Good morning, everyone, and thank you all for being here. I'm Ashwin Shirvaikar. I'm today's Global Head of Fintech Research. It's my pleasure to next welcome Marqeta. From Marqeta, we have Mike Milotich, who is the CFO. Mike, thank you for being here.
Good morning. Thank you.
Yeah, absolutely. Just always like to start with the quick level set for people that are new to the story. If you could kinda go over who is Marqeta and why is Marqeta?
Sure. So Marqeta, we, I guess consider ourselves the founding father of modern card issuing. The question is, what does that mean? Really, what that is using open APIs. We have hundreds of open APIs that we give the power of that technology to do issuer processing to our customer, and we move the bank to the background. That was a real revolution because the legacy processors, they're very constrained by how that technology was architected decades ago with the limitations that the bank provide. We removed all that and gave our customers a great deal of flexibility. In the background, we're managing the compliance and everything else to make sure everything is done properly and according to the rules. That's really what modern card issuing is.
The opportunity that we see why we think it's a very unique space that's in its very early days in terms of the size of the opportunity is there's really three trends that are going on that we think play to our strengths and the need that we provide our customers. One is the shift to sort of disruptive commerce experiences. So far we've had, you know, on-demand delivery, Buy Now, Pay Later, Expense Management in the corporate card area. These are newer commerce use cases where our technology, the flexibility we provide our customers, uniquely suits those use cases, and we think there's many more of those to come. The second is embedded finance, the trend towards sort of neobanking in general, where there's lots of non-banks providing financial services.
In the past, that would've been very constrained by the legacy architecture of the technology. With our platform, we give all that power to those players. As that business grows, we think we're uniquely positioned. Finally, the banks are also investing a lot in the modernization of technology. As they move to the cloud and make other modern investments, we also think we're well- positioned for that. We see the business as in its very early stages of growth.
Okay. We'll get into some of the details there. Before we head in, there's, you know, the two most frequent questions I get on Marqeta. The first one is your revenue concentration with your largest client.
That's weird. I never get that question.
You never get it? That's strange. I must be speaking with the wrong people. You know, and it's been 65%-70% in general. This particular quarter was a little bit greater than that. How do you get an investor comfortable with that?
Yeah. I mean, first is, we obviously want Block to be as successful as possible. You know, we consider ourselves fortunate to have our largest customer growing at that kind of rate and continuing to do new business with us as they expand into new areas. It's sort of a good problem to have, although it does create revenue concentration challenges. I think the way, you know, we would like investors to view it and get comfortable with it is, one, we provide really critical technology and infrastructure for Block in a myriad of ways. They use multiple aspects of our platform, and it's really important to how they drive their business and what drives their valuation from investors. What we provide is not easy to replicate.
It would be very difficult for them to build themselves or to get the combination of our capability at the scale which we operate from another more modern player. You know, we are uniquely positioned to help them. We also had a very close partnership now for 5+ years. You know, we really are working sort of hand in glove on a day-to-day basis with touch points across many, many functions across the company. We have many dedicated resources to their business, so just the level of responsiveness and innovation, the way we can help them with, you know, when they wanted to have someone be able to use the Cash App card more quickly, we could help them with instant issuance.
When they closed the Afterpay deal, we helped enable Afterpay to be accepted at all Block acceptance locations, right, where Square was accepted. There's lots of ways, because we've been working so closely together for many years that, you know, makes us an integral partner, so we're, you know, we're valuable to each other. I think the other thing that's important though is that we do have a great business outside of Block. We know investors are always trying to, you know, understand and estimate our non-Block revenue trajectory. Particularly in these last couple of quarters, the only thing I guess I would caution against, you just have to remember that Afterpay was not in Block last year.
When you're looking at our revenue concentration that we disclosed, last year would have had Afterpay as non-Block. Now it has, you know, obviously Block includes Afterpay, and that's distorting some of the numbers. If you include Afterpay in all periods, then our non-Block business would have grown in the mid- to high 30s% in this most recent quarter. The rest of the business is also growing quite strong, and we continue to diversify it.
Okay. You know, obviously that relationship that you have, three-part relationship with, you know, contracts expire at different times. How are you thinking in terms of a renewal? Obviously, investors would like longer-term renewal, but how are you thinking of that?
Yeah, I mean, certainly we would like a longer-term deal as well. Yes, all the contracts are up sometime in 2024. The Cash App and Afterpay contracts are up in April, and the Seller Card is up in, I think, September or October, later, about six months later. They're all up around the same time. Whether they will be put all into one, you know, large contract or kept separate, you know, will really be up to their preferences. If they would like to keep them separate, we're fine doing that. If they would like to kind of consolidate the relationship into one contract, you know, we're also okay with that.
Right. And typically when you do renewals, do they go onto the date of or do you try to do it before? Typically, this is not necessarily a Block question.
Yeah, well, I mean, yeah, you try not to cut it too close, right? I mean, I think, yeah, you'd like to do it a couple quarters early if you can, just so that there's no, you know, you can ensure continuity and, you know, people don't get stressed out as you go down to the finish line. Yeah, you'd like to do it a little bit early, if you can. That, you know, gives us that continuity we're looking for, and it maybe gives them a little bit better economics sooner, since that typically is what happens when you're renewing a contract in the payments business.
Right. This particular earnings you provided, I think for the first time, an indication of, you know, profit contribution, right? You could back into what the profit contribution is and sort of the level of, you know, gross margins. I guess, why now? Why did you do that now? At least our take was, certainly what we had believed before, it seemed to support that Block is already getting the, in relative terms, good economics as a large flagship. How is that the right conclusion, and how should we kinda-
Yeah. I mean, we wanted to provide as much, I guess, clarity as we can because we know this is sort of top of mind for every investor. You know, that was the. We have to do what you know, our customers will also allow us to share with our investors. You know, that was sort of the limitation in the past, but you know, Block was okay with us sharing that. We wanted to provide more detail. Specifically what we said was that Block was 72.5% of our revenue, but their share of our gross profit is more than 15 points lower than that. This really has to do with a few things, actually. One is just they're a large customer of ours, they have better economics.
We think we have a fair deal for the amount of value that we provide to their business. The second thing is that the way their business works, particularly in Cash App, it has much lower transaction sizes than most of the rest of our business. Why that low transaction size matters is because when you look at the fixed versus variable components of interchange and network fees, what you see is that as ticket sizes go down because of the fixed component, the margins get squeezed. Because they have a low ticket size, that means it's gonna just generally drive lower margins compared to Expense Management or Buy Now, Pay Later, for example, that are gonna have much higher ticket sizes.
Also, just the mix of their business, they're capturing a lot more everyday spending, you know, whether it's grocery or, you know, rent payments and things like that are gonna come also with lower interchange. They also have a lot of physical, you know, in-store spend, that could get routed to PIN network. There's, you know, many factors. Then the last thing when you're comparing the economics as well for the other customers is the way the network incentives can work is also gonna be quite different on a customer-by-customer basis. All those things combined are what make the, you know, the gross profit that we make on Block lower than the rest of the business.
Right. On that last point, the network incentives, why is that?
It's because the networks are very careful about who they're paying and for what. If they have an established relationship with a customer for a long time, then they won't necessarily pay us the level of incentives that we would receive if we have the relationship with the customer and we're bringing the business to the network. The incentives are designed in a way to incentivize us to bring business to them. There are instances where they might meet with a customer through their relationships, and when that customer tells them what they wanna try to accomplish on the issuing space, the network might say, "Oh, well, if that's what you really want to do, then you really need to go talk to Marqeta.
They're gonna be the best position to serve you. When they're kind of giving us that referral, then, you know, the incentive structure is obviously gonna be quite different than when we're bringing the business to them.
Okay. Understood. The second leading question I get, and admittedly, the frequency of it has gone down a bit, is with regards to Jason and, you know, in the middle of the 2Q call, obviously Jason said he no longer wants to be CEO. Again, I guess, what's the plan? He is obviously going to stay involved. What is he going to do versus a new CEO? What might be the motivation for someone to come in if you have former CEO and founder kind of looking over your shoulder? Can you talk about some of those things?
Yeah. I think Jason deserves a lot of credit. You know, he has been very clear that he's an entrepreneur.
Yeah.
He built a great business, but the business is growing in complexity, right? We're expanding our product set. We're moving into new geographies. You know, the technology has been homegrown to this point, and we're becoming more and more active in M&A. We're trying to grow the business while also getting a lot more operationally efficient and effective in established processes. You know, it's just time for sort of a changing of the guard, if you will. Jason is still gonna be very involved in the business as the executive chairman. From a product vision perspective, you know, he'll still be involved in that. He's very much in touch with what's going on in the payment space and definitely has points of view.
Also on the customer side, particularly, I mean, he has relationships with, you know, almost every fintech CEO out there, as well as a lot of the major banks and so, you know, that's something he'll continue to be involved in. We still feel like we can, you know, attract a great CEO to run the business, really operate the business on a day-to-day basis. You know, the CEO will still be in charge, and Jason's been very clear he will be in service to them, helping with product and customers and, you know, with sort of the culture of the company that he has established that's very unique. He understands he won't be operating the business.
We think the opportunities that we have ahead of us will allow us to attract, you know, very good candidates. So far, you know, we're talking to a lot of, you know, very impressive people with diverse backgrounds, and we're trying to move with urgency, but at the same time, you know, we wanna make sure we get the best candidate possible.
Cool. Okay. Should we talk about the business?
Let's do that.
Okay. Look, I mean, I view Marqeta as sort of a, you know, a really important fintech enabler, if you will, in terms of all the innovation that has come out and that you've enabled. Even people who are negative on the stock kinda give me that in terms of, yes, Marqeta has achieved a lot. The question that does come up is what's the moat, in terms of just thinking about the future, and can you keep maintaining that advantage? Can you talk about the moat?
Yeah. We think the moat is intact and actually growing. Because our platform has really the best capabilities, and I think that's pretty widely accepted that our, you know, our platform, just the configurability and the flexibility and just the pure array of capabilities is really unmatched. When you combine that with the scale that we've achieved, it really makes it formidable. Particularly like if you wanna talk about an embedded finance player, you know, like ONE Financial, the win we just announced last week on earnings, which is backed by Walmart. A business like that in terms of what they think they can accomplish, they're thinking pretty big, and they want a modern platform, but that can support them as they get to that size, you know, that we're uniquely positioned to do that.
I mean, that's one of the, I would say, the biggest factors in our moat. The second thing is, you know, what we do to enable this innovation. It requires quite a bit of expertise, and so we now have 12 years experience, which is probably double what any other player has. That's a huge asset as well because it very rarely do customers come to us and say, "You know what, Ashwin? I wanna do something very disruptive, and I've done all my homework, all my research. I know exactly what I wanna do. I just need you to help me execute." You know, that's very unusual. Normally, they're really relying on our expertise over the years. You know, we've learned a lot of hard lessons, and our customers today benefit from those.
Those are things that some of our, you know, competitors may not have even learned yet. We also continue to grow the moat by expanding the capabilities. If you think about a modern card issuer, what we've achieved and the scale we've achieved, and then you put credit and you put banking capabilities together, now that becomes a very unique and sticky platform. You know, we think by adding those additional capabilities and continuing to grow like we are, then we're actually, you know, widening the gap between ourselves and the competition.
Okay. Just kind of spending a moment on fintech itself, given what's happened to valuations, you know, primarily public, but also creeping into private valuations and some of the headlines we see around that. Given that you enable fintech innovation, right? I mean, are you seeing fewer innovators now just out there because of what's happened to valuations, or is your pipeline, you know, kind of continuing to be healthy?
Yeah. We're not concerned about the pipeline for the business, but where the innovation may come could be different.
Right.
Yeah, the past several years, you know, there was a lot of companies being funded, you know, with an array of ideas, and we of course were happy to support them. There'll still be people who are getting funding, but just maybe to a lesser degree than what we've seen in the recent past. There will also be people who have already got a business going and have achieved scale, and they may be the source of the innovation. You know, the companies who are already established in the space, you know, we support the market leader, often the leader and the number two and the number three player in the verticals that we focus on. We sort of support all the leading players, and the innovation may come from there.
We also think the innovation, again, going back to embedded finance, may come from, you know, retailers or tech companies, people who are in other business who wanna move into financial services and can provide a lot of innovation almost, how, you know, Block went from a merchant-focused business to saying, "We're gonna start Cash App, and, you know, we're gonna grow that business," and that's provided a lot of innovation in neobanking. We think that there'll be a lot of innovation and disruption, you know, using our capabilities. It just might be from different customers.
Got it. Okay. In terms of sort of your approaches to market, right? I mean, there's a Powered By, there's Managed By. Can you talk about the different dynamics there, you know, relative growth rates, you know, take rate, profitability? You know, if you're heading into a downturn, would that affect-
Mm-hmm.
The approach people take?
Yeah. The Powered By Marqeta business is where we purely serve as an issuer processor, and we don't provide any of the program management capabilities. We call that Managed By Marqeta. You know, if you kind of just work down the P&L, the TPV, our volume, there's no difference. The take rate is much different in Powered By. It's lower because we're providing a lot less value. But it also doesn't have any gross sort of cost of revenue. It doesn't have network and bank costs. The gross profit that we get from Powered By is similar to what we make in Managed By in a number of our large verticals. That's looking at the gross profit take rate, so taking gross profit divided by volume.
That can be similar, so the profitability is quite good. That being said, I mean, in total, the Managed By Marqeta profitability is a little bit better. We're providing a lot more value, and as we scale, then we should be able to do that even more efficiently on our side in order to drive incremental profit. Some of that we can share with our customers, which will make us even more difficult to compete with. But some of that, you know, we will take for ourselves. But at the same time, in the Powered By Marqeta business, which is growing very fast, you know, we said our volumes are growing well over 200%, even this most recent quarter, it can also scale much faster, right? It doesn't have nearly the operational complexity or effort that's required on our side.
It can go really fast, and it comes with, you know, almost 100% gross margins. It's a good balance in the portfolio to have from our point of view, and it makes us largely indifferent to how a customer chooses what path they choose to go down. In terms of whether that decision could be impacted in a downturn, we don't think so. If anything, you know, it might make the Managed By Marqeta even more attractive because if a customer's gonna go down the Powered By Marqeta path, then there's a lot of investment they need to make. They need to put a lot of people in place with a lot of expertise.
Again, we're providing this service to many customers, so we're doing it at a scale and with a level of kind of accuracy and effectiveness that would be very hard for someone else to replicate at the price that we're charging. You know, in a time where, you know, people might be cutting back on investment, you know, we think, you know, Managed By Marqeta will still be a very good option.
Okay. As we think of, you know, possible downturn scenarios here, I guess that leads to a few different types of questions. One is, how are you thinking about it and how can you manage your own costs is one part of it. The other part of it is, within your business, are there aspects that are perhaps more or less economically sensitive?
Yeah. In terms of our own cost structure, we're about 70% of our costs are people-driven.
Yeah.
You know, hiring is a big lever for us. You know, we are still hiring, but we're definitely being more selective and cautious right now, and I think that will continue for the first few months of the year until we maybe have a little bit of a better view on what the macroeconomic picture is. You know, we are being cautious, but we still have some very large opportunities that we wanna pursue, and we still will invest in the business. We're, you know, we're committed to doing it thoughtfully and improving on our path to profitability, so making progress on our adjusted EBITDA margins. We're also then, for things outside of, you know, our people costs, we are looking for a lot of efficiencies.
You know, just in the last few months, we've changed the way we sort of operate with our cloud provider. That's created a lot of efficiency. We've looked at different costs that come from us being a public company, insurance being a big one, and we've sort of optimized that and renegotiated. You know, just those two things alone, for example, are saving us about $7 million on an annualized basis. Those are things we've just implemented in the last few months. We're still looking for more. You know, we're going to try to manage our non-headcount costs as much as possible, and then moderate hiring, depending on, you know, what happens from a macroeconomic perspective. On the business side, you know, we don't have a lot of exposure to discretionary spending.
Only about one-sixth of our spending is in highly discretionary categories. We feel like many of the businesses that we support are really displacing other types of spend. It's not necessarily new areas of spend. You know, whether people are using Buy Now, Pay Later instead of using their typical revolving credit, you know, Expense Management, it's really just displacing more corporate card spend or maybe things that are done more manually. Neobanks are really just taking share from traditional banks or maybe gaining in the unbanked population and displacing more cash. You know, we think that also should help us, you know, maybe if there is a storm coming, you know, weather it better than most.
Okay. Yeah. As I think of sort of the functional elements of what you do, right? If you could give us some thoughts with regards to how you think of the opportunity that remains, as well as any risks or function-specific competition. Say, for example, online delivery, BNPL, logistics. These are big areas that you do. If you can kind of walk through that.
Sure. I mean, on-demand delivery continues to perform well. I mean, it's growing well into the double digits, and it's our most mature vertical. You know, our customers are finding new areas to expand, so they're targeting new merchant categories, if you will, and that's fueling a lot of growth. We're still seeing strong consumer demand. You know, that business I would say is stable, but still growing at a nice clip. You know, Buy Now, Pay Later, we definitely are seeing some of the effects of our customers tightening their credit criteria and but it's still growing very healthy. You know, our overall payment volume grew in the 50s% and Buy Now, Pay Later this quarter only grew a little slower than that. It's still growing very fast.
The shift that we think is also gonna help us, you know, we power the Affirm Debit+, the Klarna Card. As some of the Buy Now, Pay Later companies also shift to offering a card product that just delivers their value proposition to any merchant that accepts, you know, Visa or Mastercard, we think that's a huge benefit 'cause it also will solve the physical point-of-sale problem, where right now, you know, Buy Now, Pay Later doesn't capture much of that. That enables them to capture that, and so that's also sort of another leg of growth that we think is still yet to come in that space. The Expense Management business, I mean, that is growing incredibly fast and it's becoming, you know, very disruptive and much more efficient.
In these times where businesses may be looking to have more control over their costs, better visibility, then the solution that many of our customers are providing is a very good option. That's why we're seeing, you know, that business grow. It's our fastest growing vertical by far.
Okay. Something like crypto, how do you view that? Because obviously you have a number of good signings, but the end market and, you know, crypto winter and all that kind of stuff.
Yes.
Is that more or less a placeholder, or should investors be concerned about sort of a comp?
Yeah, I mean, I guess there's no real comp impact because it wasn't really even remotely meaningful to our business until Q4 of last year. Maybe heading into this quarter we're starting to lap it, but there really isn't a big business that we're losing. It was more future growth that we were expecting that maybe will take longer for us to realize. We still think there's a value proposition for it. You know, the programs that we do have out there, you know, they're not adding new customers, so they're not acquiring new users maybe as fast as we would have thought six, nine months ago. The users that they do have are, you know, spending quite a bit and are engaged. You know, there clearly is a market for it.
You know, it might take a little bit longer for it to become a bigger business for us than you know, we were thinking again at the beginning of the year. We still think there's a lot of potential there. Think of it as not just for you know, helping someone spend at the point of sale and maybe using crypto assets. Think of it more as a embedded finance play, right? A lot of these, whether they're an exchange or some other player in crypto, what they're really saying is, "I wanna support my customers on a more broad basis. If I can help them you know, keep their deposits here, right? Do some trading, they can do some spending." It's not just purely, I wanna go spend crypto.
It could be just a broader neobank offering that happens to be provided by someone who's in the crypto space.
Okay. You know, you're already working with neobanks, as well as traditional banks for some of their digital offerings. You announced this Marqeta for Banking. How is that different? What else does that add to what you're doing?
Yeah. We really enhanced a few things and then added some additional services. Things like bill payment, for example, is a new capability we didn't offer before. In terms of the, you know, the sort of early access to a deposit that may be coming in, that was something that we provided, but we've enhanced it. What's unique about what we just launched is that typically the way it works now, and there are many people who provide this, right? Your paycheck's coming in, they give you access to those two days in advance. It's really a decision that's made on you being Ashwin. What our platform is now allowing is also to do it on a per transaction basis.
You know, your neobank might say, well, your tax refund that's coming in from the government, I'm gonna give you access to that two days earlier 'cause I know, you know, that money's gonna come in. The deposit you just got from your employer, maybe I'm unsure. I've never heard of that company. Well, Citi, that wouldn't be a problem, but for many other people, right, I don't necessarily know who that company is. I don't know if I wanna give access to that funds early and maybe over time with, you know, a lot of history of seeing those come in, then maybe they could relax that constraint, but it allows for that customization. You know, that's what we've added, and we're gonna continue to add more.
We think this is just gonna make our platform even more attractive because today there are instances where we talk to prospective customers who say, "You know, I really want those kind of banking features, and you know, I really love your issuing technology, but I wanna only have one partner and one technology stack." We wanna sort of take that off the table and provide you know, a more holistic solution for customers so that you know, that can't be something that they hold against us and we can capture the business. A lot of these banking services, they do have high margins, but they're you know, it's not a great business unto itself in our view.
It's really designed to enhance our business, so improve our win rate so that when we are going after new business, you know, we have that comprehensive package that a customer could want. Once we have that customer, it does allow us to offer a few additional services that, you know, can have attractive margins that are just purely incremental, so it can be accretive. That's really the way we're looking at it as a sort of a supplement to our great issuing business.
Okay. I was gonna ask about credit, but you know, getting hand signals here that your time might be almost up. Let me ask you a question on path to profitability. How are you first of all thinking of it? Many of the companies that came public in the last, you know, 12-18 months have adapted to the new environment and kinda, you know, thinking more actively about profitability. What about you?
Yeah. It's definitely a priority for us. I mean, there's two ways I feel that you have to deal with it. One, you have to be ruthless in your prioritization. We're, you know, in the thick of 2023 planning right now. You know, really thinking through, you know, with the existing resources we have, you know, what could we accomplish or where do we need additional expertise where we might need to hire it? You know, and then what are our customers telling us? You know, what are the ROI? What's the size of the sum of these opportunities? You really have to be very disciplined to go through that process. That's something that we're doing.
The second thing is that, you know, you have to remain flexible. You have to, you know, make sure you don't get a little bit overextended, and you need to be proactive. Even at the start of this year, for example, in sort of the late February, early March timeframe, we adjusted our plan for 2022. We saw the kind of macro warning signs and we said, "Hey, let's dial back our plan. Then if things end up being okay, we can always invest more in the second half of the year, but let's be cautious for now." We think that's been a huge benefit for us, where a lot of our, you know, fellow fintechs and other tech companies have been doing layoffs and freezes.
We feel like we got ahead of that, and we adjusted our plan early. That, you know, has given us more flexibility, and we didn't have to walk anything back or lay off people, which you never wanna do. That's really what our approach is. You know, we wanna make progress on our adjusted EBITDA margin, and we also wanna share more with investors. There's sort of, I guess what you kicked off this session with, there's two things that constantly come up with investors that at least are delaying us maybe saying more, which is if we were to share something now, then everyone's first question would be, what have you assumed for Block going forward? We need to kinda clear that up.
The next question we'd get is, "Well, how do we know this plan holds if you're looking for a CEO?" You know, we need to get those two things done. I think we'll be much more forthcoming with investors. You should all know that we are committed to that, and we are committed to make progress, and that's what we plan to do.
Awesome. I think all of us like things that come full circle. Let's leave it there. Thank you very much.
Yeah. Thank you, Ashwin.
Absolutely. Thanks.