All right, I think we'll get started. We are now heading for the afternoon sessions here at the Deutsche Bank Technology Conference, and we're excited to have Mike Milotich, the CFO of Marqeta. We'll do a fireside chat format here, and then if you have any questions in the audience, just raise your hand, we can bring a mic around to you. With that, Mike, good to see you.
Good to see you. Thanks for having me.
Sure. You know, Marqeta is known for the modern card issuance, and it's really taken off over the last several years. We were just hoping you could start a little bit big picture view on the industry, its life cycle, and where Marqeta's, you know, place is right now, and where do you see it going in the future? Obviously, your background, you've been in payments for a long time, and you've-
Mm-hmm.
You're now at Marqeta, so obviously you voted with your feet.
Yes.
I'm interested in kind of your view of the company, kind of the longer-term thesis here.
Sure. Yeah, I mean, Marqeta, you know, was the first created the category, if you will, and now has been at it 12 years. Really the foundation of it is to lead with APIs and lead with tech, which allows our customers to put together very unique value propositions without the burdens of the bank being at the forefront. Lead with tech, put the bank in the back, but have us manage, ensure that you're compliant and you're following all the network rules and the compliance regulations that need to be followed. That's really what's got us to where we are.
I think in terms of where we are in the life cycle, I think we're in the very early days, and there's a few, I guess, trends that are happening that make us feel confident in that. One is just new commerce experiences. We're still in the pretty early days of technology allowing for very unique and customized consumer experiences. If you think about some of the ones that have happened just in the last five years, whether it be buy now, pay later, you have, you know, the on-demand delivery segment. You have the expense management for businesses. You know, all of those are really leveraging the configurability and flexibility that our platform provides to put together very unique experiences for their customers.
We feel like we're in the very early days of that because people wanna use technology to better engage their customers and businesses wanna have more flexibility and control over their expenses. We feel like we're in the very early stages of that. The second one is neobanking. Where all types of companies are beginning to offer financial services, not just financial institutions. Again, we believe we're very early in that trend, and our platform allows for that, which was much more difficult to do before our platform existed for you to be offering financial services. Again, there is a bank in the background. It's not nearly as forward to the consumer. That's an area that we think is gonna grow a lot.
Not just traditional neobanks, but whether it's retailers or trading platforms or crypto companies, all of them are looking at their customers saying, "They have some form of depositor relationship with us, and I wanna offer them more financial services." They need a platform like ours to make that happen. Then the third one is, all of this disruption that I just talked about is mostly focused on disruptors. It's, you know, smaller, newer companies who are disrupting in the space, but the large financial institutions who have traditionally dominated this area of the market are getting much more interested in modernizing their infrastructure. If you even hear what they say publicly, they're. Many of the large banks are talking about spending billions of dollars a year moving to the cloud and doing other kind of tech modernization work.
We also believe that although we mostly have catered to disruptors at this point, that the financial institutions are also going to, you know, wanna pursue modernization. You know, we feel like we're very well-positioned. We have the scale, and we have the lead in terms of product technology. There are some new, smaller, modern card issuers, but they don't have the scale to cater to kind of a medium and large corporates. You have companies from other parts of the payments ecosystem who are starting to get into issuing, but their offering tends to be fairly limited. They won't support consumer programs, for example, and don't have the richness of the capabilities that we provide. Then you have the more legacy players who just are, you know, bogged down with legacy platforms that aren't flexible like ours.
Great. That's a great way to start. Wanted to ask you up front, the recent news from the earnings call, which was that Jason Gardner decided that he's gonna step away. Jason Gardner is the CEO. If you look at it since the IPO, there's been quite a few kind of executive departures. We'd love to get your thoughts on the transition now to a new management team and maybe what they could bring to the table, including yourself.
Yeah. I think I actually give Jason a lot of credit, because I feel like that's a tough decision. A lot of founders stay maybe longer than they should.
The majority of founders stay longer than they should.
I think, you know, really what's happening is the business is growing really fast and growing in complexity. You know, we're expanding into new product areas like risk services and credit and more banking services. We're expanding geographically. We're looking at M&A, doing a lot of diligence on companies up to this date, the platform is purely homegrown. That's just adding a lot of complexity. Jason saying, "You know, I'm looking for a partner who can run the day-to-day business." I'll still stay actively involved, but I'm gonna stay involved in only the areas where I can add a tremendous amount of value, which is the product vision for the company.
As you know, him being sort of the one of the inventors of the space of modern card issuing, you know, customer relationships because of, you know, almost every fintech CEO he has a, you know, a personal relationship with, and then the unique culture that he's built within the company. You know, that's what he wants to focus on. So he's gonna stay very involved, but just not running the day-to-day business. We're gonna, you know, bring in a professional seasoned CEO for that.
I think a lot of the change just happens to do with the evolution of the company in terms of the kinds of skills and the kind of people that you need when it was a small and fast-growing, you know, startup private company is just quite different than the needs of the company now that we're much larger and we're still growing fast and we're public. You have some of people who have left because they're actually opting out, right? They're saying, "I actually want that startup environment, not a larger public company." I think what we're looking for with the new management team is people who have worked at, you know, world-class public companies, have seen scale and know how to take Marqeta to the next level.
That's what we're looking for the new management team to provide.
Got it. As a CFO, Mike, I was hoping you could help us understand the economics of the revenue model in the way you guys get paid, take rate fees. Just help us understand where that's going?
We have essentially four revenue models. Two that are, I guess, more directly tied to interchange, two that are not. The largest one is something we call net interchange, which is part of our Managed by Marqeta business, where we don't just provide the processing, but we bring the bank relationship, we bring the network relationships with us. The way the net interchange model works is we take the gross interchange bank fees and network fees and essentially put it in a pot and then decide how we split it with our customer. The great thing about that model is it aligns everyone's interests, right? If there's upside, we both share in it. If there are challenges, we both share in that as well. We do this for several of our largest customers.
This makes up the bulk of our revenue today, because Block is on this model and a couple of our other large customers. The second model that we have that is also interchange-based is something where our customer says. It tends to be newer companies to this payment space, smaller companies who say, "You know, I don't want all that risk associated with all the different things that move interchange around. I just want a consistent amount to be paid. So on these transactions, I just wanna make a base, like, X basis points. And anything that's left over, like, that's yours to take, Marqeta." Typically, again, these are smaller companies, and because we're taking that mismatched risk, we tend to get a better take rate to be compensated for that risk.
There are the other two models that are not as interchange-based. The first one is still in our Managed by Marqeta business, where it's sort of the opposite of the one I just mentioned, where we just say, "We just wanna get paid X basis points, you keep the rest." You know, we'll provide all these Managed by Marqeta services. We wanna get paid this amount, and whatever happens with interchange, whatever's left over is yours. That is a very fast-growing part of the business. As some of our customers get more and more sophisticated and larger, you know, this model will appeal to them. The fourth revenue model is our Powered by Marqeta business, where we purely have a processing relationship with our customers.
I would say this is often charged on a per transaction basis, but can be also just based on volume. This is the fastest growing part of our business. You know, the share of our TPV doubled, is twice as high, you know, in Q2 versus Q2 of last year. This is a very fast-growing part of the business. The one thing that's important, though, about this Powered by business, 'cause the take rates are gonna be much lower, is that the gross profit take rate, so gross profit divided by volume is very similar to our gross profit take rate in many of our other managed by verticals. Although the take rate is lower, because we don't have network fees or bank fees, the gross margin is essentially 100%.
It might put pressure on our take rate over time, but it doesn't necessarily change the trajectory of our gross profit.
Got it. Does that mean then take rate probably drops some just due to the mix of business and where the faster growth items are, but maybe even gross profit, you know, is fine?
That's right. What we've seen in the last few quarters is our volumes and revenues have been growing the same, almost exactly the same rate even despite the growth of that Powered by business. 'Cause there's also another headwind on our take rate, which is as our customers get much larger, they tend to qualify for a better price from us, right? To align our interests. That's quite common in payments. What's offsetting that is we have some favorable business mix. Some of the fastest growing areas of our business have higher take rates, as well as we're becoming more and more successful selling additional services. This is things like card fulfillment, KYC, KYB management of disputes. That is additional services we're selling, you know, on the same volume we're generating.
With those two things, we've been actually able to maintain our take rate despite some of those pressures that we might get from the growth of the Powered by business.
Got it. To your surprise, we've been talking about the economy a lot.
I am surprised.
In all these fireside chats, even in the hall room, everybody's talking about, you know, are you seeing weakness, economic weaknesses? What are you looking for? I'll ask you guys, have you seen any economic weaknesses? Kind of what are you looking at, kind of KPIs going forward that you're monitoring?
Yeah. At this point, we are not seeing any signs of changes in the trajectory of spend. I guess what we monitor, we don't have a ton of discretionary spend exposure. In Q2, our quarter that just ended, about 1/6 of our payment volume is in just highly discretionary categories, so travel, electronics, et cetera. That did decelerate in growth compared to Q1. About 1/3 of our volume is in low discretionary areas like, you know, food and drugstores. That growth did accelerate in Q2. You're seeing a little bit of a mix in the spending, but the overall spending level is holding.
I think what makes us feel what might put us in a better position, even if there were to be macro headwinds in the future, is a lot of our growth is coming from displacing other types of spend. If you think about. Those other types of spend are things that we don't support today. If you think about BNPL is mostly maybe displacing some revolving credit, right? You have expense management, which is maybe replacing corporate card spend. You know, we have a lot of thriving neobanks that are taking volume away from, you know, more traditional bank offerings that we don't really serve to large FIs. We feel that obviously if there's some slowdown, we will be impacted just 'cause maybe people will spend less.
We feel like we will be relatively well-positioned given the nature of the volume that we drive.
Yeah. I think last quarter you guys saw expense management TPV triple.
That's right.
I think there was an acceleration of at least 10 points on the on-demand.
Yes.
What's kinda driving those two segments for you guys to see in the outperformance?
It's just the incredible flexibility and configurability that our platform provides our customers. They can really customize the offering to meet their end user's needs. In on-demand delivery, it's a customer experience that consumers love, right? 'Cause it's an incredible convenience. What our platform allows our customers to do is essentially almost eliminate their fraud because of the way our platform integrates into their systems and facilitates those transactions. We allow them to deliver an incredible customer experience without taking on fraud risk for themselves, which is what's driven so much value for them.
When it comes to expense management, it's just the configurability that our platform provides from a corporate card that I give you that you can use anywhere, anytime, to a single-use card that I wanna approve every purchase you make, Brian, 'cause I wanna see everything you're purchasing. Maybe I'm only comfortable with you having a card for these couple days you're in Las Vegas, but I'm only gonna let you use that card at hotels and restaurants, and I'm gonna restrict the size of transactions you can do. All that flexibility that our platform provides is incredibly powerful to expense management providers. What makes it even more compelling is that you don't need someone technical to manage that for you.
We have a dashboard that someone in the accounts payable department goes onto a screen, selects your name on a dropdown, and can literally configure that capability right there. It's those kinds of capabilities that we offer is what's driving our success.
Got it. On the last earnings call, I think you highlighted that Fintechs are being a little less aggressive with expansion plans and investment. You know, you're likely alluding to some of the categories like BNPL and crypto, which obviously have fallen off in at times here. What does that mean then for your business model in terms of revenue and TPV trajectory with maybe some other pieces of the business that are faltering a little?
Yeah. I mean, with you know, people being companies being more interested in or putting a higher priority on conserving their cash burn, and valuations coming down, we are seeing some customers, you know, sort of slow down their level of investment. I think whether it's really impactful to us in 2023 is really gonna depend on two factors, one is this relatively temporary? Does the storm blow over relatively quickly and then, you know, they get back to investing? Obviously, that would be to our benefit. Another option is even if it does stay around a long time, whether the larger players in a lot of those verticals who are also our customers, you know, step in and actually get more aggressive. They don't have those same constraints.
They're not limited by, you know, the amount of cash that they raised. You know, they may already be public or they're very large, and so they may lean in. I know, like, for us personally as a company, that's the approach that we plan to take. Because we're so much larger and in a better position, we feel if this is gonna be a little bit of a tougher time, that our size and the fact that we're public and therefore, you know, our potential customers can see our numbers and our performance and our stability, that should work in our favor actually, as we're going after business. It's hard to know exactly what the implications will be, but, you know, obviously we have to wait and see.
Got it. You know, obviously the big question always comes up, looking at your concentration of your revenue. My thoughts on this are, you know, I'd love your take is, you know, thinking about how sticky these relationships likely are with your largest clients. Can you maybe just describe what it entails to work with some of these largest clients, and how easy is it for them to pick up and move to go to somebody else?
Yeah, it's a very sticky business. We're you know, critical infrastructure that allows them to deliver a value proposition to their customers, and it would be a lot of work to change it out. You have to be pretty unhappy. Now that's a, I guess, a plus and a negative that, you know, sometimes is, you know, makes it harder for us also to win new business and knock out other players. But I would say, particularly with the larger customers that we have, there aren't a lot of alternatives for them. What we do for them is pretty unique and it would take a lot of.
It's both the actual investment, direct investment they'd have to make to make the change, as well as the opportunity cost, because they would have to divert resources, likely, talented engineers to, you know, to stand up an alternative. You know, it's a pretty sticky business. The one area where we do see it, though, is people do want alternatives, right? They won't necessarily be moving the entire business, but they might want a secondary provider, and that's quite common. Again, we are the beneficiary of that sometimes. Sometimes our customers will also be looking for a second provider for just business continuity and to, you know, have someone to, you know, play off of you when you're doing contract negotiations. That is something. That's, you know, it's often.
It's very rare that a whole book of business moves. I think when it comes to concentration, you know, obviously, Block is about 2/3 of our revenue. They're growing really fast, which is part of why we're making progress in diversifying our revenue. It's, you know, but they're a very large customer growing really fast on our platform and doing more and more with us. I think we are having success diversifying. If you look at the customers we've signed since 2019 and, for example, like those customers, their volumes are growing more than 3x faster than our customers who have been on the platform from prior to 2019.
It's also important to understand that although Block is in this, in Q2 with 69% of our revenue, including Afterpay, that, because of the nature of their program and some of the unique aspects of it, they're a much smaller portion of our gross profit. Their share of gross profit is more than 15 points lower than their share of revenue, because of just the nature of that program compared to other parts of our business. We wanna make progress in our diversification, and we are. You know, we also view it as a positive that, you know, Block grows so fast and wants to do more with us.
I mean, is it typically like most companies in payments where, you know, there's a little bit of discounting for more volume on renewals? Is this any different? I mean, I think people are very nervous about this, obviously.
Yes.
How different is this than the rest of payments?
It's a similar dynamic, right? I mean, why payments? Really, almost any business works that way, right? You wanna incentivize that, your customer to grow with you, and you will give them better economics over time, but that are still, you're still net accretive, but you extend better economics to your customers. We're no different.
Got it. You talked a little bit about that diversification. Is there any wins or areas of growth that is helping you push further into diversification?
Yeah. I think that it's not. I wouldn't point to a one win or, like, or two wins that I think are important. It's more the collective progress we're making. If you know, look at we are expanding into new product areas. Like, all in the last few quarters, we announced that we're gonna do credit processing for Greenlight, right? That's pushing us more into credit. We announced that we're gonna do tokenization with Citi, so gets our foot in the door with another large financial institution. We are going to expand into some new verticals that we haven't been in before. Just this last quarter, we said we're gonna start working on with Western Union to help them modernize and innovate in the remittance space. We're working with In Transit in Australia.
'Cause again, In Transit, another area where people are looking to modernize payments. We also have existing customers who are expanding with us, right? Bill.com doing more with us. We have, and this maybe doesn't help our concentration, but we do have, you know, Square Card expanding into Canada. All these things are, it's not one particular deal, but they're all, ingredients in this sort of growing expansion of, our reach and our platform. That is exciting.
Got it. You know, you talked a little bit about some of the relationships with some of the larger FIs and more traditional FIs like Citi. Can you talk about a little bit how those relationships work? Because many of those have their own issuing-
Yes
... and their own card business. How are they partnering with Marqeta, and where can that business go?
Yeah. What we're typically doing for, you know, Citi and Marcus and JPMorgan is, you know, we look to try to get a foot in the door. In a lot of cases, that's come from tokenization as a service, where what we're offering in their commercial card business is to instantly provision an approved credential into an Apple Pay or Google Pay wallet. Rather than having to wait for you to receive your card before you load it, as soon as the card is approved, it can be instantly provisioned and therefore used. That's something that their legacy providers cannot do for them. They've, you know, asked us to help them with that. What is...
I guess what we feel exciting is, you know, that's a relatively small revenue business, although tokenization is growing very fast. There's not a lot of revenue in that particular service. For just to get an FI to approve and bless your technology and integrate it and do all the testing and all the rigor that comes with you being connected to their platforms is pretty significant. We look at it as a foot in the door, where now they've got that connectivity, and if they wanna then do something innovative with either, you know, a debit portfolio or, you know, something new in credit that then we could provide that, and we would be a good alternative. You know, that's. We're getting invited in the last, say, 6-9 months.
We're getting a lot more invited to a lot more, you know, RFPs. We're getting engaged a lot more from financial institutions because, again, there's a lot of momentum there for them to modernize and move to the cloud. you know, that you know creates an opening for us to provide our capabilities to them. you know, I guess we don't have the big win yet, but there's definitely good momentum there.
You talked a little bit about helping kinda push more, you know, banking-as-a-service capabilities because it feels like almost everybody or a lot of firms wanna use some form of debit and capture some of that interchange. Can you just talk about the growth still there-
Yeah.
The opportunity for growth?
It's a huge opportunity. You know, I think as I mentioned earlier, we're seeing from many of our customers, everyone has some neobank aspect to their strategy, where they're saying, "I take deposits, and whether those are in fiat currency, crypto, or it's equities that I'm holding, I wanna offer other services to my customers, and I want them to be able to use those assets to maybe do spending, and that's why I'm interested in a card program and other banking capabilities." You know, right now we do provide a number of banking services in terms of, you know, deposits and ACH.
We have a lot more coming, so we're gonna be delivering a lot more capabilities by the end of 2022 that you'll hear more about in the coming months. We're making good progress there. It is a big opportunity to bring the innovation that we bring from a processing perspective together with more banking services.
Was hoping you could talk a little bit about the cross-border growth potential for you guys and just the international markets, how that's developing?
Yeah. International is a good opportunity for us. I think it's important though to remember that right now it's only a small percentage of our revenue, and even our share within the U.S. of card processing is incredibly small, right? Very low single digits. We have huge potential still in the U.S. I think a lot of our investment will still be directed there, and Canada as well as part of North America. I think Europe is in the next place that's getting a good amount of investment. We've made a lot of progress. We have a pretty good sized team now in Europe, and we're getting good traction. We have a good reputation, and we're being engaged by a lot more companies.
We have expense management players, we have neobanks, BNPL customers. Similar use cases, but it's growing really fast and still relatively small. We think in the next five years, that's gonna become a much bigger business for us. We also have people in Australia. That's another area where we have a good amount of business. We are looking at expanding into Asia and some into Latin America in the coming years. I think still the bulk of our growth in the coming years will be mostly fueled by North America.
The market is obviously starting to place a lot more emphasis on profitability. Yet, as you've described here today, there's still a lot of investments and growth potential for you guys. How do you balance those two things, and how do you think about the profitability of the model going forward?
Yeah. The key thing is that it is a balance, and that's what we're trying to do. If you look at our P&L today, a lot of it is driven by the fact that we have to invest 2-3 years before we generate revenue on something new that we build, just because it'll take some time, say 12-18 months to build something. Then, to sign our customers and for their business to ramp on the platform can often take 6-12 months. You know, what you really see, what weighs on our profitability today is that lag, where we are investing in things where the revenue won't come for a few years, and that's what's creating our negative EBITDA. We are not that far away, though.
Like, our EBITDA is not that negative. Like, most quarters it's around, this past quarter was -$10 million. We're relatively close, so we feel like we're striking the right balance. The last two quarters we have been cash flow positive as well. Even though our EBITDA is negative because of some of the aspects of our working capital, we have been cash flow positive, and we're not burning a lot of cash. That's giving us more confidence to say, we wanna invest so that we're thinking about the strength of the business two, three, five years from now, but while also making progress towards profitability. You know, that's the balance we're trying to strike right now.
You know, I was a little surprised of the stock reaction after the earnings that it fell quite a bit. You've obviously had conversations post-earnings with clients. What do you think some of the confusion is, maybe that people didn't quite pick up from the earnings call?
Yeah, I mean, I think that a lot of it had to do with Jason's announcement and investors being concerned that he's leaving the company. He's not leaving. He plans to stick around and be very actively involved. He's not gonna show up as a CEO of another company in a couple of years. He doesn't wanna start a new business. He said, "You know, this is my third company and you know, this is the last one." It's really that he wants to spend more time in the areas that he feels he can add the most value. He wants to help take this business. He's the largest shareholder in the company, so he's used the word duty several times.
It's his duty to put in place the CEO that increases the highest probability of this, you know, of us reaching our goals and becoming a successful business. I think that's a lot of that uncertainty and that maybe us not being clear enough about his role going forward is maybe what caused the stock reaction. We've been trying to clarify that for investors.
Got it. I know we're running out of time, Mike, but I do wanna ask you on M&A and capital allocation, how do you think about those priorities?
Yeah. From a capital allocation perspective, we do have about $1.7 billion of cash on our balance sheet. Definitely the number one priority for that is M&A. Specifically within M&A, we're looking to accelerate product roadmap items. The top of our list is kind of digital banking capabilities as well as credit. You know, that is what we plan to focus on. In terms of our priorities when we're thinking about the types of companies that we're looking for in M&A, I would say one of our biggest priorities is the technology compatibility. We absolutely wanna remain single stack.
We've learned from, you know, those who came before us in processing how difficult that can be for customers as they want to expand and they say, "Oh, I wanna go to Europe now." Say, "Well, that's a different platform. You gotta do new technology work." We wanna avoid that. So when we're looking at these companies, we wanna make sure that the technology is very compatible so that it can be stitched together with our technology and deliver that single stack experience for our customers. But, you know, maybe pull our product roadmap up two, three years.
Yeah, I was gonna say, could you just build the digital banking capabilities, and the credit platforms yourself internally?
We have like to date.
Yeah.
I would say, you know, right now our roadmap goes out two, three years in terms of the things we're interested in. If we could find a good company that has those capabilities, then we could pull it forward, buy it and pull it in to be three months from now, then that's, you know, something that we're interested in.
Great.
With, you know, valuations coming down, hopefully, you know, this is an opportunistic time for us to do just that.
Yeah, definitely. Well, thanks so much, Mike. Thanks for being here. Appreciate your comments.
Thank you for having me, Brian.