Good afternoon and welcome to Marqeta's Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Stacey Finerman. Please go ahead.

Thanks, operator. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements, including statements regarding anticipated future financial and operating results and further changes in our development regarding accounting treatment among others. These forward-looking statements are subject to numerous risks and uncertainties including the risk that our accounting treatment may be subject to further changes or development set forth in our filing for the SEC, which are available on our investor relations website including our Annual Report on Form 10k for the period ended December 31, 2022 and our subsequent periodic filings with the SEC. Actual results may differ materially for many 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. A reconciliation of forward-looking non-GAAP guidance is not available without unreasonable efforts due to the challenges and impractability with estimating some of the items, such as share base compensation, depreciation and amortization expense and payroll tax expense the effect of which could be significant. 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.

Thank you, Stacey and thank you everyone for joining our second quarter 2023 earnings call. We had a strong quarter and we just renewed our partnership with Cash App for four years. Our second quarter net revenue gross profit and operating expenses were better than we expected resulting in positive adjusted EBITDA for the quarter. In addition, we've once again exceeded our sales bookings. The Cash App renewal represents the final major step in a yearlong effort to re-establish long-term sustainable growth for Marqeta. This effort started by sharpening our go-to-market operation, expanding our product line through the acquisition and fast integration of power finance and reducing our operating expenses. I am proud of the tremendous progress we have made and I firmly believe the Marqeta is extremely well-positioned to capitalize on the fast growing, embedded, finance market. Let me go back to our financial performance. Total processing volume or TPV increased 33% compared to the same quarter of 2022. This was the second consecutive quarter where our TPV exceeded $50 billion. Our net revenue of $231 million in the quarter represented 24% growth year-over-year. Gross profit was $85 million in the quarter, an 8% increase versus Q2 2022, while adjusted operating expenses were $84 million, a 5% decrease versus Q2, 2022 resulting in positive adjusted EBITDA for the quarter. As we've done in the last few quarters, we continue to grow our business while being very disciplined about our costs. Now moving on to Cash App, we're excited to continue our partnership for another four years. We believe this renewal, as well as our renewal with Afterpay. Earlier this year demonstrated the value block fees in our platform and our partnership. This value is exemplified by the scale, flexibility, innovation, and myriad of services we provide to Cash App…

Thank you, Simon, and good afternoon, everyone. We are excited about the Cash App renewal, as well as the progress we have made over the last year on both go-to-market and efficiency initiatives. Before we discuss the financial aspects of the renewal, let me highlight our strong quarterly results. Second quarter net revenue growth of 24% gross profit growth of 8% and a positive, adjusted EBITDA margin, were all above our expectations, driven by stronger volume growth from several of our top customers, as well as expense savings achieved through efficiency efforts, particularly within technology, as well as our restructuring in May. Q2, TPV was 54 billion growing 33% year-over-year, continuing to demonstrate our growth at scale. The financial services vertical continues to be the highest contributor to growth growing several points faster than the company as a whole. This was fueled by Cash Apps continued growth, and transacting active card holders, and higher-spend-proactive user, as well as customers with accelerated wage access use cases ramping rapidly. Lending, including by now pay later, growth was boosted by increased travel spend, as well as the relatively new offerings that deliver our customers the NPL value proposition through a card that can be used at any merchant. Excluding Klarna, which migrated a portion of one program in Q3 2022, the NPL growth was similar to the overall company growth. Expense management TPV also grew in line with the overall company as a whole, slowing when compared to prior quarters due to tougher comps and maturity of the vertical. Q2 net revenue was $231 million growing 24% year-over-year, as growth remains strong across multiple verticals, including financial services and on-demand delivery, as well as our powered by Marqeta business. Block continues to be a strong contributor to growth, as our net revenue concentration…

[Operator Instructions] The first question comes from Tien-Tsin Huang with JPMorgan. Please go ahead.

Thanks so much, and good afternoon. And thanks for going through all the Cash App. renewal stuff. I know we're all going to dig in to the numbers as you shared it, but I'm just curious at a high level here, as we think about the benchmarking exercise here. And I know it's tough to negotiate and talk about it publicly too much. But can you walk us through the benchmarking exercise of the pricing and the new deal on the take rate and just the general fairness? Right to all stakeholders on the renewal. I know a lot of people are listening, competitors and other clients, etcetera. But just love to understand a little bit more about the benchmarking exercise. Thank you.

Thanks Tien-Tsin really appreciate the question and good to be talking again. Let me put it this way. We strongly believe the deal is extremely fair for both parties. It is actually commensurate with the scale and the volume that Cash App has achieved and also commensurate to the value the differentiation and the premium that Marqeta commands over [Technical difficulty] exactly what it was. So, but I would say that there's two reasons companies actually diversify. One of them is economical. And the second one is more stability, which is kind of like; you distribute your load on multiple providers so that you actually have some form of redundancy. We've addressed both as in like in the agreement with bake the economical incentive for us to capture the vast majority of the volume. Right and we've done a lot of work on the redundancy and the stability of the platform. And something we've demonstrated. So there is, we've almost reduced the reasons for diversification almost to something non-existent. In terms of gross profit yes, that's fundamentally how we look at our business. And we believe that gross profit growth is going to come from three areas. One is, are the bookings that we have, within exceeding on are eventually going to translate into revenue and gross profit. Second one is our base will continue to grow. And there's plenty of opportunity with growth with Block through Cash App, through square and through Afterpay. So that's what we expect the growth, the gross profit growth to come from.

Yes, the only thing I would add Tien-Tsin is that, when you when you think about what's weighing on our growth right now, it really does stem from the incredible weak growth that we saw, sort of in the 2021 timeframe coming out of the pandemic, many of our customers business just absolutely boomed. And that meant that a lot of our deals needed to be adjusted because their businesses were just much bigger. And that's that process started last year, as we've talked about 50% of our non-Block volume, we renewed over a four quarter period, ending in Q1 of this year. And then this year, we've renewed Cash App as well as Afterpay. So we've really now renewed a lot of the business of that we had before, that just incredibly grew. And so once we get past that, now we're in, good longer term contracts that we can grow the business on the with the customers we already have. And you combine that with the sales momentum we have because of just how differentiated our combination of modern flexible platform that's global and scale for both debit and credit. It's just a very unique value proposition. And so that's what where we think the growth is going to come from, obviously, the next four quarters is going to there's going to be noise in the revenue. And we'll do our best to try to help everyone understand how much of that is just coming from the revenue accounting change. But as long as you focus on gross profit growth, you'll have a sense for how the business is performing.

Thank you so much. Glad to give you a ring out the way.

Our next question comes from Darrin Peller with Wolfe Research. Please go ahead.

Congrats, guys on these announcements, great to see. Maybe just if you don't mind just a little bit more plain vanilla clarification on the Block renewal in terms of like, what it actually does to your gross profit dollars, just to be clear from pre to post on a either second half 2023 basis or an annualized basis. Just maybe if you can bring it down for us a little bit. There was a lot of moving parts in the growth rate impacts you talked about. And then -- and then just very quickly, also on that I heard Afterpay was renewed earlier, I think and obviously Cash App here. I don't think I heard about seller. So just a quick update. Thanks, guys.

Yes, so. So let me take the first part, and then I'll hand it over Simon to talk about Afterpay and Square. So the way to think about it, Darrin is it's a 40% reduction in our price. And by that by our price, what I mean is the gross profit take rate. So the amount of gross profit we make for every dollar of volume, which really is the best measure in this case. And the accounting change, I guess, let me just take a minute to try to explain it in simple terms. I mean, essentially, what we used to do in our net interchange structure, right, is we took interchange network fees and bank fees, and combine that together and then said, how should we split that between Cash App, and Marqeta? And obviously, they got the bulk of it. But when we were determining that split, we knew we were responsible for those network and bank fees and that had to be incorporated in how much we kept because we have a cost to pay in our cost of revenue. And in the new structure, what's happening is now, the primary network fees are not going to be our responsibility. And so what we essentially book in our revenue will no longer have to account for the fact that we're going to have to pay that cost. And so what happens is our revenue is significantly reduced. But so is our cost of revenue. And so it's not impactful to the gross profit, ultimately, but it will be very meaningful, as I said, to the, to the revenue growth, and we'll just do our best to help you, sort of normalize for this impact over the next four quarters.

Okay, but net net 40% of what you would have otherwise earned in gross profit terms, less than, going forward, I guess less than before, correct?

That's exactly right. Okay. All right. That's later. Thank you. And then just on the other side, Simon if you…

Yes, yes, we did renew the Afterpay partnership, before, we just reviewed Cash App. And like, I think we said multiple times, there's so much activity going on between Block and ourselves. So it's a very fluid situation. And seller is not due to be renewed till later in 2024. So we'll be working on that as well. But again, between now and then, I expect a lot of great work that will happen between us Cash App Afterpay and seller. It is a very symbiotic relationship. It's a daily relationship. The growth they have witnessed is fascinating. And we're actually celebrating every moment of that.

Okay, and just to be clear at all. I'll turn it back to the queue. But you got the seller, while the Cash App and the Afterpay combined is the vast majority of your gross profit contribution from Blocks, right?

That's right, correct.

Okay, good. All right. Congrats again, guys. Thanks.

Thank you.

Our next question comes from Ramsey El-Assal with Barclays. Please go ahead.

Hi, thanks for taking my question this evening. Following up a little bit on Darrin's question, can you help us think through on sort of a hypothetical run rate basis what the revenue and gross profit contract concentrations will be with, Block versus non-Block. I assume, that might be the silver lining here that this deal will have Block be a lower concentration of your overall business on a percentage basis. But just wondering your thoughts there?

Yes, yes, you are correct, Ramsey, what we expect based on this is that our revenue concentration is likely to fall, sort of in the mid to high 20s percentage points. And gross profit concentration was likely to fall around 10 percentage points based on this deal going forward.

Terrific. And then on. On, I want to ask a question on bookings conversion, you've had another terrific sales quarter. Remind us again, about the bookings conversion timing, you've never had three quarters of solid sales. At what point are you really start to feel those, maybe the earlier sales and that and that three quarter period start converting to revenues? Is this still a 2024 kind of an event? Or can we start to see something start to show up here before the end of the year?

Thank you for the question. It actually, I think we're going to start seeing something before the end of the year. Just to guide you, on average, commercial programs take us between, call it 60 days to 180 days for them to go live and then they ram [Ph] from their consumer program, take about a year to launch and then and then start ramping from there. So the bulk is going to be seen less sustainable growth wouldn't be seen in 2024. But we're going to start seeing some of those program accelerated and trickling in towards the tail end of 2023. And Ramsey, it's a priority for us to accelerate the delivery kind of like all eyes are on the new delivery giving this oversized bookings number, so no pressure delivery team, but that's why we're working on.

Fantastic. Well, congratulations on the renewal. Appreciate your answers.

Thank you, Ramsey.

Our next question comes from Ashwin Shirvaikar with Citibank. Please go ahead.

Thanks. And we -- add my congratulations on getting this getting this done. In terms of just kind of thinking of thinking about the -- those perfect margin range going forward to do maybe add some color to what happens to that part of the question is it's I don't know if I heard this right, but you're kind of as you've been signing these renewals and in the newer bookings you're leaning more towards just looking at things on a on a gross on a gross profit basis. What percent of your total volume if you will is on that basis today that makes sense?

Sure so the answer to the first part of your question Ashwin, I said that in Q3 we expect our margin to be in the low 70s. As we talked about previously, our Block margin is sort of under 30% the rest of our business is over 70%. So there was a more than 40% gap in in the margin and a lot of that was fueled by the high network costs and we've talked a lot about what made Block lower margin in the past. And so by removing those costs from both there for our revenue as well as our cost of revenue then the margin now for the company is going to is going to be more reflective of the non-Block business in the past. And so that that's what you should expect to see.

Understood. And just kind of going back to Simon your comment with regards to embedded finance being sort of it seemed to me an overwhelming portion of the newer bookings. Could you maybe break that down for us in terms of the types of use cases and types of functionality that you bring into the table for that?

Sure absolutely. The good news here is that the use cases are diverse based on the segment and also their diverse from a global perspective. I’d say the there's few core use cases that are coming to us one from the retail and the broader retail and the marketplace is they're looking at us for three types of solutions; the first one is your traditional co-brand so you create basically a co-brand card but it interacts with the marketplace. So as consumers go to the marketplace and shop, the behavior of the card especially in terms of rewards is actually changing. So the card is alive [Ph] the second thing they're looking for us is bonus sale lending whether it's BMPL or something more creative like that whether they do it themselves or they do it with partners of ours, and last but not least, seller financing. So given that we can cover all these bases because of our credit solution, we become attractive to the retail marketplaces in general. The second I'd say, a used case that's growing fast for us is accelerated wage access, whether it's shift or did work or actually that are in liquid marketplaces or in large retailers that do employ a large contingency workforce that actually use case, sell at a wage access getting a pay card that they get their wages immediately without burdening their working capital is something that I’d say is a very strong demand and it's global. Third thing is, expense management and supply payments in card defying those. So using the card networks, Visa and Master Cards and others in order to streamline and simplify supplier payments, even extending credit to some suppliers given the economical situation. I think that gives you some flavors of the breadths and depths of the solutions that we're seeing, there's a lot more.

And Ashwin I just realized that I didn't answer the second part of your question in terms of looking at things on more of a gross profit basis. So you're right, I think what we we don't look as much at the gross profit margin because for things like in the credit business for example, you do have a little bit of a higher cost to deliver that product but you can charge for it so the margin might be a little lower than in debit but the gross profit take rate so how much money you're making in gross profit for every dollar volume is better and so that typically what we tend to really focus on, that also helps us normalize the differences between our powered by and managed by businesses, right, that have very different revenue structures but on a gross profit basis they're much more comparable, so that's really the lens with which we evaluate the business and existing customers as well as new customers when we're bidding on business.

Thank you for that. Thanks.

Our next question comes from Craig Maurer with FT Partners. Please go ahead.

Yes hi thanks for taking a question. Wanted to ask about the new BIN sponsorship in Brazil, Brazil is a pretty crowded market with some strong issue of processors and wanted to ask what your expectations are for that market and whether or not you're seeing demands from players outside Brazil looking to issue in Brazil and that might be part of the motivation thanks.

Great, great question. And we agree, Brazil is a moving very fast. Craig to be to answer you directly most of the demand we're seeing today given kind of where our brand resonates is international customers that are expanding into Brazil. And that's where we're getting I say the most tractions. That does not mean that since we're there we will not take what I call domestic companies that are looking to grow, but the vast majority of what we have in the pipe is U.S. companies or European companies setting their eyes on Brazil to expand.

And because it's so seamless Craig to do that on our platform what we often find is with our some many of our multinational customers once they use us and expand in a few markets and they see just how seamless and easy it is then they then what's -- once they’ve done a couple then they say okay we need to sit down and talk about where else I want to go, because we make it pretty pretty pain free and that's that's pretty unusual in our business that you could move from market to market and not have to do new integrations and new setups.

Thank you.

Our next question comes from Bob Napoli with William Blair. Please go ahead.

Thank you, Simon, Mike and yes good to get that deal behind you. I know you had mentioned I wasn’t clear though on EBITDA positive exiting 24s, just any thoughts on, I know you've been working on this deal for a long time and profitability post deal, so just any thoughts on what kind of when you're EBITDA positive post this deal and what you think the long-term model looks like from a growth and profitability perspective now that this deal is behind you.

Yes thanks for the question Bob. I think that the way we look at it is I think probably consistent we may have talked about in the past, which is as a platform business we sort of naturally get the scale benefits and up until really I guess the power acquisition was the last piece. Last year we added our banking and money moving capabilities. We added our risk products, we both those were done sort of in the second half of 2022 and then we acquired Power early this year. And we really feel like that has put all the key components of the platform are in place of course we will still add capabilities, but the foundations and the anchor tenants if you will are in place. And as well in addition to that we've built up a good size team, where we feel like we have a lot of investment capacity to continue to support our growing business and continue to innovate. So what that means is we, we can start lowering or slowing the pace of our incremental investment given that we have the platform is ready and we're more just making improvements to it, and we have a lot of capacity to do so. And if you then see the new sales kicking in, and us laughing some of these all the renewal activity that we've done and we've said in the past that a lot of these deals are more than three years so you're looking at deals that are pushing out 26, 27, 28 we think the combination of those two factors means we're going to get back to an exciting growth and we will very quickly may be adding profitability in chunks, right. It's not going to be this slow ascent we should be able to deliver pretty strong growth profit growth without high expense growth at least for a year or two to make a lot of progress in the profitability we can deliver.

Thank you. I guess just on and maybe follow up on Power and on the credit business how and maybe a little bit more color on how Power is progressing the cross sell capability and just the outlook that you see for your credit business.

Sure, progressing well. So we've done integrating the technology. Now our customers can get the APIs and start testing. So in terms of cross sell, the nice thing here, Bob, is that Marqeta has been in the credit business. It has not been the program manager. So our pipeline did not start right after the acquisition. Our pipeline was actually booted up before. So we have very strong deals in the pipeline and we're comfortable. We're going to close if you strong partnerships in the next half of the year.

Yes, the only thing I would also add, Bob, as I feel like we're also getting a little bit of a halo benefit from the acquisition in the sense that we have customers or prospective customers who may be looking to do debit first, but they, they know they might want to do credit in the future and the fact that they could do that seamlessly with us is a big benefit. And vice versa, customers who may be looking for credit product, but they say, might we do something in debit on the road. Yes, and the fact that we could seamlessly do that with you is it is a big benefit. And so I think that's also helping us just more broadly in our sales, not just credit sales.

Thank you.

Our next question comes from Bryan Keane with Deutsche Bank. Please go ahead.

Hi, guys. I'm also echoed my congratulations on the deal. Just the clarification, I wanted to try to isolate business loss with Block either going in-house or any work going to competitors. And then what new scope work is expected from the contract of any.

Good, good question. I don't believe there's anything going in-house that we know about. So from a dramatic perspective, it is continuing and strengthening our partnership. There's a lot we're doing with Block across the board and ranges from small changes to programs to some really cool and highly innovative products. That will probably see the light of day in the next six months to 12 months early to talk about, but there's a lot being worked on.

Got it, got it. And then once we get past, we anniversary this contract renewal for just a Block aspect in the second half of 2024. How will the contract grow will they grow by, Cash App transaction growth or accounts or in will it have positive growth with the growth of the business.

Great question. Mike, do you want to take it?

Yes, so we'll continue to grow. We have it set up where, the best way to set up these contracts we believe Bryan is to make it a win-win. So the way you try to set up the pricing and the tiering is that as they continue to get bigger, it's still accretive to us, but they maybe get a little bit, they grow a little faster than we do. So they accrue a little bit more of the upside as they get bigger as they should, but we still get nice growth as well. And so that's really how we tried to set it up, which aligns our interests and is a win for both parties.

Got it. Thanks so much.

Our next question comes from Andrew Jeffrey with Truist Securities. Please go ahead.

Hey this is Julian Broche on for Andrew. Thanks for taking the question. Switching gears here from some Cash App questions. What is your primary competition on earned wage access? I know you touched about it. There's a lot of them on the call here. You said strong. There was strong demand and it's global business. So kind of what is your primary competition there?

Yes. The way we've implemented accelerated wage access is actually unique to market up. I don't want to go into an extreme level of detail, but it's done in a way that the companies are not draining their working capital. So there's no solution in the market today that does what we do. Now that's something specific. Now in broader terms, there are, I say, independent software developers, some of them based on market us, some of them others that take an independent approach like their fintechs, they go to a labor market place and say I give you a solution. So that is there, but also it depends on the size of the marketplace. And we have some very deep relationship with some of those eyes, these like branch, we work very closely with them on accelerated wage access and they're a great customer of ours. So I mean to summarize, I'd say the way we've done it, no one has done it this way, but it doesn't mean that that, there's other perspectives on how people can implement accelerated wage access. Again, what we're trying to do the accelerated wage access is to, to be the entity that gets the employee what they want, without having the, without burgeoning the balance sheet of the technical employer.

Got it. Thank you for the clarification, that's helpful.

Sure. Maybe time for one last question?

Sure, our next question comes from Jason Kupferberg with Bank of America Merrill Lynch. Please go ahead.

Hey, this is Kathy Chen on for Jason, thanks for taking the question. Just quickly wanted to ask about July trends, anything you can share there relative to June or the second quarter around TPV or ticket size, maybe managed by versus powered by, any color there? Thank you.

I would say overall, the trends are stable. We're not seeing a meaningful change in the trajectory of the business. So yes, steady as it goes.

Okay, if I could sneak in a quick follow up, I know you got to jump for the second quarter, you guys had some unexpected incentive benefits. Could you just elaborate a little bit about that, how much did that contribute to growth, profit growth in the quarter and just to clarify you're not expecting that continue into the third quarter, correct?

That’s correct. So our gross profit growth was about five points faster than we expected and roughly two thirds of that is driven by these unexpected incentives and really how it came about is we're obviously in close contact with all the networks and constantly talking about the business that we're doing together. And as part of that, we discovered that we had actually been owed more incentives than we had been paid in the past. And so, as part of that discovery, we were, we were, I guess, paid our appropriate compensation and so that was really just a onetime catch up for prior periods that we benefited from. So it's not something that we'll reoccur.

Great, thanks so much, guys, and congrats on the quarter.

Thank you. Maybe we do have time for one more.

No. There are no more questions in the queue.

Oh, perfect. Thank you.

Right. So our Q&A session has been concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.