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

Okay. Welcome, everyone. We're going to get started here. So we're going to start off, first of all, thank you and congratulations to Mike Milotich, who was recently named CEO, so now CEO and CFO, at least temporarily. But congratulations to Mike on the appointment, and thank you for being here in Arizona.

Thank you for having me.

All right. Also I want to say thanks to Maria, who also made the trip. So the IR team from Marqeta here in Arizona as well. So thanks to both of you guys for year in and year out being such a big part of our conference here. All right. So we mentioned that Mike was recently named as the CEO, and we wanted to, again, congratulate you on that. And just talk a little bit about some of the strategic initiatives that are top of mind for you. We fully appreciate that you were already a part of a lot of the planning. So not a ton is changing, but it's just a good way to kick things off.

Yes. Thanks, Tim. I would say, agree, I was very involved in the business as CFO and then have been interim CEO since February. So not a lot. It feels like I've very much settled into the role. I would say my focus really lies on continuing to make sure that we progress in the areas that what truly makes Marqeta different, which is that we are a full modern platform that's operating at scale that does both credit and debit, consumer and commercial across 40-plus markets. That really is something that separates us and we think is going to be a big driver of our growth going forward because we are -- we feel differentiated in the market. I would say the couple of things that are top of mind then based on that is really twofold. So one is the platform itself. So that's something that I spend a good amount of my time on and trying to ensure that we continue to progress to make our capabilities more extensive. We are trying to become more and more of a -- have a full offering where we provide kind of front-end user experience. We provide, of course, processing and program management, banking and money movement capabilities. So that full stack and then more and more making sure the platform continues to scale well. Like this year, we're going to add about $100 billion of volume to our platform. And so really making sure that the platform is ready to support many very large enterprises and 1-day FIs. So really focusing on making sure that our platform can scale appropriately. The second area that I focus a lot on is just how we work, making sure that we are efficient in how we're doing things so that we can remain nimble and responsive to our customers because that is something that separates us now where we leverage our expertise to do unique things for our customers, and we want to make sure that even as we get larger, that we continue to provide that kind of service.

All right. That's a great intro. Thank you, Mike. Let's talk a little bit about the holiday season. So coming out of the earnings call this past quarter, you did talk about some really strong performance in BNPL, which is also a big category for the holiday season. Maybe you could just talk a little bit about your BNPL business and how that's going.

BNPL was definitely one of the stars of our earnings this last quarter, where our overall TPV growth was 33% in the quarter and accelerated 3 points. But what we said about our lending and buy now, pay later use case is that it accelerated 10 points from Q2, and it's growing about twice the rate of the company, so growing over 60% -- and the highlight there is that from Q1 of this year and last year, the run rate trajectory of our lending and buy now, pay later use cases was in the growth in the 30s. So the growth has accelerated about 30 points since then. And it's really driven by 3 factors that are each roughly similar in weighting. So the first is that the adoption of Visa's flexible credential within the buy now, pay later use case, and we now have 2 of our customers live in the U.S. utilizing it. And this shift has been happening for some time. We've been talking about it for probably a year or 2, what we call pay anywhere cards and buy now, pay later, where the value proposition is shifting from a bug you click on the merchant website to the buy now, pay later provider, providing you a card that can be used anywhere Visa, Mastercard accepted and buy now, pay later is a feature on that card itself. And the flexible credential is just improving that value proposition, and we're seeing incredible adoption. We were the first to make the flexible credential a reality in the U.S. And as far as I know, we're still the only processor with a program live using it. So that's a big factor in the U.S. The second component is also U.S.-based, but outside of the flexible credential, where there's 2 things happening. One is the buy now -- our buy now, pay later customers are getting additional distribution through wallets. So there's a lot more volume that they're tapping into that was maybe happening in the buy now, pay later space, but outside of our customers' purview. And as they're picking up that volume, so are we. And that's one aspect of it. And then the second, and we've talked a lot about this in the past. In early 2024, one of our U.S. buy now, pay later customers was diversifying some of their virtual card business. And so we are now lapping that and our growth rate is benefiting. The third piece is Europe. So our Europe business is growing fast in general, but particularly in lending and buy now, pay later, and it's driven by 3 factors. One is also the wallet distribution is helping Europe there. The second piece is Klarna migrated between 4 million and 5 million cards to our platform last October. And so we'll be lapping that in Q4. But up until now, it's growing very strongly. And since it got on to our platform, it's also been performing very well. So that's a big factor. And then the third piece is we have a very large SMB lending customer in Europe that has businesses is very much thriving and they're doing new offerings on our platform. And so -- those are the things that are driving the growth. Most of it, we feel is sustainable. In Q4, we will lap the client migration in Europe. So we expect the growth rate to slow a little bit. But the -- overall, it's going to grow meaningfully faster than the overall company. In terms of the holiday season, I mean, it's a little too early to say. I would say we're about halfway through. And yesterday, obviously, is a big day, a big part of the holiday season. But we expect that use case to perform quite well and again, faster than the overall company.

All right. Excellent. That sounds good. Thank you, Mike. These next 2, we're going to combine a little bit. So you did talk about some favorable business mix, right, that was benefiting gross profit growth. And related to this, you also have some contract renewal updates coming, right? Some shifted a little bit into next year. But maybe those 2 can go together, and you can just talk about what that means as it relates really to the difference between volume growth and gross profit growth.

Sure. So in addition to buy now pay later, which we just discussed, the second area of our business that was performing -- performed quite well in Q3 was our on-demand delivery business, where it hasn't grown in the double digits in many quarters and over a year. And this quarter, the growth rate doubled and it's into the double digits growth. And that's being driven by our customers are expanding in terms of the merchant categories and also geographically. So they are moving into new markets also on our platform. And so that's helping the growth rate there. So that's part of the beneficial -- the mix that we're seeing. The other components that are also important is we have been expanding our value-added service capabilities. And in doing that, we're getting more and more adoption from our customers. So in years past, that was a very small part of our gross profit stream. In Q3 or in 2025, maybe I would say is maybe a better way to look at it, we expect it to be about 5% of our gross profit. And so it's becoming a more meaningful part of the business, and that's all in the same volume. So that's something that is also helping the business as some of our larger customers adopt new capabilities from us. In terms of the renewals, we talked at the beginning of the year that we have 2 major renewals that we're doing this year. If you step back for a minute, in 2022 and 2023, we renewed about 80% of our volume. So they're coming out of the pandemic, there was a lot of activity and our customers had grown quite a bit, many of them by many multiples, and we were resetting pricing. This year, these are the last 2 of our top 10 customers who we haven't done renewals yet. Both of them their business has more than doubled since the last time that we did a contract. And so we do expect the pricing to reset to some degree. At the beginning of the year, we thought it would be done by midyear. It's just taking longer. We're still pretty far away from the contracts expiring. A lot of what's causing it to just take a little bit longer is we're also talking about new opportunities to do together as part of the renewal. So we're trying to broaden the relationship. And as we discussed that, it's just taking a little bit longer. We expect one to get done in Q4, and it will impact our growth by about 2 points and the second one to get done early in 2026 and again, also impacting our growth by about 2 percentage points.

All right. Thank you, Mike. And these topics are kind of all somewhat related. So you did raise the recent gross profit guide, right? And I was hoping you could just put a little context on what this means in terms of the exit rate gross profit. And for next year, just what are some of the items that we should be considering as we model out gross profit for next year, a few of them you've already mentioned?

Sure. The growth is definitely going to be stronger this year. I mean 2024 is a little bit hard to look at as well as 2023 because in the middle of '23, we did our big Cash App renewal, which had a significant impact on our gross profit growth. So the easiest way, I think, to look at it would be in Q4 of last year, we exited the year growing at 18% gross profit. So that is where we exited last year. And this year, we're now expecting to grow over 20%. The acceleration is really coming from some of the things we've already just talked about. So the incredible strong performance in buy now, pay later, On-demand delivery is doing better, and we expect in Q4 will still be relatively strong. Even in our expense management use case, that's another area where our platform showcases very well because of the flexibility and the controls we give our customers. That use case has consistently grown faster than the company overall, and that continues to be the case. And then even in our financial services, which is our largest use case, but when you look at our financial services use case, excluding Block, that is growing at about twice the rate of the company. So it's still growing quite fast. So everything related to our growth is first going to be driven by volume, and there's very strong factors. The second thing that's helping acceleration is our international business and particularly Europe. So Europe TPV continues to grow over 100% in Q3. And our international business as a share of volume is now in the high teens, and it's up 5 percentage points from last year. So as that very fast-growing business becomes a larger and larger part of the company, it's just lifting the growth rate for the overall business. And we're still bullish on Europe. It's not going to grow 100% forever, and that's probably going to end here soon. But it's still going to grow very, very fast. It's becoming a larger piece of the business. The last thing is what I already also briefly mentioned, which is our selling of value-added services. We're just much more effective at adding additional value for our customers and charging for those things. And we think that will continue as we continue to build out a portfolio of services to offer.

Excellent. Thank you for that, Mike. All right. Let's move on to next, which is your largest customer in Block. So to set the stage, Block-related gross profit has already decreased from kind of north of 50% to now down. We think it's roughly in the 40%-ish range of gross profit. And you have a long-standing relationship with them, many services, many products. It's not just the Cash App. But recently, and this is a natural thing in the industry for large customers to diversify processors. But recently, you received notice that Block was going to be diversifying processors for Cash App. And if I understand correctly, they stated intentions to have all the new card issuance come under the Bancorp and handled by a different processor beginning on January 1. You called out a roughly 200 basis points gross profit impact to 2026, assuming that all new issuance went to this new processor starting January 1, which in reality, that might not be the case. It might not go 100. It might not all go on day 1. But I was hoping we could talk a little bit about that for 2026, but maybe more importantly, what this means over the longer term if we were to take those statements simply at face value and having the lack of renewed cards coming into the business over time?

Sure. What I would say, as you mentioned, this is a very natural and Common Risk Management approach in the industry and lots of industries to diversify your providers. And most of our top 10 customers now are using more than one provider. So this is not a surprise in that sense. I think what's important, the way we look at it is what's typical in the industry, both within processing, but even how the issuers will utilize the different networks is most people in the space tend to have a primary partner. So you give the bulk of your business to one partner and then you have a secondary provider who keeps your primary partner honest. And so what Cash App is doing in diversifying is not a surprise to us. This is something they've been working on and we were aware of. And so -- and it is perfectly understandable. So the key for us now is to continue to deliver and focus on just maintaining the primary partner. So the key is that what they've told us is we should expect they're going to try to do new issuance on another platform in 2026. But the key is how long will that last? Like one of our other large customers, for example, who diversified between 1 and 2 years ago, they stopped at about 10%. And so clearly, in that case, we remain the primary provider, and they have a secondary provider who is roughly 10% of the business. And so what's unclear is how it's going to unfold after 2026 because it will take some time for them to build a meaningful amount of volume on [another] platform. And so in the meantime, we continue to work together. I think what's important from my point of view is that we continue to talk about new things we're doing together, and we're doing new things currently. So it's not like we -- they've sort of said, okay, our relationship is -- you're just in maintenance mode, and we're moving on. We're still very much engaged. The companies interact quite a bit. And we also think there are areas that we can really help them continue to grow because of the way our platform is structured, new growth areas for them potentially could be, for example, moving outside of the U.S. They're pretty U.S.-centric right now. They could do that seamlessly on our platform. If they were to move more into credit card issuing, they obviously do some credit today, but not on like a true sort of revolving credit card. If they were to go down that path, again, we could seamlessly deliver that for them. So we think there's still a lot of ways that we can add value and drive growth together. And we'll see what happens. We have to earn the business every day, and that's what we intend to do.

All right. Thank you, Mike. I think many investors will appreciate you having cleared that up. All right. Let's move on to another big topic, which is the Klarna card. So it launched in 15 new countries in Europe. It had a U.S. launch, and Marqeta is enabling, as you mentioned earlier, live programs on Visa Flex credentials. So maybe just talk a little bit about this. This is another marquee customer for Marqeta and this program specifically.

It's very exciting what's happening with Klarna and how we're enabling their growth. I would say it started in October of last year when they migrated between 4 million and 5 million cards in 3 countries to our platform. So they moved that debit business onto our platform. So that was -- and we obviously have a long-standing relationship with them, but that was in this journey in terms of them doing what we call pay anywhere cards, really shifting their value proposition to being a card that they put in the consumers' hands as opposed to a checkout at the merchant. That shift really started last October in Europe. And then in the summer, they launched the flexible credential in the U.S. And then what's now happening is -- those 3 markets we did for them in the migration last year, they are shifting to the flexible credential and they're expanding that into 15 markets. So additional markets on top of those 3. So I think what that really showcases in terms of what makes Marqeta unique is that -- we bring obviously a lot of scale to support them because those businesses are growing very fast. But we still have the flexibility to really innovate as the first provider of the flexible credential in the U.S. and now helping them expand into 18 countries in Europe, all within 6 months' time because the U.S. program only launched in June. So it really shows the kind of value that we can bring. And Klarna has been a great partner for many years, and we're excited to keep supporting them as they grow their business.

All right. Excellent. Thank you, Mike. All right. Well, let's move on to a little bit of a different topic, which is OpEx. So the way we word it is that cost containment has been a hallmark of the Mike Milotich era. And I think you've done a really good job in letting some of the EBITDA come through. So maybe you could just talk a little bit about how investors should be thinking about modeling costs into 2026 and also specifically stock-based comp.

When I joined in early 2022, we just were not very efficient in the way we approach things. So there was a lot of opportunity. So that's really what we've been focused on. I would say there's really 4 areas where we've made a lot of progress. So first is we've just made -- we've invested in a lot of sort of tools and processes and ways of working that allows our internal resources to be much more efficient than they had in the past. We were a little bit unstructured and intended to kind of throw bodies at problems kind of pre-IPO versus now we're being a lot more disciplined about it. The second thing is we're definitely adopting AI. It's making us do things much more efficiently, particularly in engineering. The third area is from an org structure perspective, we were a little bit top heavy in the past, and we've created a much more sustainable and sort of fluent org design. And then finally, we also were -- as a platform company, we were very U.S.-centric at the time of the IPO, and we have now diversified our talent. We're finding great talent in both Poland and Canada. So we've diversified our workforce quite a bit, and that's a lot of what's improving the profit trajectory of the company. And we've come an incredible way. I mean, last year, we had $29 million of adjusted EBITDA, and it was about a 6%, 7% margin. This year, we now expect it to be over $100 million, so more than 3x and at about a 17% EBITDA margin. So we've come a long way. And we think that this business can be a 50% EBITDA margin business. It will take time. It's going to take a long time to get there. But the nature of our business is that it's very high fixed cost. So we have to make a lot of investment. And if we make the right investments and we execute well, then it scales very well with very low marginal cost. And so as long as we continue to do that well, we think we can grow expenses materially slower than gross profit. This year, our adjusted expenses are going to grow in the low single digits. So this year was a little bit of an anomaly. It's a particularly strong year. But we would expect to grow in sort of the high single digits on a go-forward basis, which should be significantly slower than our gross profit growth, which means we should continue to see margin expansion on a go-forward basis.

Excellent. Well, you kind of covered one of the questions. So in the interest of time, we're just going to see you hit the 50% maybe longer term. You talked about the OpEx growth maybe in the high single digits. Do you mind just putting a finer point on the stock-based comp component?

Sure. Again, another area where at the time of the IPO, maybe we're not quite as disciplined as we have been in the last couple of years. I think the key whenever I'm talking with investors about our stock-based compensation is just for people to understand that what shows up on the P&L is based on vesting. So even though we had changed our practices several years ago, you still had grants that were done in 2021, 2022 that were still flowing through our P&L based on the vesting cycle. And now we're really getting to the end of that. And really, what you see in our P&L now are more grants that have been done in the last couple of years. that we feel we've done much more appropriately. And so that run rate of stock-based comp that we're at now, which is around roughly $110 million a year is where we think it will really settle for at least the time being. So we don't think there'll be further improvement from here because stock-based comp is still a very critical component to attract and retain key talent. And ultimately, for our business, it is very talent-driven as a tech platform company and roughly 2/3 of our employee base are in product and technology. This is just a big part of how we remain competitive and continue to be differentiated. But that new run rate we've established now, we feel good about, and that's something that's going to help us as we've said in 2026 to at a minimum, have -- be GAAP breakeven. So we're on the verge of GAAP profitability.

All right. Excellent. Thank you, Mike. We only have a few minutes left, but I think we can probably squeeze in this last one. You touched on this a little bit earlier in terms of the acquisition of TransactPay and what's going on in Europe. But specifically, you recently made some comments around it driving significant customer interest. You're seeing inbound referrals, some enterprise-type opportunities coming your way. Maybe you could just expand upon these inbounds that you're receiving.

Sure. TransactPay, there's really 2 sources of value that we looked at. So one is we want to be able to serve customers on a multinational basis and do it in a very consistent way. And prior to the TransactPay acquisition, we could do that in processing consistently between, say, North America and Europe, but we did not have the program management capabilities. So if our customer wanted to expand into Europe, they had to bring on additional partners to support them in areas that we do -- for services we do for them in North America. The inclusion of TransactPay allows us to now have a much more consistent value proposition. And we just this in Q3, announced that one of our long-standing U.S.-based customers in expense management is now expanding to Europe and taking advantage of the fact that we can do processing program management with the EMI license and make that seamless. The second aspect of value is that we've been got consistent feedback over the years in Europe that the very high end of the market, the very large players only want one partner for processing, program management and the license. And so that was a part of the market we really couldn't serve effectively. So that's another aspect that we're hoping to see value, and that's exactly what's happening. So in our pipeline now, we have both European-based customers, but as well as U.S.-based companies that are looking to deploy a card product on a multinational level in relatively short order. And the size of those companies and the opportunities that exist, we just don't think would have been coming our way had we not made that acquisition. So it's looking very promising in terms of realizing the value that we expected.

And is it safe to say that those U.S. companies that are looking to go to Europe, it's a lot easier just to pick you now because it's one less meeting, one less negotiation, one less everything.

Absolutely. The shift that we're making, we've been talking about for a couple of years now from fintech to embedded finance. The embedded finance customers is -- think of these as large companies. These are Fortune 500 companies that are not in financial services, but want to launch a card product. And those companies are usually going to be multinational already. So they don't think about -- in fintech, a lot of them were new companies. So they were starting in one country, and then they might try to expand. These are businesses that day 1 say, well, I mean, I might launch in the U.S. first or I might launch in the U.K. first, but then I very quickly, within a year, want to be on a multinational level, sort of like what we're seeing with Klarna and the flexible credential, right? In 6 months' time, they're going to be in 19 markets. So people with that kind of mindset, again, it just -- it one of those things that really sets Marqeta apart where we have the modern platform that has all the capabilities, but we have proven scale to support a very large customer, and we can do it across all these different use cases of credit and debit, consumer and commercial and do it on a multinational basis in really the most attractive card markets. I mean we're 40-plus countries. We don't have true global coverage, but we are in the really attractive card markets. And so we really think that's what sets us apart and should be driving our growth for years to come.

All right. We made it just on time. Again, to Maria, to Mike, thank you so much for being here. On behalf of our old team in UBS, we really are glad to host you guys here many years here in Arizona.

Thank you, Tim.