Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Marqeta Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Stacey Finerman, Vice President of Investor Relations. Thank you. And you may begin.

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, 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’d like to turn the call over to Simon to begin.

Thank you, Stacy, and everyone, for joining us for Marqeta's fourth quarter 2023 earnings call. Last fiscal year was a transformative year for Marqeta, and I'm excited about the foundation laid for the future of our company. I'll briefly touch on our results for the fourth quarter and full year '23 before sharing exciting developments at Marqeta. The last term we spoke was after we released our Investor Day materials, which detailed the changes we made throughout 2023 and the opportunity ahead of us in 2024 and beyond. This most recent quarter demonstrates the focused effort made during 2023 is starting to pay off and has set Marqeta on a new trajectory. This path will lead to sustainable growth, profitability, innovation and a great ability to capitalize on the fast-growing embedded finance market. Total processing volume, or TPV, in the quarter was $62 billion, an increase of 33% compared to the same quarter of 2022. Our net revenue of $119 million in the quarter contracted 42% year-over-year, which included a decrease of 59 percentage points from the revenue presentation change related to our Cash App contract renewal. Our gross profit of $83 million contracted by 4% versus Q4 2022, primarily due to the Cash App renewal pricing. Our gross margin for the fourth quarter was 70%. Our non-GAAP adjusted operating expenses were $80 million, a 16% decrease versus Q4 2022 due to our restructuring, operational efficiencies and delayed investments, resulting in a positive adjusted EBITDA of $3 million in the quarter. On a full year basis, TPV was $222 billion, an increase of 34% compared to the previous year. The full year net revenue was $676 million, representing a 10% contraction from the previous year. This includes a 31 percentage point decline related to the revenue presentation change resulting from…

Thank you, Simon, and good afternoon, everyone. As expected and consistent with last quarter, net revenue and gross profit contracted due to the Cash App renewal with the majority of the renewal impact on revenue resulting from the revenue presentation change. Q4 was a strong finish to the year with TPV growth of 33% and better-than-expected results for net revenue, gross profit and expense driving positive adjusted EBITDA. Net revenue and gross profit outperformed due to stronger-than-expected TPV growth, particularly in BNPL, on-demand delivery and accelerated wage access, as well as higher network incentives, continued execution of efficiency initiatives, such as streamlining technology spend as well as delays in planned investments, coupled with higher gross profit led to $3 million of adjusted EBITDA in the quarter. I will share the Q4 highlights before spending more time detailing our expectations for 2024. Q4 TPV was $62 billion, growing 33% for the third straight quarter. Non-Block TPV grew approximately 10 points faster than Block growth. The financial services vertical continues to grow a little faster than the overall company, helped by the rapid ramping of accelerated wage access TPV, which now contributes about 3% of total company TPV. Lending, including buy now pay later grew several points faster than the overall company due to a strong holiday season and the continued adoption of our BNPL customers pay anywhere card solutions. On-demand delivery continues to grow in the double digits due to consumer adoption of new services and merchant segments, as well as geographic expansion. Expense management growth reaccelerated this quarter, but it's growing a little slower than the overall company as this vertical matures. Q4 net revenue was $119 million, a contraction of 42% year-over-year. The key drivers of our net revenue growth are as follows. The most significant impact was the…

Thank you very much. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Timothy Chiodo of UBS. Please go ahead.

Great. Thank you for taking the question. I wanted to touch on accelerated wage access a little bit. So you had the two large customers to start with Uber and also the One App [ph] One App was it becoming the default for all Walmart employees as new employees have come on and others have rolled off or left the company. Can you just talk a little bit about the traction that you're seeing with the offering with that one large customer? And related, you had mentioned that there were others coming down the pike in terms of your pipeline for accelerated wage access. Could you just give a brief update on what that looks like now a few months later?

Hey, Tim, Simon here. Thanks for the question. We are indeed extremely excited about accelerated wage access. So the trend is extremely healthy and accelerated wage access is now about 3% of our processing volume, up from an insignificant number in 2022. So I mean, to put that in perspective, you're looking at about an annualized $7 billion of pay that is running through the Marqeta pipes. That's a massive achievement. We can't comment specifically on individual customers, but the trend is extremely healthy and so is our pipeline. I mean, at the end of the day, look, I mean, our solution is kind of a win-win-win. Our approach actually benefits the actual employer that has a contingent workforce because they can retain the working capital but at the same time, give accelerated wage access to their contingent. And of course, the associates or the contingent workforce gets paid instantaneously, and we save the employer money. So they actually make money. So you're taking effectively an expense line and moving it into a revenue potential that could be returned to the contingency in terms of rewards and discounts. So I mean, the win-win-win gives us ironically an accelerator, and we're extremely excited about it.

Thank you very much. The next question is from Ramsey El-Assal of Barclays. Please go ahead.

Hi. Thanks for taking my question this afternoon. It was great to hear you signing some credit deals, can you comment on the credit pipeline and just signals you're picking up in the marketplace in general about the demand environment for credit. And maybe even to put a little nuance on it in the context of the sort of embedded finance use case that it seems like you're winning?

Yes. Thanks, Ramsey, for the question. The pipeline is extremely healthy. As we stated many times, we actually did expect the consumer credit demand to be high. What we were positively surprised by is the SMB credit demand. And especially from, I'd say, aggregators or platforms that have established relationship with SMBs and have great purview and visibility into the performance of these SMBs and can help with getting them credit because they know what their revenues are going to be, so they can diminish the risk. So I would say across the board, our credit pipeline is extremely healthy. And I would say that the vast majority is in the embedded finance, whether it is commercial or consumer, I mean that's the space we're playing in. So there could be a bias because that's what we're actually chasing. But also from a demand perspective, I would say, between SMB credit and new modern day co-brand, I think there's plenty of innovations to simply drive user engagement and change online commerce and not just payments. So we're very excited about that.

Thank you. The next question is from Tien-Tsin Huang of JPMorgan. Please go ahead.

Thank you so much. Really strong bookings with what was up 50%, I believe. I'm just curious, does that include any wins with the potential for clients to become maybe top 10 down the road? Just a little bit more context on the type of stuff that you're adding and also just your confidence in your ability to replenish that pipeline and backlog. Are there large deals out there to win versus 90 days ago? Thanks.

Hey, Tien-Tsin, Simon here. Thanks for the question. I mean, let me start with your last. Our ability to replenish the pipeline is actually very strong. We have drained the pipeline or accelerated or artificially accelerated any deals. Quite the contrary. Our pipeline is actually growing very efficiently. In terms of the customers, we have closed absolutely. I mean all of them could be big. It takes time. I mean you understand this industry, it takes time to ramp. But all of them have great potential and transformative potential. I mean not at each one of them, but there's definitely quite a few that we're very excited about. And ability to capitalize on the pipeline, we do have an aggressive plan, but we feel comfortable about it.

Thank you. Next question is from Darrin Peller of Wolfe Research. Please go ahead.

Guys, hey. Thanks. A couple of things. Just number one, it looks like when we see the -- all the adjustments that would sort of normalize for gross profit, a bridge to normalized gross profit growth, we're coming out to the -- well into the high 20s percent growth. And I know there's obviously some element of cadence as the year progresses as your second quarter starts off with incentive rebuild, et cetera. But maybe just talk about that nuance to make sure we're in the right ballpark first. And second of all, you talked about the second half being a little bit better, Mike. So any more color on what's gone well there would be great.

Yes. So the first question, I would say it's probably more closer to mid-20s. We were negative 4% on an adjusted basis, as you mentioned, we were negative 4% in our reported results. The Cash App is mid-20s. And then Visa incentives and renewals are both kind of low to mid. So it kind of puts you low to mid-single digits that is. So it's a total impact of, say, around 30%, plus or minus, which puts you kind of on an adjusted basis in the mid-20s percent growth, which is now what we're sort of saying we expect the second half to be is in that 23% to 26% gross profit growth range in the second half of 2024 once we've lapped most of these things. The biggest, I guess, benefit we're getting compared to what we knew a few months ago when we had Investor Day is some of it is a little bit of business mix, as you know, in our business between all the different use cases and -- and is it physical or virtual card? Is it powered by managed by, like we have lots of different gross profit take rates on our volume. And there's a little bit of positive mix there. But I would say the bigger factor is that we have a couple of programs right now where we feel we incur sort of excessive network costs. And we're always working with our customers to try to optimize how their program is operating, both for their benefit and of course, ours as well. And this can take the form of how they're looking at declines. And are they really optimized based on the way their program is set up? Are they incurring sort of unnecessary costs? Or the same thing can happen in cross-border? How exactly is their program set up for cross-border? And as you know, those come with much higher fees associated with them. And so are there changes that can be made. And we've identified some changes for a couple of our programs that are in flight right now that we expect to be fully in place for our benefit in the second half. These kinds of things are always opportunities you're hunting for, but you don't really count on them. They are a lot like how flips. I would say how we think about flips. We're always, of course, going after flip volume, but you don't count on flip volume when you're projecting business into the future. So that's really what's driving the upside in the second half. And that's a great win because it's really a structural benefit for our -- for those programs and therefore, our P&L.

Thank you. The next question is from Bryan Keane of Deutsche Bank. Please go ahead.

Hey, guys. I just want to ask about the bookings ramp. It sounds like Simon, you've closed some of the time to ramp. Can you talk about that as the bookings, the 50% growth in bookings kind of unfold in 2024? And do we still expect kind of the $20 million in revenue in '24, $50 million in '25 million and $150 million and '26 million from these bookings? Just trying to get the cadence down correctly in the ramp times? Thanks.

Yes. Hi, Bryan, thanks for the question. Yes, it's about right. I'd say we are on track to deliver the number that we kind of pegged at Investor Day. So the 20, 50 and 150. So I mean we're always working to accelerate those. But I think that's the right range. So we're very comfortable with these numbers.

Thank you. The next question then is from James Faucette of Morgan Stanley. Please go ahead.

Great. Thank you so much. I just wanted to ask quickly on the long-term FI opportunity, just there's some opportunity to win some de novo at some of the top 10 banks. How long do you think it will take for those stacks to catch up such that adoption of Marqeta becomes easier? Just trying to think about ongoing penetration into more of that broader market?

James, yes, thanks for the question, Simon here. So we're still on the same time line. There is definitely a lot of conversations with large FIs, but I do believe we're still on the same trajectory. The majority of the growth we will witness over the next 2 years will be from fintechs and embedded finance customers. But as I'd say those players take share, either de novo or take spending share, it's going to be extremely hard for the financial institutions not to look and say, hey, what's going on here? And we expect that trend to start materializing exactly what we've guided in the '25, '26 time frame.

And just to add one thing, James, to that. I think that we fully expect that the initial opportunities are likely to come on the commercial side as well because if you look at what's happening with some of the more modern sort of expense management and corporate card issuing platforms, several of those companies have gotten to be quite big and starting to capture larger and larger accounts. And so we believe that there's a little more activity within large banks on the commercial side to sort of counteract the impacts that might be seeing from those companies. There's less of that so far on the consumer side. We hope to, I guess, propagate that in the future with people coming on board and doing some modern co-brands with our new credit capabilities. But we would expect the initial traction is much more likely to be in commercial than it is in consumer with large FIs.

Thank you. The next question is from Andrew Bosch [ph] of Wells Fargo. Please go ahead.

Hey. Thank you for taking the question. I know you don't guide to it per se, but I just want to get a sense on how we should be thinking about TPV growth and kind of the take rate dynamics here than the '24. I know you've mentioned in the past that because of your enhanced data capabilities that your ability to forecast TPV is significantly better than it has been in the past. So any thoughts around there would be helpful.

Sure, Andrew. So our TPV growth, we expect it to be about 30% throughout 2024, and it will be relatively consistent each quarter. So just to give you a little sense, if we grew in Q4 33%. It was relatively consistent each month. October was a little lighter, November a little stronger. But in January, our TPV growth was very similar to the December growth rate. It was only one point lower. And February through the first three weeks, is looking very similar to January. And of course, we'll get the benefit of leap year at the end of the month. So I'd say the trajectory of TPV growth is sort of in that low 30s range so far and that -- and we expect about 30% growth for the year. So it will all be kind of in that same area of around 30%, plus or minus. From a take rate perspective, I think we're starting to see stability, right? We -- as we've said, we have 80% of our -- over 80% of our TPV we've renewed recently. And so as I sort of called out, if you exclude Cash App, which, of course, we're still lapping, our take rate on revenue has been consistent, excluding cash up for three straight quarters. On the gross profit side, it's actually ticked up in Q4 compared to Q3 when you exclude Cash App, which just has to do with a lot more incentives happening in the fourth quarter compared to Q3. So we expect take rate stability for the most part. There will always be some -- a little bit of renewal activity, but we'll also have new customers ramping who aren't nearly as deep into their pricing tiers as our existing customers. So we expect relative stability on that 30% TPV growth.

Thank you. The next question is from Dan Dolev of Mizuho. Please go ahead.

Hey, guys. Great results. Thank you for taking my question. I think, Simon, you mentioned that you flipped volumes from your competitors in your prepared remarks, like without naming specific names, can you give us a flavor of sort of the types of competitors that you're winning share from? Thank you.

Sure. Thanks for the question. Yes. I mean I'd say there's two flavors. One flavor is taking share from legacy. The others is, I'd say, the flight to quality. There's folks who have probably chosen an alternate processor because they were cheaper than Marqeta. But then as they scaled up, and they realized our stability, our multiple lines. And as the business scales, they're looking for a partner that can take them to the next stage. So I'd say it's a mix, a healthy mix of like taking incumbents out and also taking kind of less stable processors.

And just to add a little bit to that, Dan, I would say the -- in Q4 of our bookings, about 10% were flips and that's actually on the low side for each quarter of the year. So each quarter in 2023, at least 10% of our bookings were flipped. So I think there's a good amount of activity of as Simon was saying, people who maybe a couple of years ago made a different choice. We were a contender for the business, and we didn't get it. And now they're sort of realizing some of the benefits of -- in terms of our expertise to help them scale and grow their platform, also the reliability we provide. And so I think that's really what's helping us.

Thank you. The next question is from Craig Maurer of FT Partners. Please go ahead.

Yeah, hi. Thanks for taking the question. I wanted to come back to buy now pay later for a second. Do you expect that Block's new Cash App strategy to drive more adoption using buy now pay later will cause any inflection in volume?

We do - I mean, there's no question that the buy now pay later market is here to stay. And we're seeing two types of distribution for buy now pay later solutions. One is integration with merchants. And the other one is integration with the payment vehicle. And we are seeing I would say, higher engagement, consumer engagement with integrating buy now pay later into a payment vehicle or a card. So across the Marqeta platform and that's where Marqeta has a higher moat. So in terms of Cash App specifically, of course, I mean, Cash App is widely distributed. It's a highly engaging product. So having buy now pay later in it, which is also powered by Marqeta, is definitely a solution we're excited about. It makes sense for the consumers. It makes sense for the distribution of buy now pay later. And it's a segment that Cash App is well penetrated in.

Yes. I mean if you think about, Craig, that there's over 23 million active Cash App Card users every month. So although Afterpay has been successful for them and for our business, that's an incredible installed base. So what they talked about on their call last week makes a lot of sense to us.

Thank you. The next question is from Chris Kennedy of William Blair. Please go ahead.

Good afternoon. Thanks for taking the question. Can you provide an update on your -- on the regulatory environment for banking as a service and embedded finance and kind of how you view that operating environment? Thank you.

Thanks, Chris. I would say there's no changes. There is not much that we can talk about, either positive or negative. I'd say that the environment is -- remains healthy. I mean the great news about a lot of what's going on in embedded finance is solutions that are catering to the unbanked and the underbanked. There is no question that buy now pay later has opened the credit box and provided what is effectively lending without the 29% APR. So that's definitely helping the community. And same thing with SMBs, they're kind of like the forgotten entity. So I do -- there's a lot of goodness that is happening with these solutions. So I do -- we're comfortable with the regulatory environment. The second thing I'd say is, as a company, we have invested in program management, and we've invested in compliance. We've invested in a lot of these services because number one, we take it very seriously. And the second thing is that when we target the brands, especially in embedded finance, the last thing we want is bring them regulatory trouble. So I think we've taken this very seriously as a platform.

And I think as you maybe referred to, Chris, I mean, some of the announcements out there about SaaS platforms and some of the banks to do business with, the more of those announcements, there's definitely a component of a flight to quality, which we think we are the beneficiaries of just given our scale and the level of investment, and we were one of the first movers in this space. So we think that although it's unfortunate that there's some disruption in the marketplace like that. I think generally speaking, we're definitely more of a beneficiary than something that hurts us.

Thank you. The next question is from Cathy Chen of Bank of America. Please go ahead.

Hi, guys. Just two quick questions for me. So first, I wanted to ask about the competitive landscape. There's obviously been some headlines around corner and block with audience. Are you guys seeing the competitive landscape evolving or intensifying among the existing clients? And then just a quick clarifying question. Did you guys disclose the impact? Or was there any from Reg II in the quarter? And if there's anything assumed in the one quarter -- in the first quarter of the 2024 guide? Thank you.

Cathy, thank you for the question. I'll take the first one, and I'll toss the second one to Mike. In terms of the competitive landscape, I'd say it is more favorable than it used to be because the majority of the growth we are seeing is in the areas that Marqeta has a much higher moat. So in the onetime, I'd say the onetime virtual commercial card space. Yes, there is competition. But most of our customers buy from us or partner with us on more than that. So the growth is coming from areas where our moat is higher. So I think we're comfortable there in terms of the competitive landscape. Now that doesn't mean we're not mindful of competition on the contrary we respect it. It keeps everybody honest, and it keeps us innovating.

And on your second question on Reg II, nothing really to -- nothing really of note to point out. I think last quarter, we did have something because we were a little surprised by the changes that went into effect and the degree to which the mix of volume changed, which is very relevant for us in cash up now based on the way the accounting change in the renewal. So that was something where we just didn't expect as much shift as we saw and that impacted our economics a little bit in Q3. But with that knowledge now, Q4 was largely as expected, and there's nothing we see or I've assumed in '24, that's noteworthy.

Thank you. The next question is from Andrew Jeffrey of Truist Securities. Please go ahead.

Hi, good evening. Thank you for taking the question. I wanted to ask about expansion deals. It sounds like or expansion of existing relationships, it sounds like that was a call-out growth driver as well last year. Can you talk a little bit, I guess, you said perhaps 60% of total bookings for expansion deals. Can you talk a little bit about additional capabilities and how you're monetizing existing customers at an improving rate that way you are?

Yes. Absolutely, Andrew. Thanks for the question. There's many angles to this. I mean, what we've done over the last year is focused on solution selling. Like if you look at the trajectory of Marqeta, that I would say there is neobanking, then buy now pay later, then expense management and on-demand delivery, and we started working on accelerated wage access, SMB credit and co-brands. So -- and all of them processing is kind of the least common denominator. And just in time processing is the least common denominator, everybody uses it. And then as we started rolling out like banking-as-a-service product, program management such as disputes and chargebacks, risk solutions, those are kind of like good add-ons. But I'd say what also has happened is a lot of our customers started launching multiple programs with us. Like as an example, the buy now pay later community, most of them started with a solution that integrates with merchants. And all of them are now moving, I'd say, a good majority of them actually either integrating into a payment card or having a payment card like a super card. So they launch more programs with us. So I'd say it is either more programs launched with us or value-added services that we are adding. The third angle is international expansion. So we've taken the strategy that we're going to basically go where our customers go. I mean, with reason and efficiency. So a lot of them -- a lot of the multinationals are -- they want to code once and deploy everywhere. And Marqeta gave them that ability. So that's the third dimension of expansion. So in summary, I'd say, first one is launching more programs. The second more value-added services. Third one is international. Now looking forward, credit is a phenomenal opportunity to a lot of the debit partners we have. So we are in deep conversations with a lot of our customers that use us for debit and they want to use us for a credit as well.

And another example that I would just add to what Simon just said is they might look at credit or maybe they have something that's customer-facing. And now maybe we're engaged on something that's more employee-facing on accelerated wage access. So as we add to the use cases and the breadth of our platform, there's lots of different opportunities that we can discuss with our customers. And that's one of the -- as we go into embedded finance, that's one of the really compelling things about our platform is most of these customers are going to -- or prospects are going to start somewhere, but many of them are already big companies in their own right and are thinking a little bit bigger, and they have that opportunity to do that with one partner on the Marqeta platform that might be difficult to achieve with some of our competitors.

Thank you. The next question is from Moshe Katri of Wedbush Securities. Please go ahead.

Hey. Thanks for taking my question. Can we talk a bit about the center that you're opening in Poland? And how that could potentially bring down some of your technology or development costs down the road?

Absolutely. Thanks, Moshe. Yes, I mean we all come from a background in which we scale the organizations. And there's multiple reasons to do this. One is the talent in Poland is really good. And especially as some folks in our industry, whether it's networks or I'd say, accounting have back-end services done in Poland. The second one is strong back-end engineering, risk operations, AI, machine learning, so on and so forth. The labor market is still favorable compared to the United States in terms of availability and in terms of cost. So the areas where we are investing in Poland will help us on the risk operations, program management, as well as engineering services. And we expect also to invest on the -- what I call the back office sales organization as well. I mean, throughout my career, I've had tremendous success in Poland. So I think we're looking good there.

Thank you very much. Our final question is from Jamie Friedman of Susquehanna. Please go ahead.

Hi. Thank you. Mike, I think you said in your prepared remarks that the non-Block renewals lowered gross profit growth, low to mid-single digits. If I heard you wrong, I apologize. If so, that's the case. I was wondering how we might -- if you could unpack that a little about the inputs and how we might be thinking about that in 2024 would be helpful. Thank you.

Yes, you've got it exactly right, Jamie. This is -- it was low to mid-single digits from deals that we did between Q2 of '22 and Q1 of 2023. So in that four quarter period, we renewed about 50% of our non-Block TPV. And so the last couple of quarters, I've been calling this out. So this will lap in Q2 of '24. Now what's not in there. It's not all renewals that are non-Block. It's just within that window of time when there was just a lot of activity. And so we really just have one more quarter, Q1 of '24 before we start lapping. But you got it right. It was low to mid-single digit of gross profit growth drag in Q4 as a result of those.

Thank you very much. Ladies and gentlemen, that does conclude today's event. Thank you for attending, and you may now disconnect your lines.