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

Marqeta, Inc. (NASDAQ:MQ) Q4 2023 Earnings Call Transcript February 28, 2024

Marqeta, Inc. beats earnings expectations. Reported EPS is $-0.08, expectations were $-0.09. Marqeta, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Marqeta 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.

Stacey Finerman: Thanks, operator. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website, including our annual report on Form 10-K for the period ended December 31, 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.

Simon Khalaf: 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 the Cash App renewal. Gross profit for the full year was $330 million, a 3% increase compared to 2022. Gross profit was negatively impacted primarily by several renewals, particularly Cash App and changes in our Visa incentives at the start of the year. I'm thrilled with these financial results, and thank you to all Marqeta'ns who have made this possible. Outside our fewer financial performance, we've delivered on product innovation, sales growth and operational efficiencies. In 2023, we greatly enhanced our credit platform. We added credit program management capabilities with the acquisition of Power and quickly executed the integration to launch a unified modern credit offering.

The two commercial deals we recently signed are characterized by their ability to bring an embedded experience to their end customers, made possible by Marqeta's flexible platform. The first deal we signed was with International Travel Solutions or ITS. ITS is a successful travel management company with a substantial customer base. ITS plans to use the Marqeta credit platform to build an unsecured credit card for its end users. ITS chose us because of our established reputation in modern card issuing, not to mention our ability to offer solutions with a significant amount of customization and control, which is critical to travel management. With our partnership, ITS can launch and innovate faster to meet the ever-changing demands of its travel partners.

Additionally, ITS can personalize its offering to its partners, allowing them to run their business more effectively by providing more robust controls over their travel expenses. For example, ITS expects to enable carbon impact tracking to help partners make conscious decisions and provide dynamic rewards to enable more customized incentives. We also signed another commercial credit deal, albeit for a very different use case. Affinipay, is leader an online payment and software solutions for professionals will partner with Marqeta to launch its planned LawPay Visa credit card embedded within the MyCase platform. The first comprehensive solution in the industry that helps law firms pay, track and manage firm and client expenses. Affinipay selected us because of our trusted platform for building card program management at scale that are dynamic, flexible and tailored to customer needs.

By partnering with Marqeta, MyCase Smart Spend users will have a comprehensive, easy-to-use platform that gives them access to real-time card issuing, transaction data and spend controls to their credit card offering. This helped cardholders stay on top of business expenses and access capital easily, all from a single dashboard. Smart Spend will be rolled out to other Affinipay product, CASEpeer, and LawPay in the end of 2024 and beginning 2025. Let me talk about the progress we made in our go-to-market approach. As we've previously discussed, we have overhauled our go-to-market operations to better capitalize on the embedded finance opportunities. These changes included reorganizing the sales force, realigning our compensation structure and shifting the focus of the sales organization more towards full solution selling such as accelerated wage access, SMB credit, as well as co-brands.

These changes resulted in bookings growth of over 50% in 2023 compared to 2022. Specifically, in the fourth quarter, we captured another solid slate of bookings, generally in line with the makeup of what we saw during the year. Expansion deals with existing customers came in at approximately 60% of total bookings. Although most bookings came from North America, 20% of the deals came from Europe and predominantly from net new customers, which bodes well for the future of that geography for Marqeta. Like previous quarters, we also won multiple deals through flipping volumes from our competitors as customers sought out Marqeta's proven scale, flexibility and expertise in modern card issuing, which was lacking through their current provider. In addition to growing our bookings, we also made great strides in accelerating the time to launch for new programs signed to convert these bookings into revenue and gross profits faster.

On average, the time between close and launch in Q4 of this year was about 100 days better than the previous year. This was achieved without adding significant resources by focusing on solutions architecture and using preconfigured card constructs. In other words, while we designed innovative solutions for our customers, we also rely on our expertise to create a plan that will be approved by other members of the payment ecosystem such as banks and networks. Moving back to product. Another area where we invested in 2023 was our reliability and continued ability to scale. The results from this investment can be seen in our transaction success rate metrics for the 2023 holiday season, which increased by 3 basis points. This is remarkable when one considers that on our peak day in 2023, our platform saw over 40 million authorizations, up 66% compared to the peak day in 2022.

This improvement occurred simultaneously with efficiency initiatives that rightsize our technology spending, but also increased investment on multi-region authorization, demonstrating that we are focusing on the right efforts when considering the reliability of our platform. In summary, in 2023, we focused on building the solid foundation for a growing and profitable business in the long run. We went broad, building out our platform and reorienting our sales teams to a proven and winning solutions. In 2024, we plan to accelerate what we started and the return to strong revenue and gross profit growth as we bring to life new and exciting solutions with our fintech customers and prospective embedded finance customers. Our ability to offer credit, debit, banking and risk solutions at scale positions us well to unlock the massive embedded finance opportunity that's ahead of us.

We've only just begun to execute over the strong foundation we have built. With that, I will turn it over to Mike for a more detailed look at our results for the quarter, the full year and financial outlook for 2024.

Mike Milotich: 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.

A financial services team at work reviewing customer data on their digital bank.

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 59 point growth headwind related solely to the revenue presentation change resulting from the Cash App renewal. As we've described previously, this change in revenue presentation is related to the costs associated with Cash App's primary payment network volume. Previously, the bank and network fees associated with the primary network volume were included in net revenue and cost of revenue. Starting in Q3 2023, these costs are netted against revenue.

There's an additional 10 percentage point decline in net revenue growth due to the Cash App renewal pricing. Non-Block revenue growth accelerated by more than 5 points as we begin to lap prior year renewals and newer, faster-growing solutions such as BNPL, pay anywhere cards and accelerated wage access increase in their contribution. Block net revenue concentration was 51% in Q4, increasing 1 point from Q3 due to seasonality. Our net revenue take rate remains unchanged from last quarter at 19 bps. Excluding Cash App, the net revenue take rate has remained consistent over the last three quarters despite the lower take rate powered by Marqeta TPV growing faster than managed by as we continue to move beyond the period of heavy renewal activity.

Q4 gross profit was $83 million, contracting 4%. Similar to net revenue, gross profit growth, excluding Block, also accelerated by more than 5 points. Three factors continue to weigh on gross profit growth. First, the Cash App renewal lowered growth by mid-20 percentage points. As a reminder, the Cash App revenue presentation change does not impact gross profit. Second, non-Block renewals between Q2 2022 and Q1 2023, lowered growth by low to mid-single digits. These customers represented approximately 50% of our non-Block TPV and the effects of these renewals will be fully lapped in Q2 2024. Lastly, we lost full Visa incentives for two of our customers at the start of 2023, lowering growth by low to mid-single digits each quarter until we lap this impact in Q1 of '24.

Our gross profit take rate was 13 bps consistent with last quarter. The gross profit take rate outside of Cash App increased 1 point from last quarter due to higher network incentives. As expected, the gross profit margin was 70%. Q4 adjusted operating expenses were $80 million, a decrease of 16% year-over-year due to realized savings from our restructuring in late May, as well as efficiency initiatives in our technology and professional service expenses. These savings were achieved without sacrificing innovation, compliance or platform resiliency. On a sequential basis, expenses grew 7% quarter-over-quarter, largely due to an increase in professional services, which tend to increase in Q4 due to the timing of audit fees as well as product and security assessments.

Q4 adjusted operating expenses were over $3 million lower than we expected, mostly due to investment timing delays, particularly hiring as we just recently established an office location in Poland, which we intend to utilize for a significant portion of our headcount growth. Q4 adjusted EBITDA was positive $3 million, a margin of 3%. Interest income was $15 million, driven by elevated interest rates. The Q4 GAAP net loss was $40 million, including a $10 million noncash post-combination expense related to the Power acquisition. During Q2, we announced the buyback of $200 million. As of the Q4 quarter end, we purchased 31.3 million shares for an average price of $5.36 for $168 million. We ended the quarter with $1.25 billion of cash and short-term investments.

The full year 2023 net revenue decrease of 10% and gross profit growth of 3% did not necessarily reflect the strength of our underlying business due to the change in the Cash App revenue presentation and heavy renewal activity. 2023 was a transformative year for Marqeta putting the company on a path to sustainable growth, profitability and innovation. TPV grew 34%, and our adjusted EBITDA was negative $2 million as we restructured our cost base and focused on efficiency while securing over 80% of our TPV in renewals over the past seven quarters. We were free cash flow positive for the year. Now let's transition to our expectations for 2024. Let me quickly provide full year 2024 expectations before diving into more details on the first and second halves.

I will also call out any changes to the 2024 financial targets we shared at Investor Day a few months ago. Full year 2024 net revenue is expected to contract 20% to 24% as the change in Cash App revenue presentation weighs on growth in the first half. 2024 gross profit growth is expected to grow 6% to 9%, which equates to a gross profit margin in the high 60s. Adjusted operating expenses are expected to grow in the mid- to high single digits as we continue to operate with a strong investment discipline and focus on achieving economies of scale. Therefore, we expect full year 2024 adjusted EBITDA to be around breakeven or said differently, an adjusted EBITDA margin of around 0%. Because of the details I'll describe in a minute, we expect to be adjusted EBITDA positive in three out of the four quarters in 2024.

This expectation is a little better than what we shared at our Investor Day in November as a result of efficiency initiatives. Before I get into the more granular detail, let me first start by providing important context for 2024. We have assumed the overall macroeconomic environment remains consistent with recent trends. We have yet to see meaningful changes in the spend patterns on our consumer and commercial cards in the past several months. Therefore, we assume the current trajectory persists. Our financial performance will be meaningfully different in the first and second half of 2024, primarily for two reasons. First, the lapping of the effects of the Cash App renewal will dissipate at the start of Q3. Second, the revitalization and strength of our sales bookings since Q4 of 2022 should lead to a fair amount of new business launching and ramping on our platform throughout the year.

The contribution of these bookings to net revenue and gross profit will increase each quarter, further accentuating the difference in our first and second half growth rates. Adjusted expense growth will also be meaningfully different in the first and second halves of 2024 due to our restructuring executed at the end of May 2023. Our expense base was meaningfully different in the first five months of 2023 than it was in the last seven months. The difference was further exacerbated by the fact that we did not reinvest some of the savings in new initiatives and focus areas as quickly as we intended, as we referred to in my Q4 2023 comments. Therefore, our second half 2023 adjusted expenses are unusually low. Now let's turn to the first half of 2024.

For Q1 2024, we expect net revenue to contract between 45% and 48%, including a 65 to 70 percentage point negative impact of the Cash App renewal, mostly due to the revenue presentation change, consistent with what we have seen in the last two quarters. We expect Q2 net revenue to contract in the same range. As expected, this is a few points lower than the second half of 2023 due to the unfavorable business mix and slower growth from a few of our customers without much contribution from new program launches at this point. Q1 gross profit is expected to contract between 8% and 10% with a gross profit margin in the high 60s. We expect gross profit to contract in the same range in Q2. However, the Q2 gross margin will be approximately 7 points lower than Q1 as our network incentive tiers reset in April with our two largest network partners.

The first half gross profit contraction is now expected to be a little worse than what we shared at our November Investor Day due to unfavorable business mix and revised expectations for the timing of when some key customers will achieve certain price tiers based on their TPV trajectory. Q1 adjusted operating expenses are expected to shrink in the mid-teens, similar to Q4 '23, but with some ramp in hiring results from the delays I discussed earlier. In contrast, we expect Q2 adjusted operating expenses to grow in the mid-single digits. In Q2, we'll begin to lap our restructuring from last May, and we'll incur additional costs from our reinvestment in hiring as well as investments and platform resiliency to support our scaled customers. Therefore, Q1 adjusted operating -- sorry, therefore, Q1 adjusted EBITDA margin is expected to be in the zero to positive 2% range.

This is better than what we shared at Investor Day due to our investment delays and increased efficiencies we realized in Q4 '23. We expect Q2 to be our only negative adjusted EBITDA quarter with a margin in the negative 79% range due to a combination of the resetting of our network incentives weighing on gross profit and additional investment needed to support our growth. In the second half of '24, our business performance metrics are expected to improve significantly after lapping almost all of the major renewal activity, particularly Cash App. We expect net revenue growth in the second half of 2024 to reaccelerate to 23% to 26%, primarily driven by three factors. First, lapping the Cash App revenue presentation change; second, realizing existing customers' growth as we lap all the elevated renewal activity, and third, benefiting from the ramping new programs as we progress through the year.

Second half 2024 gross profit growth is also expected to be in the 23% to 26% range, consistent with net revenue. This second half gross profit growth is expected to be a little higher than what we shared with you at Investor Day due to positive business mix and expected shifts in a couple of existing program constructs where we currently incur excessive network fees. Second half 2024 adjusted operating expenses are expected to grow in the high teens as we continue to invest in growth initiatives and resiliency, combined with the fact that we grow over the unusually low expenses in 2023 as our post-restructuring reinvestment was delayed. Therefore, we expect second half 2024 adjusted EBITDA to be positive 1% to 3% margin, a little higher than what we shared at Investor Day due to higher gross profit.

In conclusion, we are exiting 2023 with great business momentum and a solid foundation to deliver sustainable growth, profitability and innovation in 2024 and beyond. Our excitement and confidence is primarily driven by three factors. First, by renewing over 80% of our TPV in the last seven quarters, most of which are in contracts of at least 4 years, we have secured our attractive customer base and opened up potential cross-selling opportunities as we continue to expand our platform capabilities. This was short-term pain for long-term gain. Second, we are starting to get contributions from ramping new use cases such as BNPL anywhere cards and accelerated wage access. As we move through 2024, this will be combined with ramping new cohorts that result from our improved sales performance that delivered over 50% bookings growth in 2023.

Third, we are getting early customer traction with our new credit capabilities, signing our first two customers to leverage our fully modern scaled issuer credit platform for innovators. Although this won't meaningfully contribute much to the 2024 P&L, credit will be a meaningful driver of future growth. Fourth, Marqeta's differentiated platform in terms of both breadth and depth of our capabilities gives us an outsized market opportunity as many fintechs continue to thrive, combined with the continued emergence of embedded finance use cases. Lastly, we have achieved a more efficient cost structure while maintaining compliance, security and innovation that will power profitable growth for years to come. Starting in the second half of 2024, our business and financial metrics are expected to reflect this momentum as we return to growth.

We are excited to share our progress with you in the coming quarters. I'll now turn it back over to the operator for questions.

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