Thank you for joining us. Very pleased today to be kicking off the 2023 Morgan Stanley TMT Conference. Thanks to everybody for joining us in this opening session with Marqeta. Today, we have Mike Milotich, CFO. Thanks for joining us today.
Thank you for having me.
Before I get started, make sure that I don't get in trouble for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way, Mike, thanks for joining us. excited to-.
Good afternoon.
Like I said, excited to be kicking off with Marqeta here this morning. Maybe help us level set, if you will. You know, it's been a couple of years since the company came public. Where is Marqeta today? How's the business progressing? Really kinda what are your key to-do items for the future?
Yeah. I think the business is in a very good place. We've been scaling very rapidly in a really incredible way. If you go back to the first two years of the pandemic, from 2019 to 2021, those two years, you know, the business grew over 4x. Even if you just look at our TPV in 2022, the year we just completed, it approached $170 billion, which is just about 3 percentage points smaller than 2020 and 2021 combined. The business is getting big quickly, and we're getting to the point where we're scaling, and that has a lot of, you know, trickle-down benefits for us, both from a market perspective in terms of attracting customers as well as in terms of our cost structure and getting to profitability.
I think the other thing that's great about where we are is just in the second half of last year, we really sort of rounded out our platform. We launched our credit products. We launched Marqeta for Banking, just earlier last month we made a acquisition in credit. We really feel like we have the comprehensive platform that we need at this point. We feel like we're in a good place. In terms of focus areas, I think there's two key areas. One is the embedded finance opportunity is really picking up momentum, I'm sure we're gonna talk a lot about that.
Right
... this morning. The second thing is just starting to do things in a much more structured, repeatable way, as a company so that we just get more efficient and effective. You know, so many of the things when you're in hypergrowth and you're a relatively young company, you tend to throw bodies at problems to get things done. You know, we're at the point now where we're starting to get a lot more structured and that should be, help us going forward.
wanted to touch, you know, you highlighted embedded finance, but, you know, with Simon coming in now as CEO, and having been named recently, et cetera, what are the key aspects of the strategy that we should expect to be different with him? I mean, I know that in kind of his initial public statements, he has talked a lot about embedded finance.
Mm-hmm.
Is that the key thing, or are there other areas that you think will allow him to define his own strategy?
Yeah. I think what I think won't change is the big picture strategy is not something that will change, only because it's very clear the direction we should be going in. We have great product market fit. We hear very consistently from our customers what they want from us. Even just in this past fall, we, you know, completed our first multi-year planning effort, and Simon was a big part of that from a product as well as a go-to-market perspective. I think sort of where we're going is not gonna change. I think the biggest things that are gonna change with Simon at the helm is sort of how we do things.
Okay
not what we do. I think it. It's a couple of key changes. One is more of a solution orientation. With embedded finance, what's happening is it's rather than smaller, narrower-focused companies, it's much more established players who are looking to have comprehensive offerings, which means. Now that we've rounded out our platform, it's about how do we put those pieces together, take our highly configurable and flexible platform, and put it together in unique ways for solutions that meet our customers' needs. That's one big change. Another big change is just continuing to innovate, but within the economies of scale we've already achieved. We think we're gonna be able to slow down our incremental investment significantly.
Mm-hmm
... leverage the resources we have with our platform now largely built out. That focus on profitability, that focus on solutioning is, I think, really the big difference you're gonna see in terms of how we approach the market going forward.
I wanna you know, I definitely wanna talk about some of these products and what you're doing to build on those. One of the big questions that we get from investors universally right now is on macro and just what are you seeing generally across your platform, maybe from a verticals perspective?
Mm-hmm
any macro sensitivities you think are important to, for us to be aware of?
I would say things are stable and healthy. If you look at our key verticals, you know, financial services, the growth remains stable and strong. It's growing faster than the overall company. Block's a big part of that-
Right
... with just their incredible user engagement and growth. The expense management vertical is still growing over 100%, so that's scaling really rapidly. On-demand delivery has been stable really all four quarters of the year, grows double digits. It's our most mature vertical, but it's, you know, healthy growth. Buy now, pay later, you know, this quarter, the growth slowed, you know, for really for two reasons. One, just growing over an incredible holiday season from 2021, and the second thing is we did lose a portion of one of our programs from one of our customers in the buy now, pay later space in Q3. If you adjust for that volume loss, buy now, pay later was going a little bit slower than the overall company. Most of the verticals are healthy.
I'd say when we look at the categories of spend, what we see is the highly discretionary areas of spending, which is roughly a sixth or so of our volume.
Okay.
We look at nondiscretionary, which is about a third, and then there's sort of the medium bucket of sort of everything in between. When we look at those three categories, each of them are growing at roughly the same rate.
Oh, interesting.
everything is growing fairly consistently, versus in past quarters, the discretionary spending was growing faster.
Right. Right.
... was growing the fastest. That is a slight change. The overall, we're not seeing a big pullback in consumer spending. We're seeing buy now, pay later customers, you know, tighten their credit profiles a little bit. You know, in expense management, we're seeing businesses, you know, tighten up a little bit. I would say very small headwinds, nothing significant.
Let's turn to the theme of embedded finance. You mentioned it this morning. It's been a topic on at least the last couple of conference calls or earnings calls. How does that trend, you know, contribute to the sustainable profitable growth? Is there something beyond just volumes, or is it just volumes? Like, how should we think about like the sensitivities and levers there for Marqeta?
I think the biggest change with embedded finance is, one, as I mentioned just a few minutes ago, they want a comprehensive solution.
Okay.
If you look at the fintech boom that really fueled, you know, our growth and our sort of path to the scale we have today, it was well-funded, relatively narrow-focused companies doing something very specific. Marqeta did a great job at solving very specific needs for customers in a very specific vertical, whether it's on-demand delivery or buy now, pay later, expense management, et cetera. Now what we're seeing is either our existing customers are looking to expand to get more comprehensive offering, or the new players, the momentum embedded finance is much larger established companies that already have a user base, and they're looking to embed financial services into that. What that means is that, one, they're gonna use our whole platform, and they're much bigger, so they can be bigger customers, not many small customers.
That helps from a profitability perspective. The second thing is, because we've already built a lot of that part of the platform, we do think that we're not gonna have to invest as much incrementally, and we can leverage our economies of scale. Then the third component really is that, you know, we are at this point where we are quite significant in size for being a modern player. So for these larger embedded finance customers, scale matters a lot.
Right.
When they're making a decision, they say, "Can you help me two, three years from now when I get big, given the size of my user base already?" That plays into our favor. All those things, we feel, will help us not only continue to drive great growth, but do it in a more profitable way on our path to profitability.
A question I have on embedded finance is like, how does what's your sense of potential partners and their embedded finance aspirations? How sensitive are they to things like interest rates and cost of capital, et cetera, right? You know, it's one thing is like we can start to embed finance and provide embedded financing to customers when interest rates are low and delinquencies.
Mm-hmm
... and all these other credit-related aspects are performing well. As those normalize or even get worse than normal, how's that affecting the conversations you're having with them?
I would say not as much as you might think.
Okay.
Again, it goes to the fact that these are more established companies.
Right
... who have a much bigger sort of, investment pool to draw on. It's not as much, large net new incremental investment for them. They have a certain investment capacity, and it's all about prioritization.
Right. Right. Right.
... for them. You know, what we're seeing, like a big difference between our embedded finance customers versus maybe our previous customers of a couple years ago, is when a customer was looking to launch, before, we really had to work closely with their. You know, they had, you know, a handful of engineers. This product was critical to their product market offering. It was really about getting it up to speed as soon as possible. With our embedded finance customers, it's much more about, "Okay, where do I fit you in on my roadmap?
Right. Right.
I have a slot in May, and I have a slot in October. Do you think we can get this done by May?
Right. Right.
Or should I really be thinking October for you?" It's a very different kind of conversation because the companies already have a lot of resources and scale to put behind these programs.
Got it. Got it. Turning to one of the products that you've been focused on is credit, and that's obviously been a focal point for your team recently. Can you walk us through the acquisition rationale for Power Finance? Just wondering what you were seeing in the market that made make sense from a product fit perspective. Was this just like a time to market versus build internally?
Yes.
Just kind of the things that went into making that decision.
We feel there's a huge opportunity in credit, and that it's been really held back by legacy technology in terms of the way people want to engage either their consumers or their business customers with more of an embedded offering.
Right.
That's really what Power is bringing to Marqeta, is for debit and prepaid, we can offer you program management solutions where we take everything off your plate. In credit, we were really just a processor, and we were using partners to satisfy the program management. We had some success doing that. What we found is that by inserting another party into the discussions, it just slowed down our ability to solution and sort of the creativity that we could.
Right
...with solutions. We were hearing pretty consistently from customers, you know, "We'd really love in credit what you offer in debit and prepaid." That was really the rationale. We could have built it ourselves. We were on our way to doing that. You know, we thought that was probably about two years out...
Right
...to be realistic. If you think about the momentum that embedded finance has, you know, just in our pipeline, we literally have tens and tens of deals in the credit space. What, you know, investors love about our business and we love about our business is it's pretty sticky.
Right
...if people are gonna be making decisions over the next two years, we'd like to offer a comprehensive program management credit solution, and then build that business and grow with that customer for many years to come. That two-year window, to your point, in terms of accelerating the time to market, had a lot of value to us.
Yeah
That was really what drove us to do the deal.
You know, we talk about, you know, the ability to accelerate what you can do with embedded finance and some of those other credit products. What about, like, more traditional issuers and credit opportunities? I mean, what does that look like and does Power Finance fit anywhere within that solution set? Is that something that if you're going to address that market, you're gonna have to continue to develop more internally?
Yeah. I think it's. We look at it, or I guess I look at it as a means to an end.
Mm-hmm.
We don't need the program management capabilities to serve the larger FIs, which is really what you're referring to.
Right. Right, right. Yep
...to really control the credit space today, 'cause they will do their own program management. It allows us to get to a scale that makes us more viable for large FIs.
Got it.
The way we look at it is the larger embedded finance players, whether it's a consumer-oriented program, because a lot of you probably have co-branded cards out there, and you don't really think about how you go to the bank app to manage that.
Right.
Right? We just don't think that's necessary, and on our platform it wouldn't. Our customers could truly embed the experience in their app and in their user experience in a way that doesn't really happen in today for credit. On the commercial side, there's also large opportunities.
Mm.
You know, if you think about the, you know, the Payment Facilitators, sort of Payment Aggregators, marketplaces today, a lot of them are extending credit to their small business customers.
Right. Right, right
who are using their platform. We think a card solution would be a very creative and efficient way to do that. There's a lot of interest. We think both opportunities are large. As we close those, grow that business, then, you know, our $165 billion-$170 billion volume now, you know, gets much bigger. Large FIs would say, "Okay, now they're at the scale and capacity that it's more reasonable for us to leverage their platform and not feel like it's a risky decision.
Got it. Turning to customers, on the most recent earnings call, you highlighted a large number of renewals that occurred in 2022. Can you talk a little bit about, you know, what was the driver behind those renewals and how we should expect that will impact 2023 in your outlook?
Yeah. We typically had three-year deals in the past.
Okay.
About, roughly about a third of our business should be coming up for renewal in any given year. What we've done in, since May of last year, in about the last nine months' time is renewed four of our top eight deals, about half of our top 30, and it's about half of our non-Block volume. It's a good amount of activity, and it's really being driven by, I guess, three factors. Besides just some of them were just up for renewal. That's normal course of business. The second is, as customers are looking to expand on our platform, then it's quite common that just as we look at it, they say, "Okay, well, my volumes are gonna go a lot bigger. I'd like to, you know, add a couple tiers on the end-
Right. Right, right
...so that I capitalize on that much larger size on your platform. In exchange for that, I am willing to commit for a longer period of time." That, that's the second big driver. Then the third is just in these times, right, every business is looking at what are my costs, what are my opportunities, and a lot of customers were coming to us, who are more the winners in their space, saying, "I'm willing to commit to your platform from the long term, and, but I would like to, you know, redo our deal-
Right
...and get the opportunity to hit those better terms faster. In exchange for doing a 4 or 5-year deal, like, we're happy to do that so that we can work in partnership with our customer to grow their business, which, you know, is in our interest. That's really what drove it. The impact, I would say the incremental impact built above and beyond the normal third of our volume that would be up, is probably a couple of points on our gross profit growth in 2023.
Okay
... that would be, you know, the rough impact of all this additional activity.
And I wanna get to Block, but on the non-Block customers, you know, what is your sense in terms of their own ability to accelerate growth trajectory and like, how are you anticipating and formulating your plans around that?
Yeah. I mean, I think it's, it just comes down to working closely with our customer with their plans and leveraging a lot of our-
Mm-hmm
...experience and expertise in terms of what it takes to successfully launch a card program and what we're seeing in the marketplace. We try to be as helpful to our customers as we can and pass along our knowledge. Then, of course, they know their users very well and do a lot of analytics themselves. Between the two companies working together, you know, it maximizes the chances of success.
Got it. And I do wanna touch on Block is, I mean, anything incremental for us to keep in mind regarding that renewal? Just remind us when it isComes up for renewal. On the earnings call, Simon was confident that, or expressed some confidence that a renewal could get done this year. Like, can you help give us some idea what's leading into and feeding into that, to that commentary?
Yeah. the Cash App deal is up essentially at the end of Q1 of 2024.
Mm-hmm.
The seller and Afterpay deals are later in 2024. All the contracts are up sometime in 2024. What gives us confidence in the renewal is, first, we have a very tight relationship.
Yeah.
It's not just, you know, at certain executive levels, it's every aspect of the company has a counterpart on the Block side that they support. Even people within finance, within risk management, product, you know, platform, technology. There's a, you know, there's a very close relationship, and we support them in many aspects. That one thing that gives us confidence. The second thing is their success comes from a relentless focus on user experience and what they do well, and they leverage experts like ourselves to help them execute.
Right.
We feel like as long as we continue to deliver and execute, and we add the value we are for what we consider to be a very fair price, then we should be able to, you know, renew and extend the relationship. That's really where the confidence comes from.
Got it. We've hit on a lot of things already this morning. I wanna take a breath here and if there are any questions from the audience, please just raise your hand and we'll get you guys a microphone that we can ask. We have one here.
Hi there.
Hi.
Your comment about buy now, pay later slowing this quarter, is that this 2023 quarter in progress or last quarter?
Oh, sorry. That's Q4 of 2022.
Okay. Q4 2022. How do you think about pricing these contract renewals? You know, everybody's looking to, you know, be more aggressive on the cost side, so that's gonna be a headwind for you guys. How do you, yeah, how do you expand margins in that environment?
I think one of the benefits we have is that we do serve a large number of customers in each of the verticals that we operate in. We have a good understanding of the market and the competitive dynamics and have a lot of value to add to our customers. That's one thing. Another thing we look at is it needs to be accretive for both sides. We try to solve for a win-win, and we're fortunate enough to be in fast-growing businesses, generally speaking, which makes it a little bit easier to find those win-wins. That's really the way we approach it. We try to find what we think is a reasonable deal for both sides so that everyone is happy, and it's a, you know, fruitful four or five -year relationship.
I think I follow.
Just so everybody can hear, the question is, like, has that been the case with the deals that you've signed and the progress so far?
It has. It has. That's exactly what we're seeing in the market. As the market matures, right? We're not where we were three years ago, where things were booming. people have a good understanding of the price points and the value we're bringing. yeah, we do feel like we can reach those points of win-win.
Got it. Like I said, if anybody else has questions, just raise your hand and we'll get you a microphone. Mike, I want to turn to margins and, like, the evolution, if you will, of the profitability. Maybe I'll just give you the floor to talk about where we stand on gross margins. Can you remind us of kind of the incremental complexities surrounding the, especially the network incentive adjustments.
Mm-hmm
... that surprised at least a lot of us?
Yeah. We've said that we would expect our gross margins to be 40%-45%, you know, prior to the IPO. In 2022, we were sort of right in the middle of that range. For 2023, we expect to be on the lower end of that range. That's really driven by a change in our network incentives, is really the biggest impact on that. What it comes down to is the way the network incentives work is the level of incentive is tied to the nature of the relationship between us, our customer, and the network. There are large customers we have where the network already has a pre-established relationship and a lot of times even refer that customer to us. In those cases, we won't make any incentives.
There are many customers where we initiate the conversation, the relationship. We bring that customer to the network, and that's how we maximize our incentives. Then there's a few variations in between. Although this hasn't happened before, in this case, two of our larger customers, the nature of the relationship is changing because of much broader relationship they have with the network.
Mm.
That is impacting the level of incentives that we are receiving. This is not something in four or five years we've been working with the networks that we've seen. This is a relatively new, I guess, impact to us. In the new deal that we just did with Visa, we also feel like we have minimized the chances of this happening going forward. We feel good about the renewal that we did. Just to, again, put it in perspective, our previous deal with Visa had been done in about three years ago. Just given the incredible pace at which we've grown our volumes, what was happening in the last program year on our old contract, you know, we were already in the top incentive tier within three, four months.
Oh, okay.
The big value that we got in this deal that is to add several more tiers, so that we can continue to, I guess, get the value for all the volume we're bringing to the network for the years to come.
With this kind of reset, et cetera, is that how we build back to the middle or even the upper end of the gross margin structure? Can you kind of walk us through, like, the drivers of that?
Yeah. There's really three main drivers. One is selling incremental services on the existing TPV that we already capture. If you think about our credit offering-
Mm-hmm.
That would be incremental, value that we add that we would charge for. A lot of our banking capabilities would be similar. It's an incremental charge. Also, as our Powered by Marqeta business continues to grow at a much faster pace than everything else, that is also a much higher margin business, so the revenue profile is different on a kind of basis point basis on volume...
Right. Right.
... but the gross profit is similar, so that's something that will also help the gross profit. The last thing is just as we continue to grow and scale, that will positively impact our network incentives as well as our bank contracts that we have where we also get rewarded for growth. Those are the reasons why we feel we can definitely stay in that range in the long term and continue to improve our gross margin.
On adjusted EBITDA margins, obviously you're aiming for 20%+ over time. How should we think about that? Is it effectively around 40%-50% conversion of gross pro-profit to adjusted EBITDA? I guess maybe more importantly, at least for our purposes, do you have a general sense of the scale required from a volume perspective to reach that type of conversion and ultimately those margin levels?
Yeah. You're right. It is roughly that 40%-50% sort of dropping down from gross profit to adjusted EBITDA to hit that margin. We feel we are approaching the scale that we need to do that. We talked a lot about on our earnings call last week is that we feel like we are reaching the economies of scale we need, where we have the investment capacity required to keep innovating without a lot of incremental investment.
Right.
We are about 1,000 people now. You know, roughly two-thirds of those people are in product and technology, so we have a size of business now and resources that we feel that with having launched credit, having launched Marqeta for Banking, now having acquired credit program management, that we have the pieces in place, and we can, of course, keep improving and refining and delivering incremental value for our customers, but without a lot of incremental investment.
Right.
That's why we believe our expenses in 2023, we can grow in the high single digits on an organic basis. We'll have about two points from Power coming in starting in February, two points of additional growth. That is how we're achieving that. If you go forward then, a year or two, what you start to see is that the incremental gross profit growth, sort of in dollar terms, exceeds the incremental expense growth by, you know, $100 million, and then the next year, $150 million, and the next year, $200 million. With that economies of scale we've reached, once we get to EBITDA positive, it's gonna start increasing actually relatively quickly.
Right.
It won't be a, sort of a steady climb. It'll increase, rapidly. That's what makes us confident that we can achieve that 20% plus EBITDA margin, in the reasonable future.
On the OpEx side is that since you've joined, you've managed to streamline a lot of the costs in the business.
Mm-hmm
about that even at the outset of this morning's conversation. What are not only the OpEx growth for this year, kind of what you're anticipating, but how do you project that into the future then? Especially as you're looking to add additional programs and capabilities and customers.
Yeah. I mean, I think the first thing that positioned us to deliver what we're delivering in 2023 actually goes back to the beginning of 2022. When I first came on in February of 2022, you could see the sort of warning signs macro-wise, and we immediately started reducing our investment level and our hiring, where I think a lot of people at that time were still sort of plowing ahead.
Right. Right.
We again in Q4, just a few months back, also then slowed down even more. In that time throughout 2022, we were investing a lot in processes, tools, systems, so that we can change the way we get our work done and be less people dependent and a little more structured and automated. That is what is putting us in position for where we are in 2023. I mean, just the full year impact of the '22 hires that we made, the merit increase we made in this, you know, fairly high inflationary environment we're still in, as well as some of our contractual commitments we have with some of our technology tools, just those three things had our expense growth growing in double digits before we did anything else.
We actually feel like we've done a very good job at taking a lot of costs out of the business by getting a lot more efficient. We're gonna Our head count growth's gonna be in the single digits. We have renegotiated a lot of our contracts with a lot of our suppliers. We've optimized our usage. There's a lot of things that you can do with your cloud providers and tech tools where we started really looking at, okay, what are we spending? What drives that? Is that really critical, or can we just get more efficient, take costs out without-
Right. Right.
... impacting the business? We've also looked at, you know, how much we use outside help and professional services, things of that nature. That's how we've pulled a lot of the costs out of the business to keep our expense growth down.
Well, that's great. Mike, that's all the time we have this morning. Thank you very much for joining us. Look forward to catching up again soon.
Thanks so much for having me.
Thank you. Good job.