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

Thank you. All right. Uh, going to get started. Closing us out for the second day of the conference is Mike Milotich, Marqeta's Chief Executive Officer. Mike, you've been here several times over the last couple of years, and we're pleased to have you.

Thanks so much for having me.

So maybe for those in the audience or in the webcast who are not as familiar with Marqeta, I thought it'd be great to give a brief overview of Marqeta and maybe over the last 5 years that the company has been public, what you think has changed and what do you think has remained the same about the story?

Sure, we were the original modern issuer processor, so we've been at this for over a decade and essentially our customers use our APIs as building blocks to create more embedded and personalized experiences in the card business. So what makes us different than maybe issuer processors of the past that most banks? We give our customers more control and agility to create more unique experiences that really engage their customer, and many of the FinTech winners are on our platform and we serve a diverse set of use cases. So, you know, whether it's in buy now, pay later with Affirm, Klarna, Afterpay, Sezzle, expense management with Ramp, BILL, Expensify as examples, on-demand delivery, Instacart, DoorDash, Uber, and then in neobanking, like Cash App and Square and OnePay, Trade Republic. These are all customers of ours that innovated in a unique way using our APIs in their own personalized fashion. In terms of maybe what's a little different about the story, I would say there's a few trends that are emerging now that weren't existing just a few years ago. I'd say the first is multinational issuing. So as more and more of the business shifts to FinTech winners, they are becoming big businesses and are starting to expand geographically. And as the business shifts away from banks always being the lead in an issuing relationship and banks are inherently local, FinTechs and then enterprises are becoming multinational. And so that's becoming quite common. So just as an example, 12 of our top 15 customers are in more than one country on our platform. And that's definitely a newer trend that's emerging as the FinTechs have gone from sort of innovative startups to big businesses. And now new enterprise customers that are coming to us are thinking multinational from day 1. So that's a big change. I would say a second change that's quite different is what we call an emergence of a product continuum. What used to be quite common in card was either you had a debit card and a credit card and that was sort of the end of the story. It was relatively straightforward. Now there's many iterations in between as these FinTechs and more enterprises are launching card programs and want to cater to all their users and drive engagement. So they want a product that fits everyone, which means now we have prepaid, we have debit, we have flexible credentials where you might have buy now, pay later and a debit card combined in a 1 value proposition, you have secured cards so people can do credit building, you know, charge card in a commercial construct, and then, you know, revolving credit. So you have a whole spectrum of offerings, and many of our customers now want to have several of those because each of those are going to appeal to a different type of user, and that's pretty different than it was even just 3, 4 years ago.

Yes. That makes sense. So maybe you can talk about what the growth algorithm is. There have been a handful of moving pieces this year, so several larger renewals that are a moving target over the course of the year on timing. The Block pricing tiers, the smaller impact, cash out new issuance changes, all of which we can kind of talk through, but I think underneath all of that, some of the noise, TPV's still growing north of 30% for the last 4 quarters. So if we strip out discrete items, how do you think investors should be thinking about the underlying revenue and gross profit growth of the business? How do you think about the long-term potential from here?

Sure. So let me touch on just a few of the specifics that you mentioned. So we have a couple of unique items that are impacting us this year. So, um, one of them is we have 2 large renewals that are lowering our gross profit growth by about 3 points in the year. And these are the last 2 renewals that are coming out of the FinTech boom. So what we started to see in around 2023 is we were starting to reprice a lot of our business because the FinTech companies got a lot bigger, but also you know, the dynamic shifted where it wasn't just all about growth. It was about profitability and profitable growth. And so we had to reset our pricing with a number of customers, and these are the last 2. And so that's about a 3-point impact on our growth. And once we lap these 2, that's really pretty much behind us. Behind us, we've repriced everyone. The second thing is that you mentioned is in our Block contract, we have a bigger step down in the contract tiers and what the history on that is in the middle of 2023 when we renewed that contract, they had asked for a certain number. When we reach this volume size, that's a different level we should be rewarded for that. And we agreed to that. And so there's sort of an abnormally large step down in the pricing tiering that they just went into at the start of this year. And that's creating about another 3 points of drag. So those 2, once we lap those next year, they're gone. And that's about 6 points. So our growth right now is in the low double digits we're expecting for the year. So that puts us in the mid to high teens level. In terms of the growth algorithm as I as I look forward, so I would say in the near term, 1 thing that's important is that the first component is just our FinTech customers continue to grow very fast. So 6 of our top 10 customers by gross profit, their volume grows more than 50%. And another stat that's important what's quite interesting is in the last 2 years, so in 2024 and 2025, our top 15 customers launched over 30 new programs on our platform. So our new our very fast growing large customers continue to do new business with us. And so we continue to help them expand into new products, new geographies, and that's a big part of the growth. But with all that the FinTechs having all, driving all that business, what we're now seeing is enterprises want to offer similar financial services and embed that into their existing user base. And that's where the next wave of growth, we believe, will come. So they're looking at what FinTechs as non-banks achieved, and they want to insert that into their user base. User base and we're getting a lot of demand in that area. In terms of the long term growth algorithm, if you think out further, ultimately the way I look at it is the share of modern card issuing. There's a wave of modernization that is coming to the card issuing business and a lot of it's being driven by the success of the large FinTechs that are on our platform. And so if you look at our market share, we have about 2% market in issuer processing in the 40-plus markets that we are active in. And we're by far the largest modern player. So modern is relatively small piece of the market. And as you go forward the next 3, 5, 10 years, we expect to see a lot more existing issuers start to modernize because it's going to be hard for them to compete otherwise. And that is share for us to gain. And so that as we look out into the future, there's so much growth opportunity because if you don't have these kind of modern capabilities, it's going to become harder and harder for you to compete.

Got it. Okay, another topic that came up on the most recent earnings call, the Block relationship clearly remains strong. You continue to add programs, services with them. That's even while Cash App is diversifying the new issuances, which we can talk about. Patty mentioned on the call, the contract is coming up in 2028. Obviously, it's a large contract, though. To maybe compare and contrast the situation that you're in today versus the last renewal. And additionally, while we're on the topic, are there any notable updates around the Block, new issuance activity that you previously communicated?

So our last deal got done in the middle of 2023. And so that was really, again, coming in out of that time where the FinTech boom had just happened, people were becoming more focused on profitability, and there was a lot of repricing that was being done in the market. Those businesses had gotten multiples bigger than the time we had signed the contract, and Cash App was in that same boat. And so the last time we had a fundamentally changed the pricing and we reduced our price by 40%. But in doing so, we also inserted a lot more price tiers that we expected to go well beyond the renewal that's coming in the middle of 2028. So we still have a lot of tiers that they haven't reached that we believe will make the renewal mostly a non-event. So that's how we protect ourselves and set ourselves up for success so there isn't such an event a large price discussion that needs to be had. And so we're in a fundamentally different place than I think we were 3 years ago. In terms of the latest update on their diversification of their new issuance, so we started to see a small impact in June, it stepped up in July as expected, and we expect that the new issuance will slowly move away from our platform as we move through the year, and we essentially will not have any new issuance on Cash App by the end of the year. So that's what we expect and what is in all of our guidance. And everything is as planned. And just quickly to reiterate, right now we essentially are their only processor for Cash App, Square, and Afterpay. So their desire to diversify their processing is very reasonable and expected, and almost all of our largest customers have done so at this point.

Got it. Have you seen examples of prior relationships that have moved to do this diversification? Are there any parallels that you could draw for how long it takes to reach kind of targeted diversification?

Sure. We, so again, almost all of our large customers have done it and everybody does it a little differently. Some customers have been, are very clear in advance. Like we, like 1 of our largest customers came to us and said, okay, we're going to target a 90%, 10% split. And so you're going to lose new issuance for about 9 to 12 months while till we get to the 90%. And then you'll start getting 90% of the new issuance. And we're going to try to balance at that level. Other customers will say, well, I have a new product. I'm going to put that on a different platform. And so depending on the success of that, if that doesn't end up being that much of a success, you'll end up with 95% of the business. If that's a runaway success, maybe you'll have 75% of the business, and that's how they choose to diversify. So everybody does it a little bit differently. But what I can say is, of many of our large customers who have done this, with all of them, we remain the majority partner. So we are their primary processor in each case. And in many cases, it's actually helpful help strengthen the relationship because when all they've known is you, we're not perfect. There's things that they would like us to improve. They would like us to see us do differently. And typically what we've seen as they diversify and they start working with someone else, it gives them a little bit more of an appreciation for the things we do well, how good our technology is. And it's tended to strengthen the relationship, not hurt it.

How green the grass is.

Yes, exactly.

Maybe before we go a little deeper, uh, let's touch on just the broader environment. You're processing 120 billion a quarter now. You've got a pretty good read real time on the consumer and on SMBs. You said in August you weren't seeing a notable shift in spend or consumer behavior, and we're assuming relatively consistent patterns for the rest of the year. Is what you're seeing so far in the quarter consistent with that?

Yes. It is. I think what you've probably heard from a lot of other people in the industry, things are, given everything that's going on, sort of macro, things are quite stable and steady. And so we judge that in 2 ways. We look at overall spending levels and things are largely in line with what we had expected. But then we also look at it by sort of the level of discretionary spending. So we take the merchant categories and we sort of break them into tiers of high, medium, low discretionary spend. And we look at how those things are moving over time. And that mix of kind of discretionary spending has been very steady. And even as gas prices have gone up a lot, so we see more gas spending, it's not enough to really move low discretionary spending up significantly. So it's pretty steady. And so all is expected, which means we expect that to hold for the rest of the year.

Got it. Okay, uh, kind of back to the business. The average deal size that you've signed in the second quarter was up over 90% year over year. I'm sure some of that is what we talked about earlier around non-traditional issuers. I'm curious if you view this as the market pulling you in that direction, or if there's been a more deliberate shift in the organization. And then second, can you just talk about how that impacts the sales and implementation cycles and the economics on those deals?

Sure. It's a little of both. Some of it is that the newer people coming to market are more enterprises that have seen kind of the FinTech winners accomplish what they have. But some of it is also purposeful. That's where we see a lot of the growth. And as the FinTech winners have become big businesses, it's just harder now for a smaller company to compete, right? So 6, 7 years ago, or maybe even 8 years ago in the earlier days of FinTech, we were signing a lot of deals knowing that there'll only be a few winners left here in each use case, but we don't know who that will be. And so you're trying to cover a lot of the market. But that's because there was a lot of kind of green space. You know, now you've got big companies who are operating in those spaces. So if you're going to try to enter, it's going to be hard if you're a small smaller company. And so what's happening is that the people who are entering are much more established businesses they have established user bases, established brands, and they want to insert that type of product into into that user base and utilizing that brand. And so that's the dynamic that we see. And that is also what's happening contributing to the large deal size. The second part of your question in terms of how do we then, how does that affect implementation? It's a little bit of a mixed bag because our existing customers who are now expanding rapidly and launching all these new programs, they can move quite fast. So they know us, they know our technology, we've worked together before. And so I would say they can launch programs really fast really quickly. It can be, sometimes some of our large customers will come and say, we have this idea and we want this, ideation now, we want this live in 2, 3 months. Like that's really, really fast to move that quickly and we can accomplish that. I would say the newer enterprises, it's a little slower. It's a bigger company, decision hierarchy is a little more complex and maybe there's more layers to go through. It takes a little longer, but what we find and we were confident about is even though it might take a little longer, the probability of success is much higher because this is an established business, established brand, existing users. So, um, even though it might take a little longer, we feel more confident that 3 years later it will be successful and it'll have achieved some of its goals compared to maybe some of the customers we were onboarding 5 years ago. So we're sort of happy to make that trade off. And the last thing I'd say that's important as these deal sizes go up, it's also a big part of what's driving the improvement improvement in our profitability, right? We're not spread nearly as thin. We have, we're much more efficient in who we're bringing to market because there are fewer new launches, but they are larger and again, higher probability success. And that's something that's helping us drive, you know, adjusted EBITDA growth and ultimately net income this year.

So on this topic, you've talked a lot about non-FinTech issuers being a bigger part of the story. So 3 Fortune 500 companies signed over the last year. You talked about a large U.S. financial institution, a wallet partnership. What are you seeing? Are there any kind of commonalities across the non-traditional or non-FinTech issuer space?

Yes. I think the biggest commonality is that they're after user engagement, which is a little different. FinTechs, a lot of times, what we were offering them was core to their value proposition. So they're monetizing that directly as part of their core business. And I would say the traditional issuers were also similar. What as we see the enterprises entering in, what they're really after is user engagement. So not direct monetization of the card program, but more something that drives their core business with increased usage, increase time in their environment, their user experience, et cetera. And so that means they're objectives and how they think of things is a little bit different in terms of what they're what they're targeting. And so that that makes them think differently about the user experience, the value proposition, how the economics are going to work. And so that is a pretty big shift. And that also, though, opens the door for us to provide more services. So because this is not their core business and they're really after engagement, the last thing they want to do is sort of piece together multiple partners to create this value proposition. They're looking for you to bring the full solution, which is great because then the shift we see is that FinTechs want to do a lot themselves, which means they may have used us for processing, program management, maybe a few additional services, versus enterprises are really looking for you to do a lot for them. Because it's not their core business, it's not their expertise. And so that means there's more included in the sale, but that also means there's probably better economics, higher value.