Marqeta, Inc. (NASDAQ:MQ) Q1 2023 Earnings Call Transcript

Marqeta, Inc. (NASDAQ:MQ) Q1 2023 Earnings Call Transcript May 9, 2023

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Marqeta’s First Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. I would 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 and 10-K for the period ended December 31, 2022, 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 would 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 first quarter call for 2023. Our first quarter results further demonstrate our ability to innovate at scale to drive growth while delivering operational efficiency. Our net revenue, gross profit and adjusted operating expenses were better than we expected. Total processing volume, or TPV, increased 37% compared to the same quarter of 2022 and represented the first time our volume surpassed US$50 billion for the quarter. Our net revenue up $217 million in the quarter represented 31% growth year-over-year. Gross profit was $89 million in the quarter, a 19% increase versus Q1 2022. Our adjusted operating expenses were $94 million, a 10% increase versus Q1 2022.

We are pleased with our Q1 numbers and look forward to delivering even more with our great product market fit, market trends that play in our favor and clear strategic focus. The operational changes we started continue to improve our execution and ability to capture our full potential in the coming quarters. Let me start with strategy and the big picture. Our industry is witnessing a major shift, one that plays directly into our strength. The expansion of the market to include embedded finance in addition to fintech is accelerating. First and foremost, let me explain what embedded finance means. We define embedded finance as companies whose primary business is not banking, nor finance. It’s companies that offer financial services to their consumers through seamless integration into their existing product.

Embedded finance takes banking to consumers versus asking consumers to go to the bank. Marqeta conducted a global survey of over 4,000 consumers this past quarter. The survey revealed that 47% of consumers would now consider using a non-traditional financial service provider. Our platform, which is comprehensive with debit, credit, money movement, risk control and program management is well positioned to serve this market and we are already seeing a strong response from our prospect and customers. The shift is already evident in our numbers as more than 50% of our sales in the past year came from embedded finance customers. What is most exciting about embedded finance is the number of companies that can choose to participate in the opportunity are almost limited.

The solutions can extend multiple verticals, company sizes and geographies creating demand for our services in a horizontal and global fashion. One of the embedded finance solutions we’re excited about is accelerated wage access. Not only does it enable workers to access their wages sooner, but it also drives employer loyalty and goodwill without training a company’s working capital. This is the perfect match for Marqeta as it uses multiple aspects of our platform, including card issuance and banking as a service capabilities. Accelerated wage access has already started contributing to our gross profit growth. Not only has a number of active users quadrupled from the end of Q3 2022 to end of Q1, but TPV growth from the fourth quarter of 2022 doubled into the first quarter on a sequential basis.

In addition, our pipeline for accelerated wage access is also rapidly growing. Another area where we’re seeing traction in embedded finance is within marketplaces. This is an environment where money is constantly moving between supply and demand, creating the perfect scenario for financial tools to keep the ecosystem running smoothly. Marqeta makes a great marketplace partner because of the myriad of solutions we can offer: seller financing, accelerated seller payouts, bonus sale lending for consumers, co-branded cards and banking as a service just to name a few. During the quarter, we signed the partnership with an online employment marketplace where healthcare job seekers are matched with employers. Marqeta’s powering a spending card linked to a loyalty program for workers placed using the platform.

In addition to driving loyalty, the program enables better tracking of placement data. Also, employers only need to fund the cards when they’re used to make a purchase optimizing their working capital outlet. In addition to online marketplaces, we also see our products helping in-person marketplaces, also known as brick and mortar retail. During the quarter, we signed two deals with very large enterprises, one of whom was already a customer on our platform. These customers are using our capabilities to deliver innovative in-person bonus sale solutions that make things like authentication and just in time financing a much more seamless customer buying experience. There are few reasons why Marqeta was chosen. These customers required a partner with significant scale and expertise in card issuing.

Also, in both cases, the customer is using the Marqeta solution with an existing workflow requiring extreme flexibility. Now, let me turn to execution. First, our integration of Power Finance is ahead of schedule and we expect to complete the process by the end of the quarter. With intention, we sought an asset whose technology was built in a similar way to Marqeta, so we could combine these two solutions quickly. Our prospects have responded well to the combined solution. In addition to demand for co-branded cards, which we actually anticipated, we’re seeing demand for commercial credit cards, especially in a high interest rate environment that has made access to working capital difficult for small businesses. Second, in terms of how we go to market, the changes we made to the sales organization over the past six months continue to pay off.

After a strong end to 2022, our bookings in Q1 exceeded our target. The number of deals closed in Q1 was approximately the same as the number of deals we closed in the entire second half of 2022, a testament to the built up demand for our services, our strong competitive position and improvement in sales operations, all accomplished without a material increase in headcount. While it usually takes 6 to 12 months to translate these bookings into material gross profit, the strengths of our bookings gives us a good leading indicators of growth for 2024. Two-thirds of the deals we closed in the quarter were expansions with existing customers, which speaks to our customers’ affinity for Marqeta platform and our land and expand go-to-market strategy.

These expansion deals that fell mainly into three categories: the launch of a new product, expanding into a new geography and the addition of managed services. In terms of new products, we signed two deals for point of sale lending this quarter, as I mentioned earlier. Our new geographies, we have two of our top 10 customers, one in e-commerce and the other one in on-demand delivery signed expansion deals to take successful products to new markets in the EU and Latin America. Both of these customers have previously used us to expand into other geography, which is a testament to how seamless the process is on our platform. Our work with Western Union is a great example of how customers expand on our platform. After a successful wallet launch in certain European countries, Western Union planned to launch its U.S. debit and prepaid card with Marqeta as part of the company’s U.S. wallet launch.

On the managed services side, the deals we signed for the quarter are for addition of risk control, our real-time fraud detection platform and dispute management as customers thought Marqeta’s expertise to help them grow. While we are excited about expansion deals and our ability to serve our top customers, we are also focused on growing our customer base to diversify our revenue and gross profit growth. No single deal signed this quarter represented more than 15% of the total bookings value for the quarter. In addition, about one third of our net new deals for the quarter came from the EU, which helps us diversify the geographic mix of our business. Lastly, the net new deals we signed this quarter were also a healthy mix across our use cases with digital banking and expense management, both having multiple deals in the quarter.

Now let me turn to operational and capital efficiency. This is an area where I see our commitment and focus as a business is really starting to pay off. Let me give you some example of our increased operational efficiency. We were able to renegotiate multiple contracts as well as optimize the usage of certain technology tools. As a result, we’re able to save over $10 million of annualized expenses. At the same time, our focus on operational efficiency does not mean we’re sacrificing the reliability of our platform. In fact, we are improving our reliability while also managing increased scale. During the quarter, our authorizations increased by 9% from the fourth quarter of 2022 as our business continued to grow at scale. However, at the same time, our success rate improved by six basis points over the same time period.

We are able to accomplish this without significant headcount addition by focusing on increased rigor and automation around engineering development. While our focus is and has always been serving our customers and capitalizing on the tremendous market opportunity, we believe that the best way to accomplish these goals is by making Marqeta itself a more efficient company, a path we’ve already made great progress on. In Q2, we will accelerate our focus on efficiency and take focused action to reduce our adjusted operating expenses by $40 million to $45 million on an annual run rate basis. Unfortunately, this will result in approximately 15% reduction in headcount in Marqeta. This is not a decision we’ve made likely, but is a targeted move to help us capitalize on the tremendous opportunity in front of us in the most aggressive and disciplined way possible.

Based on the opportunity we’re seeing unfold along with improved execution, we believe our stock is undervalued and our board has authorized a $200 million share buyback program. Before turning it over to Mike, our CFO, I would like to reiterate our commitment to capitalize – to capitalizing on the growing embedded finance opportunity while serving our traditional fintech and engaging with large financial institutions modernizing their offering. We intend to achieve these goals through innovation at scale and laser focused on operational and capital efficiency. Our platform is a perfect fit for this market and we’re fully committed to serving our growing list of customers to rapidly grow and diversify gross profits while we progress on our path to sustainable profitability.

We’re well on our way in this journey. Now over to you, Mike.

Mike Milotich: Thank you, Simon, and good afternoon, everyone. Marqeta delivered a great quarter to start 2023 with net revenue growth of 31%, gross profit growth of 19%, and adjusted EBITDA margin of negative 2%. All three performance indicators were above our expectations, driven by stronger volume growth from several of our top customers, as well as accelerated execution of our cost efficiency effort. Q1 TPV was $50 billion, growing 37%, continuing to demonstrate our ability to grow at scale. Growth was stronger in the first two months of the quarter before slowing by several points in March, driven by two factors. Last year’s comps were easier early in the quarter because of the omicron outbreak, but became more difficult when the post pandemic recovery started later in the quarter.

Also active card was stronger in the first two months of the quarter this year, which aligns with the shifts in consumer confidence. Looking at our TPV performance by vertical. Growth in the financial services vertical continues to be the highest contributor to growth, decelerating by a few points versus Q4, but growing a little faster than the company as a whole. This was fueled by cash apps, rising card penetration among their rapidly growing users and increases in direct deposit usage, driving higher spend per card user. Lending growth including buy now pay later accelerated a little versus Q4 driven by several customers expanding their use cases and merchant categories with travel-related spending being particularly strong. Overall BNPL continues to be hampered by Klarna’s migration of a portion of one program in the third quarter of 2022.

Excluding Klarna, BNPL growth was roughly similar to the overall company growth. Expense management TPV grew significantly faster than company as a whole, but growth did slow compared to prior quarters due to tougher comps. Four of our top six customers are growing faster than 75%. Q1 net revenue was $217 million, an increase of 31% consistent with last quarter. Block continues to be a strong contributor to growth driving our revenue concentration to 76% in Q1, up about two points from Q4. The increased concentration is mostly driven by the strength of cash app as well as slower BNPL growth. Revenue growth remains strong within our managed by Marqeta business, including the on-demand delivery vertical. The net revenue take rate was slightly lower than last quarter and two bps lower than Q1 2022.

When comparing the take rate to last year, it is higher in three of the four major managed by Marqeta verticals. However, that is more than offset by the volume mix shift toward the powered by Marqeta business. Q1 gross profit was $89 million, growing 19% with a gross margin of 41%. The margin is lower than Q1 of last year due to an increase in Block revenue concentration, which has a margin almost one third of the rest of the business and the Klarna volume migration partly offset by the positive impact of our value-added services not directly tied to TPV. Our Q1 gross profit growth, excluding blocking Klarna is almost three times higher than the overall company growth. While the Block revenue concentration has steadily increased over the past four quarters, the Block gross profit concentration has remained consistent.

This is due to less favorable volume mix within the Block business for both purchase and ATM transactions combined with improving margins in the rest of the business. The improving non-Block margins are primarily driven by better pricing from multiple bank partners, higher incentives with one network partner and a large card fulfillment benefit in the quarter. Q1 adjusted operating expenses were $94 million, essentially flat for the last three quarters, but a year-over-year growth of 10%. Approximately one point of which is inorganic driven by the inclusion of Power starting in February. Our adjusted expense growth, decelerated versus Q4, and each of our major expense categories due to realized efficiencies and the benefits of platform scale.

We continue to exercise discipline in hiring as our automation and tooling efforts improve efficiency. We have also reached a healthy investment capacity. As a result, the incremental investment required to fuel our future growth and innovation is relatively small given the major platform expansions are behind us. Scale, optimization and vendor negotiations are helping our technology tool related expenses as our transaction growth of 45% is almost 20 points higher than our technology expense growth. We further reduced expenses by actively managing our use of external resources and better leveraging our internal expertise. Q1 adjusted EBITDA was negative $4 million, a margin of negative 2%. This result was better than we expected, driven almost equally between higher gross profit due to business performance and accelerated execution of our cost management effort.

Interest income was $12 million driven by continued rising interest rate. The Q1 GAAP net loss was $69 million, including a $32 million one-time non-cash post combination compensation expense related to the closing of the Power acquisition. Similar to prior quarters, we had positive cash flow excluding the closing of the Power acquisition, including operating cash flow if you amortize bonus payouts. We ended the quarter with approximately $1.5 billion of cash and marketable securities. Our Board has authorized a share repurchase program of up to $200 million. We believe that our current valuation does not properly reflect the following. One, the expansion of our market opportunity with the emergence of embedded finance. Two, our differentiated product platform with the comprehensive offering of debit credit, money, movement, risk control, and program management for consumer and commercial use cases.

Three, sales momentum driven by our renewed go-to-market motion. And four, increasing expense discipline and a healthy investment capacity that will limit future expense growth. At our current valuation, this attractive growth path combined with our strong balance sheet and limited cash burn make this buyback program a great opportunity to reduce dilution as we continue to manage the business for the long term. We expect this program to be roughly equivalent to both the stock-based comp shares vesting and issued in 2023. Now let’s shift to our Q2 and full year outlook. As a reminder, although a Block renewal is a top priority for us and we would like to secure renewal in 2023, the various Block contracts run beyond this year. Therefore, we cannot indicate a potential impact to our financial performance until renewal is done and have assumed current contracts are in place throughout 2023.

Q2 is off to a solid start. April TPV growth was consistent with March with the managed by Marqeta business accelerating bit offset by the powered by Marqeta business decelerating on a consistent trajectory we have seen as the comps toughened due to the rapidly growing base. We expect Q2 net revenue growth to be between 17% and 19% consistent with the expectations we shared on our last call. The two more significant factors driving the slowdown and growth versus Q1 are approximately five points is driven by Q1 performance. We don’t expect to continue specifically the stronger spend per user in January and February that did not sustain as well as a large card fulfillment benefit. Second, the results in Q2 last year benefited from a higher net revenue take rate due to favorable volume mix, both in terms of merchant mix as well as pin versus signature debit mix, as well as the beginning of more robust usage of our additional services not tied directly to TPV and a resurgent corporate travel environment coming out of the pandemic.

We expect Q2 gross profit growth to be in the 1% to 3% range. This is a slightly bigger step down in growth versus Q1 than we expect in revenue, primarily for two reasons. First, a drop in the average transaction size that started in late March, which pressures our gross profit due to the interplay of the transaction and volume based components of interchange and network fees. Second, the timing of incentives. Remember, Q2 is the start of our annual incentive contracts that run April to March. Therefore, the incentive benefits are lower as the volume tiers reset. As we discussed last quarter, we lost some of the full Visa incentives we were previously receiving, which will cause the step down incentives to be more significant than what we experienced last year.

In Q2, typically is our lowest gross profit margin quarter for the year as the net revenue does not follow the same seasonality as incentives. As Simon mentioned, we plan to take further actions to reduce our operating expenses with a restructuring in Q2, which reduce our workforce by approximately 15%. This is part of the current management team’s broader prioritization of organizational efficiency in order to put our company on a sustainable long-term path to profitability. We expect this will result in a $40 million to $45 million reduction in our annual adjusted operating expense run rate as well as lower future share-based compensation. We do not anticipate any impact to our service, products and operations primarily for three reasons.

One, we plan to be hyper focused on a relatively limited number of opportunities we feel will generate the most value for customers and therefore the highest return on investment. Second, the major components of our platform are already in place, debit, credit risk and authentication and banking and money movement solutions. And third, we have a significant – we’ve made significant progress on our automation and tooling efforts that make us less dependent on large numbers of people to complete important tasks. We plan to execute the restructuring in the next few weeks. So there will be a small benefit to Q2 adjusted operating expense. We expect Q2 adjusted operating expense growth to be in the low to mid single digit. We will also incur a one-time restructuring charge of $9 million to $11 million.

Therefore, we expect Q2 adjusted EBITDA margin to be negative 4% to 6% on an organic basis, excluding a one point negative margin impact of the Power acquisition. Our expectations for the full year 2023 largely remain unchanged with the exception of our adjusted EBITDA margin. Although the Q1 outperformance give us a small boost for the full year, we still expect 2023 net revenue growth to be in the low 20s, given the level of macroeconomic uncertainty caused by the rising interest rates, tightening credit and banking turmoil. We expect Q3 growth to be similar to Q2 before accelerating into the low 20s in Q4. Once we have fully lap the Klarna volume migration and we begin to lap the impact of heavy renewal activity. Similar to revenue, we still expect 2023 gross profit growth to be in the mid-teens.

We expect Q3 growth to be in the mid-teens and then accelerate into the low-20s in Q4 in alignment with accelerating revenue growth. Before taking to account the cost benefits of restructuring, we expect the 2023 adjusted EBITDA margin to be negative low single digits on an organic basis, excluding the approximately one point negative margin impact of the Power acquisition. This is a result of our increased cost discipline as well as our realized efficiencies and platform scale. Including the revised cost base post restructuring, we now anticipate our 2023 adjusted EBITDA margin will be around breakeven. We expect adjusted EBITDA margin to be slightly positive in Q3 and positive mid-single digits in Q4. To wrap up, our strong Q1 performance across both financial and operational indicators has us on track to accomplish our goals for this year.

Marqeta is at an inflection point in 2023 with exciting progress on several dimensions. I would highlight three in particular. First improvements to our go-to-market approach are driving a significant acceleration in bookings, which coincides with the massive broadening of our market opportunities due to the emergence of embedded finance. While we will still focus on specific FinTech verticals, embedded finance is a horizontal trend cutting across a wide variety of industries, making almost any company with an engaged user base and potential customer. Our highly flexible and configurable platform operating at a scale for consumer and commercial use cases is tailormade to serve the demand. The bookings will take several quarters to impact the P&L, but are a strong indicator of future growth.

The integration of Power’s credit program management capabilities by the end of June, less than five months after completing the acquisition is a foundational addition to our single-stack platform. We will serve the full spectrum of credit, including B2B seller financing, consumer credit building, charge cards, transaction underwriting, and revolving credit. Our pipeline suggests the opportunity to innovate is large and moving quickly. Again, another positive sign for future growth. Lastly, we are making meaningful progress on operational efficiency, reducing waste, and the use of professional services, leveraging our scale and optimizing technology usage and incorporating automation and tooling efforts all to accelerate our path to profitability.

Our restructuring in Q2 will only enhance our focus on key priorities to sustainably deliver customer and shareholder value. I will now turn it over to the operator for questions.

Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. Our first question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your questions.

Bryan Keane: Hi – result. Mike, I just wanted to ask growth in the second quarter, it seems to be a little bit lower than Street expectations at 1% to 3%, but yet you’re reiterating it for the year. So I guess just trying to think about your expectations going into the year. Did you think that the second quarter would be lower and have the same trajectory because again the guidance is still the same for fiscal year 2023 for gross profit growth? And how much of the weaker economy transaction size has built into the model going forward in the back half of the year?

Mike Milotich: Yes, thanks for the question, Bryan. So, a few things to unpack there. So the first thing is, yes, last quarter what we had expected our Q2 gross profit growth was to be in the mid single digit. So it is a little bit lower. What we’re expecting now is a little bit lower than we thought a few months ago and that’s really due to two reasons. One is that the mix of business within Block is not generating gross profit quite as much as we had expected. So the margin is decreasing a little bit, which is why as the revenue increases, it’s not increasing the concentration of gross profit. So that’s one factor. And the second factor is this, the lower ticket sizes, which we started to see in around the mid-March timeframe and continued through April.

And this just puts a little bit of pressure on our gross profit, but it’s not something that we would expect to continue. In January and February, things were a little better than we had expected previously. So it’s not something that we’ve assumed will continue to pressure the second half. And therefore, we still expect that our full year numbers combined with our outperformance in Q1 will not change. If anything within the range that we shared last quarter for full year, we would say we’re maybe on the higher end of those ranges than we were a couple of months ago based on the trajectory of business and the new things that are going to be coming onto the platform in the second half.

Bryan Keane: Got it. And then just as a follow up, when I look at the acceleration in bookings and the impact it’s going to have, it looks like it starts maybe a little bit in Q4, but probably mostly impacted in 2024 – in fiscal year 2024. How do we think about the pressure on margins? Is there any kind of initial ramp up costs that might impact margins in fiscal year 2024 just from the strong bookings and the acceleration of the revenue?

Mike Milotich: No, we don’t expect that if anything – it will help as I mentioned in my remarks, the Block margin is almost a third of the margin for the rest of the business. And so as we diversify the revenue streams with the incredible sales that we’ve been closing and we expect to come onto the platform in the coming quarters that should help the overall blended gross profit margin for the business. So we don’t expect there to be any challenges related to that. The other thing that I would mention related to in Q4 we do expect gross profit growth to be over 20%. And one of the reasons for that is that we had a lot of renewal activity last year. As we mentioned last quarter, we had renewed about 50% of our non-Block business in the last few quarters.

And so as we start to lap that, the comps just get much easier for us to deliver gross profit growth. And so the – what the business is going to look like in the fourth quarter with growth in revenue and gross profit in the 20s, we think is a good indication of where we expect to exit 2023.

Bryan Keane: Got it. Thanks for taking the question.

Mike Milotich: Thanks Bryan.

Operator: Thank you. Our next question comes from the line of Tien-Tsin Huang with J.P. Morgan. Please proceed with your question.

Tien-Tsin Huang: Hi, thanks. Thanks so much. I know there’s a lot going on here. So Simon, I thought maybe just to ask you here, you’ve been in the seat – CEO seat now for about a quarter. So do you want to give us a progress report on your impressions and any surprises to call out that that’s shaping your call to action here? Thanks.

Simon Khalaf: Thank you for the questions, Tien-Tsin. Actually, the good news is that there are no surprises, which is the great news here. And that’s part of the advantage of me being an insider of taking on the COE. So I’d say the first thing is we are absolutely focused on the right thing. In embedded finance, the market is very receptive to our message and our bookings are showing that there is wide reception, so over 50% of our bookings are embedded finance. So in addition to the two strong quarters of bookings, we have not depleted our pipeline quite a contrary. So our pipeline has increased 80% in the U.S. from Q4 and 40% in the EU just sequentially. So we’re meeting and exceeding the goals without draining the pipeline.

The third thing I’d say is we strengthened the management team. We’ve added a CRO who’s taken the helms of the go-to-market organization without missing a beat and also Chief Legal Officer. So we’ve got a very strong team. And the last thing I’d say is the focus on efficiency starting to pay off. We’re very happy with the operational efficiency, which is reflected in our operating expenses, but also the action we announced today is first other testament that this management team is committed to exactly what we said will do, which is a scaling of the business in a sustainable matter so through automation and as well capital and operational efficiencies. So all in all, we all understood what the trajectory for 2023 is, but as Mike mentioned, the bookings that we are seeing, the customer reception as well as the laser focus of the company gives us very strong confidence for the, I’d say, tail end of 2023 and 2024.

Tien-Tsin Huang: Perfect. No, that’s great. That’s a segue to my follow up. And on just the exit rate that Mike, you mentioned the 20% for gross profit growth. Is that a good jumping off point to assume a baseline growth rate for 2024? I know you’re not going to give guidance. I know the Block renewal is still outstanding. But just want to understand because there are so many moving pieces to the gross profit piece. Like for example, we – I would assume we wouldn’t expect another network incentive surprise other than just the earn-out piece as an example. So just trying to better understand the puts and takes as we recast for 2024 off of 2023?

Mike Milotich: Yes, we think that’s a good indicator, Tien-Tsin, at least. If you think about even this year, even with a lot of renewal activity, we’re – our gross profit growth, we expect to be in the mid-teens. And as that includes, as you mentioned, roughly five points coming from the change in the Visa incentive. So if you take that out, we would have grown around 20% even with heavy renewal activity. So, if we look at going into next year with accelerated sales and diversifying our business, we’re – we feel good about growing at that rate if not a little stronger. Whereas it’s still our goal to grow gross profit on a regular basis of over 30% and we’ll obviously talk a lot about 2024 in a couple of quarters.

Tien-Tsin Huang: Cool. Thanks for clarifying.

Operator: Thank you. Our next question comes from the line of Timothy Chiodo with Credit Suisse. Please proceed with your questions.

Timothy Chiodo: Great, thank you. So you gave some great context on the bookings with the Q1 bookings roughly equal to the second half of 2022. You talked about diversification by size, geo. There wasn’t a lot of concentration there. But could you – and maybe I missed it, I apologize. Could you put some rough sizing on the size of maybe the volumes associated or potential volumes associated with that cohort of customers that came on in terms of that Q1 bookings group even if just directionally?

Simon Khalaf: Yes, I mean, I guess, Tim, I would say that I guess a decent indicator would be that we said that our goals for this year in bookings were about 70% above last year. So obviously that volume sort of comes in over time and ramps, but it gives you a sense for the – sort of the size of the increase in bookings that we’re expecting. The business will obviously get bigger in 2023. So it – that doesn’t mean we’re going to grow 70%, but as those new customers come in, we would expect them to meaningfully contribute. It’s hard to tell you specifically right now.

Timothy Chiodo: Okay, no problem. Appreciate the context you gave earlier. And then the brief follow up is around, is there anything to call out in terms of with regulation in terms of having to have two unaffiliated debit networks for any of the debit cards that you’re issuing that are being used online. Is there any indication – any implication there in terms of the interchange that you might earn associated with those cards? Is there anything mechanically that you could call out there in terms of – if any change at all?

Mike Milotich: Yes, Tim, we’ve looked at this very closely, studied it over the last several months and quarters, and we do not expect to see a big impact. As you know from prior experiences when changes like this are made, one, the implementation of it tends to be relatively slow. But secondly, when we look at the makeup of our business and the different end change categories that we could expect to potentially be qualifying for when changes are made. We really don’t expect to see a major impact to our business in 2023. And obviously once we have a couple quarters on our belt – under our belt over the – in the second half of this year, we’ll have a better indication. But at this point, at least for 2023, we do not expect it to be significant.

Timothy Chiodo: All right, great. Thank you for taking those two, Mike.

Operator: Thank you. Our next question comes from the line of . Please proceed with your questions.

Unidentified Analyst: Yes. Hi. Thanks for taking the questions. First question is the refocus or new focus on embedded finance, it’s a space that you’ve actually seen a lot of focus on over the last five to 10 years by other players in the market. And so I’m wondering, where you’re seeing the most intense competition from and has it been a challenge coming back to this focus again? And secondly, I wanted to ask if there’s been any change in behavior that you’ve seen at all from Block, considering the scrutiny on the company when it comes to things like KYC with regards to the Cash App business. And are you concerned that any potential regulation along those lines could hinder the business flowing to Marqeta? Thanks.

Simon Khalaf: Sure. Craig, thank you for the question. Let me address your first questions about embedded finance. I would say there are no material changes in terms of the expectations from the customers, quite the contrary. So our – the comprehensiveness of the suite we have actually eliminates a lot of competition. So, and by comprehensive, I mean, we can do credit, we can do debit, and then we can do money movement, and at the same time, we can do program management and we can do that in the United States and outside the United States. So it’s those two dimensions that actually eliminate a lot of the traditional competitors that that we tend to compete with in fintech or pure fintech. So it placed actually to our strength. The second questions, we don’t see any change in the behavior of Block neither in terms of KYC or anything else. I think Block has responded to the allegations and we don’t see any change in behavior.

Unidentified Analyst: Okay. Thanks for taking the questions.

Simon Khalaf: Thank you.

Operator: Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question.

Darrin Peller: Hi, guys, thanks. You know what, maybe we start off with just a reminder of the mix of the business beyond obviously the, let’s call it, 55-ish percent of gross profit from Block. I guess helping us understand the contribution from by vertical, whether it’s expense management, BMPL, or maybe on-demand delivery. And I guess more importantly, I mean, some of those are going to have continued growth, some of them are going to have tough comps and decelerate. And so, I’d love to hear an update on the newer areas that you can find – that you can see supplementing or replacing the areas that are going to decelerate, whether that’s credit card now, given the deal you guys just finished and have – you talked about having a lot of really good pipeline in new verticals. Can you just give us some color on those areas?

Mike Milotich: Yes. Darrin, thank you for the question. There is quite a few, but again, part of what we’re doing is focusing on a few use cases that can expand. So I’d say the first one is accelerated wage access. That’s something that is starting to contribute to our gross profit growth, and we expect that to significantly increase. The second thing is around credit. So we did talk about the co-branded cards, which is something we anticipated, but the area where we’re seeing also really good traction and we expect that to be a growth contributor is commercial credit and especially with small businesses and seller financing. And most of that is driven by the difficulty and the cost increase of working capital. So, for example, if you are, let’s say, a seller that – and you list your products or services on an online marketplace, you do need financing and no one is better off understanding your potential other than the marketplace.

So the marketplace, working with us on seller financing is, I think, something we expect to see a growth in. So I’d say in the consumer space, accelerated wage access and co-brand is strong. On the commercial side seller financing and point of sale financing would be areas of where we expect good growth going forward and we’re seeing corresponding traction on the sell side.

Simon Khalaf: In terms of the mix of the business, Darrin, I would say two things. One, the gross profit concentration of Block is now closer to 25 points lower than the revenue concentration. And then when you look at the non-Block business, both for revenue and gross profit, it’s relatively similar in size for on-demand delivery, BNPL and expense management. They’re all roughly the same size as we’ve talked about with volumes. They’re all over 10% of our volume. And so, they’re all similar inside. And then you have some small verticals that that make up the rest, but that’s sort of the state of the mix of the business.

Darrin Peller: That’s really helpful, Mike and Simon. Thanks guys. Just a quick follow up would be on the proactivity. It’s nice to see the proactivity on expense management now, and the obvious focus on profitability is as early as this relative to what we were kind of thinking is would wait till the Block renewal before you got more pros – proactive on that, or at least outward on that. When you think about a) what drove the decision to start now, does that signify anything on the coming Block renewal? And maybe just a quick update on your thoughts on timing on that for what it’s worth.

Simon Khalaf: Thanks, Darrin. Again, this is Simon, and I’ll – let me give you a quick answer. So I mean, we are running the business based on how we run the business. So we have scenarios. And as Mike mentioned, we will share those when we have a little bit more clarity in terms of what I would call sustainable path to profitability. Of course, given the concentration with Block on gross profit, even if it’s significantly lower than revenue, it still has an impact. But in terms of the measures we’ve taken is to actually put us on the right path or much closer to the path that we believe would be the most rational path going forward. In terms of Block and timing look we have multiple work streams with Block. They refer to their systematic ecosystem.

We work with them with Cash App, we work with them with Afterpay, and we work with them on the seller side. And I say that the majority of the contracts go beyond four quarters. So the relationship we have with them is very dynamic. Just from my stay and Marqeta, right, we’ve had close to approximately about 20 change orders to the contract and to the products that have moved forward. So to very dynamic relationship and our focus remain on making them very successful. If you look at what they – if you follow what they have announced last week, they announced over 20 million cards. So this doesn’t happen by accident. I’d say it’s good execution on their part, but also leveraging good partners like ourselves. So something is going well.

So and I think that is something that will remain. So in terms of timing, it is a priority, but again, the priority we have is continued the wild success with them. Mike, anything?

Mike Milotich: The only thing I would add in terms of the timing and the restructuring, I think there’s three components to it that I would, I guess add to what Simon said. One is we’ve made a lot of progress on automation effort. So we’ve been working on that pretty – in a pretty focused way for the last several quarters. And we now feel like we’re in a position where we’re not quite as people dependent, and we can be a little more efficient in the operation and not be concerned about the reliability and performance of the platform. So that’s one. The second thing is that we – when we think about the path, the trajectory of the business, we are getting just a lot more focused, right? So we know exactly where the large opportunities are, which is informed by this growing pipeline, and we can be a little more targeted in where our investments are going.

And that obviously allows us to be a little more efficient in how we deploy resources. And the last piece that I would say that I also want to keep stressing is the anchor tenants of our platform are in place. And that’s not to say we don’t have improvements and enhancements to make, but the big anchors are there. And that’s quite helpful because we have even post restructuring, we’re going to have a good amount of investment capacity to make those enhancements, but we’re not doing large new builds at this time to meet the demands that are filling our pipeline.

Darrin Peller: Great. Thanks a lot, guys.

Operator: Thank you. Our next question comes from the line of Ramsey El-Assal with Barclays. Please proceed with your question.

Ramsey El-Assal: Hi, thanks for taking my questions this evening. You mentioned signing deals with two large customers using Marqeta to deliver in-person solutions. Could you give us a little more color on those deals and also just how you view the broader opportunity or addressable market for you to actually provide in in-store type solutions?

Simon Khalaf: Absolutely, Ramsey. Thank you for the question. So yes – so this is more in the line of just in time financing at the point of sale. It’s kind of taking the BNPL use case, which is one form of point of sale lending and expanding to it exactly where the customer is, which is at the checkout counter basically. So the same way you can experience that in an online marketplace, you would experience that at the point of sale terminal let’s say in a supermarket or a retailer which is you’ll get there and then you’ll actually scan a QR code and you’re able to receive some form of just in time financing and does not have to be in a form of buy now pay later as in pay in for. It could be something like that, but also some form of a duration based loan that you qualify for.

That is something that is ideal with our platform because you are effectively not underwriting a person, you’re underwriting a transaction. So the marketplace or the retailer in that case is taking a little bit less risk than a revolver so or a program. So that’s something that we expect that thing to grow. It does make sense for the retailer. It does make sense for the consumer as they’re not filing up more debt, and it suits this economy very well because it also reduces the debt stack on the consumer. So you’re not effectively giving the consumer fully working capital to go spend anywhere they want. They’re actually spending it in the marketplace. And last but not least, it adds loyalty. So to make a long story short, we do see this as something that we see the retailers be excited about.

Mike Milotich: Yes, Ramsey, I would say, like a good parallel to maybe think about is one of the reasons why these types of retailers are utilizing our platform is because they can get the customer experience they want without having to make changes to their own operations and point of sale. So if you think about how we support our BNPL customers today, right? The primary use case that we’re serving was to allow a consumer to use BNPL without the merchant having to integrate to that BNPL provider’s platform, right? So the consumer feels like they’re using that platform, but actually behind the scenes that’s not how it’s working. And our platform is sort of bridging that gap. And so if you think about that as an example, you can start to think about how retailers would look at those kind of capabilities and say, wow, I could start impacting what my customer experiences without having to fundamentally change how my point of sale operates.

And once, you kind of get there, it can unlock a lot of innovation.

Ramsey El-Assal: Interesting. Thank you. A quick follow-up from me is just more broadly on the credit pipeline. You mentioned some credit sounding elements in the context of the marketplace’s opportunity. It’s kind of interwoven in some of the offerings that you’re talking about today, but just how is the credit pipeline shaping up?

Simon Khalaf: It’s actually very strong. Some of it we anticipated because Marqeta, I mean, we were in the credit business. We were simply not the program manager. So they were spent up demand. I would say the positive surprise is the demand on the commercial credit side. So we were expecting kind of like the to be to live and strong. But the pipeline we’re seeing in terms of seller financing and in terms of commercial credit for small to medium size businesses that are supported by large marketplaces or online providers that have very strong balance sheet. So that’s something that was a very positive surprise to us and a growing demand once I’d say the market quite understood what the combination of power and Marqeta gives them.

So I mean, point of sale financing, seller financing, creative economy financing, labor marketplace folks who do have labor supply. So that’s the area that I – we’re seeing some very good traction that I’d say we were not expecting before.

Ramsey El-Assal: Fantastic. Thanks a lot.

Operator: Thank you. Our next question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your questions.

Sanjay Sakhrani: Thanks. Good afternoon. Obviously, very encouraging, you guys had a strong quarter of new business bookings. I’m just curious if there was something specific that drove the strength and how the pipeline looks from here for the rest of the year.

Simon Khalaf: Thank you for the question, Sanjay. Of course, yes. I mean, we started putting the changes in the go-to-market organization around the Q4 timeframe, which is reorganizing our teams around pod. And that gave them kind of the autonomy. So and the pods are very focused right? They’re focused on the right segment, and they’re focused on the right markets. So in terms of the bookings themselves, I mean, we’ve done two bank deals that are modernizing. We’ve done two flip deals. They moved off competitors. We’ve done two large retailers. We’ve done two accelerated wage access. So definitely we’re seeing the traction from embedded finance play in our favor because of the comprehensive nature of our platform.

So you do have the improved organization. We also made changes to the compensation structure of our sales organizations that also improved the operation. And I say last but not least, is having credit made our solution more comprehensive to the target market. So in terms of the future, like I mentioned, we have beaten our internal targets, but we did not drain the pipeline quite the contrary. Our pipeline is very strong. We’ve grown it 80% in the United States quarter-over-quarter on a sequential basis, and we’ve grown it 40% in Europe on a sequential basis. So while we are beating our numbers, we are actually creating a lot of top of funnel and middle of funnel demand in order for us to continue that trajectory going forward.

Sanjay Sakhrani: That’s impressive. Mike, just a couple of clarification questions for you. So you mentioned the share buyback offsetting the stock vesting dilution. Is there something different about this year? Could – maybe you could just help us with sort of the run rate of vesting as we look beyond this year, just to get a sense of what kind of dilution we should think about in years – in future years. And then secondly, just in terms of the guide and your assumptions on the macro, did I hear that right that you’re assuming sort of no change to the macro or are you incorporating some of the weakness you saw later in the quarter? Thanks.

Mike Milotich: Yes, so, thanks Sanjay. So on the dilution, I think that if you go back and look at what was happening kind of in late 2021 and early 2022, I guess maybe the height of the frenzy of FinTech and it being very competitive for the type of subject matter expertise that we’d be looking for. We were issuing a lot of equity to employees both who are here and new talent we were bringing to the organization. So I’d say in the last several quarters, we’ve gotten much more disciplined and we intend to be more disciplined going forward. And we’re – for this year in 2023, for example, we set a budget and said, this is what we’re going to do based on what we’re willing to have for dilution because of the input and feedback we get for shareholders and our desire to drive shareholder value, and we’re going to live within those means.

So I think we have a little bit of a wave coming, which we think we’re going to help offset with this buyback this year. But we are managing it much tighter for the go for it. And in terms of the macro, what we’ve assumed is we have assumed much change. We’re seeing things got a little bit weaker in March and in April, but nothing to be of concern, and that’s what we’ve assumed going forward. We haven’t assumed a major slowdown or the opposite.

Sanjay Sakhrani: Okay. Thank you.

Operator: Thank you. Our final question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.

Ashwin Shirvaikar: Thanks. Hi Simon. Hi Mike. I guess when I look at sort of how you maintain your non-GAAP operating expenses reasonably steady, the last three quarters. And incorporating the impact of the restructuring is that where we should see the primary benefit and where can you get the kind of the quarterly run rate of operating expenses down two, it’s kind of one part of the question. And then kind of the second part of the question is with regards to the big renewal that’s on deck with lock. I mean, where should we expect – I mean, assuming it happens, where should we expect the impact of that? Is that kind of spread all across the P&L? Or is it primarily a lower revenues impact on gross profit type of thing? How should we think of some of the parameters around that and the restructuring would help?

Simon Khalaf: Yes, so thanks for your question Ashwin. So on the first one, yes, the last three quarters are adjusted operating expenses have been relatively flat after growing at a pretty good clip for several quarters before that. So we feel good about even before the restructuring that we were starting to manage our expenses quite well and getting more efficient without having any business impact. And so we felt good about that. The restructuring will drop that rate. So as we mentioned, we estimate the impact to be in the $40 million to $45 million on annual basis. So, you can think of that as 10 million roughly lower run rate on the expenses than we would’ve had otherwise. So that’s what you can expect. From a Block perspective, the biggest impact will be in gross profit because the deal are our costs – our cost of revenue is based on our cost to banks and what we pay the networks.

And that won’t change as a result of the deal. So, you will see it in revenue, of course it will assuming, they would get a better price from us, it will impact revenue. But I would say that the bigger impact is you’ll see it in gross profit and not really significant impacts in our expense base.

Ashwin Shirvaikar: Got it. Got it. And then you guys had announced the Wedbush provisioning product which seemed quite interesting with the instant tokenization of cards into wallets. I’m assuming that sort of functionality is kind of incorporated when you talk about bookings, embedded finance related bookings and so on so forth. But I just wanted to check with regards to any comments or on traction of the product anything you can provide there.

Simon Khalaf: Yes. Absolutely. So no question that Wedbush provisioning actually expands the opportunity beyond I say the application on a mobile device, you do have a lot of retailers that actually do not have an app. So you actually have to go to the mobile website and then that’s something that expands the market. So no questions asked that this is helping. But I’d say in terms of what are the major technology changes that are working on in terms of embedded finance, the integration of credit is something that we should finish this quarter. We had ahead of schedule that will give us the full suite that is expected from us from an embedded finance perspective and adding a single program management a layer on top with one place to do KYC in KYB across credit, across debit, and across banking and money movement.

And so that helps a lot. And the second thing I’d say is credit is not just your traditional consumer revolver card. There’s a lot of things we’re adding on the commercial side, but even on the consumer side, there’s a lot of innovation that we’re building to allow, I’d say the under bank or the new generation that is getting into the financial independence to build credit from a simple debit program. So we’ve kind of like thinking about credit as a comprehensive suite and something that we will work with the consumers as they graduate into full financial independence and will work with small businesses as they graduate towards really strong financial health of their businesses. So I think there’s a lot that we have already built in terms of technology that we are packaging in terms of solutions that we can take to the embedded finance market now that honestly, the aperture has opened so much in terms of where we can take our solution, given that the addition of credit.

Ashwin Shirvaikar: Got it. Thank you. Thank you very much. Very useful.

Operator: Thank you. We have reached the end of our question-and-answer session in the conclusion of today’s call. Thank you for your participation. You may disconnect your lines and have a wonderful day.