Marqeta, Inc. (NASDAQ:MQ) Q4 2022 Earnings Call Transcript

Marqeta, Inc. (NASDAQ:MQ) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Marqeta’s Fourth Quarter 2022 Earnings Conference Call. 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, to 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, 2021, 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 Chief Financial Officer. With that, I’d like to turn the call over to Simon to begin.

Simon Khalaf : Thank you, Stacey. And thank you, everyone, for joining us for Marqeta’s fourth quarter 2022 earnings call. I’ll briefly touch on our results for the fourth quarter and full year 2022 and then share our top priorities for 2023. We ended the year in a position of strength, once again demonstrating our ability to grow and innovate at scale. Total processing volume, or TPV was one hook was $47 billion in the fourth quarter, a 41% increase compared to the same quarter of 2021 and 2.5x the TPV in the fourth quarter of 2020. Our net revenue of $204 million in the quarter grew 31% year-over-year with financial services empowered by Marqeta as the fastest growing segments. Gross profit was $87 million in the quarter, a 15% increase versus Q4 2021.

This growth was 16 percentage points more than net revenue as we lapped the incredible ram in the buy now, pay later business we had in Q4 last year. Our gross margin for the quarter was 43%. The full year 2022 was another great one for Marqeta. Total processing volume, net revenue and gross profit grew 50%, 45% and 38%, respectively. We attribute our success to our great product market Fit, where our scale platform has been adopted by many of the innovators in this changing digital economy. As a result, we have strong growth among our customers and continued satisfaction with our products, which is evident in our healthy net revenue retention of 144% compared to 2021. This revenue retention is consistent for both our Block and non-Block business.

While I’m pleased with where we ended 2022, I’m actually more excited about the opportunities ahead of us. The embedded finance market is rapidly expanding and evolving. Marqeta has powered embedded finance for years, one application at a time. We started with on demand delivery, enabling an entirely new commerce use case by minimizing fraud. Then we moved to Neo Banking, introducing engagement features such as an issuance. Next, we enabled buy now pay later alleviating the time and costs required to build merchant acceptance and then move into expense management to help digitize B2B payments. Going forward, there are several new large opportunities in front of us, such as wage disbursement, accelerated wage access, flexible account stable and point of sale lending.

In addition, over the last several quarters, we’ve seen demand change from narrowly focused syntax to larger, more established companies looking to embed financial services into their offerings. Their goal is to drive more loyalty among their large user base and create additional revenue opportunities. We do expect that trend to continue and drive further demand for Marqeta as our solution is ideal for this market. First and foremost, with a cloud native and an API first, making us easily embedded into our customers’ work flows. Second, our solution is comprehensive, with support of debit, credit money movement coupled with program management making us a natural choice for this market segment. Our customers won’t need to stitch together mis-footed solutions from multiple vendors.

Finally, our scale gives our customers the confidence in our ability to support their growth on a global basis. Given this renewed focus on our path to profitability, let me share our three priorities for 2023. Number one, to integrate our Power acquisition. Number two, to continue to accelerate sales. And number three, to drive innovation within our economy of scale. We began making progress on the last two focus areas in the second half of 2022, so this doesn’t really represent a departure for the company. Rather they represent an acceleration through sharper focus. Our first priority is Power integration. Credit represents a huge addressable market that is currently held back by the constraints of legacy technology that has not kept up with how companies engage their consumers.

At Marqeta, we have provided credit processing for two years, but we’ve leveraged program management from partners. While this approach has had its successes, such as the launch of the Green Light credit card, our prospects have been clamoring for more from us in terms of the solution that combines both processing and program management that is on par with our debit and prepaid offerings. That’s what the Power acquisition delivers. Our customers will be able to create credit card programs that are unique and personalized in significantly less time than it would take with multiple platforms. Let me give you an illustrative example. Our customers will be able to create personalized and dynamic rewards that are suited to an individual end user based on their specific transactions and not just your typical cash back or travel rewards.

The possibilities extend far beyond consumer programs, as we see in multiple commercial use cases, in expense management, ecommerce, and a variety of marketplaces. In fact, since the announcement, we’ve already engaged with well known, retail brands, B2B providers, and marketplaces that are excited about our combined solution. As far as this is concerned, we honestly found the perfect match in Power. The platform was built using very similar architecture as Marqeta, they focused purely on program management within credit, using a partner for processing, while we did the exact opposite. Therefore, there’s very little overlap between the two platforms, and we anticipate the integration which is already underway will be completed in Q3 of this year.

Moving on to our second priority is to accelerate our sales motion with greater focus and improved efficiencies. Over the years, Marqeta has grown fast and achieved scale partnering with high growth syntax. We expect these customers will remain a base of profitable growth as they use Marqeta to grow, launch new products and expand into new geographies. However, we were slow to adapt to the evolving market, which in late 2021 started shifting from fintechs to more established brands looking to bring embedded finance solutions to their existing user base. As a result, our new bookings in late 2021 and through Q3 2022 did not meet our internal expectations. These sales challenges have only just started to impact our financial performance, as it roughly takes 12 to 18 months for customers to onboard and ramp their card programs.

Unfortunately, we will feel most of that impact in 2023. The good news is we believe that this problem is now behind us. As I expanded my role in the summer to include managing go-to-market, we reorganized into modular teams focused on specific segments. We also integrated solutions and sales engineering into the modular teams, giving leaders end to end account ownership and sustained relationships based on deep account knowledge and payment expertise. In conjunction with the changes, we properly align our sales incentives to our growth objectives. We are very pleased these changes have already began producing the desired outcomes. In fact, our few four bookings were extremely strong, totaling more than the first three quarters of 2022 combined.

The use cases for our recent sales are extremely diverse, highlighting the breadth of our platform for both consumer and commercial customers. One customer is a large expense management provider who’s using us to expand their business to Canada. Another is looking to offer financial wellness services for immigrants. A more specific example of a unique partnership we closed is our win with Rakuten France and Mastercard to launch an integrated payment solution for the loyalty program, which has over 12 million members, the first time an ecommerce platform offers a digital payment method linked to a cashback system. To do this, Marqeta will enable the issuance of a single use virtual cards and provide additional managed services to improve the security of each transaction.

In addition to the reorganization and go-to-market, we also focus on signing longer term contracts with customers. Since the second quarter of 2022, we’ve renewed four of our top eight customers and about half of our top three customers. Approximately 80% of these contracts were renewed at a longer duration than our previous typical duration of three years. In fact, over a third of these renewals were done for five years. I’m confident that this improved sales trajectory will continue and even accelerate, given the sharpened focus and team alignment. Moving on to the third priority is innovating within our economy’s scale. In 2022, we had two sizable product launches. First one is risk control to minimize fraud and charge and the second one is Marqeta for banking to offer additional money movement capabilities.

Our recent addition of credit program management with Power is yet another significant platform expansion. Over the next year, we will invest in enhancing our platform capabilities, scale, resilience and security. However, this increase in investment will be significantly smaller than in previous years. There are three main reasons we’re confident we can continue to innovate while achieving economies of scale. First, we build an outstanding product and technology team over the last few years. Given the current scale of our platform and organization, we have sufficient capacity to innovate and launch multiple enhancements quarterly with limited incremental headcount. As we mature, we have automated some tasks that we traditionally use headcount for, onboarding our customers would be a concrete example of that.

And third, since we no longer have major solution gaps to fill, we plan to leverage our existing platform and focus our efforts on small and strategic unlocks to solve our customers problem in highly innovative ways. In closing, our industry is undergoing another evolution. The fintech boom led to an unbundling of the banking industry, leaving it to customers to piece together disparate systems into a suboptimal solution. Embedded finance customers simply will not tolerate that. Neither will Marqeta. We’re extremely positioned to serve the needs of this customer base as a global cloud native and API first platform going very deep with a fully bundled offering, debit, credit, risk management, money movement and program management. We consider ourselves the only issuer focused company with a bundle that truly meets where payments are going.

I am confident we will capitalize on this tremendous opportunity. With that, I’ll turn it over to Mike for a more detailed look at our results for the quarter as well as our financial outlook for 2023.

Mike Milotich : Thank you, Simon, and good afternoon, everyone. Q4 was a strong finish to a great year for Marqeta with Q4 TPV growth of 41%, net revenue growth of 31%. Gross margin of 43% and adjusted EBITDA margin of negative 4%. The net revenue growth and gross margin were both on the high end of our expectations, while adjusted EBITDA was better than expected as we continued to slow incremental investment by leveraging improvements in our efficiency and effectiveness. I will cover the Q4 highlights before spending more time detailing our current expectations for 2023, Q4 TPV was $47 billion, growing 41%, once again demonstrating our ability to grow fast at scale. Let me put the rapid scale of our TPV in perspective. In Q4, we had over 50 days, where we processed over $500 million in volume compared to over 30 days in Q3 and less than 20 days in Q2 of this year.

And Q4 TPV of $47 billion is more than our first three quarters of 2020 combined. Looking at our TPV performance by vertical, growth in the financial services vertical was consistent with Q3 growing a touch faster than the overall company, fueled by cash apps rising card penetration among the rapidly growing users and engagement driving higher spend per card user. On demand delivery has been relatively consistent all year, growing double digits driven by merchant category expansion and steadily rising consumer demand. Lending, including buy now, pay later growth slowed this quarter, but did remain in the double digits. The growth is typically low for three reasons. First, one customer migrated a portion of one of their programs to another processor in Q3 for diversification reasons.

If you adjust for this migration, this verticals growth would have been a little shy of our overall TPV growth. Second, the 2021 holiday season was exceptionally strong for BNPL, creating a very difficult comp. We saw a nice surge in holiday spending this year with sequential growth for BNPL from Q3 to Q4 in the mid-20s, but that falls well short of 2021 when the sequential Q3 to Q4 growth was over 50%. Finally, many of our customers tightened credit requirements in Q4 given the evolving macroeconomic environment. Expense management TPV more than doubled year-over-year, the growth is lower than prior quarters due to rapidly rising comps as well as the uncertain macroeconomic environment causing businesses to manage their spending more closely.

Powered by Marqeta Q4 TPV more than doubled year-over-year, reaching almost 20% of our total TPV, up more than five points from Q4 last year. This growth is fueled mostly by expense management lease cases in the US, as well as international growth. Q4 net revenue was $204 million growing 31%. Block continues to be a strong contributor to growth, driving our revenue concentration to 74% in Q4, up about 1.5 from Q3. This is mostly driven by cash app with after pay and the seller card also contributing. Another factor is our slower revenue growth in BNPL due to the reasons I shared earlier. Our Q4 net revenue outside of Block and BNPL is growing several points faster than our total company growth. The net revenue take rate was one bps lower than last quarter and three bps lower than Q4 €˜21, mostly due to the growth of our Powered by Marqeta whose share of total TPV continues to steadily increase.

Remember, the TPV growth of the Powered by Business affects the net revenue take rate much more than the gross profit take rate. Q4 gross profit was $87 million, growing 15% with a gross margin of 43%. The margin improved one point from Q3, mostly due to higher network incentives as volume increased, but also was helped by our value added services not directly tied to TPV. The margin is lower than Q4 last year due to the lower contribution of the BNPL as well as an increase in Block concentration given Block’s lower margin profile than the rest of the business. Two additional points about our gross profit dynamics. First, although our Block revenue concentration is up five points in Q2, Block’s gross profit concentration remains unchanged during that time.

This is due to less favorable volume mix within the Block business as well as improving margins elsewhere, in part due to increasing network incentives. Second, BNPL also significantly impacted our Q4 gross profit growth as a result of the slowing volume growth. Our gross profit outside of Block and BNPL in Q4 is growing over 3x faster than our total company growth and more than ten points faster than the revenue growth outside of Block and BNPL. Q4 adjusted operating expenses were $95 million, growing 27%. Our expense growth was slowed meaningfully each quarter in 2022 due to a significant amount of investing in €˜21 that we did not repeat, identified efficiencies and continued discipline in hiring only for roles critical for growth. As a result, the incremental year-over-year investment required to fuel our future growth and innovation is shrinking.

Q4 adjusted EBITDA was negative $7.5 million, a margin of negative 4%. This result was $3 million to $4 million better than we expected, driven mostly by our decision to slow the pace of hiring during the quarter. Interest income was $11 million, more than 50% higher than Q3, driven by continued rising interest rates. We also recorded an $18 million gain on the sale of a private company equity investment. The Q4 GAAP net loss was $26 million. In 2022, we purchased 11.7 million shares for an average price of $6.77. Since the start of 2023, we had utilized the remaining $21 million of the $100 million the board authorized from last September. With our recent acquisition of Power and our beliefs that there will be other attractive opportunities to further accelerate our product roadmap through M&A, we don’t plan to buy back more stock at this time but may consider it again in the future.

Similar to prior years, in 2022, we had positive cash flow, excluding all financing activities, including share buybacks and the sale of the equity investment. Although our adjusted EBITDA was negative for the year, we are not burning cash, which further demonstrates the strength of our business. Now, let’s transition to our expectations for 2023. First, let me start with several important points. Based on the trajectory of our business over the last several months and the often conflicting macroeconomic indicators that suggest both strength and oncoming risks, we have assumed a modest slowdown in the trajectory of consumer and business spending as 2023 progresses, i.e. a relatively soft lending, not a significant decline in consumption and business investment that typically comes with a recession.

Although a Block renewal is a top priority for us and we would like to secure a renewal in 2023, the various Block contracts run into 2024, and we cannot indicate a potential impact to our financial performance until a renewal is done. Therefore, we have assumed our current contract is in place throughout 2023. From May €˜22 through March €˜23, we will have renewed approximately 50% of our volume, excluding Block. Customers are opting to sign longer term contracts, which shows their conviction in Marqeta as the partner of choice and solidifies a base of business for which we can drive sustainable, profitable growth in the future. In these renewals, our customers receive better economics as they get bigger, much in the same way that we benefit from our scale.

Therefore, 2023 gross profit in particular, as well as net revenue growth, will face headwinds as we grow over old contracts with more favorable terms. There are two business factors weighing on our 2023 net revenue and gross profit growth that we believe are unusual and will only affect 2023 growth, not the subsequent years. First sales bookings were below our expectations in late €˜21 and the first three quarters of €˜22 as we transitioned from supporting specific use cases to a solution oriented enterprise platform with a structured and repeatable sales motion. Although, we believe we have solved the sales challenges based on Q4, 2022 bookings and progress so far in Q1, ’23, the previous lack of sales has reduced the number of customers who are ramping their card programs in ’23.

Second, earlier this month, we renewed our relationship with Visa to set ourselves up for long term success. We feel great about the partnership with Visa and believe our agreement reflects our track record for achieving scale and growth. As we’ve discussed in the past, the level of our overall network incentives is based on the nature of the relationships between Marqeta, the networks, and our customers. For two of our larger customers, shifts in these relationships are negatively impacting the level of incentives Marqeta earns. While this type of change is rare, it will have a significant impact on our 2023 gross profit growth. For the full year 2023, we currently expect net revenue growth to be in the low 20s, with TPV continuing to grow more than five points faster than revenue due to the Powered by Marqeta trajectory, the net revenue growth assumes modest macroeconomic pressure and is mostly fueled by volume growth of long standing customers with a small lift from our risk control and Marqeta for banking products starting to get traction.

The growth from new customers signed in the last two years is offset that by more favorable renewal terms extended to customers initially signed prior to 2021. Given it takes roughly 12 to 18 months for new customers to onboard and ramp their card programs, we don’t expect much impact from our strong Q4 €˜22 sales on our €˜23 revenue. We also do not expect a meaningful contribution from credit programs in €˜23, as the Power integration will not be complete until Q3 this year. We expect 2023 gross profit growth to be in the mid-teens, which equates to a gross profit margin in the low 40s. The change in certain network incentives tied to specific customers should pressure our gross profit growth by over five points, lowering our gross profit margin by almost two points.

Putting the Block renewal aside, the combination of our rapidly improving sales, the availability of our complete credit offering, and the lapping of our renewal activity, we are very optimistic that our net revenue and gross profit growth will meaningfully accelerate in 2024. We plan to grow our 2023 adjusted operating expenses in the high single digits, excluding the two points of additional expense growth for the addition of Power. We plan to achieve this discipline and focus that began early in 2022, innovating within our economies of scale and continuing to drive efficiencies throughout the company. The organization as a whole has done a tremendous job finding more effective ways to deliver for our customers without the need for significant incremental investment.

This minimal expense growth demonstrates our desire to progress towards our profitability goals while continuing to develop and deliver valuable solutions for our customers. Therefore, we expect 2023 adjusted EBITDA margin to be negative low to mid-single digits, excluding negative approximately one point from the Power acquisition. For Q1 2023, we expect net revenue growth to be between 26% and 28%, our highest growth quarter of the year, driven by easier comparisons as our cash app business started to accelerate in Q2 €˜22. Q2 and Q3 are expected to grow in the high teens as the comps get tougher and the macroeconomic environment worsens a little before accelerating in Q4 into the low 20s once we have lapped our BNPL customers partial volume migration and we begin to lap the impact of all the renewal activity.Q1 gross profit growth is expected to be between 14% and 16% in line with our full year expectations, Q3 should also be similar.

Q2 is expected to be the lowest growth quarter in the mid-single digits, mostly due to the quarterly cadence of our incentives. Q4 growth is expected to be in the low 20s, in alignment with accelerating revenue growth. Q1 and Q2 adjusted operating expense growth is expected to be in the low teens on an organic basis due to technology, product and sales headcount added in the second half of €˜22. In the second half of 2023, organic expense growth should fall to mid-single digits as we lap the €˜22 hiring. All four quarters will also have an additional approximately two points of inorganic expense growth due to the inclusion of Power. Therefore, Q1 adjusted EBITDA margin is expected to be negative 5% to 6%. In Q4, we expect to have a positive adjusted EBITDA margin as gross profit growth accelerates and expense growth remains subdued.

In conclusion, although we expect our 2023 financial performance to have some challenges, we are excited about the momentum we have to drive sustainable, profitable growth for years to come. Our excitement and confidence are primarily driven by four factors. Marqeta has great product market fit to serve companies looking to embed financial services into their offerings in the US, Europe and beyond, a very large and rapidly growing market. Number two, in the first half of 2022 we became more focused on our investment and began to realize economies of scale within our expense base as we start down the path to profitability. Number three, in the second half of 2022, we expanded our product set, evolved and accelerated our sales motion in a sustainable fashion and began securing large portions of our business with longer term renewals.

And finally, number four, earlier this month we acquired Power to expand our credit offering, which further enhances our differentiation as the modern scaled issuing platform that supports all card use cases for innovators. Therefore, Marqeta has the team, the opportunity, the product market fit, the installed base and the operational discipline to achieve significant long term sustainable growth. We are excited to share our progress with you in the coming quarters. I will now turn it back over to the operator for questions.

Q&A Session

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

Tien Huang: Great. Thanks for taking the question here. I wanted to ask on the gross margin side if you don’t mind. I know a lot of moving pieces there. I heard the sales bookings change; I heard a lot more deals getting renewed longer term. And you’re giving us some economics. But what gives you confidence that things will improve beyond 2023? And Mike, can you go through again why this Visa renewal is a onetime factor. And it sounds like some of it is being influenced by some of your partner relationships as well. It’s not just straight up with Visa. So would you mind just giving a little bit more detail around that because I was a little bit confused by it. Thank you.

Mike Milotich : Yes, let me start with that, Tien-Tsin. So we’ve talked about before that the level of our incentives is based on the nature of our relationship with our customer and the relationship with the network. So there are some customers that are referred to us by the networks, which means that we don’t make incentives. There are some customers where we absolutely control the brand decision and we get full incentives and then there are several variations in between those two extremes. And what is happening in this case is that with two of our larger customers, the nature of that relationship is shifting in a way that is not a positive for the level incentives that we are. And so that is creating, as I mentioned, over five points of gross profit growth drag in 2023 and it lowers our €˜23 margin by almost two percentage points.

That’s our gross margin. So it does, that will have an impact going forward beyond €˜23. But it particularly is impactful to growth because this is happening this year on volumes we already have. While we have new customers that have yet to ramp that will be growing much faster once we get beyond €˜23. So we see this as although it is something that will impact us beyond this year, the significance of that impact is magnified in 2023 based on just the situation that we’re in, the dynamics of the business. In terms of the overall gross profit growth, what makes us also more confident is one, as you know, when you do these longer term deals with customers, we get better economics. That for the first four quarters of that you have the pressure particularly on gross profit because what’s happening when we do a renewal is our revenue comes down, but our cost of revenue, that is our bank and network costs generally remains the same.

And so although that feels like a lot of pressure on revenue just based on our overall gross profit margin, it actually is much more impactful to the margin from a growth perspective because you’re dealing with a much lower base. So that’s one factor. Another thing that gives us confidence is that what we’re seeing right now is in previous quarters, we’ve talked a lot about the mix of our business between discretionary and nondiscretionary spending and that although discretionary spending was not, would continue to grow faster than nondiscretionary spending. That’s what we’ve seen all the way up until Q4, where essentially the high discretionary categories, medium and low discretionary categories all sort of grew at roughly the same rate. And why that’s important is because generally the interchange is going to be higher on in discretionary areas.

And so what we’re starting to see right now, because network and bank fees don’t typically aren’t any different, depending on the nature of the spend that is also putting pressure on our gross profit growth in 2023, as we expect there’ll be some impact from the macroeconomic environment. But as we move past 2023 and you look out then we see that as something that should not be a drag anymore and should continue to benefit us. So those are the big factors.

Operator: Next question comes from Darrin Peller with Wolfe Research.

Darrin Peller: Thanks, guys. Hey, first of all, Simon, congrats on the new role. Maybe just start off with you. And I’d love to hear your thoughts strategically on what you see when you look in this business going forward. Really, when you look at the next couple of years, the measure of mix between Block and other categories and the vertical differentiation that the company has been having. Where do you really want to put more investment into? And then how important is that profitability metric for you again? And then just quick follow up, Mike. I guess I’ll just ask both questions at once, and it’s a little bit of an add on to Tien-Tsin’s question I guess, when we look at the factors you went through that are impacting the results last year and into this year’s guide, I guess if you were to sort of force rank and back out the incentive side, the readjustment there as well as backing out some of the, if there were — maybe there were one or two big noteworthy renewal at a different price point.

What was the underlying growth metrics beyond that? I’m just curious if it’s a little bit more of a one off thing we can isolate.

Simon Khalaf: Darren, thank you so much for the question. Let me start by saying what I see is actually what I hear from our customers. And ever since I joined, I’ve been spending a lot of time with our customers. And then one thing that came clear everybody wants more from Marqeta to the point where fewer frustrated Marqeta was not delivering the full solutions to them. So there’s great product market set. The second thing is as the market shifts towards embedded finance and by that we mean companies whose major business is not financial services, they actually want a full suite, they want a bundle. They don’t want to go and shop around to multiple fintechs to get a single solution. They want a full suite product, they want credit, they want debit, they want prepaid, they want banking and money movement and they also want program management over that.

And so that’s what we offer. So that’s effectively what we see going forward. I mean the line would say that finance or fintechs are just not going anywhere. They’re going everywhere. And I think we’re the engine that is going to power that. So in terms of profitability, look, at some point in time, once you reach the scale we reach, it is extremely important to focus on profitability. It’s not just a vanity metric, it is something that scale teams do. We focus on operational excellence in every function of areas. We put processes that are sustainable and repeatable and then we don’t succumb to incrementalism. In other words, we continue to innovate at scale. But all these things lead you to be a healthy and profitable company and that’s something we’re committed to put ourselves, we’re committed to put our customers as well, because the healthier we become, the healthier our customers become.

I’ll turn it over to Mike for your second question.

Mike Milotich : Yes. So, Dan, for the, kind of to isolate some of the factors. So a couple of things to keep in mind. So first is when you’re looking at buy now, pay later, we have just some unique factors impacting just our Q4 numbers that are indicative to what’s to come in 2023. So we have some volume loss from one program from one of our customers, which we will lap in Q3 of €˜23. And then we also just are lapping an incredible acceleration in BNPL use during the holiday season of 2021. And so if you take BNPL aside, and of course, what’s happening with Block, which grows very significantly. One of the things I mentioned in the quarter is that our gross profit growth outside of Block and BNPL is growing 3x faster than our total company growth in the quarter, which was 15%.

So the rest of the business gross profit is growing faster than 45%. And we think that shows you the trajectory that the rest of the business is on. The second thing that I would also comment on is Block and particularly cash app, continues to grow really fast and it continues to increase our revenue concentration. It’s up another 1.5 this quarter, and it is lower margin business for us, just given their size and just the nature of their business and the use case. But I think what’s important too, and why you hear me, maybe spending more focus on gross profit growth and not margin is because as that business, if you take the Block business, for example, as it continues to grow fast, although it weighs on our margin, it’s still driving incremental gross profit which is ultimately what matters on our path to profitability.

And so that is also something that we think is a positive going into next year. And so those are the two things, I guess, that would help you isolate some of the factors. And again, just to reiterate, the issue with the Visa incentives resetting is approximately or a little over five points of our gross profit growth in 2023.

Operator: Next question comes from Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar: Thank you. Hey, Simon. Hi, Mike. I wanted to ask about the comment on Block, the assumption of no renewal this year. Is that just to clarify, is that a simplifying assumption or do you genuinely not expect to sign a renewal this year? Any incremental information there would be great. Then as we sort of try to build out the overall model, anything you can provide with regards to the underlying macro assumptions would also be great.

Simon Khalaf: Ashwin. This is Simon. Thanks for the question. I’ll take the first part and then hand off to Mike about the macro assumptions. So in terms of Block renewal, we’re highly confident that we will be able to renew the partnership this year. So the agreements go through 2024 but we do have a high degree of confidence that we will renew them this year. And I say our confidence stems from a couple of things. I mean, the first one is the cash app success is not a random event. It is the result of their team’s excellence and relentless focus on delivering consumer value and also leveraging partners like ourselves. Our relationship is very symbiotic. So I do expect that to continue. The issue is the timing is not something that we have full confidence on the timing, right.

So is it next week, is it in a couple of months? So on and so forth. And hence why we want to wait until we have the deal renewed so that we share more information. So we don’t want to be in speculation land. So that’s why we’re taking a more cautious approach around the renewal. But in terms of the confidence of a renewal, it’s very high, right.

Mike Milotich : Yes. And then on the macro assumptions so I guess first is what we’re seeing generally what we’re seeing in spending is that and I’m sure you’ve seen it and you’ve heard it from many other payment companies. Generally speaking, payment spending is holding up quite well both within consumers and businesses. There are some signs out there, right, the BNPL players are tightening credit a little bit, which does have some impact on spend growth. Within the expense management, we are starting to see a little bit of impact there, but I would say it’s relatively minor at this point. And so what we are assuming is a modest slowdown in consumer and business spending as the year progresses. So right now what we can see through most of February is things are still holding up which is what’s reflected in what we are expectations for Q1.

But as we look further out, right, there are a lot of I guess conflicting signs of what’s going to happen as we get into the spring and summer. And so we’ve been, I guess a little bit cautious but have not gotten bearish on what’s going to happen macroeconomically and we’ll just have to wait and see and stay flexible. And just, I guess one more point just related to that flexibility. For example, with the number of hires that we are making in 2023, which is relatively low, most of them are in the back half of the year, just as an example of where we are trying to maintain some flexibility to wait and see what happens from a macroeconomic perspective.

Operator: Next question comes from Bob Napoli with William Blair.

Bob Napoli: Thank you. Good afternoon. So, Simon, maybe just some, what are your thoughts on what the right growth rate for this business is? The target operating model that was put out there during the IPO. Just any thoughts around the growth of that and your confidence in a target operating model? And Mike, if you can give any color on the Power Finance, what kind of revenue or growth your rate that company is driving. Thank you very much.

Simon Khalaf: Thanks, Bob, for the question. I’ll give you kind of my philosophy as what I would consider sustainable and profitable growth. And that’s something we’re aiming for. So I would consider a healthy company and something we’re aiming for is growth in the 30% and that’s gross profit in the 30% and then EBITDA in the above 20%. That’s the kind of company we’re building towards. And that’s as a management team, we’re committed to that type of organization. So and we have a plan internally that we’ll be able to look at to deliver that kind of numbers. But it’s also tied to given the concentration we have with Block, it’s tied to the Block renewal, but just kind of a backup envelope that would as the management team, as a scale management team, we’re aiming for is a 30% year-over-year growth, sustainable growth in gross profit and 20% EBITDA a norm. Mike, any comment.

Mike Milotich : And then in terms of the impact of bringing Power into the business as of the beginning of February, there is really a very insignificant impact on our revenue and gross profit. Power has a few customers and they’re really all in beta mode, which we actually see as a positive. So they had cards in the wild, but a relatively small number. And as you may remember, when we’ve talked about acquisitions in the past, what we are really focused on is accelerating our product roadmap. We don’t need an acquisition to bring us sort of sales pipeline because we are already engaged with all the major players who would want to be interested in credit in the ecosystem. So what Power is bringing is the technology, which is a very good fit with our platform.

So we actually saw as a positive in this case that they were very early because we don’t have to focus on customer migrations and kind of maintaining the business while we’re integrating. We can really start fresh once the business is integrated in Q3. So really the revenue and gross profit is what’s going to be driven after we integrate in Q3, which will be quite minimal. On the expense side, again, they were also early. It’s relatively small and so we expect the expenses to just increase our growth by about two percentage points for the year. So it’s again a relatively small number as we integrate the business.

Operator: Next question comes from Timothy Chiodo with Credit Suisse.

Timothy Chiodo: Great, thank you for taking the question. I was hoping you could bring to light a topic that comes up in investor discussions and it has to do with Block, but I guess it could be applied more generally. When we look back at the last negotiation back in 2021 and we look at what’s happened with take rates and gross margins since then, there was no drastic change, at least that we can observe. Sure, there’s been a slight downward trend, but there hasn’t been a drastic change. And I think part of the reason for that has been increased services that you’ve been able to attach and more value that you’ve been able to deliver to this one large important customer. I was hoping you could bring to life examples of some of the additional services that you’ve been able to deliver maybe as cash app has evolved into more of a banking platform and just a peer to peer app.

Simon Khalaf: Thanks Tim, this is Simon. And thanks for the question. There are actually quite a few. We cannot say much because that’s something that they would have to disclose, but there are many services that I say Cash and Block has introduced over the past couple of years around more banking services, more BNPL for the Afterpay acquisition. And I say we’ve been working very, very closely with the Block team around adding and powering some of those features and additions. So I’ll point you towards, I’d say, BNPL as an area that we are very excited to work with Block in general and Cash in particular. And that’s something that we have great confidence in. There’s many, many others, but I would prefer to the Block team to share those.

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

Ramsey Assal: Hi, thank you for taking my question this evening. I wanted to ask about bookings and kind of ask you to comment a little further on your confidence level that the bookings headwind issue that you faced last year is behind you. Specifically, I’m thinking about the shifting demand environment from more sort of fintech customers to more traditional customers. I’m just curious if that’s not making visibility a little bit cloudier or whether you feel like you got a pretty good handle on what’s to come at this point.

Simon Khalaf: Thank you, Ramsey, for the question. Actually, it doesn’t. So as we put together what I say a very strong enterprise sales discipline and practice, we look at the pipeline like hawks on a daily basis and a weekly basis, and you always don’t look at a snapshot. You always look at trajectory. And that’s the methods we have put in place in the August-September time frame, and we were pretty close to what we have delivered in Q4. So there’s three things that are giving us the confidence. One is how the pipeline is actually moving forward. So in terms of confidence levels, our reps have the management discussion we’re putting on top and also the diversity of the use cases that are coming from our customers, the breadth, which means the market segment that is coming after us.

And the third one, the global nature of that demand. So that points to a broad product market fit versus an isolated solution. And the second thing I’d say is a lot of our customers and prospects are coming to us and saying, hey, we’re changing our strategy and our thinking because our OpEx is tighter this year and hence we want to reduce the number of vendors that we want to work with. We want more from you because you have more and you can support us on a global basis. So that is actually shifting some of demand to us. So and a lot of our customers that actually put together solutions from Marqeta and many other partners or players, they found themselves spending all their energy stitching all these solutions together versus innovating on their end.

So I do believe that there is a combination of three things. First one is enterprise quality, pipeline hygiene and management and account based marketing. The second one is the right solutions that has been packaged to address that market. And last but not least, that demand itself. It’s actually invigorating to see the type of demand that we’re seeing.

Mike Milotich : I’ll just, Ramsey, I’ll just add two additional things that I think are important. So one is that as the market is shifting, as you’re describing, what is very beneficial to us about it is that it’s shifting from sort of smaller but well-funded fintechs to much larger organizations that have maybe bigger ambitions that could come sooner because of their large existing user base. And so our scale is a huge benefit. The fact that the combination of our kind of modern, highly configurable platform and our proven scale delivering for very large customers is a big benefit as the market shifts because that aligns better with the types of customers who are coming our way. The second thing I would say that I guess hinted that briefly in my prepared remarks is not only was Q4 really strong, but we’re also seeing Q1 at least through the first two months, we’re seeing that pace continue.

So we’re quite confident that. We’ve sort of turned the ship, if you will. And we’re now very much moving in the right direction at a rapid pace.

Operator: Next question comes from James Faucette with Morgan Stanley.

James Faucette: Hey. Good afternoon. I wanted to follow up on a couple of the questions have just been asked and all time together. Is that first should we understand then that your current outlook for this year is based on the assumption of some sort of renewal with Block later this year? Would that any renewal this year actually have impact on financials from your perspective during the course of 2023 and then just back on kind of the new customers and programs, Mike, I know you just said that you see a lot of those new wins are with more established companies et cetera not necessarily fintechs, but I’m wondering if you can talk a little bit about the maturity of programs they may be looking at what your position within those programs is likely to be and where there’s potential variance there just once again trying to gauge confidence in the ability to show that acceleration you’re talking about once we get beyond this year. Thanks.

Mike Milotich : Thanks James. I’ll quickly answer your first one, then hand it over to Simon. So, yes, the specifically the, I guess the projections we shared and our expectations for 2023 do not have any impact related to a Block renewal. So we have assumed that the current contract we have is in place through the end of 2023. And as I mentioned, we, of course, I guess, hope that that is not the case and that a deal is done in that time. But because we don’t want to speculate for now, what we are assuming is that the existing contract remains in place.

James Faucette: Cool.

Simon Khalaf: In terms of the new customers, James, I’d say there are multiple use cases that we’re kind of focused on and we expect, I’d say sustained demand from and I’ll explain our role in them. So the first one is co brands from specific, I’d say retailers or brand, consumer brands that have very wide distribution. So they do want the loyalty play, the traditional loyalty play, and a new revenue stream. So and our solution is ideal for that. The second use case that is coming up a lot and we’re extremely well positioned to win is wage disbursement and early wage access, especially with gig and shift workers. So the free labor marketplaces. That’s another use case that’s very strong. And then there’s two more. One is flexible account stable, which is creating a virtual card in order to settle a payment in a short period of time given the rising interest rates and on working capital.

And last but not least, I call it BNPL NV, which is everybody is looking at this mechanism, which is culturally accepted installment payments and trying to bring it to the point of sale but in a broader solution. I call that point of sale lending, but in a highly innovative manner. You don’t need to send paperwork, you don’t need to scan the lawn, you just take a snap, a QR code and you swipe and you actually underwrite that transaction. So those are, I’d say, four use cases that our solution is actually made for. And we see the demands on all four coming from, coming fast at us.

Operator: Next question comes from Andrew Jeffrey with Truist.

Andrew Jeffrey: Hi. Appreciate taking the question Simon, It’s interesting to hear sort of the discussion of the business. I feel like evolved a little bit from the modern card issuing platform to being a full-fledged embedded finance company. And I wonder if you just put a little bit of a finer point on how you think you compete in that market. I know you mentioned some of the verticals, but is there — is this the kind of transition that you now think is complete? And that’s what we’ve seen in terms of ramping 4Q bookings, or is there more work to do? Obviously, credit is going to help, but it just feels like it’s almost a cultural shift in the go-to-market for the business. I just wonder, maybe more philosophically, how you think about that.

Simon Khalaf: Andrew, great question, and thank you for the question. I wouldn’t say it’s a philosophical shift. I think it’s an operational choice. So we, again, there’s many embedded use cases that Marqeta has powered already, and we’re very proud of a lot of the use cases. And everywhere we’ve gone and embedded finance, we were the entity that helped, I say the brand achieves their success in financial services. But I’d say the market itself is shifting and a lot of companies do want these embedded services in their experience. Co brands would be another example. Again, the relationship between an entity and its employees or its contractors, they want to control that flow. And honestly, it’s a lot of money for them because it’s pure EBITDA.

So it’s a new revenue stream. So we’re very well positioned to do that. So in terms of the shift itself, it is when we reorganize into modular themes, we went sector by sector and we’ve given the leader, let’s say, of that module complete ownership from prospecting all the way to managing the relationship. So they develop expertise, they develop account partnerships, but also, they develop an ability to sit down with a customer who’s usually not an expert in fintech and put together those solutions. So it’s not a cultural shift, it’s an operational shift that has led to us succeeding in this space. And the second thing is, the market came to us because that’s how Marqeta is. Marqeta is the API first, so by definition, we could dwell into somebody else’s technology.

We’re comprehensive and with the addition of credit, that completed the solution. So honestly, Marqeta was standing what the puck was going to be if I want to use a hockey analogy, and I think that is what happened.

Operator: Thank you. This concludes today’s Q&A session and today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.