Marqeta, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Marketsa Second Quarter 2021 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will open the lines for your questions. As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Stacey Feinerman, Vice President of Investor Relations, to 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 prospectus dated June 8, 2021, and our subsequent periodic filings with the SEC, such as our quarterly report on Form 10-Q, for the quarter ended June 30th, 2021. 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 may include non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for gap financial measures. Reconciliation to the most directly comparable gap measures can be found in today's earnings press release, which is available on our investor relations website. Hosting today's call are Jason Gardner, Marketta's founder and CEO, and Sherp Fay, Marketta's chief financial officer. With that, I'd like to turn the call over to Jason to begin.

Thanks, Stacey. Thank you, everyone, for joining us for Marquetta's first earnings call as a public company. It's great to be connecting with you all. We had a very successful IPO. We raised a lot of capital, and we're off to a great start. Tripp and I are excited to share Marquetta's second quarter results, as well as an overview of our business. I want to cover a couple of financial highlights about which trip will provide additional detail. Next, I will talk about three key themes for the quarter. And lastly, for those on the call who are less familiar with us, I'll provide some focus on Marketo. With that, let's begin. Our second quarter results demonstrate our solid product market fit and execution in this rapidly evolving digital payments landscape. $27 billion in total processing volume, or TPB, a 76% increase compared to the same quarter of 2020. $122 million in net revenue, a 76% increase compared to the same quarter of 2020. There are three key themes that I want to highlight from the second quarter. First, we continue to land winners. Google chose Marketo to power the launch of a digital card for Google Pay balance users, allowing them to instantly use their balance through a virtual card tokenized in Google Pay. Second, we continue to expand and grow rapidly with our current customers. We expanded our relationship with Square. Square announced Square banking services during the quarter, and we are proud to power the Square checking product. And third, we continue to build long-term relationships with our customers. During the quarter, we extended our agreement with Affirm until 2024. This is a confirmation of our enduring value of our platform and our robust partnership. Again, Trip will provide more details on our second quarter performance in a few minutes. Still, this is our first earnings call. I'd like to spend some time providing you a brief overview of Marketo, the industry tailwinds driving our growth, and a few of our strategic initiatives. Archeta created modern card issuing, which is at the heart of today's digital economy. When you think of the cards in your wallet, these do very little and have seen little innovation in decades. Now, imagine a card that could take any form factor you wanted to, solve significant payment problems at scale, and disrupt entire industries. from authorizing transactions based on dozens of dynamic criteria to allow you to pay installments to creating a brand new consumer or commercial experience. These cards can be physical, virtual, or tokenized into mobile wallets. They can be credit, debit, or prepaid, built by developers in days using cutting-edge tools instead of months. This is modern card issuing. When you order food using DoorDash or groceries using Instacart, Modern card issuing works in the background as money moves from the app to the delivery driver's card. When you buy a big screen TV and pay for it in installment using Affirm or Klarna, modern card issuing helps move money to the payment card used to pay the merchant seamlessly. Some of the most disruptive companies of the last decade, such as Square, Instacart, Uber, and Klarna, use Marketo technology at the heart of their products. We're the first modern card issuing platform built from the ground up by developers for developers in the cloud with open APIs and best in class developer tools. We believe we are the first to market with multiple issuing and processing innovation, including the first open API for building bespoke payment card solution, just-in-time or JIT funding, and tokenization as a service. These innovations put the control of designing outstanding payment experiences in the hands of customers to enable them to launch unique payment card products in a fraction of the time they could on legacy platforms. We believe that Marketa is now the de facto modern card issuing platform and that our continuous innovation further cements and expands our market leading position. We are deeply integrated with our customers in three ways, technical, experience, and partnership. Arquette's technology underpins our customers' core business or supports their core business. Our people are their trusted partners as our solutions drive their key processes. Our deep experience serving the most innovative commerce disruptors, technology giants, and financial institutions brings valuable issuing expertise to build and scale innovative programs. Additionally, we partner with our customers for long-term success. Our usage-based business model provides a win-win for our customers and Marketo. As their businesses thrive on our platform, our net revenue grows. Moreover, our customers are incentivized to bring new volume and launch new car programs on our platform as they benefit from volume-based discounts via tiered pricing. As a result, we have long-term contracts that promote and maintain alignment. Customer success is at the core of everything we do, and connect the customer is a core company value. We build technologies for people who serve people. The strength and durability of our customer relationships are evidenced by our second quarter year-over-year net revenue growth of 76%. We managed to support massive innovation for these customers at a considerable scale. Our platform operates at 99.995% uptime, but volume through the Marketo platform has increased 30x in the last four years. We operate in 36 countries and growing. We believe the opportunity within payments and modern card issuing is tremendous. There's a $74 trillion global money movement market, of which $30 trillion is international card issuing. The Marketo platform processed $60 billion last year, a small fraction of the total card issuing opportunity. With the accelerating shift to digital payments, the market continues to expand. We believe Marketa has the modern technology, deep experience, and momentum to capture a growing share of this market. We believe this TAM is a vast ocean of opportunity ahead of us as everything moves to digital electronic transactions, changing the entire landscape of how the world is moving money in the future. Marketa is well-positioned to capture this large opportunity in three ways. First, The shift to digital payments is accelerating. More and more transactions are moving online, and when they are in person, people worldwide are increasingly choosing not to pay with cash. They are choosing to pay with a card or with contactless payments. This has only accelerated during the pandemic. Second, payments are not only becoming more digital, they are also integrated more frequently into consumer and business applications. Think about the last time you used online food delivery, a messaging app, or a digital marketplace. Payments is deeply embedded as part of the experience. Software companies continually partner with payments companies to provide simple, scalable, and configurable payment services to meet their end users' needs. Third, consumers' trust in new payment technology is growing. Consumers are increasingly more confident about the use of online shopping and digital payments for safety and convenience. While the pandemic may have encouraged the use of services such as Instacart or contactless payments as a matter of safety, once consumers experience these conveniences, we believe they are unlikely to change back. Because of these three tailwinds, as well as our 11 plus years of experience, we are confident in our ability to further expand our leadership position in modern card issuing. The work we have achieved to date and our goal to be a generational business going forward is dependent on creating an atmosphere where Marketans can do the best work of their lives. To do this, we have recently added two new leaders to the executive team, and Darren Mowry, our new chief revenue officer, and Randy Kern, our new chief technology officer. Both Darren and Randy have tremendous hands-on experience in scaling large enterprise businesses. Darren comes to Marketo from leading AWS through EMEA, a business unparalleled for the innovations it has powered at scale and the same laser focus on customer success as Marketo. Randy has spent almost three decades in engineering, nearly all of it at Microsoft and Salesforce. building the technical infrastructure to support substantial high availability businesses. We are excited to see their impact on the company and have a strong belief that these are the right people to have on our executive team as we focus on capturing the vast market opportunity in front of us. This quarter marks the first step in our life as a public company. We believe we are barely scratching the surface when it comes to modern money movement. We are excited about the opportunity in front of us, and we look forward to our successful track record. With that, I will turn it over to Tripp Bay, Marquetta's Chief Financial Officer, to discuss our second quarter financial results. Thank you.

Thanks, Jason. Good afternoon, everyone. I'm excited to talk to you today about our strong Q2 financial results. and provide guidance for Q3. Given this is our first earnings call as a public company, I will talk briefly about our business model and some of the key points of our story. We're a usage-based business, a transaction-based business, an interchange-based business. We believe that total processing volume, or TPV, which increased 76% compared to Q2 of 2020, is a key indicator of market adoption of our platform, growth of our business, our ability to scale with our customers, and our customers' continued usage of the platform. TPV drives a majority of our revenue as we earn interchange fees from card transactions. We share those interchange fees with our customers so that our customers' interests are aligned with those of Marketo's. Our customers are incentivized to bring new volume and launch new card programs on our platform as they benefit from volume-based discounts via tiered pricing. This results in long-term contracts that promote and maintain our alignment. The amount we generate after our revenue share with our customers is recorded as our net revenue line item on our income statement. We also generate revenue from other sources, processing fees, monthly platform access fees, ATM fees, card fulfillment, and tokenization. Cost of revenue consists of card network fees, issuing bank fees, card fulfillment costs, and a contra line item of network incentives. When looking at costs, it's important to know that through our strategic partnerships with the card networks, we receive incentives that are earned based on achieving certain volume milestones over the year. Again, these network incentives are recorded as contra cost of revenue and therefore reduce our cost of revenue. Incentives can be earned in the quarter or on an annual basis. For certain incentive arrangements with an annual measurement period, the one year period may not align with our fiscal year. This can result in variation in our cost of revenue between quarters. Finally, Netting our cost of network fees, issuing bank fees, card fulfillment costs, and our contra cost of revenue, network incentives, gets us to Marketo's gross profit line item. With that, I wanted to turn to our results for the three-month period ending June 30, 2021, and then discuss some of our non-GAAP results. Total net revenue increased by 76% to $122 million in Q2 of 2021, from 69 million in Q2 of 2020. This was a strong result that exceeded our expectations. The increase was primarily driven by a 76% growth in TPV. Our revenue share payments increased by 78% from the second quarter of 2020. As a reminder, revenue share payments are incentives to customers to increase processing volume on our platform. As a result, net interchange fees increased 68% to $95 million. Processing and other fees increased 121% to $23 million in the quarter, primarily due to higher ATM processing volume, along with monthly fees and tokenization as a service. Let me delve into TPV for the quarter, which was $27 billion, an increase of 76% compared to the second quarter of 2020. This increase reflects outperformance from both our digital banking and buy now, pay later, or BNPL customers, mitigated by tougher comparables from our on-demand delivery customers. First, in our digital banking vertical, it's important to note that in addition to the strong adoption of these products, we also benefited from the tax season filing deadline shifting further into Q2, from April 15th to May 17th. We believe the effect of that filing delay resulted in more spending shifting into the second quarter as people receive their refunds later. Second, our BNPL customers experienced 350% growth in net revenue compared to the same quarter of 2020, demonstrating both the growth enabled via product market fit on our platform and the adoption of this method of payment worldwide. Third, The quarter also represented the first time we encountered tougher comparables in on-demand delivery as a result of the pandemic. Although growth for this vertical was down compared to previous quarters, absolute volume levels remained high. This is a testament to the enduring nature of our changing consumer behaviors, strength of on-demand delivery services, and secular tailwinds in our industry. Gross profit increased 70% year-over-year to $47 million compared to $28 million from the second quarter of 2020. Gross margin decreased slightly from 40% in the second quarter of 2020 to 38% in the second quarter of 2021, primarily due to card network fee growth, which was driven by a 76% increase in TPV and a 77% increase in the number of transactions, offset by lower growth in our issuing bank fees. I wanted to spend a little time on gross margin. Firstly, we remain committed to our long-term gross margin target of between 40% and 45%. We had a higher gross margin in Q1 2021 due to an annual recurring incentive payment from the networks. This lowered our cost of revenue and increased our gross margin by a few points. In Q2, we had higher network fee growth. Network fees can vary significantly by merchant MCC code transaction type card, not present and the like. Why we will not be providing specific gross margin guidance going forward because we're usage based business and our margins can vary quarter to quarter. We do not expect 38% gross margin as a run rate going forward and are very comfortable with our longterm target for gross margin between 40 and 45%. Overall, Our gap net loss was $69 million, driven by our continued investment in people and technology, and included $56 million in share-based compensation, of which $23 million was recorded for restricted stock units upon the consummation of our IPO. In addition, we recorded stock-based compensation of $5.8 million for secondary stock sales, which should be considered non-recurring. On a non-GAAP basis, adjusted EBITDA for the quarter was negative 10.6 million compared to a loss of 3 million in the comparable quarter of 2020. The growth was largely driven by compensation-related costs to invest back into the business to support future growth. As a note, we do view adjusted EBITDA as a useful measure for our operating profitability. We ended the quarter with over 1.7 billion in available liquidity and cash and marketable securities. Approximately 1.3 billion of that liquidity was the result of the capital we raised in our initial public offering. As Jason mentioned in his opening remarks, we're just scratching the surface of a large addressable market. Therefore, we believe that the best way to capitalize on that opportunity is to invest in our products, our technology, and our people. I'll now move on to guidance. As we mentioned in our press release, we're providing the following guidance for the third quarter of 2021 based on our current assumptions. Net revenue for the quarter is expected to be in the range of $114 million to $119 million. At the midpoint, this would represent growth of 38% on a year-over-year basis. Our range for adjusted EBITDA is negative $16 million to negative $13 million. Q2 was a strong quarter that exceeded our expectations. Q3 guidance reflects ongoing strength from our digital banking and BNPL verticals. We believe Q2 net revenue included a one-time benefit from the delayed tax season, as I mentioned earlier. If we normalize Q2 for this one-time benefit, our guidance for Q3 2021 net revenue would have represented a sequential increase quarter over quarter. The midpoint for our Q3 net revenue guidance is 38% year-over-year growth, as we will be one year removed from the Q3 stimulus of 2020. We remain very pleased with the growth we're seeing from both our largest customers and from our emerging customers, both in the near term and our forecast for the long run. In addition, our adjusted EBITDA guidance takes into account increased headcount investments. as we look to add additional talent, primarily in our product and technology teams. While we're not giving guidance for Q4, we did want to provide additional color. Historically, we have seen a positive bump in Q4 driven by increased consumer spending, which has traditionally manifested itself in our digital banking and buy now, pay later verticals, given the Q4 holiday season. In past years, we've also seen an increase in our expense management vertical due to travel. However, we remain thoughtful and prudent as we're all grappling with the changing dynamics of the COVID pandemic. In summary, we had a very strong Q2 overall and are very optimistic about the quarters ahead, our customers, and the opportunity ahead of us in modern card issuing. I'd now like to turn the call over to the operator to open up the line for Q&A. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Tinjin Wang with JP Morgan.

Thanks so much. Thanks. Good afternoon, and congrats on the first public call here and the great growth. I wanted to ask, well, overall results were comfortably ahead of our estimates. I know there are a lot of puts and takes that you just went through, but I wanted to ask simply on the revenue side, that was up handily, sequentially, while gross profit was slightly down sequentially. What would explain the difference there, if you were to summarize it?

Thanks, Sinjin, for the question, and good to hear from you. I'd say on the top line, outperformance was driven by three factors. Number one was continued strength in our digital banking vertical. The second is the BNPL, which saw 350% year-over-year growth. And the third was expense management, where we saw 100% growth year-over-year. Does that answer your first question? Happy to go on to the gross margin.

Yeah, no, for sure. Then on the gross profit side, yep.

From a gross profit perspective, I'll first start off by saying that we believe our performance in Q3 will be in line with our target of 40% to 45%. We did have a higher gross margin in Q1, due to an annual recurring incentive payment from the networks, which increased our gross margin by a couple of points. In Q2, we had higher network fee growth. Network fees can vary significantly by merchant, by MCC code, transaction type, card not present, and the like. I will point out that we did have higher ATM volume this quarter. But I think the most important message here is we believe that our performance in Q3 will be in line with our long-term target of 40% to 45%. Got it.

So you move away from some of the nuances you just called out. No, it's very clear. So maybe if you don't mind, one more quick follow-up, maybe for Jason, I'm sure. And I heard that amazing stat on buy now, pay later, net revenue of 350%. I had to read that a couple times to make sure I saw that right. So for you, Jason, you've seen a lot of use cases take off, I'm sure, right? And I'd love to hear your thoughts on buy now, pay later in general and And, of course, what the square afterpay combination means for Marketo, if you could opine on that. Thanks.

Yeah, so as you pointed to, we've seen this popularity on our platform as far as buy now, pay later. Revenue for the vertical has increased 350% from the comparable quarter of 2020. So if we point to the work that Square and Afterpay will now do, both founder-led companies, both build beautiful customer experiences, it just demonstrates that buy now, pay later is an immensely popular method of payment that we believe is here to stay. And as a reminder, I believe you know this, Klarna, Affirm, and Sezzle are also customers of Marketo. And I think this deal just simply illustrates every part of the financial services value chain can be disrupted, which plays into our strengths as a modern card issuing leader. We saw, you know, really buy now, pay later. It started in Europe with Klarna. We saw, obviously, that come to the United States with Affirm. We've seen Afterpay, who we support in the US. We support in Australia and New Zealand. continue to grow. So both of these market customers, both Afterpay and Square, coming together is pretty significant. And we believe we'll see continued growth in the buy now, pay later vertical.

Good stuff. Thank you.

Next question, Josh Beck with KeyBank. Please go ahead.

Thank you so much for taking the question and my congratulations as well on life as a new public company. I wanted to go to the Google announcement. Obviously that's a very high profile win. They have really incredible internal resources. I'm sure there are lots of other companies that were bidding for this business. So maybe just help us understand what you felt like really helped differentiate you and really create a win-win for both companies in choosing you.

Thanks, Josh. I would start their belief in modern card issuing to use the best tools in the market, the partnership, the technology, and the experience is paramount. And you're right. talks to everybody across the world that issues and processes cards, but the belief in Marketa and our technology and where we're headed was paramount for them. Our platform is simply designed to be able to help the world's most innovative companies execute game-changing products at scale, and Google chose Marketa for that. The product that we built with them is we're powering a new virtual Google Pay balance card. It allows users to easily spend their Google Pay balance through a virtual card tokenized into the mobile wallet, the Google Pay wallet, and use that accepting merchants, which we today, you know, there's a lot of merchants, especially here within the U.S., that accept that card. And before, Google Pay balance users were very, very limited into how they can use their funds. So this really opens up an entire ecosystem. I would say that the tailwinds in why we both believe in the product is contactless payments And mobile wallet usage has really surged during the COVID-19 shutdown. And consumers have significantly moved away from cash and physical cards to mobile wallets. Like my mom uses Google Pay all the time now, which is a great example. She's a bellwether for accepting technology. Marketo was one of the first companies to enable companies to instantly provision tokenized cards as a mobile wallet. And we've already done this at scale with companies like JPMorgan Square and others. So we're very honored to be working with Google and launching this product in market.

Well, congratulations. And a follow-up maybe for Tripp, you obviously have given us some very helpful context on the verticals that were particularly strong within the quarter. You had some comments also about on-demand delivery. So maybe just at a high level as you build out the forecast for the second half of the year in Q3, just anything that we should be aware of with respect to the different verticals and some of the cross-currents there.

Absolutely. Our Q3 guidance reflects ongoing strength from digital banking and BNPL verticals. We have a midpoint of our net revenue guidance of 38% year over year. We also mentioned that while we're not giving guidance for Q4, we did want to provide additional color. Historically, we've seen a positive bump in Q4 driven by increased consumer spending, which has traditionally manifested itself in the digital banking and BNPL verticals given the holiday season. You asked very specifically about on-demand delivery, and we have seen some softness in on-demand delivery, but I also want to highlight that we see continued elevated levels on the platform. And so that, in our mind, is a testament to the services that they are providing via our platform.

Congrats again. Thanks, Tim. Thank you.

Next question, Ramsey Ellis with Barclays. Please go ahead.

Hi, thanks so much for taking my question this evening. There's a lot of moving parts in the Q3 guide, lapping stimulus, timing of tax season, et cetera. Can you just review for us again sort of those moving parts and also comment on the visibility you feel you have now to Q3? I mean, maybe, you know, and compare it to sort of in a more normalized year Do you feel like you have that same type of visibility now that you had historically in the business?

Thanks, Ramsey. That's a multi-part question, so let me attack it from various ways, I'll say. We believe we benefited from the tax season filing deadline shifting further into Q2 from April 15th to May 17th. We believe the effect of that filing delay resulted in more spend shifting into the second quarter. And when we normalize Q2 without this benefit, we believe that revenue growth would have been in the low 60s to mid 60s in Q2. Comparing this to our midpoint guide of 116 and a half on a pro forma basis would be increasing sequentially, quarter over quarter. You talked a little bit about visibility to Q3. You know, I think everyone's kind of dealing with the lapping of stimulus payments from Q3 of 2020. But we feel very good about our midpoint guide of 38% year-over-year growth. Again, that's supported by our digital banking and strength in our BNPL vertical.

Okay. Okay. One quick follow-up. You know, there's been a lot of chatter recently about the durability of the small bank carve-out in the Durbin Amendment and the ability of fintechs like Marquetta to kind of issue through these small banks and earn the unregulated interchange. Do you see any changes on the horizon? I guess more importantly, if there were any changes, how would you navigate those changes?

Maybe I'll clarify.

We don't see... Yeah, I can jump in here, Troy. Yeah, so Josh, we don't see anything changing in regards to the Durbin Amendment in the near term. We keep our eye on it. It's been in place and it was meant to protect small community banks and was meant to protect consumers. A change like that would be pretty significant. to the industry, but again, we keep an eye on this stuff. We keep an eye on a number of regulations like right by eye and other things going on in the industry. That being said, we have a healthy and growing business outside of the US, which is not driven off of interchange purely. We have another business model that we've been successful in building. This is both in Europe, this is in Australia, this is in New Zealand. You know, if things begin to change around Durban several years out, you know, we'll be very, very thoughtful in regards to how we change our business model so we can maintain our growth.

Super helpful comments. Thank you.

Next question, Darren Keller with Wolf Research.

Hey, guys. Congrats on first quarter out of the gate. being strong on the revenue side. When we look at the growth rate of your story, and we looked in your 10Q, and I think it showed Square was up somewhere in the low 70s, your revenue growth obviously overall is outperforming that large customer. I think what you talked about what happened is the diversification of the business expanding from other kinds of offerings to Clearly, Buy Now, Pay Later is one of those neobanks, digital banks in general. So can you just touch for a minute again on really the differentiation on the Buy Now, Pay Later spaces or maybe just moving beyond some of what you've had as your core contributors to revenues, the tech differentiation, since I know Marquette has really been known well for things like that on-demand delivery. Buy Now, Pay Later, if you could just go through how you're winning so well there.

If you look at the companies that are on platform, Firm, Klarna, Afterpay, Sezzle, they really drive experience. They don't build one product. They build multiple products on a platform. I think that's number one. Second is through multiple geographies. We know how to operate inside of not only different regulatory environments, but different technology environments, different operational environments. This is very, very complex and experience is key. We have over 11 years of experience doing this. And just like we had built out in the beginning, we talked about this in the roadshow. When we think about commerce disruptors, buy now, pay later, or BNPL is right there. And our goal has always been to dominate a vertical, go in, land and expand winners, get the experience, and know how to operate these businesses at scale. So we do see tremendous growth. The 350% growth year over year is tremendous, and we expect to see more growth within that space. But they simply choose Marketta. We do smart deals. Our customers do smart deals. We focus on connecting the customer, leading innovation, and delivering results associated with our platform.

Got it. All right. So it seems like that can persist when we, and then just an add on question would be around the expansion from what you've been doing. And you touched on, you pretty much are started pre into credit card. I think it was really last couple of quarters. And there's also been more progress or I guess incremental partnerships with banks underway. Can you just touch on the opportunity there, mainly the credit card side and where the progress has been? Thanks for being asked.

Yeah, and we talked about this publicly. We've announced our relationship with Deserve. We have a customer already using the platform and test, and obviously we look to grow that pretty significantly. 50% of consumers in the US use credit. We know credit is going to be growing outside the US, both in Europe and one of the largest credit card markets in the world is going to be Asia in the coming years. We know consumers want more credit. So we thought very differently how we wanted to go and build. We wanted a better experience for consumers and businesses. We wanted them to be able to create just like the promise of APIs. And when we started our business is to create cards that either can disrupt entire industries or solve large problems at scale. They couldn't do that with cards that were just look like everyone else's cards delivered by banks. So we thought the same way with credit. What does the credit card of the future look like? And how can they go and build that? So we have a fairly large team here at Marketo focused on that product. We believe that product in the coming quarters will expand. We'll have more to announce there, but certainly excited about credit. And then there's a number of other areas in regards to not only issuing and processing, but car products and the uh associated uh uh processing that that goes around a lot of the tools and things certainly around um uh program management so um a lot to talk about in the future lots of run written chapters and um certainly more to come great and we're looking forward thanks jason next trip welcome thank you next question ashwin shervakar with city

Hey, guys. Congratulations. Good start in your life as a public company. Thank you. I guess I wanted to ask about Square. You know, any new work that you do for Square, would that necessarily, I guess, fall into one of the existing contracts? And if so, would it sort of benefit from Square's perspective or any benefit from the higher thresholds already hit. And obviously, you know, I understand client confidentiality. So the second part of the question, a generic answer is fine if you can do that, just conceptually trying to understand that.

Sure. So we have a number of products with Square. We've talked about Square is absolutely the shining example of modern card issuing. You know, they truly understand within their DNA in regards to how to build beautiful outcomes for the customers, starting with the cash card. And second is with Square card, which is on the merchant side. So we see, we talked about and announced that the square banking services represents sort of a much more fulsome authoring higher savings lending and square checking. And we're powering multiple parts. We're powering square checking. We've talked about the square debit card accounts and routing numbers and FDIC insurance. Again, companies use our APIs to solve financial problems at scale and Obviously, we welcome that. We welcome our customers building more products on our platform. It creates a nice horizontal approach, which is really a part of how we connect the customer and how we go to market. And we want them to continue growing. So, yes, we will hit volume tiers based on their success. Certainly Square's success is our success, and we want them to continue doing that.

Got it. Understood. And then as I, you know, sorry to belabor this, but the sort of the 3Q, 4Q commentary was not super clear with regards to the fall off, so to speak, as you're thinking of the next couple of quarters. Is it primarily caution? I mean, I get the tax piece. Is there anything beyond the tax piece plus caution? And are you actually seeing, you know, as you look at current results, the impact of Delta variant and things like that?

Yeah, I mean, everything we have shared, I'll kick it off, Chip, and then I'll just hand it over to you. I mean, everything we've talked about, we've factored into our guidance. we believe we're only scratching the surface here. We have $60 billion in processed volume, and there's $6 trillion in the U.S. alone in volume on cards. So I will start with that, and I will turn it over to Trip.

Ashwin, our Q3 guidance reflects, again, strength from digital banking and BNPL verticals. We have expressed that we've seen some softness in our ODD, but they continue to be at very elevated levels on our platform. You know, 38% year-over-year growth of net revenue is the midpoint of our guidance. And we are lapping Q3 stimulus from 2020. And so we continue to be thoughtful. We continue to be prudent as a new public company.

Understood. Got it. Thank you.

Next question, Bob Nicoli with William Blair.

Thank you. Good afternoon. And let me add my congratulations to a successful IPO and your first quarter call and strong numbers out of the gate. Thank you. Jason, you know, just, you know, you have, I mean, I think as you've pointed out, I mean, a massive opportunity. internationally, uh, not only in the U S but also internationally, which is a, uh, right now, or last year was a small part of your business. Uh, I think, you know, maybe 2% of the business, uh, you have a number of international, uh, customers. And, uh, so just some thoughts around, you know, the growth of international timing for growth. What does it take to, uh, to make that a much bigger part? of your business. I know you just hired a senior executive from AWS in APAC or EMEA. Maybe that's part of the strategy.

Part of the strategy in hiring Darren is his experience at AWS for over 10 years and building that into a formidable business throughout EMEA, especially obviously international, is incredibly important. So I would start with this. You know, modern card issuing is certainly a global phenomenon. You know, in towns, cities, countries, continents, you know, the ability for customers to accept payment cards, whether online or offline, is continuing to grow around the world. And we see absolutely no change in that. In fact, we're going to see it increase because we're seeing obviously massive reductions in cash. This is international, specifically a huge opportunity for Marketo in the future. You know, our business has been global for a long time. We've been transacting in basically every country that you can transact in in the world. The secular trends we've been discussing apply every major market, not just the U.S. And moving from cash to card, as I mentioned, and then from card to mobile is really a worldwide phenomenon. So we'll enter a new market when it makes sense. It's a fit with our long-term strategy, support of existing customers and their expansion plans, compelling conditions to build a strong local business, hire strong talent to achieve these outcomes. And then our international plans are partially driven by our customers. DoorDash in Australia, Instacart in Canada, Klarna in Australia, Afterpay in the US, Canada and Europe, and Uber in the EU. We had talked about in the roadshow only 2% of our revenue actually comes from outside the US, but there's a $30 trillion global card issuing opportunity. And we also believe that a lot of the current volume is moving off legacy platforms to more modern platforms. So we see growth outside in the international market to be tremendous. So part of your question was, So what does it take? Every country is different. Every country has different networks, different rules, both on how money is moved, but also how you manage consumers' data, their PII, their personally identifiable information. So as we go enter a country, we're very thoughtful, we're very prudent on how we do that. And obviously we look to build both a great business there and being able to support our customers around the world.

Thank you, appreciate it. And then just in the bank space itself, and for JP Morgan, Goldman, Marcus, maybe, I think, and obviously the neobanks, you're pretty good with Square. I mean, there's a lot of other neobanks out there, some of which you have, but a lot of which you don't currently. And there's a lot of new startups in that space. So just some thoughts on the large bank space and then maybe the opportunities

in the neobanks outside of square and is there anything in your contract with square that prohibits you from working with certain other neobanks or certain other banks uh no there's there's nothing in our contracts that preclude us from growing our business um yeah so so the the space the digital banking space is a big space for marketa it's something that we're very hyper focused on um digital banking or neobanking or whatever label you want to apply to, it is massively disruptive. We've seen both Jamie Dimon talk about the disruption coming from neobanks or digital banks. We also hear and see growth from companies like Square and the Cash App and the card that we have built and the other products that they've built on top of our platform. So we have been very purposeful As a business, we started in commerce disruptors. We moved to digital banks. We moved to large tech giants. And as you mentioned, JPMorgan Chase and markets by Goldman Sachs is how we're breaking into LFIs or large financial institutions. We like to refer to them internally. Those large financial institutions is where a majority of the volume today exists. And they are looking to modernize. They're looking to move from on-prem to the cloud. So on-premise managing hardware into the cloud. And that is a core to our business. And it's how we think about the future. We know everything is moving to the cloud. We also know that the large financial institutions want to build on new platforms. It allows them to not only reduce total cost of ownership, but allows them to build and iterate much faster and and bring new products to market than much faster before. So I'm breaking it down into four different areas, which is commerce disruptors, digital banks, large tech giants, which we also believe a lot of large tech giants want to become financial institutions in one way, shape, or form. And then the large financial institutions or existing financial institutions. And we have very clear, precise strategies on how to not only grow our existing business, but win more business within those institutions. specific landscapes.

Thank you. Very helpful.

Ladies and gentlemen, as we come to the end of the Q&A session, please limit yourself to one question. Your next question comes from Craig Moore with Anonymous. Please go ahead.

Yeah, hi. Thanks for taking my question. I'll keep it brief. It's just a quick one. The acquisition of Afterpay by Square, does this trigger any material adverse change clause in your contracts with either that might push a more aggressive renegotiation schedule? Thanks. Thanks, Craig. No.

Both Square and Afterpay, they use multiple parts of our platform to power their businesses. Also, I'll note is Afterpay is not a top five customer in terms of volume on our platform. Therefore, we don't see this combination moving concentration risk significantly trigger renegotiations or the like. Both companies also have long-term agreements with Marketa into 2024. All right.

That's very helpful. Thanks. You're welcome.

Next question, Dan Dolev with Mizzouho.

Hey, guys. Thanks for taking my question. So it was nice to see, I think, the yield improve by about a point. quarter over quarter. But, you know, the key controversy has always been, like, what's going on with square versus non-square yields. Obviously, they declined dramatically in 2020. So can you maybe help us understand a little better, you know, what is going on? What are the dynamics that have driven that? And maybe, you know, parse out slightly more exactly what is going on. I appreciate it. Thank you.

I'm happy to take that one. I want to clarify a few points that we've heard around non-square portfolio, as there has been probably some misinformation. Number one, the portfolio is very diverse. It includes on-demand delivery, buy now, pay later, expense management, e-commerce enablement, amongst others. Number two, volume from these verticals can vary quarter to quarter. We are a usage-based business. Number three, the services that we provide to our customers can be different, and the COG structure can be different, consumer versus commercial. Certain non-square programs underwent exponential TPV growth. I think we highlight in the queue that the non-top five grew 265%. And that's wonderful, and it's a testament to our platform. We absolutely look to grow gross profit dollar growth. And why? It's because the marginal cost of processing that incremental dollar volume or transaction is diminished. So I hope that clarifies a little bit around those portfolios.

Yeah, no, it does. I mean, I was looking for, you know, some real specific data, but, you know, I understand kind of where you're coming from. I appreciate it. Thank you.

Next question, Andrew Jeffrey with Truist.

I appreciate you taking the question. I look forward to getting to know you better, Jason and Tripp. One of the things I think that Marquette has highlighted is network connectivity, and I think it's a key point of distinction. Can you talk a little bit about Discover, in particular, as it relates to BNPL and some recent transactions that have taken place in the space, and whether that's another network you'd like to add, and just generally, if you think you have globally ample network connectivity to drive your global growth ambitions?

Yes, I'll start. I mean, Visa and MasterCard have blanketed the globe. You know, if you're a merchant, you want to accept payment cards, whether online or offline, we're working with Visa and MasterCard. That being said, I mean, we have actually worked with Discover for years. Discover was our first network. They were the first network we got up and running with. They were the first network that we built not only our Archeta card with when we first got started, But our first customers, including the Facebook card, if anyone remembers that back in the day in 2012, that was actually on the Discover Network. So to your question in regards to coverage around the world, we have it. We're not authorized to operate in every single country. There's a lot of work. that you need to do to get supported, both through Visa and MasterCard, but with the banks to operate within specific countries. We have a plan to do that. We're 36 countries today and growing. But with regard to Discover, I mean, we've had a long-term relationship with them, but they're not necessary for us to not only grow our business, but blanket the globe.

Appreciate it. Thank you.

You're welcome.

I will now turn the floor over to Jason Gardner for closing remarks.

Well, thank you everybody that joined us on this call and for your interest in Marketa. Have a great rest of the summer, stay healthy, and Tripp and I look forward to speaking with you all next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.