Marqeta, Inc. (NASDAQ:MQ) Q1 2024 Earnings Call Transcript

Marqeta, Inc. (NASDAQ:MQ) Q1 2024 Earnings Call Transcript May 7, 2024

Marqeta, Inc. beats earnings expectations. Reported EPS is $-0.06962, expectations were $-0.08. MQ isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Marqeta First Quarter 2024 Earnings Conference Call. At this time, lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will open the lines for your questions. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Stacey Finerman, Vice President of Investor Relations. Thank you and you may begin.

Stacey Finerman: Thanks, operator. Before we begin, I would like to remind everyone that today’s call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC which are available on our Investor Relations website, including our annual report on Form 10-K for the period ended December 31, 2023 and our subsequent periodic filings with the SEC. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of the time of this call and the company does not assume any obligation or intent to update them, except as required by law. In addition, today’s call includes non-GAAP financial measures.

These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today’s earnings press release or earnings release supplemental materials which are available on our Investor Relations website. Hosting today’s call are Simon Khalaf, Marqeta’s CEO; and Mike Milotich, Marqeta’s CFO. With that, I’d like to turn the call over to Simon to begin.

Simon Khalaf: Thank you, Stacey and thank you for joining us for Marqeta’s First Quarter 2024 Earnings Call. Our first quarter results demonstrate how the strong foundation we built in 2023 is leading to growth with new and existing Marqeta customers and speaks volumes to the strength and depth of the Marqeta platform. We started the year strong with net revenue, gross profit and adjusted EBITDA outpacing expectations. Total processing volume or TPV was $67 billion in the first quarter, a 33% increase compared to the same quarter of 2023. In Q1, we had a day where we processed over $1 billion in TPV, a significant milestone for the company. Our net revenue of $118 million in the quarter contracted 46% year-over-year which included a decrease of 58 percentage points from the revenue presentation change related to our Cash App contract renewal.

Gross profit was $84 million in the quarter, a contraction of 6% versus Q1 2023, primarily due to the catch-up renewal pricing. Our gross margin for the quarter was 71%. Our non-GAAP adjusted operating expenses were $75 million, a 20% decline year-over-year due to our restructuring in Q2 2023 and operational efficiencies. This resulted in a positive adjusted EBITDA of $9 million in the quarter. Q1 was a solid quarter, indeed. First and foremost, the accelerated bookings we started in late 2022 and our relentless focus on converting them to gross profit are starting to pay off. For example, we launched a program with Trade Republic and new customers signed in late 2022. Trade Republic is Europe’s largest broker and leading savings platform headquartered in Germany.

Trade Republic uses Marqeta to power an innovative consumer debit card that combines spending and savings for their 4 million customers across 17 markets. The company chose Marqeta due to our ability to reliably deliver innovation and easy geographic expansion. Over 1 million people joined the waiting list for the highly innovative card in just a few weeks. Second, in addition to launching and scaling new customers, we continue to focus on expanding with our existing customers. Uber Eats recently expanded with us into Latin and South America, Canada and Australia, bringing to 9, the number of markets served. Also, Florida announced that Klarna card has been open to all U.S. Klarna users. The offering is built into Klarna’s app and provides flexible payment options with no revolving credit, personalized spending and budgeting recommendations and up to 10% cash back.

Beyond geographical expansion, our customers are growing with Marqeta by leveraging our deep payments and program management expertise. Previously, several of our customers, namely fintechs, chose to take program management and other services in-house only to reverse course later given the complexity and regulatory requirements associated with scale. Now many customers look to Marqeta to ease a significant amount of operational burden. During the first quarter, about 20 of our existing customers added program management products and/or optional services from our programs like disputes, compliance reporting and 3D Secure. Going forward, we believe compliance-related services, in particular, will be a key selling point and differentiator for our platform.

Many competitors do not offer the same level of service and many prospective customers don’t want to do this work themselves, especially when we have the advantage of both expertise and economies of scale. While ramping our previously booked programs as a top priority, we’re also focused on the significant embedded finance opportunities right before us, like the $2 trillion market for accelerated wage access or AWA. As we look to capture this tremendous opportunity, we’re working with multiple distribution partners to increase our reach and expand our offering. While we’ve seen tremendous growth from early large adopters like Uber and Walmart’s One finance, we’re approaching other channels to bring our solution to a broader market. In April, we announced our new customer Rain, a financial wellness benefits provider that uses technology to help companies give employees greater control over their finances.

Rain’s customers include global brands like McDonald’s, Taco Bell, Hilton and Marriott. Rain brings the technology and payroll acumen that come from integrating with multiple payroll providers to determine the proper withholdings along with what the employee has earned. This relationship delivers value for Marqeta on 2 fronts. First, Rain will offer a plug-and-play AWA solution for employers, including the Rain spending card which Marqeta will power. Second, we’re working to offer a more comprehensive AWA solution that seamlessly combines our experience, scale and reliability in modern card issuing with the technology and payroll acumen of AWA specialists and the rain partnership is a significant step in achieving that end state. Another way with approaching the accelerated wage access market opportunity is by working with labor marketplaces, like the deal we announced with WorkWhile, a labor marketplace for shift workers.

This offering is stated to go live in the next few months. This brings me to an important point. For many of our customers, especially labor marketplaces, offering accelerated wage access is only the beginning of that embedded finance journey. In fact, they believe that accelerated wage access is part of a comprehensive neobanking solution for their workforce to increase retention in this tight labor market. As a result, these customers are coming to us for additional services such as banking and money movement. We believe that this conversion is not an isolated event but rather part of a broader conversions and personalization trend, giving consumers spectrum of integrated payment options, including debit, installment pay and revolver with a global and personalized experience across all merchants.

We believe that our platform which has been strengthened with the addition of credit position us extremely well to capitalize on this trend. In summary, we’re starting the year strong and seeing the foundation we laid over the last year start to deliver solid financial results. Our revamped sales efforts are beginning to pay off as the new embedded finance customers gain traction. In addition, our strong existing customer base continues to expand with us a testament to the value they get from our platform. Before I hand it over to Mike, I must mention Jason Garden’s decision to step down as Executive Chairman of the company, next month after 1.5 years in the position. As our largest shareholder, Jason has always been focused on where he can contribute to maximize shareholder value.

His persistence in value creation continues this tradition which Mike will touch upon in his comments. He has contributed significantly to the company over the past 14 years and this is just the latest chapter as we strive towards sustainable, profitable growth for long-term value creation. Since late 2022, we have made changes to mature and evolve the business. Jason felt that the company no longer required the ongoing support and governance that his Executive Chairman role provided. As a Board member going forward, Jason plans to focus his role as Chair of the Board’s new Payments Innovation Committee, Albin oversee Marqeta’s platform capabilities and the acceleration of our innovation agenda. I am excited to work with Jason and the rest of the Board on the massive opportunities ahead of Marqeta at the embedded finance market growth.

Over to you, Mike.

Mike Milotich: Thank you, Simon and good afternoon, everyone. Our Q1 results represent a strong start to the year with all of our key metrics exceeding our expectations. TPV grew 33% with broad-based outperformance, particularly in BNPL, on-demand delivery and financial services. The stronger-than-expected TBV growth drove net revenue to the high end of our expected range. Gross profit meaningfully outperformed due to those volume gains and the benefit of capturing additional network incentives which I will discuss later in more detail. Finally, continued execution of efficiency initiatives, particularly the streamlining of technology costs, when coupled with our higher gross profit led to significantly higher adjusted EBITDA of $9 million in the quarter.

Q1 TPV was $67 billion, a year-over-year increase of 33% for the fourth straight quarter. Non-Block TPV [ph] grew approximately 15 points faster than Block growth. The financial services vertical grew in line with the company overall as neobanking which some of our customers combined with accelerated wage access solutions continues to resonate with consumers. Lending, including Buy Now, Pay Later grew faster than the overall company due to the continued adoption of our BNPL customers pay anywhere card solutions. On-demand delivery growth remained in the double digits, accelerating quarter-over-quarter as our customers expanded into new merchant categories and geographies. Q1 had our highest on-demand delivery TPV growth in the last 2 years.

Expense management growth accelerated for the second straight quarter, growing on par with the overall company, driven mainly by strong performance from our top customers. In fact, one of these customers have been increasing the share of their volume on our platform after seeking platform diversification with a competitor in the past. Q1 net revenue was $118 million, a contraction of 46% year-over-year. The key elements of our net revenue results are as follows: the most significant impact was the 58 point growth headwind related solely to the revenue presentation change resulting from the cash renewal. As we’ve described before, this change in revenue presentation is related to the bank and network fees associated with Cash App’s primary payment network volume which previously were included in net revenue and cost of revenue.

Starting in Q3 ’23, these costs are netted against revenue. There is an additional 10 percentage points decline in net revenue growth due to the Cash App renewal pricing. There was one additional revenue presentation impact related to our Cash App renewal this quarter. We renegotiated a platform partner agreement with reduced pricing that went into effect this quarter. Due to the terms of the Cash App renewal, we passed through the proportional savings to Cash App. Based on the revenue presentation changes we made last year, this reduced pricing impacts Cash App net revenue but not gross profit. The impact was approximately $4 million, lowering our Q1 growth rate by approximately 2 points. This partner agreement impact was not contemplated when we last shared our 2024 expectations in February.

Non-Block revenue growth accelerated quarter-over-quarter by 3 points as we lap some of the prior year renewals. We continue to see increased contributions from fast-growing solutions such as BNPL, PayMe work cards, on-demand delivery category expansion and neobanking combined with accelerated wage access. Block net revenue concentration was 49% in Q1, decreasing 2 points from Q4. The decline in concentration is helped by the broad outperformance from other customers on our platform, particularly larger customers. Excluding Block, our top 10 customers increased net revenue by 30% year-over-year. Our net revenue take rate of 18 basis points declined 1 point from last quarter due to seasonality as the mix of our TPV during the holiday season typically has a higher take rate.

Q1 gross profit was $84 million, a gross profit margin of 71%, outperforming our expectations primarily due to higher network incentives. In the simplest terms, our stronger TPV trajectory across multiple networks over the last couple of quarters led to this benefit. In the case of one partner in particular, in the final days of the quarter, we reached another incentive tier, generating a gross profit benefit for the quarter before our incentive tiers reset in April. As a reminder, our 2 largest network incentive contracts run April to March which results in Q1 being our highest incentive quarter and Q2 being the lowest. On a year-over-year basis, our gross profit contracted 6%. While we are starting to see the newer higher gross profit cohorts begin to contribute, renewals continue to weigh on gross profit growth.

The Cash App renewal lowered gross profit growth by mid-20s percentage points. As a reminder, the Cash App revenue presentation changes do not impact gross profit. In addition, although the renewals lowered growth by mid-single digits. Roughly half of this impact is driven by renewals completed between Q2 2022 and Q1 2023 which will lap in Q2. The remaining impact is driven by the Square renewal which won’t anniversary until Q4. Non-Block gross profit growth accelerated quarter-over-quarter by 7 points, helped by the higher incentives. Our gross profit take rate was 13 basis points, consistent with the last 2 quarters. Q1 adjusted operating expenses were $75 million, a decrease of 20% year-over-year due to realized savings from our restructuring in May last year and efficiency initiatives targeting our technology and professional service expenses.

We continue to find opportunities to optimize our operations and execution while maintaining high reliability. On a sequential basis, expenses shrank 6% quarter-over-quarter, largely due to a decrease in professional services which tend to be higher in Q4 due to the timing of audit fees as well as product and security assessments. Q1 adjusted EBITDA was positive $9 million, resulting in a margin of 8%. Interest income was $14 million, driven by continued elevated interest rates. The Q1 GAAP net loss was $36 million, including a $10 million noncash post-combination expense related to the Power acquisition. Within Q1, we exhausted the $200 million buyback authorization announced in May of 2023. In the quarter, we purchased 5.2 million shares at an average price of $6.22 for $32.7 million.

We ended the quarter with $1.2 billion of cash and short-term investments. Now, let’s shift to our Q2 and full year outlook. We expect Q2 net revenue to contract between 47% and 50%. This is in line with the expectations we shared last quarter with the exception of the 2-point revenue presentation impact related to the renegotiated platform partnership. Consistent with what we have seen in the last 3 quarters, we have assumed a 65 to 70 percentage point negative impact of the cash app renewal. Q2 gross profit is expected to contract between 7% and 9%, a little better than our expectations at the start of the year based on our current trajectory. We expect gross profit margin to be in the low to mid-60s as our network incentive tiers with our 2 largest network partners reset every April.

Therefore, Q2 is always our lowest gross profit quarter. Q2 adjusted operating expenses are expected to grow in the low single digits as we start to lap our restructuring from last May. This is also better than our expectations at the start of the year due to optimization initiatives but we will continue to reinvest in headcount and enhance platform resiliency to support the growth of our scaled customers. Therefore, Q2 adjusted EBITDA margin is expected to be in the negative 5% to 7% range, 2 points better than our expectations at the start of the year. Although the reset of our network incentives will lead to negative adjusted EBITDA in the quarter, barring unforeseen macroeconomic events, we expect this to be our final negative adjusted EBITDA quarter as we move forward on our path of sustainable profitable growth.

Our expectations for the full year 2024 have increased for adjusted EBITDA and gross profit remains largely unchanged while reducing net revenue growth. We now expect net revenue to contract 24% to 27%. This is a 3-point to 4-point reduction from what was shared previously, driven by 2 factors, neither of which are impactful to gross profit. First, the revenue presentation impact related to the renegotiated platform partnership is approximately 2.5 points for the year. Second, we now expect the mix of our TPV to be more heavily weighted toward the Powered by Marqeta business which materially impacts net revenue but has a much lesser impact on gross profit. This will lower the revenue growth by approximately 1 point. Gross profit is now expected to grow 7% to 9%, lifting the bottom of the range from what we have shared previously.

TPV year-to-date has been a little stronger, helping the first half gross profit growth but the majority of the Q1 gross profit upside was related to incentives that are specific to Q1 because of the way our incentive contracts are structured. Our expectations for the second half gross profit growth remained unchanged for now at 23% to 26%. These changes in our net revenue and gross profit expectations highlight why we focus on gross profit as the measure of value we deliver for our customers. Our net revenue can be noisy based on our business mix and revenue presentation. Based on our continued success with cost optimization and efficiency initiatives, we are raising our full year adjusted EBITDA margin to positive 1% to 3%. We still expect positive adjusted EBITDA for 3 out of our 4 quarters in 2024 with Q2 being the exception.

Before we wrap up, I wanted to address our stock-based compensation and the impact of Jason’s election to step down as Executive Chairman. As we discussed during our Investor Day late last year, we are being more thoughtful in our deployment of stock-based compensation and are managing to a dilution target of below 3%. We are on track to meet our target in 2024 but it will take time for our increased discipline to impact our stock-based compensation due to the vesting of grants from prior years. For the past several quarters, approximately 30% of our stock-based compensation is driven by the accounting for Jason’s pre-IPO long-term performance award which consists of 7 equal tranches that vest upon the achievement of company stock price hurdles ranging from $67 to $173.

For this award to be earned, it included very specific service requirements as the CEO or Executive Chairman. Therefore, Jason’s decision to step down from the Executive Chairman role were resorting him forfeiting the award and the reversal of previously recognized expenses. This reversal will occur with the transition in June, resulting in a $158 million onetime benefit to stock-based compensation in Q2. In addition, we will no longer expense $32 million of stock-based compensation that we would have booked from Q2 to Q4 of this year. Therefore, this change will lower our 2024 stock-based compensation by $190 million compared to what was expected at the start of the year. This will also lower our 2025 expense by $18 million. While this does not change the timing of sustained net income profitability, it does substantially reduce our net income loss over the next 2 years.

In fact, we now expect 2024 net income to be around breakeven to slightly positive due to the accounting of this forfeiture then going negative again in 2025 before reaching true and sustained profitability exiting 2026 as we laid out in our Investor Day late last year. In addition, Jason has elected to voluntarily convert a portion of its Class B shares to Class A shares on a one-for-one basis. Therefore, our Board has authorized another share repurchase program of up to $200 million. While we are not ready to commit to being a systematic buyer of our stock going forward, we continue to believe that our current valuation does not properly reflect the market opportunity, our differentiated and comprehensive offering and the expense discipline we have instilled in our business.

This attractive path to sustainable profitable growth, combined with our strong balance sheet and limited cash burn, make this buyback program a great opportunity to reduce our shares outstanding at our current valuation as we continue to manage the business for the long term. In conclusion, we are starting 2024 with solid results and continuing to generate the momentum we’ve built over the last 18 months to deliver sustainable growth, profitability and innovation in 2024 and beyond. Once we lap the Cash App renewal impacts at the end of Q2, our second half financial metrics will begin to reflect what we believe is our true performance trajectory. Our success with efficiency initiatives is expected to deliver positive adjusted EBITDA in 2024 for the first time as a company while continuing to enhance our platform capabilities to capture the immense opportunities ahead with new and existing customers.

I will now turn it over to the operator for Q&A.

See also 15 Best Low Cost ETFs and 14 Best Large Cap Dividend Growth Stocks To Buy Now.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang: I just wanted to ask on the bookings front. Any update there? How did it start the year? What are you seeing from a pipeline standpoint; any changes? I know last year was up nicely, up 50%.

Simon Khalaf: Things are looking good. And I’d say we had a plan. I think last year, we spent a lot of time disclosing bookings number because it was a problem before I’d say, in ’21 and ’22. That problem is way behind us right now. So we’re doing really well. And in terms of pipeline, the pipeline is growing strongly in both fintech as well as embedded finance. So we don’t track, I’d say, slightly ahead.

Tien-Tsin Huang: And then just my follow-up. Just I think on the expense management side, you talked about where you’re doing some split processing. You did see some higher share for one of your partners there. Can you discuss why that’s the case? I know it’s common for us to just assume it’s pricing but I’m sure performance is a part of it. So just maybe walk us through what changed there and how you win those jump-off situations.

Mike Milotich: Yes. I think what happens is particularly when in expense management, there can be a lot of single-use commercial card. And that is a more competitive area of our business. But when you look at our comprehensive offering and all the different value that we can provide our customers over time, what we’re seeing is in this case is they’re starting to see that value and are adding just more volume to our platform and growing much faster with us now. So it’s just a tribute to the breadth and depth of the platform and the value proposition we offer. And we obviously would like this to happen with many of our other customers who may have also sought diversity.

Operator: Our next question comes from Timothy Chiodo with UBS.

Timothy Chiodo: I was hoping we could spend a little bit more time on the Rain partnership. You mentioned some of those large employer logos that are part of Rain’s network or customer base. Maybe you could dig into the mechanics of how you go about penetrating those employers? Is there co-marketing that you do alongside Rain or the employers? Are there any revenue share mechanics that we should think about? Timing? Really, anything that you could help us on, on better understanding the Rain opportunity.

Simon Khalaf: Yes, I’ll spend time on that just to frame the broader market. I’d say that this is a very large market. As we discussed in our Investor Day, it is a $2 trillion market. And I’d say 10 gig workers in the United States are almost 83 million people. And they’re distributed between very large organization, the gig economy as well as some regional players that either serve consumers or serve businesses. So we decided to take a 3-tier approach to the market, given its size and the requirement that comes from our customers. So in the high end of the market, that I’d say, especially with the gig workers, where they have a vast majority of their labor force as 1099 contractors, we’ve taken a direct approach to them or highly skilled ISVs. So I put the Ubers in that category and Walmart One.

So that’s one segment of the market. The other segment of the market and a fast-growing segment of the market would be open labor marketplaces in which a company goes in and rather than hire a shift worker, they had to shift and these labor marketplaces fill that shift on their behalf. That’s one of those deals we announced last year is worthwhile. And those labor market bases are growing fast. Now, the third tier would be your traditional employers such as large franchisees, so on and so forth. And they have a combination of W-2 as well as 1099 related workforce. And our partnership with Rain will address that market. So you can consider Rain as a highly specialized and extremely fast-moving ISV that logs into the payroll systems and tap into the right flow with the creation of the Rain debit card that’s Powered by Marqeta.

So between, I think those two, I’d say, go-to-market initiatives, we feel good about our opportunity in the space.

Operator: Our next question comes from Ramsey El-Assal with Barclays.

Ramsey El-Assal: Maybe I’ll follow up on Tim’s question about earned-wage access. It was interesting how you contextualize that as maybe the fit into the wedge into more neobanking type services. Maybe you can give us a little more detail on that opportunity and how you can position yourselves to benefit from it?

Simon Khalaf: Look, this is not new. I’d say at the turn of last century, credit union started emerging because they could support a certain workforce and the employer wants to offer a lot of these services to their employees to increase labor retention. When there was a very, very tight labor market and the growth of a company is limited by the number of employees they have. And we’re seeing the same thing materialize now. So you can think of accelerated wage access as like a new credit union but the credit union actually applies to folks that are not direct employees of that entity. So I’ll give you an example. Like let’s say, if I’m a new bank and I want to offer accelerated wage access, I can do that to a broad swath of the population.

But for specifically the employees or workers or laborers of that company, I can offer instant wage access. So one will get paid immediately. The other one will get paid 2 days or anything below 15 days is actually a bonus to about 60% of the U.S. population. So I think that’s what’s creating the conversions. But Ramsey, I’ll say that conversion is not just unique to that space. We’re seeing the same conversions that happen in embedded finance. They won everything from us. We’re seeing fintechs starting to look almost the same as embedded finance, no longer focused on a single use case. They’re focused on a consumer or a business and offering all their financial services to them. So that trend example, I mean, no one will benefit from BNPL more than the underbanked that accelerated wage access provides.

So we are extremely excited about this conversions because obviously, we are bought of very, very, very few competitive sets that can offer these combined solutions with the right program management on a global basis, including they now pay in installments, revolver, secured credit on the consumer side as well as commercial and consumer on the credit side. So I think we’re looking good there.

Operator: Our next question comes from Darrin Peller with Wolfe Research.

Darrin Peller: Listen, just on new bookings. You obviously have talked over bookings being more material contributor in the back half of the year for those that you’ve already bought. Just curious if you could touch on how the cohorts are trending? Any variance you guys are seeing with regards to those customers ramping? And then just a quick follow-up. I’ll just ask together on credit and maybe a little more on what the pipeline is looking like there and if we spend conversion there.

Mike Milotich: So far, what we’re seeing is we’re a little bit ahead of schedule. So we had said we expected about $20 million in revenue coming from these new cohorts for 2024 and then that ramping to $60 million next year. And in Q1, it’s obviously early but we are a little bit ahead based on a couple of customers launching a little more quickly than we expected and 1 or 2 also ramping a little faster than we had projected. That being said, because of, as you can imagine, the ramp of a card program, it takes a little bit of time. So we’re, I guess, encouraged by the first couple of months but the real value will be generated, say, 4 to 7, 8 months after the launch, when you really start to see what kind of momentum those programs have and what kind of volume they can generate. But we’re off to a good start, a little bit ahead of schedule.

Simon Khalaf: On the credit side, again, like we said, our focus is to do a hell of a job on the initial accounts and partners that we have established. I’d say we’re looking really good on the consumer credit side. I’d say for one particular reason which is most of the brands that align with our vision on credit are thinking about a co-brand as an engagement tool and not just a loyalty tool. And kind of like addressing the top of the funnel which is bringing more users or regain me the usage that have lost versus making my loyal customers more loyal. So that fits exactly with how we perceive the credit market going and also it’s a great thing for our platform because it operates in real time and the rewards engine could be changed in a real-time basis in order to increase engagement and not just loyalty.

And on the commercial side, it’s actually better than we had expected. We did not anticipate such strong demand in commercial credit. And most of it is driven by, I’d say, the aggregator marketplaces that have great visibility into the performance of a small- to medium-sized business. So just to give you an example, at all lending that JPMorgan has done last year, only 2.6% of that went to small businesses. But small businesses account for like 53% of our GDP. I think we should have anticipated this great demand but we didn’t but I think it’s actually a very good sign for us.

Operator: Our next question comes from Andrew Bauch with Wells Fargo.

Andrew Bauch: I wanted to speak about the expense management customer that you highlighted in the prepared remarks. You said that this one customer was looking at other competitors but then decided to come back to us. So maybe if you could just extrapolate what went on there.

Simon Khalaf: So as expense management players start adding more features and start reaching scale, they will look at Marqeta as a platform of choice. I’ll give you an example. It’s very simple. Like expense management is part of it that finance department takes. There’s like invoicing, there is bill payments, there are so many things. So as we see this conversion trend materialize and like I said, it’s not just in the consumer space, in the commercial space which is where expense management land, we’re seeing a lot of players come to us and say, look, I can do more with your platform and you have all the program management that I need. You’ve got all the relationships that I need. I’m coming back to you. And that takes us away from, as Mike mentioned, the one-time virtual commercial card that is almost a commodity or heading in that direction. So I would attribute these things to the conversion trends.

Mike Milotich: Then the only thing I’d add is that it also is this is where I think we are benefiting from our focus on issuing specifically. So as our customers get bigger and bigger and so therefore, they become more sophisticated and looking at a lot of different capabilities they would like and to be delivered at very high reliability and a high level of service, that’s something that we’re just well positioned to do given our sole focus on the issuing business, where a lot of our competitors have a broader remit and therefore, may not have the breadth of capabilities and focus that we have.

Andrew Bauch: I wanted to just talk to the adjusted EBITDA outperformance in the quarter. Nice to see the EBITDA positive and the cash headwinds coming to an end in unison in the third quarter here. So how should we think about the ramp of EBITDA margins as we progress beyond these headwinds that you guys have been experiencing? Meaning the amount of flow-through or in your ways you want to invest in the business?

Mike Milotich: The way we’ve thought about it is that we believe we can grow our gross profit in the 20%-plus, so in the 20s. And we also believe that if we’re growing at that pace that we only need to grow our expenses in the low double digits, that there should be at least a 10-point gap. Once we lap all this and we get a normalized base to grow off of starting in ’25 and ’26 that there should be about a 10-point gap at least between our gross profit growth and our expense growth. And that’s just the benefit of a platform business and reaching our economies of scale. And so when you start to look at that 10-point gap in growth and you start to grow that out a year or two, you’ll see that the EBITDA comes in pretty significant chunks.

It doesn’t just drip in. It’s becomes a meaningful gap as our volume and business just keeps getting bigger and bigger. And so that’s really the formula we’re looking at. And just to get a little more specificity, because we’re so headcount and technology-driven, our cost structure. What we see is between merit increases and things we’d get to our employee base as well as the variable costs we have of running our platform with Cloud costs and other data tools that we use, just those 2 things, our expenses would probably grow in the like mid- to high single-digit range, assuming we continue to compound at this kind of clip in terms of volume. And so with that then, it’s all a matter of how much more are we going to be investing incrementally to drive additional capabilities on the platform.

And that’s where we’ve said we think that anywhere from, say, 3 to 5 points of growth should be enough investment on top of the existing investment capacity we already have which includes over 300 people who are focused on our platform today. And so that’s the model that we are projecting our business going forward.

Operator: Our next question comes from Gus Gala with Monness, Crespi, Hardt.

Gus Gala: Last couple of updates you talked about ramps coming down about 100 days. We’re here 1/3 of the way through the year. How are these sparing now? What are we making progress on tangibly that’s allowing this to happen? And last one I’ll layer in there is can you dig in on progress maybe penetration in Marqeta-in-a-box helping drive that down? I appreciate all the comments.

Simon Khalaf: You’re absolutely right. We’ve made a lot of progress and I’ll attribute all these to the Marqeta-in-a-box solution in addition to engaging our solutions team early on in the process and not when the MSA is signed. So in a more concrete way, throughout the whole thing, as like from the moment we touch a customer all the way to realizing the gross profit, we’ve made tremendous improvement north of 10% which is material if you actually look at how this compounds. And I’d say that there’s Marqeta-in-a-box that made a huge difference engaging the solutions team, working on a good blend between commercial and consumer, commercial moves much faster than consumer. And last but not least, focused on the, I’d say, more expansion into the existing base that reduces a lot of the upfront cycles.

So they know us. They’ve worked with us. Our bank partners know them. So I would say, overall, there’s tailwinds that are helping us because our customers land and we expand with them. But also, we’ve made significant operational improvements that have helped tremendously.

Mike Milotich: And the one thing I would add is the last several quarters, we’ve had a couple of flips per quarter. And where that helps is not only are those customers already very experienced, so they’re not learning as they go. They already know how to run the card program. But as the cards move, the volume obviously comes very quickly because they already have existing volume. And so that’s also something that’s contributing to the time it takes to realize that gross profit is collapsing.

Simon Khalaf: I’ll add one more thing is we’ve been able to do this without adding more operational expenses. And if we’ve had them, it’s extremely small; so it’s operational efficiency.

Operator: Our next question comes from Bryan Keane with Deutsche Bank.

Bryan Keane: I wanted to ask about international. It sounds like Uber Eats expanded internationally. Maybe you could just talk to us about what you’re seeing in the pipeline and growth of TPV. Is it still Europe and Canada, the big opportunities you see right now?

Simon Khalaf: So look, there is demand everywhere but we have to remain focused. So there’s two parts of international. I’d say the first part is our domestic customers like U.S.-based customers that want to expand overseas. And we’ve done well there. Uber is just one example. And what is good news here is all of them want to go through the same countries. So it doesn’t give us that divergence in terms of where we need to put the effort. And then the second part of international is in the EU in which we see, I’d say, the base of innovation accelerating in Europe. And as a consequence of that, our volumes, albeit smaller than U.S. are outpacing the growth of the U.S. So I’d say those are two healthy trends.

Bryan Keane: And then my other question, you talked about adding value-added services, in particular, you highlighted compliance. Does that help with retention? Does it help with the gross margin and profitability? Just thinking about how you add on these products where we see it in the P&L.

Simon Khalaf: Yes, yes and yes. So I’d say in terms of retention, of course. I mean the more they engage with us, the better it becomes. And also from a gross profit take rate, yes, it does help. And examples would be managing disputes, whether it’s related to Reg E or Reg Z or 3DS which is related to factor authentication, they just file on to our gross profit take rates. And despite the growth in volume, it will either keep the gross profit take rate flat or inches it up. That’s how it will reflect to our bottom line. And the last thing is economies of scale. Our team has handled and managed disputes and the reduction of cost make it attractive for us but also attractive for our customers. So it’s kind of like membership has its benefits.

Everybody benefits from the economy of scale achieved by Marqeta. And that’s something that is extremely hard to achieve, especially on the consumer programs. So it might be easier on commercial programs but in order to get that economy of scale across both debit and credit on a global basis, it’s a huge moat for us. So we’re excited about it because it’s like a win-win-win. So we win, our partners win but more importantly, our customers win. And honestly, the embedded finance customers don’t want to deal with this at all. The fintech players like to dabble in these services but not with the economy of scale is going to be hard for them to beat our economy scale but the embedded finance services, I’d say from day 1, they pleased with us that they want this to be done by us and they’re happy to pay for it.

Mike Milotich: Yes. I think this is an area where everyone is in the market in the market’s focus on profitability is something that really helps us quite a bit because of that economy of scale advantage and expertise advantage. A lot of our even existing customers, like Simon mentioned, we have 20 programs that added some service in the quarter. Everyone is evaluating, are these really my core competencies? Should I really be doing these things myself? Or should I make this a variable cost and utilize someone who has more expertise and scale than I do. And as that continues to happen in the market, that should benefit us. And the more it happens, then we get even more scale and it becomes a sort of feedback loop.

Operator: Our next question comes from Craig Maurer with FT Partners.

Craig Maurer: My first is on earned wage access. Could you compare the unit economics of that business to your other lines of business and the upside to that over the long term from embedded finance. And second, we’re starting to see some improved performance out of the larger U.S. neobanks, at least the ones that are public. If you could update if there’s any renewed opportunity in the FI space for you?

Mike Milotich: I’ll maybe take the first one and then pass it to Simon for the second one. So our unit economics rate way, I would say, are very similar to our neobanking economics that we would have for other customers. Those use cases are tied together in many ways. And so our economics end up being quite similar. So it’s a very attractive use case for us in terms of how much we can earn on par with what we earn and many other use cases across our business.

Simon Khalaf: In terms of your two other questions which is, are we seeing renewed interest or opportunities in new banking and the third one was large FIs. So the answer on two is absolutely as we see some of the accelerated wage access players expanding from just being a credit union for the lack of a better term and to be effectively a national bank, we are a benefiter of that trend. And there’s a couple that are getting interesting traction. So that’s one. On the large financial institutions, we’re still on the same time line. I would say the commercial side of the large financial institutions are starting to probably accelerate the conversations with us. We’re still on the same timeline in terms of not that segment being material in terms of revenue until like the late ’25, ’26.

Operator: Our next question is from Cassie Chan with Bank of America.

Cassie Chan: So just want to ask any changes to your TPV growth expectations for the full year? I believe you previously said about 30%. Obviously, you’re running slightly higher than that. Should we expect it to remain relatively steady in ’24 and kind of associated take rate dynamics that we should expect there? And then on a related note, you mentioned the mix of TPV swinging more towards the power buy side which is impacting some of those net revenue figures and expectations for the full year. Is there any change in client behavior in the market that you’re seeing? And how should we think about the mix of Power by versus Manage by going forward?

Mike Milotich: So in Q1, our TPV growth was 33% but a little over 1 point of that is the leap year benefit. So we do still expect our TPV growth to be about 30%. Things are running a little bit better. But obviously, as we go through the year, as I mentioned in my remarks, this is the fourth straight quarter where we’ve grown 33% year-over-year. And so our comps will get tougher as the year goes on. So we don’t expect material changes from quarter-to-quarter but Q1 because the leap year will be a little bit on the higher end and we still expect our growth for the year to be about 30%, roughly. In terms of your second question on the shift to Power by, I think we’re not seeing a change in the behavior. It’s really related to two dynamics.

One is some of our very large customers who we are in a Power by relationship are growing very quickly. And so that’s one dynamic that’s happening. The second is that there are a lot more customers who are coming to us with what internally we call Power by Plus type constructs, where they want to maybe manage the network relationship themselves or have their own bank relationship, for example but they still want us to do everything else. So we’re still going to do a lot of program management activities for them. But the big difference from a P&L perspective between power by and manage buy is that when we’re managed by the network and bank costs are also running through our P&L versus in a Power by construct, we’re really just charging for our processing services and any other additional service we provide.

And so it ends up working out similar in gross profit, not exactly the same because obviously, when we manage everything, we add a little bit more value but the revenue difference is what’s so significant. And so it’s not really a change in behavior. It’s more just about the growth of customers and how people are approaching the marketplace.

Operator: Our final question is from Alex Markgraff with KeyBanc Capital Markets.

Alex Markgraff: Just wanted to come back to the expense management volume migration that you mentioned. I’m just curious, taking that in the broader context of Marqeta. What is the right way to think about that? And maybe another way to ask it is thinking about Marqeta wallet share or TPV share at customers today? Just curious if there are other opportunities in the future around this type of migration or if it was more of a onetime anomaly?

Mike Milotich: Yes. Maybe I’ll start and then Simon may have some comments as well. I think that if you think about the way our customers view it is as they sign a new customer and they’re in the expense management space, in particular and they are going to start offering a card solution. If they’re using more than one provider, typically, they’ll decide, okay which platform are going to put that customer on. They can start to diversify between 2 providers and maybe they’ve been doing that for the last couple of quarters and then they start to say, okay but now the customers I’m signing want these types of capabilities. And so maybe before it was a 70-30 split the last few quarters now, maybe I’m going to be 80-20 or 90-10 because a lot of the types of deals I’m signing are things that I think will be better served on one of the platforms or the other.

So it really is a dynamic environment, particularly in this space where many of these companies are growing quite quickly. These are not customers growing 5%, 10% a year. These are companies growing 30, 50, 50-plus type percentage growth rates. And so as they’re bringing on that much additional volume, where they decide to put that volume can be pretty impactful in terms of the share we capture. And so in terms of as we look ahead to your second question, I think what we believe is because of our focus and the comprehensive nature of our platform as well as the consistent reliability that we deliver, it should help us increase our lead over time. We should become more attractive to larger players who are looking to do a program that maybe is focused on engagement, as Simon talked about, rather than just loyalty in the co-brand space.

or if you’re an expense management player and you’re really thinking big, then that reliability and that focus in terms of the capabilities we can serve up becomes quite attractive as you get to even greater and greater scale. So there will also be new competitors, of course, along the way but we think that our position should benefit us more and more as time goes on.

Simon Khalaf: Yes. I’ll add to that, Alex, that credit is a big differentiator. Like a lot of the customers that were focused on either prepaid debit or debit only or even net 30 are actually all of them thinking about what their disposition is on credit. And they’ve come to us saying, okay, we could have distributed the volume or the relationship among many debit providers. But when it comes to credit, you guys are going to win this. The second thing is international expansion. So you can’t be a U.S.-only or an EU only in this market where we’re seeing a consistent experience across the globe. So those are helping us as well. The last thing I’d say is, look, as our customers scale their regulatory requirements and their operational requirements scale with them.

And while they could have taken it on their own and distributed their processing volume, it gets very complicated and expensive as they grow up. So they’re bringing it back to us and saying, look, your economy of scale is significantly better than mine so I’m hopping on your platform. And that makes the — I’d say, the distribution or whatever you want to call it, diversification or distributing the volume harder to accomplish. So I think all in all, we are benefiting from the winners winning more and it’s looking good for us.

Operator: This concludes today’s conference. You may disconnect your lines at this time and we thank you for your participation.