All right, we're going to get started. We're lucky to have with us Mike Milotich from Marqeta, CFO. And just for those of you on the webcast, because it's the first session of the day, I'm Craig Maurer, Co-Director of Research here at FT Partners. Thanks for joining us.
Thank you for having me.
Yeah, Mike. So maybe just start with your background a bit, because I have a feeling a lot of people in the room know you from your previous post.
Yeah, so I've been in payments now for about 18 years. I did a stint at Amex on the issuing side, did some time at PayPal on the acquiring side, and then a decade at Visa, where I was the head of corporate finance and investor relations. So that's where probably I met many of you, and I've been at Marqeta now for almost three years.
All right, thank you. So let's start with your most recent results. Can you walk us through Q3 and what led to the guidance change for Q4? And I think something on investors' minds is, why this didn't come up on the Q2 call?
Yeah, so our Q3 numbers, we very much outperformed from an EBITDA basis. And our gross profit growth was strong at 24%, but it was about two points lower than we had previously expected. And the difference was really the contribution we're getting from new programs that are going live. And that's coming for a number of reasons, the largest being that we had 15 programs that were delayed. The launch was delayed by an average of 70 days. And so with those programs essentially launching later, it impacted the growth in the quarter. But then also what happens is what's a relatively small impact in Q3 ends up magnifying over time as you have a ramp of business that's supposed to be launching. So not only delays, but then also fewer programs that are ramping up. And that's really what's impacting our Q4.
The second thing that also is impacting our Q4 numbers is we have a few sophisticated long-term customers, fintech customers of ours, who are taking over a component of a program, and that's having a relatively minor impact on our gross profit in Q4, but is also one of the factors.
Okay. Maybe talk to us about what's changed in the banking environment and, specifically, obviously, how it applies to you guys, and maybe give us an example of something that's changed.
Yeah, sure. So to launch a card program, it's a very detailed process where you specify every aspect of the program for bank approval as well as network approval. And so when the level of scrutiny ratchets up, it's very easy for something to kind of get tripped up and cause delays. So a simple example would be something related to what's called spend limits. So when you're launching a card program, one of the things you specify is, what is the maximum amount of spend I'm going to allow on that card? Even if it's a commercial debit program where it's all a good funds model, for risk purposes, there's essentially a limit that's set. And that could be $25,000 or $50,000.
In the past, what would happen is one of our customers, in the initial part of the launch process with the bank, might specify a lower spend limit. And then as they continue to refine their business case, let's say it's $25,000, they may say, well, actually, we see now more opportunity at the high end of the market, or maybe some of our employees are going to have these cards. There's a chance they could do a lot more activity in a given month than $25,000. We'd like it raised to $50,000. And in the past, because it was a good funds program, that approval could go on in parallel to as implementation progresses so that by the time you get to launch, that change had been approved and the launch goes smoothly. What's happening today is very different than that.
If you decide in the middle of implementation that you want to increase the spend limit, for example, then you really have two options. The bank says, okay, we either halt the onboarding and essentially you get out of line, you resubmit everything again with a new spend limit and everything has to be reviewed again. That would cause a multi-month delay in the launch. The second option would be you complicate your launch by you go forward with the lower spend limit, which then makes it more complicated for our customer to make sure they're screening out customers of theirs who might need a higher spend limit. Once you're live, you try to work with the bank to get that approved and you maybe have that capability six or twelve months later.
What's happening for most of our customers, because a launch of a new card program is complicated enough, they're electing for the first option, which is, okay, I'm going to essentially step out of line, redo and resubmit everything, which is causing delays. And so that's just a simple example of the kinds of changes that are happening. So it's just with the change in the banking environment, creating this additional scrutiny, everything is just taking a lot longer than we had expected. And if you go back to 2023, on average, it took us approximately 150 days to launch a new program across our several bank partners in the U.S. And at the beginning of the year, at the very beginning of the year, we could see the increased scrutiny coming and we planned for that.
So in the first half of this year, it took us on average about 300 days, so twice as long as it took us in 2023. But that was something that we'd planned for because the consent order started coming in early February. And also because of our ramping sales throughout 2023, we had fewer programs in the first half to launch. So we had a lot more programs to launch in the second half of the year. And so through the first half, we were on track. Our revenue and gross profit from new business was as planned. At the start of the third quarter, we had felt like we could get back to that 2023 run rate of 150 days because we had been working with our bank partners to adjust to the new environment. Unfortunately, that's not what happened.
And in Q3, it ended up being about 30%-40% longer than that, so a little over 200 days. And now we expect that to be the case for another couple of quarters. So what we really did not get right at the beginning of the quarter is we underestimated the time it was going to take to get back to kind of a typical run rate to launch a new program. And that's what has caused us to change our expectations.
Okay. Considering a lot of this stems from regulatory changes and scrutiny, how do you think the new administration might have an impact on things?
Yeah, we don't, I guess, want to speculate too much because obviously it's still a few months away from them getting into office. And then the government tends to move relatively slow. So even if they're going to make changes, we won't see them for some time. So the way we're approaching things is we are working towards getting processes and procedures with our banks so that we can, in the new environment, get to kind of that typical run rate of 150 days. And that's what we're working towards. And we're confident that in a couple of quarters, we'll be able to get there. So that's the way we're operating. I think since we think we can solve that problem, if there is a little bit of a relaxing of the regulatory environment, for us, we think the opportunity is going to be more the level of innovation.
So it's a little bit harder to innovate the last year or two as the scrutiny has been ratcheting it up. And given we're a platform that has a long history of catering to kind of disruptors and innovators and helping them drive success, if the level of innovation or the pace of innovation picks up again, that's something that could definitely benefit us.
Okay. So to get a little more granular on Q3 and what's happening over the next few quarters, you mentioned on the call that there were 15 programs that got delayed into Q4 and Q1. And there were five that launched in Q3. So what's the progress being made on the 10 that were outstanding?
That's right. So on our Q3 earnings call, we said of the 10 that end up slipping out of the quarter, we thought nine would launch in Q4 and one would move into Q1 of 2025. We are making good progress. So of the nine, almost all of them now have either the bank has approved and the customer has selected the date of the launch, or the customer has bank approval, and it's just up to them now to determine the exact day they're going to launch. So we feel pretty confident that we're on the pace as we expected.
Okay. And part and parcel of that was also bringing on new partner banks. How's that process going? Was it any more than just trying to lighten the load on any one bank, or you were looking for differentiated capabilities or stronger regulatory practices?
Yeah. So first, when the scrutiny started ratcheting up in Q1, the first order of business was to focus on our existing customers. And both ourselves and our bank partners had the same mentality. We have, in 2024, we're going to end up processing almost $300 billion of volume. And so the first focus was the business that already exists and is flowing through the pipes every day. Let's make sure that there's as little disruption as possible. And so that's where a lot of the focus went. And then in the spring timeframe and into summer, we started saying, okay, it looks like we should start talking to new banks and looking for additional capacity. And it's a combination of both things you said. It is both with the delays starting to happen, what happens is you start having a backlog.
So as I talked about earlier, we have nine programs that are shifting from Q3 into Q4, but we had other programs that were slated for Q4, and now they're competing for the same resources at the bank. And so a backlog can start to build. And so new capacity, if you will, on the bank side is important to address that. The second thing we also, though, look at is different capabilities. So the banks are not all the same. They focus in different areas. They're comfortable with certain types of use cases, generally speaking. And so as we see demand coming as the market evolves, a lot of times we will seek out banks that will cater to those types of use cases. So it's a little of both.
What we found in the process of talking to many banks is actually that we're a very attractive partner because we typically deal with the players with a lot more scale. So if you're a company that is already relatively large or you're looking to expand to a new program, you're looking for a platform that can handle a lot of success. And that tends to be Marqeta, which is what's aligned with what the banks are looking for as well. What they're finding with the tighter environment, the newer programs are fairly expensive for them without, and everyone gets paid on basis points. So it's not as attractive. So we became a very attractive partner as we started talking to potential banks because of our, I guess, reputation and track record of attracting larger customers.
You gave us some thoughts on 2025 on the call. Maybe review that, expand where you think is necessary, but certainly help us think about 2025.
Yeah, we'll certainly give more details on our next earnings call. But what we said on our Q3 earnings call is that our growth that we expect for Q4 is at least for now a good indicator of what to expect in 2025. And again, it really comes back to us launching and ramping up new business. If we look at all the programs that launched prior to 2024, all of those are mostly as expected, even going back to what we thought at our investor day. The big difference is really coming from new programs. And why it's so impactful is to understand the steepness of the ramp curve of a new program. So we've gone back and looked at hundreds of programs that we have had at Marqeta, and we take out the bottom 10% and the top 10%.
So you kind of take out the ends of the curve and you say, okay, this is what a typical program should do in terms of ramp. And just to give you a sense for it, if you look at the first six months of a program, 90% of the volume happens in months four to six because usually it takes a couple of months for our customer to acquire card holders, get the spend flowing, etc. So a lot of spend happens in month four to six. And then in months seven to 12, the spend is six X the first six months. And then months 13 to 18, the spend is three X what it was from months seven to 12. So there's a very steep ramp of the spend.
And so when you start shifting that curve out by something like 70 days, almost a full quarter, it has big implications as you go out several quarters out. And that's what's really affecting our 2025 growth outlook at this point. So the new revenue at our investor day a year ago, we talked about new revenue contribution from new programs that we'd be launching in 2024 and beyond. And it looks like now we're roughly one to two quarters behind that pace. And that's where we'll catch up. That being said, on an expense management perspective, we've had a lot of success at getting a lot more efficient. And this has to do with we use a lot of technology tools in our business.
And a couple of years ago, we probably weren't as diligent as we should be in terms of making sure all those services are optimized and there's not a lot of waste. So the last 12 to 18 months, we've had a lot of success at optimizing our usage of those tools with no impact to the service we provide, but just much more cost-efficient. We've also renegotiated in many cases. We also, again, prior to 18 months ago, our business, our platform was completely built, operated, managed purely by U.S. resources. We now are hiring people in Poland and in Canada. We're finding great talent, but it's also a little more efficient for us. So we've had a lot of success there.
And so even with our a little bit lower gross profit growth, we still expect our path to profitability to not be disrupted and to deliver EBITDA of about $50 million, at least $50 million next year.
Okay. One follow-up to that that we get questions on is, has the environment changed your view on how big the programs that you're onboarding now will be going into, say, the end of 2025 and into 2026?
We don't think so. It really comes down to planning. I don't know. An analogy I use, I don't know how many of you have ever done home construction, but if you've ever done a project on your house, what every contract will tell you is what really gets you in both the cost and time are change orders, right? So the better you plan, the more efficient and things will go, and therefore you'll save cost as well. And that's what we've really been emphasizing with our customers. And just to, again, remind everyone, what we said about our sales, even in 2023, two-thirds of them were expansions with existing customers. So many of these customers have gone through the onboarding process before 2024 and can remember what it's like and feel the difference.
And so it's just a matter of the way we operate together with our customer and the bank partner just has to change, but it doesn't change the ultimate opportunity.
Okay. Well, that brings me to my next question, which is, has the regulatory changes or the environment changes impacted your existing customer base in the same way it has new onboarding? And how are you supporting existing customers through that?
We haven't seen that to this degree. Part of that, though, was, as I mentioned earlier, the initial focus. When things started really ratcheting up in Q1, I would say our focus and our bank partner's focus was really on the existing business, and so a lot of energy and care was put into that, so we haven't really seen a lot of disruption, and our business is performing well. You look at our non-block TPV growth grew 15 points faster in Q3 than our block TPV growth, and within our non-block customers, the top 10, their TPV is growing over 30%. Outside of that top 10, it's growing over 50%, and our international business is growing almost 100%, Europe growing well over 100%, so we are having a good amount of success, and we haven't seen a lot of disruption.
Okay. Something that you mentioned earlier that I was hoping you to elaborate on, which is you mentioned on the earnings call that customers are choosing to take ownership of parts of their program. Maybe you can go into a little bit more detail on that trend.
Yeah. So we have customers who are taking on a certain part of a program. They're taking on that responsibility. And there's three different flavors of this. Each are contributing roughly a similar amount in terms of the impact to our profitability. So the first one is we have two programs where the customer is going to take responsibility for the bank relationship. So what that means is they are responsible for all the compliance components at the bank. And this is something that is relatively unusual because you need very specific types of resources with a very specific skill set. And so that's why many of our customers don't choose to do that. But in this case, it is happening. But also, it's important to note that in this case, we're still going to provide many program management services to those customers.
And in fact, in the U.S., when we have customers who own the bank relationship, almost half of those customers do buy at least one program management service from us. So it is still something that we can monetize. But in this case, on those two programs, we're just going to make a little less on the volume because we're going to be providing one fewer service. The second flavor is we have one customer who's taking one of our risk services in-house. I would say this is even more unusual. You have to be very sophisticated, have a lot of data. In this case, the customer has a lot of data from other aspects of their business. And they're sophisticated enough with data scientists and everything else to have built a homegrown risk solution. This is, again, this is not very common.
Our risk services are pretty widely adopted. We have over 40% of our programs or customers use at least one risk service from us. We find it skews to the larger customers. The people who are using our risk services drive about two-thirds of our non-Block TPV. These are services that are valued, but in this case, we have one customer who's bringing it in-house. Then the last flavor has to do with our customers connecting directly to an endpoint in their business. If you think about the value that we provide in buy now, pay later or an on-demand delivery or even in a lot of AP automation, the service we're actually providing is allowing our customers to transact without there being technological connectivity to the merchant.
Think of this as this would be a buy now, pay later company connecting directly to a retailer or an on-demand delivery company connecting directly to a restaurant chain or a grocery store chain. They're going to complete the business without using a card product.
Okay. Do you see a heightened risk as customers grow that more might choose to bring types of processes in-house?
We don't think it's a big risk. I mean, these are all things independently. Each of those three flavors are independently things that do happen in our business and have happened in the past. It's the concentration of them all happening at the same time, which is why we think there's some link to the regulatory environment that's happening. But when it comes to bank ownership, again, we think it's unlikely for two reasons. One, very specialized resources. A lot of people just don't want to hire and build that kind of expertise. And we have a lot of scale, so we can generally do it better and cheaper than they can. The second factor that's important when it comes to owning the bank is we pass on our scale benefits to our customers to some degree.
So we're aggregating volume across many customers on our platform with that bank, which gives us a price that any one of our individual customers could never get from that bank. And we pass on that benefit or at least some of that benefit to our customers. And then, of course, that's some scale benefits that we get. But the combination of those two things makes that pretty unusual. On the risk service, again, we haven't really seen this. This is a pretty unique instance of someone who's just very sophisticated and has a lot of data. So that one we don't see. And on the last one where you're connecting directly to an endpoint, again, the value that we actually are providing in many of those businesses is that the merchant can offer buy now, pay later or offer delivery without having to do any technology connection.
This is something that merchants don't want to do this work, generally speaking, and even our customers don't necessarily either want to. They very much value the distribution that our capabilities provide without having to do all that work, and so we don't think, again, these things have happened in the past, so it's not that they'll never happen again, but we think the concentration of it is very much related to the environment and not going to be an ongoing risk.
Okay. Maybe we can turn to the competitive environment. We've seen some newer companies like Stripe and Adyen enter the space. Galileo is a revamped business, apparently. So perhaps discuss the modern card issuing landscape today.
Yeah. Yeah. So I think the more the people who have been in the business for a longer time, generally what the value they're bringing is a lot of stability and scale. The more upstart players who are newer in the space usually have a lot more agility and some innovative capabilities. What we hear a lot in the market and from our existing customers is the beauty of Marqeta is that you get both. That we have a lot of scale. Again, we're going to process almost $300 billion in issuing volume in 2024. And yet our platform is very flexible and configurable and can support a lot of different use cases. And so that makes us differentiated.
I think what we're seeing that makes us well positioned is that in some ways what's happened in fintech is the winners have been crowned and many of them have become very big businesses and are looking to expand into new use cases or expand geographically, and the same thing with the trend in embedded finance. Typically, the companies who are pursuing embedded finance are already large companies who therefore have lots of different use cases they could offer and they want to do it in multiple countries, and Marqeta is unique in the sense that we do all kinds of use cases across consumer and commercial credit and debit with program management capabilities, and we do that in 40 countries and make it seamless for you to expand internationally.
So I would say in some use cases, like in commercial virtual card, for example, there's probably a little more competition than there was several years ago. But generally, the market is also getting broader and bigger. And so we're not feeling any difference in the competitive intensity.
Okay. You announced some interesting innovations and program management developments, but you also announced some interesting extensions or new wins with Klarna as well as Varo. So maybe walk through what those changes have been, what they enabled for Marqeta that's allowed you to win or extend these deals.
Yeah. So one of the things that we're excited about is a migration capability. If you think about where modern card issuing is, it's probably 7 to 10 years behind the kind of shift to modern acquiring. And so migrations didn't typically happen in the past because when you're evaluating a different platform, the difference in the capabilities were relatively small for the time and investment it would require as well as the risks to sort of disruption to your end users. It just meant a lot of people wouldn't do it. But we think the capability difference between a more legacy platform and what a modern platform can offer is significant enough to get people interested. And so we're trying to make that as seamless and painless as possible. So when Klarna came to us and said, "Look, we have millions of cards in Europe.
They're on a different platform. We'd love to have them. Those programs also have the kind of capabilities and reliability that Marqeta can provide. We want to migrate that business over to your platform. We took that as an opportunity to build a product. So rather than just doing it just for that instance, we spent a little bit more time doing it so that we are better positioned to facilitate those kinds of opportunities going forward. And as you said, we are doing a conversion for Varo next year. And there are other programs that are in our pipeline that are similar. So we think this is an exciting opportunity and one day might also put us in a position to, as we try to break into the with large financial institutions, the ability to migrate programs will be a big asset.
Yeah. Just extending on this question, you've done Affirm's entrance into the Apple Pay solution. I believe you also enabled that for Klarna. So talk about how perhaps Marqeta is uniquely positioned to advance that particular opportunity for your clients.
Yeah. We've always been on the forefront of buy now, pay later, and there's been a few different evolutions of it. I think the first was what we talked about a little bit earlier, which is allow merchants to offer buy now, pay later without really having to do any technology work. That was the first innovation that we enabled probably seven, eight years ago, then the last couple of years, we've been talking a lot about what we call a pay anywhere card where the buy now, pay later companies are offering their own debit product, essentially that delivers the buy now, pay later capability, but that card can be used anywhere that Visa or Mastercard is accepted, and so that was sort of the next evolution.
And then the third one that we just recently announced about a month back is what we call Marqeta Flex, which is trying to make it even easier within, particularly within wallets or within some sort of card on file type use case to make buy now, pay later even more seamless. And the goal is really to make buy now, pay later available on all debit cards. So what the service really does is for the issuer, it enhances the value proposition of their debit card and it allows them to capture spend they may not have gotten otherwise because maybe it's a larger purchase the person doesn't have a balance for, but if you could break it into installments, they could afford it.
They can do that through one connection to Marqeta as their processor as opposed to having to do deals with many different buy now, pay later companies. Then the value we bring on the buy now, pay later company side is we're giving them additional distribution. These are potential new customers that they can acquire. These might already be existing customers that then they can reach and drive loyalty. There's also an opportunity for us to share some of the data from the issuer to help them in their underwriting and our platform. We just view this as the next evolution of Marqeta trying to broaden the reach and scale of buy now, pay later as a value proposition.
Could you talk about the difference between Marqeta Flex and Visa Flexible Credential, which has been talked about a lot?
Yeah. So Visa Flexible Credential is more about being able to have multiple payment types on one credential. So one card that works for credit and debit without having to sort of change the physical card you hold. So that might be a funding option within Marqeta Flex, but Marqeta Flex is thinking much broader than that. And it's really saying, "We want to try to bring BNPL functionality to all debit cards and do it in a way that makes it easier for both sides of the ecosystem to take advantage of that service." So they're complementary, but what we're trying to do is a little broader.
Okay. We mentioned Varo earlier. Varo, it looks and sounds and smells a lot more like a typical bank as opposed to a fintech, right? And they have their own bank charter, so on and so forth. So is the opportunity expanding or re-accelerating again in the typical FI space?
I don't know if it's accelerating. I think we still believe that we will ultimately serve large financial institutions, but it's probably at least three, maybe more like five years away. The large banks typically don't move super quickly. When we've had conversations before, they're usually planning several years in advance. Where we think we're likely to get traction is more of a de novo opportunity. They wouldn't necessarily migrate their whole book. They might do something more innovative that they're going to trial and they would use our platform. We think that's most likely to happen in commercial. If you look at what's happening in the expense management and corporate card space, some of the newer, more innovative companies, many of them are using our platform to just offer their customers a lot more control and flexibility. They are broadly winning in the market.
That's creating some pressure, we believe, on the more traditional players in the corporate card space. So we think large financial institutions are going to need similar capabilities to compete effectively, which should open the door for us. On the consumer side, it's probably a little further out. We need to, I think neobanks have had a lot of success up until now, but I think with the new wave of embedded finance companies coming and also us starting to push into credit and co-brand, we'll be able to create the same kind of pressure on the incumbents and the banks to have to go modern. But we still think it's several years away just based on the pace that they generally move.
It sounds like Europe is seeing some pretty fantastic growth. Maybe you can talk to us about how the environment there is different when you look to compete.
Yeah. Our Europe business, again, our volume is growing over 100% in Europe. And what's interesting about Europe, in many ways, it's ahead of the US. And the reason for that is that because interchange is so highly regulated, people don't just focus on the monetization aspect, right? In the US, that's a big part of when you're launching a card program, you're looking at the direct economics that come from the card. In Europe, because the interchange is so much lower, people are way more focused on other aspects of what a card program can value that can drive. So in new customer acquisition to their broader business, driving engagement with those customers, making certain transactions or services they provide more convenient by inserting a virtual card might be happening in the background and the user doesn't even realize that's what's happening, but the user experience is much better.
And so we think what we see in Europe is that because of that focus, we think that's where things are headed in embedded finance because that's exactly when we talk to embedded finance prospects. Many of them are large businesses who might have a million or 10 million users on their platform. And what they're really looking to do is just drive more engagement because with that business, they make money on impressions and how much time you spend in the app and all these other things. That's what their core monetization is. And so they're looking at card products to drive that kind of engagement. And Europe is ahead of the U.S. in that regard. There's a lot of innovation happening in that market that we think is going to be in the U.S. soon.
Okay. With that, I think we have to wrap. Thanks, Mike. Really appreciate coming.