getting the experience. We also completed a migration earlier this year for [ per pay ] a customer. So we have now experienced migrating both debit and credit programs, which we think will be very valuable experience as we go forward and look to take on volume from companies who may be using a more legacy provider and are looking for more capabilities in a modern platform. So we're getting good experience, and we have a good pipeline of people who are looking to do something different. What makes our platform unique is that they can truly embed the experience in their platform. And that also were enabling flexible rewards or dynamic rewards. So our view of rewards and credit is that today, they're one-size-fits-all. So everyone who gets the card has the exact same reward structure. But if you look at almost everything else in technology and in the digital world, personalization is a key factor for engagement, and that's what we think is going to happen in the credit card business as well. And so we've invested a lot of time and effort to create a dynamic rewards platform that would allow for more customized experiences for each individual user, and that would be a really critical way to drive engagement. If I'm a company that controls my inventory, then I'm used to marking down and giving special offers. I could do that in a very dynamic way or also if I am a digital platform, so I have an advertising revenue stream, then I could utilize sort of dynamic rewards to drive spend behavior in a way that would be very advantageous to my advertising business. And so those are some of the conversations we're having, and we're excited to capture more and more business and drive growth through credit.

Do they usually come for credit? Do they usually come with an existing relationship already, like they were doing debit and then they add credit? Or are they coming separate to do credit first?

It's both. It's both. And in fact, one of the things we're talking to people who are completely new to Marqeta is what also something that makes us unique because it's all one platform is to offer both debit and credit. So it's quite common in a co-brand use case that a lot of people who apply get declined for the card because they don't qualify. And again, if you're targeting people who are already on your platform, so they're already customers of yours that might not be the most ideal customer experience. And so we're -- one of the unique approaches that we have is to say, you could come up with also offer a debit card that maybe doesn't have quite the same reward structure, but would be the fallback option. And then from that debit card, maybe do some transactional lending through our Marqeta Hub product, which allows you to inject Buy Now, Pay Later into that debit card then maybe you start doing some credit building and then ultimately move them up into the revolving credit card that they originally wanted, but you help the customer get there. So that would be something that we could offer fairly uniquely in the market because of the breadth of our platform.

All right. I got three questions, and we got a little over 3 minutes, Mike. So we're going to speed round.

We're doing a little speed round here.

I want to ask about the FIs because that's always been a thing at the back of my mind of seeing if any FIs will adopt Marqeta's kind of modern platform services. Can you talk about the adoption there?

Sure. Our discussions with FIs are becoming more frequent and more substantial, I would say. So we're definitely having more engagement with them. We don't expect this -- the banks are going to be pretty methodical in their approach and thorough. And so we expect it to take some time. But our strategy is really twofold. One is by enabling the fintech customers we have that are now big businesses as well as embedded finance, that's just continuing to put pressure on the bank's business. And if they're falling behind in terms of the capabilities they can offer, that just puts pressure on them to modernize, which would open the door for us to start working with them. And so that's one aspect of it. The second is just making sure that they understand the use cases that we can support them in. So I think some of the early ones, I mentioned one earlier, which is really on the commercial side of the bank where we feel that if they are starting to lose some deals to the more modern players who are offering more dynamic capabilities that we could provide that same thing through our processing. And then the other use case is on the consumer side of the bank in more Buy Now, Pay Later like use cases, lending use cases. So both credit and Buy Now, Pay Later, we think there's a lot of opportunity for us to help the banks kind of increase the breadth of their offering that to be more similar to some of the newer entrants into the space over the last 5 or 10 years.

Take rates, the gross profit take rate, I think, was up in the third quarter maybe 12 basis points. How do we think about take rate going forward?

Yes. There's -- we don't expect it to move a whole lot. The mix is always an important part of our factor for us in our gross profit take rate because -- each use case is priced a little differently. The degree to which we provide program management can also affect our take rate. So the pressure that could come on the gross profit take rate is mostly has to do with renewals and price tiering. If customers are moving through our price tiers, that's a good thing. We see that as a good thing. We're very careful to make sure it's accretive as people grow like that and they get better pricing that is still accretive to us. So -- to us, that's a little bit of a cost of doing business and to be expected. The offsets, though, to increase our gross profit take rate, there are three. So TransactPay, we talked about. So offering program management and an EMI license in Europe will help bring our take rates up in Europe. We are also offering a lot more value-added services than we previously did. We have a white label app, a lot of risk capabilities, tokenization are some of the areas where we're seeing a lot of growth. And then the third piece is credit, as we talked about. The gross profit take rates tend to be better in credit because there's a lot more complexity and you're adding a lot more value. And so as that business grows, that should also help the business mix. So -- those are the levers, and we'll just have to see how the business does going forward.

Last one, I can't leave this conversation without talking about the margins, the EBITDA margins beat expectations handily so far in 2025. I think you're now expecting $100 million in adjusted EBITDA for 2025. I think that was double maybe your original expectations. Where can EBITDA margins go? And then where are we on the whole GAAP profitability?

Sure. Last year, our adjusted EBITDA was $29 million, and this year, we expect it to be a little over $100 million. So we're going to have increased that by more than 3x on a year-over-year basis. So our path to profitability is sort of really gaining steam. So the last couple of quarters, our EBITDA margin has been in the high teens percent. Our view is that because of the nature of a platform business where you have very high upfront investment, but you inherently get a lot of scale. We don't see any reason in the long run, why our EBITDA margin couldn't approach 50%. We think that, that would be several -- many years from now in terms of we have to reach a different level of scale. But -- we believe that is sort of the long-term goal from a margin perspective. And we believe we can get there. From a GAAP profitability perspective, we've said in 2026, so -- I mean, maybe it was our last earnings call in Q2, our expectation is that we'll be at least GAAP breakeven in 2026. So we're excited about the progress that we're making from a profitability perspective.

Okay. With that, we'll keep it there. Thanks so much, Mike.

Thank you.