Marqeta, Inc.

Q4 2021 Earnings Conference Call

3/9/2022

spk13: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Marketa Fourth Quarter 2021 Earnings Conference Call. At this time, lines have been placed on mute to prevent any background noise. After the speakers' 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 call over to Stacey Feinerman, Vice President of Investor Relations, to begin.
spk00: 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 quarterly report on Form 10-Q for the quarterly period ended September 30th, 2021, 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 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 the Investor Relations website. Hosting today's call are Jason Gardner, Marquetta's founder and CEO, and Mike Miletic, Marquetta's chief financial officer. With that, I'd like to turn the call over to Jason to begin.
spk11: Thank you, Stacey. Thank you, everyone, for joining us for Marquetta's fourth quarter of 2021 earnings call. We are excited to share our strong fourth quarter and full year results as well as our plans for 2022. I'd like to begin with our fourth quarter results. We ended the year in a position of strength with financial results that serve as a true reflection of everything Marketa accomplished in 2021. As a result of the strong execution and continued customer focus of all Marketans across the world. Total processing volume or TPV was $33 billion in the fourth quarter, a 76% increase compared to the same quarter of 2020. An acceleration from the 60% growth rate in the third quarter. This represents the achievement of a significant milestone. In December, we saw our TPV for the first year across the $100 billion threshold for the first time. as we process $111 billion for all of 2021. This demonstrates our ability to provide modern infrastructure that enables fast-growing companies to deliver innovative, high-volume car programs globally. Our net revenue of $155 million in the quarter was a 76% increase from the previous year, representing acceleration from the 56% growth rate in the third quarter. We saw significant outperformance from the buy now, pay later vertical as this mode of payment was extremely popular during the holidays. We witnessed another decline in our block concentration from 68% of total net revenue in the third quarter to 63% in the fourth quarter of 2021. Our phenomenal fourth quarter is a testament to the outstanding growth Arquetta has demonstrated over the last three years. as our TPV grew over 400% from 2019 to 2021. Much of this growth was fueled by digital commerce disruptors that grew significantly due to shifts in consumer behavior during the pandemic. Our platform and products helped make much of this growth possible, enabling our customers to offer experiences that have changed commerce in remarkable ways. Our ability to help our customers scale successfully admit This unprecedented growth has earned us valuable trust. With 2022 underway, we are starting to see some stabilization regarding the pandemic. It is clear that the new commerce experiences, like on-demand delivery and buy-now-pay-later, are here to stay, and customers' trust in financial services offered by neobanks is increasingly on par with their trust in typical financial institutions. These commerce experiences play to Marketo's strength. We have already built trusted relationships with companies that have become household names like Karna and Clash App that have a track record of expanding on our platform. For the next set of disruptors looking for a trusted partner who can help them scale, this serves as a proof point. Importantly, we have a foothold into large FIs like Marcus by Goldman Sachs, JP Morgan, and Now City that need a technology partner to deliver solutions consumers want. As we look forward to the remainder of 2022, the remarkable growth we took part in during the pandemic required significant focus to help our customers scale. As a result, our newer solutions like credit and digital banking did not get as much focus as we would have liked because of how fast our existing customers were growing. We began to significantly ramp up hiring for these efforts towards the latter part of 2021. Our approach in 2022 will be more balanced between fueling our existing customers' success and building for the future. Therefore, our focus areas in 2022 will be threefold. We will continue to fuel our customers' success. While we are focused on broadening our base, our existing customers still represent Marketo's core and a significant source of future growth. These customers can tap into our modern card issuing expertise that allows them to build customized and contemporary payment solutions when paired with our platform's agility and scale. Our dollar-based net revenue retention rate of 175% for 2021 demonstrates how our customers grow in our platform. Let me share two examples. After a competitive process, Divi, a bill.com company, began using Marketa in late 2020. Divi was in hyper growth mode and it was important for the company to have a card issuing partner that could help them build best in class products and do so at scale. Once on board the Marketa platform, Divi was able to ramp quickly. As a result, Divi rapidly added new customers to their program and extended their service to even more businesses and cardholders. Divi is one of the reasons We have seen the expense management vertical gain such significant traction, approaching $2 billion in TPV this quarter. In contrast, this segment was insignificant a year ago. After launching with Klarna in the US in 2018 and supporting its launch in Australia and New Zealand in 2020 and 2021, Klarna chose to extend its partnership with Marketa into 13 new European markets last November. Klarna is a digital disruptor experiencing tremendous market traction in the last few years, and Marketo has provided vital support to their growth trajectory globally. As a result of their success on our platform in the U.S. and APAC, the company recently expanded its partnership with Marketo by moving over volume from another provider. Klarna has seen firsthand how they've been able to quickly make program improvements or launch new card products. often within complex markets and environments working with Marketa. This expansion, especially in European markets where Klarna has a long track record of success, is a testament to the maturity of our European business and the strength of our partnership. We will continue to build a resilient and reliable global platform. 2021 TPV of $111 billion represents more than 50 times growth in four years. However, to truly connect the world through global money movement and unlock the potential in front of us, we must be thinking more extensively about the breadth and depth of what our platform can support. Eight months into his role, our CTO, Randy Kern, has already made significant strides towards building our scale and resiliency to handle the next wave of growth. Proactive capacity planning with our customers, organizing our internal teams around a mandate to scale, and new key infrastructure developments have had huge impacts on the degrees to which we can scale card programs. We expanded our platform globally by adding local network certification and card issuance capabilities in three new markets, the Philippines, Thailand, and Singapore. The Philippines and Thailand are large, high-growth markets where digital payments adoption is still well below 50%, and younger populations are urbanizing steadily. The Barketa platform is enabled in 39 countries, with more countries to come later this year. The geographic expansion is an integral part of our roadmap as we want to allow our customers to build once and launch anywhere. We will broaden our business in three ways. The customers we serve, the solutions we offer, and the verticals we support. To truly diversify our business, we need to target large customers focusing on additional credit, digital banking, and money movement offerings. Established financial institutions represent a large portion of the total issuer processing volume worldwide. While making significant inroads will likely take time, these customers are essential to achieving our goals of connecting the world through global money movement and achieving durable long-term growth. We are thrilled about our new partnership with Citi and their commercial cards team. Citi plans to use Marketa's unique tokenization as a service capabilities to power mobile wallet provisioning in more than 40 markets worldwide. Marketa's modern card issuing platform will integrate with Citi's existing systems and enable Citi's global commercial cardholder base to seamlessly provision corporate plastic cards and virtual cards into mobile wallets. Citi recognizes Marketa's leadership and card tokenization and the impact this can have on their commercial cardholders. especially against the backdrop of rapid change in payment preferences post-pandemic. We see this as an opening step of what we hope is a long and fruitful partnership. As discussed last quarter, we see partnerships as an efficient way to broaden our product offering. Our partnership with the First National Bank of Omaha, FNBO, expands our credit ecosystem and allows Marketo's customers to launch and design an embedded credit card program quickly. By partnering with FMBO, we combine FMBO's decades of deep experience in credit card programs with the flexibility and control of Marketo's modern card issuing platform. Similar to our partnership with Azure, FMBO will handle program management capabilities. At the same time, Marketo will act as the issuer processor, bringing the technology that allows customers to create customized card experiences lacking in credit. Our recent partnership with Plaid underscores our desire to move beyond moderate card issuing into enabling global money movement. This partnership will simplify ACH transfers, allowing customers to seamlessly and securely authenticate their bank accounts and fund their accounts to power more immediate card shopping. As a result, developers building on the Marketo platform can quickly and easily authenticate users' bank accounts versus the traditional cumbersome ACH process. Plaid worked with over 12,000 financial institutions. This scale, combined with its commitment to information security, makes them a perfect partner for Marketo. I am excited about our progress in 2021, especially how we ended the year on such a solid foundation. With over $500 million in yearly revenue, we are capitalizing on the changes in consumer preferences to ensure the performance of the business for years to come. Mike will touch on our growth and additional investment in his remarks, which brings me to the vital role of CFO. I want to take a moment to recognize the work of our outgoing CFO, Tripp Fay. Tripp led Marketta through a very successful IPO and two major fundraising rounds. His partnership and friendship have been important to me as a CEO and and our company as a whole. I wish him every success for his next chapter. I am also thrilled to welcome Mike Miletic as our new incoming CFO, who will shepherd us into the next phase of our growth. With that, I will turn the call over to Mike to discuss our results and outlook for 2022.
spk15: Thank you, Jason. Although I know many of you on the call today, I'm excited to speak with you in my new capacity as a CFO at Marketa after joining the company two weeks ago. While Marquetta has already reached significant scale with over 110 billion in TPV in 2021, there is still a massive opportunity to support innovative partners who are meeting evolving consumer needs in digital commerce and global money movement. I look forward to partnering with Jason, the executive team, and all of our employees to help the disruptors scale and those at scale become more disruptive. Marketo delivered a very strong quarter to close out our first fiscal year as a public company, with both TPV and net revenue growth accelerating to 76%. Net revenue of $155 million and adjusted EBITDA of positive $1 million were meaningfully better than we expected, primarily for two reasons. One, stronger holiday and overall consumer spending drove the majority of the upside, benefiting the BNPL and digital banking verticals in particular. And two, higher card network incentives as a result of reaching a new performance tier. So let's dive into the Q4 TPV, which was 33 billion, growing 76%, accelerating 16 points from Q3. BNPL benefited from the increased consumer spend during the holiday season, growing over 50% sequentially versus Q3. Digital banking growth accelerated 15 points versus Q3 in line with the overall TPV acceleration. Newer clients and growing verticals increase their contribution to our growth as we continue to diversify our customer base. Our top five customers continue to perform well with TPV growth over 50% in Q4, while the remaining customers grew over 200%. As further evidence of our growing diversification, newer customers who joined our platform since 2019 grew three times faster than customers who joined the platform prior to 2019. The growth of these newer customers and outperformance from the BNPL vertical were a big reason why we saw another significant decline in our top customer concentration, which Jason highlighted earlier. Net revenue growth of 76% was consistent with TPV growth and accelerated 20 points versus Q3. The net revenue take rate declined less than one BIP versus Q3 purely due to changes in the mix of volume. In fact, the Q4 take rate improved versus Q3 within several of our large verticals. Gross profit grew 108% on a year-over-year basis, over 30 points faster than revenue. The gross profit margin of 49% improved four points versus Q3 for two reasons, each contributing approximately two points. First, incentives. We amended one of our card network incentive agreements in Q2, and we hit a new volume tier in Q4 that resulted in a higher incentive being applied to volume over the past three quarters. Therefore, the three-quarter catch-up benefit was booked in Q4, which made the impact more significant. These incentive agreements are a testament to our strategic relationships and strong alignment with network partners, as well as the powerful operating leverage that can be achieved in our business as we scale. The second factor was volume mix. The holiday season had a TPV mix that provided more favorable gross profits. Our GAAP net loss was $37 million, driven mostly by continued investment in people and technology that are fueling the growth of our business and the scaling of our platform. On a non-GAAP basis, adjusted EBITDA for the quarter was positive $1 million, which exceeded our expectations by roughly $10 million, entirely due to higher gross profit. To quickly summarize full year 2021 performance, TPV of $111 billion and net revenue of $517 million delivered robust growth of 85% and 78% respectively. Gross profit grew 97% with a gross profit margin of 45%, which is on the high end of our long-term target range of 40% to 45% due to improved scale and favorable network incentives. Adjusted EBITDA was negative $13 million, equating to a negative 2% adjusted EBITDA margin. We ended the year with over $1.7 billion in available liquidity in cash and marketable securities. Now let me move on to 2022. First, let me share some of the key assumptions informing our Q1 guidance that was noted in our press release. We expect Q1 net revenue growth to be between 48 and 50%. Our take rate should be relatively similar to last quarter. Therefore, the lower growth compared to Q4 21 is related to volume growth, mostly due to two factors. Q1 is facing tougher comps due to the government stimulus in the first quarter of 2021, and to a much smaller degree, the beginning of the ramp in BNPL volume. Our sequential net revenue growth last year from Q4 20 to Q1 21 was 22% compared to an average of 15% growth from Q4 to Q1 in 2019 and 2020. This tough comp is partially offset by the tax season returning to April this year, where the benefits of tax refunds are split across Q1 and Q2 versus last year when the benefit was mostly in Q2. Also, January got off to a bit of a slower start as Omicron likely impacted volume in many of our verticals, with the exception of on-demand delivery, which thrived as more people stayed home. Volume did pick up in February as the Omicron wave passed, with February volume comfortably exceeding January, despite having three fewer days. Q1 gross profit margin should be in the 43% to 44% range, which is consistent with the first three quarters of 2021. This is lower than Q4 21, which benefited from the catch-up incentive and favorable volume mix during the holiday season. We expect the Q1 adjusted EBITDA margin to be negative 8% to 9% due to elevated investment levels to drive long-term, sustainably high net revenue growth. I will talk more about our investment priorities for 2022 in a minute. Amid the current economic uncertainty, I did want to share some preliminary thoughts on 2022, and will plan to share more next quarter once I'm completely settled in here at Marketo. It remains to be seen whether Russia's invasion of Ukraine will have any broader implications that may impact our business. Similar to previous years, we expect the majority of our growth to come from our largest customers, which are spread across the digital banking, on-demand delivery, BNPL, and expense management verticals. Our newer customers are growing several multiples faster than our top customers and therefore growing in share, But even our largest customers keep growing at a strong pace, as evidenced by our high revenue retention of 175% in 2021. Our business massively expanded during COVID. 2021 net revenue was more than three and a half times 2019 net revenue. The pandemic accelerated consumer adoption and usage of newer commerce experiences, such as on-demand delivery and BNPL, where Marketo was an early innovator and market leader supporting many of the top companies in those categories. The increased shift to digital payments during COVID has also led to increases in consumers using digital bank or neobank offerings, which tend to provide great digital user experiences. Again, this is a market where Marketa established early leadership. As a result, we are growing off a much larger base of business in 2022. The pandemic recovery is now well underway, and consumers' new commerce habits are sticking and stabilizing. Therefore, we expect our net revenue growth be at least mid-30s for full year 2022. To put the change in scale during the pandemic into context, let me share one fact. We expect our year-over-year revenue growth in dollars in 2022 to be larger than our total net revenue just three years ago in 2019. Consistent with the scaling over time, net revenue will grow the fastest in Q1 stepped down several points sequentially in both Q2 and Q3 before a larger step down in Q4 as we lapped the incredible quarter we just finished. Also note that Block's acquisition of Afterpay, who is also a meaningful client for us, means we don't expect to make progress on our Block concentration as we add Afterpay performance to Block starting in Q1 2022. If we were to normalize for the acquisition and combine the companies for past years, we do expect a minor reduction in our concentration. We expect 2022 TPB to grow faster than that revenue at over 40%, with take rates declining slightly on a year-over-year basis, on par with the decline in 2021 as customers who grow on our platform enjoy better pricing. This is partially offset within gross profit by achieving better pricing from our card network and bank partners. We expect our gross profit margin to be in the low to mid 40s, consistent with our long-term guidance of 40% to 45% on the annual basis. Network incentives can be inconsistent, as we just saw in Q421, so let me share a few more details to help with the quarterly cadence. Our incentives operate on a contract year that runs from April through March, which means volume tiers reset in Q2 of each year. This means Q2 will typically be a lower gross profit margin quarter, generally at the bottom of our long-term range, while Q3 to Q1 of the following year typically benefit from growing cumulative volumes. If we hit certain volume milestones, an individual quarter can be above the long-term range. Based on our client pipeline and because of the time it takes to onboard and ramp new clients, we need to invest in advance of the revenue to best position us for success. Therefore, we expect the adjusted EBITDA margin to be negative high single digits in 2022 and relatively consistent with each quarter, except Q2 will be a few points lower due to the lower gross profit margin. While the investments we make in 2022 will result in negative EBITDA on the short term, we are looking to achieve sustainably rapid growth while also being committed to a path to profitability. In the long run, we remain confident the business will operate at a 20% plus adjusted EBITDA margin once we have captured more of the immense market opportunity. We began stepping up our level of investment as we progressed through 2021 as it became clear our revenue and gross profit were scaling rapidly. We plan to stay on that investment cadence through 2022. The investment is mostly directed towards technology and product, primarily through hiring in those areas, as well as increasing software and services to support our platform. The primary focus of the investment is new capabilities in digital banking and credit, international expansion, and platform scale. Once the volume is captured, our unit economics are very attractive due to low marginal operating costs with the ability to generate positive EBITDA, as we did in this most recent quarter. To close, Marketo just completed a fantastic year, surpassing $500 million in net revenue. Looking ahead, we have a wealth of opportunities ahead of us, including new products, geographies, and verticals, all while our existing customers thrive on our platform. We believe our differentiated offering will continue to be the destination for disruptors as digital commerce and global money movement rapidly evolve, fueling strong growth for many years to come. I will now turn the call back over to Stacey and the operator for questions.
spk13: At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A competition tone will indicate your line is in the question queue. You may press star 2 if you'd 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. One moment, please, while we pull for questions. Our first question is from Sanjay Sakrani with KBW. Please proceed with your question.
spk10: Thanks. Good morning. Good afternoon, and congrats, Mike. Maybe a question about the investments in tech and product. As we think about, you know, the different channels that Marketa can grow into, can you help us think about where internationally that will come from?
spk11: Yeah, thank you for your question, Sanjay. I mean, as we talked about, modern card issuing is a global phenomenon. We're actively working to attack the large addressable market. A couple things that we're doing is, I think, number one is we're constantly assessing where our customers are looking to launch, what markets they want to launch in, and hold the most immediate potential for our technology. So as we've talked about, we are in 39 countries today. We recently announced Singapore, Thailand, the Philippines, and we'll look to set up an APAC hub probably in Singapore. And as we go international, we found that binary card issuing is a global phenomenon. And if we talk about what our rallying cry this year is for Marquette is to connect the world through global money movement. Our customers truly come to us to unlock value, not just here in the US, Canada, Europe, and Asia, but in many countries, cities, and continents where they're looking to really bring their business. And we'll continue to focus on the verticals that have done really well for us, like Buy Now, Pay Later, digital banking, expense management, and many others. So we're really excited about the process we've made to date. As Mike talked about, we did $517 million in net revenue, which is a solid, solid foundation. And I look forward to updating you with new market announcements, international partnerships, and future quarters.
spk10: Just a follow-up on BNPL. Obviously, it's seen tremendous growth for you guys and as an industry, but as we go into 2022, there's difficult comps. There's probably a little bit more competition on the margin for those types of loans from the incumbents and perhaps even shifting merchant preferences. I guess when we think about the growth potential of BNPL specifically for you guys, is it that you're just expanding inside your existing relationships or or should we expect some pressure on growth? Thanks.
spk11: So when we started working in Buy Now, Pay Later about five years ago, when I was at Money 2020 in Europe, we went with this company named Klarna, which today is a household name, but at the time we really didn't know what they specifically did, and we heard this concept called Buy Now, Pay Later. What we do, and we've been really successful at this, is we've actually built purpose for specific verticals. So now Klarna... A firm, Sezzle, which announces buying Zip, Apertay, which is now part of Block, really speaks to the strength and competitive position for Marketa's platform. So I'll start there. Beyond Outpay Later continues to be an important and significant growth driver for Marketa at well over 10% of TPV. And so other highlights. A launch partner for MasterCard's new installments program. We're working with Sezzle on their deal with Target. The amount partnership, bringing buy now, pay later to FIs. We're powering Figure's new FigurePay product, which is a digital payments account with native BNPL functionality. So what we're finding is a couple growth vectors. There's international, which we're enabling them to take advantage of more and more merchants on the platform. New, obviously, geographies, new technologies. We see we're now... customers are getting into tokenization, they're getting into actual physical card products, and they're coming to Marketo to do that. So I wouldn't look at buy now, pay later functionality in a sort of single focus as just virtual cards. There's many different card types they're looking to build on our platform as they begin to diversify their businesses in the coming quarters. Great.
spk10: Thank you very much.
spk13: Our next question is from Mike Ng with Goldman Sachs. Please proceed with your question.
spk04: Hey, good afternoon. Thank you very much for the question. I appreciate all the detail when you talked about TPV performance by vertical. I was just wondering if you could talk a little bit about some of the assumptions as you think about the 40% TPV growth in 2022. Any qualitative or quantitative detail would be very helpful. Thank you.
spk15: Yeah, thank you for your question. It really is more of the same, just with tougher comparisons. Obviously, as even Sanjay just pointed out in the previous question, BNPL had explosive growth during 2021. And as the base is bigger, the growth will slow a little bit. But we still think most of our growth is going to be fueled by the primary use cases with everything roughly comparable to 2021, which is maybe, you know, but a little bit of a slower rate. And that's, you know, in digital banking, BNPL, expense management, you know, being some of the big ones. So I would say the mix of the business, we're not expecting to fundamentally change a lot. It's just, you know, tougher comps bringing the growth rate down a little bit.
spk04: Great. Thank you. That's very helpful. And I just wanted to ask a housekeeping question. The mixed benefit to gross margins in the fourth quarter, could you just give a little bit more detail around that? And should we see a sequential improvement from that mix every fourth quarter? Thank you.
spk15: Yeah, I mean, I guess it's hard to say, you know, to predict the future exactly. So I don't know if I can answer the second part of your question. But if you think about interchange dynamics, right, it's predicated on all different scenarios in terms of, you know, what type of card is being used? Is it, you know, consumer, commercial, credit, debit, prepaid? You know, what type of merchant is being used at? What's the size of the ticket? So there's, you know, a lot of those factors will ultimately end up impacting, you know, what's the rate that applies? And then on top of that, we have different types of agreements with our customers in terms of how do we work with them in terms of how much we share with them versus how much is kept here at Marketta. So those are kind of all the different levers and variables that play into that number. And so what happened, at least in this case, in the holiday season is really the type of spend in terms of where it was directed in terms of merchants and the types of products that were used is what drove the benefit for us.
spk04: Great. Thank you for all the thoughts. Really appreciate it.
spk13: Our next question is from Ramzi L. Asal with Barclays. Please proceed with your question.
spk01: Hi. Thanks so much for taking my question this evening. I wanted to ask about the Citi partnership. And if you could describe sort of the path from a project like this kind of into a deeper issuance relationship at a large bank like Citi, what challenges kind of stand in your way to sort of moving a little deeper into an organization like this?
spk11: Thanks, Ramzi. Yeah, winning the business of large FIs is a major strategic initiative for Maqueda. And as we've talked about in the past, I mean, we really had this DNA match with commerce disruptors. We then went into large digital banks like Cash App and Lydia in France. We then went to large tech giants like Uber and Google. And we always have been focusing on sort of the long game within large FIs. So You know, as we talked about in my opening remarks, you know, excited to announce the Citi deal and their commercial card team. So what they're doing is in 40 markets is using our tokenization as a service capabilities to power the mobile wallet provisioning. And obviously Citi recognizes Marquette as leadership in card tokenization. And we see this deal as really just the beginning of what we hope is a long-term partnership. Large FIs typically don't move fast. nor do they make decisions quickly. Our goal with these programs truly is over time just to get a foot in the door and then expand our relationship, as you referred to, like more issuance. As we've seen, these are very large, from a technology perspective, complex environments. So bringing us into that is something that's pretty significant for us. And then we're there to really prove our relationship, prove our technology, prove our services so we can expand throughout and beyond tokenization as a service. So we help them in areas where they can help them be more innovative, and we want to see value where we're really adding to their business and obviously trusting us. So while making inroads will take time, these customers are absolutely critical to achieving our goal of building out more durable long-term growth.
spk01: Okay. And on the higher card network incentives, I'm just curious, how should we think about the cadence of those types of opportunities to renegotiate those contracts, which is to say, can you go back and kind of renegotiate at will as you grow, or are there sort of fixed contract timelines that when those expire is the time that you go back and can kind of take another bite of the apple in terms of renegotiating those fees?
spk15: Yeah, yeah, I would say it's a little bit of both, right? You can't just – there are contract terms and timelines, so it's not like you can go back at any time you want. But obviously as the business grows and you try to do more things together, new card programs, you know, there's always ways to look for additional opportunities for us. And then, of course, as the business, if it continues to grow as rapidly as we expect, then, you know, you can end up doing early renewals and changes as you see fit. So I would say it's a little bit of both. You know, there are obviously terms that have been agreed to, but, you know, there's always ways to – to look at those and as we get into new opportunities, see if we can, you know, work the economics that we have with our, both our network and bank partners.
spk01: Thanks, Mike. I guess you would know better than most. So I appreciate your answer. Indeed.
spk13: Our next question is from Dan Dolev with Mazoho. Please proceed with your question.
spk06: Hey, thanks and congrats, Mike. Great results. Can you maybe, and I'm sorry if I missed this, can you give some more specifics, anything last quarter you gave about sort of the growth of the top five versus not top five from a TPV perspective?
spk15: Yeah, so what we said was in terms of the top five that they grew over 50% in Q4, and then the remaining customers grew over 200%. And then just, Dan, the other way we also look at it in terms of as we're looking to diversify our customer base, the other one that we shared was just that our customers that have come onto the platform since 2019 grew more than three times faster than the customers who came on board prior to that time.
spk06: Not as specific of a number as the last quarter, right? I think last quarter you had like 226 or some number on the non-top line. That's over 200%.
spk15: Yeah, I guess I can't specify, but yeah, I guess maybe I'll have to take the blame for that one then, Dan, if we're being less specific.
spk06: Yeah, yeah, no worries. And then on Plaid, I mean, it looks like it definitely helps you diversify away from the reliance on debit cards. What are you seeing in terms of the opportunity there with the partnership?
spk11: I'm sorry, Dan, which partnership? Plaid. Oh, Plaid. Yeah, so what Plaid does is Plaid is working with 12,000 banks, and it makes it really easy for our customers to leverage Plaid through Marketo's platform to go build better experiences. So our business is truly predicated on money in, money out. So money in is ACH. And money out is through card, which is predominantly where we make our revenue. So what this does is it actually shortens time to market significantly for customers to bring more dollars into Marketas platform. So instead of a consumer knowing what their ABA routing number and account number is, now they just need their username and password for their bank account to begin bringing money into Marketas ecosystem through our customers.
spk06: Got it. Thank you, and nice quarter again. Great results. Thank you.
spk13: Our next question is from Tin Jin Huang with JP Morgan. Please proceed with your question.
spk05: Hey, everyone. Thanks. Great results as well from my side, and welcome to the call, Mike. It's good to hear from you. Just wanted to ask on the visibility. I know Sanjay and others asked about buy now, pay later. It seemed like that carried a lot of growth in 21. On demand delivery, I think of in 2020 being a big contributor. What about in 22? What verticals do you think will step up and sort of carry the load here? And I'm curious where banking as a service might rank as an example for contributing growth this year.
spk11: Yeah, I'll start with this. Hi, Finjin. Good to see you. Good to hear from you. Marketic customers care deeply about global money movement, where they can really use specific tools to solve a business need to unlock value. So as we think about the specific verticals like buy now, pay later, expense management, on-demand delivery, digital banking. I mean, these are the areas and then new verticals that we're looking to enter into where that methodology is the same. So if we wake up every morning here thinking about how do we connect the world through global money movement, it really comes down to solving a business need within a specific vertical. We still see growth in our core verticals. Our business has been growing significantly over the years. Mike talked about some specific data in regards to simple volume on our platform within these verticals. And our methodology, our strategy is to really identify those verticals early, build technology that's pretty unique, and help our customers really, really spread their wings. So if I look at the strategy for the year in regards to where we're headed, it's international. So our customer is looking to build more globally. adding new features and functionalities to specific verticals. So as they begin to grow and go into new areas of the market, we look to support them with our technology. And then really fuel our existing customer success in areas like the bill.com acquisition of Divi, making sure that Divi has what they need, then connecting that strategy to bill.com. So as we look to broaden our market, broaden our revenue opportunities, It's those core areas that I've talked about. It's commerce disruptors, where are the new verticals we can enter and having a DNA match and seeing continued growth, especially in buy now, pay later, as we saw in the fourth quarter. Then we go into digital banking, more capabilities there. We had Block, for instance, Cash App launched the team card last year. Then going into large tech giants and then the large FIs. As we begin to move up market, especially landing companies like Citi, in regards to tokenization of service and launching that in 40 markets. We're really excited about more we're going to be talking about in the future around large FIs, but really focusing on the core four areas of where we've been able to really grow, landing new verticals, and then helping our customers expand.
spk05: Got it. That's very clear, Jason. So just my follow-up to that, maybe on the expense side and hiring, I think you – I wrote down here that you guys ramped up your hiring in credit and digital banking. So do you feel good about the prospects of hiring people, especially internationally, to do what you just laid out from a people perspective? I know everyone's asking about War for Talent. I know that's been a theme on there this early season. Yeah, they'll be good at asking here, too.
spk11: Yeah, and the War for Talent is not just a market problem. It's a global phenomenon. It's for all of us. And engineering talent specifically and product talent specifically is tough. I mean, it's very competitive out in the market. So as we look to build more within credit, I mean, 50% of consumers in the United States hold credit cards. Credit is pretty nascent in other parts of the world, but we're going to see it grow. We know that Asia is going to become the largest card market in the world in the and add new features and functions in these areas. As I talked about around credit, you know, 2021 was really the year we were investing pretty heavily within credit. Towards the end of the year, we saw, you know, just the scale of our customers and really investing into that. But a lot more to come in credit, a lot more to come in digital banking, not from a banking as a service perspective, but more of all the core functionalities that build together. So our customers are coming to us. They want to build on Marketo platform once and then build globally. So we look to add more and more features that they can take advantage of within our platform.
spk05: Got it. Great.
spk11: Well done.
spk05: Thank you. You're welcome.
spk13: Our next question is from Andrew Jeffries with Truist. Please proceed with your questions.
spk12: Hi, good afternoon. Appreciate you taking the question. I wanted to ask a little bit more, and the expansion and diversification of your business is really exciting. But particularly when I look at Block and the acquisition of Afterpay, can you talk a little bit about the potential for that customer actually, and I'm thinking about Cash App in particular, accelerating and maybe even comprising a larger portion of your revenue in 22 and maybe into 23. I just think if Block is truly successful in knitting together those two ecosystems and driving greater engagement, it feels like that could be an underappreciated growth driver for Marketo. How are you thinking about that?
spk11: Yeah, that's a good point. As we've seen, Afterpay is a great customer of Marketo. The acquisition by Cash App makes sense to really grow their ecosystem, bring more opportunities to their cardholders. And then we see, even with Cash App acquiring Credit Karma's tax prep services, you see them diversifying. And obviously, that drives more volume into the platform and then drives more volume out of the platform. And our success is our customers' success. So we'll see that grow. You know, it's a good question about, like, if they really execute, you know, can they grow more volume on the platform? For us, we hope so. I mean, that's how we make money. Their success, you know, is our success again. So if they're able to do that, then that's fabulous. They win, their customers win, and so do we and our shareholders. So, you know, our goal is to give them everything they need to be successful and That relationship we have with Block, specifically Cash App, Square Card, and now Team Card is obviously very, very important to us. And it's been very successful for both companies over the years.
spk12: Okay. Yeah, I look forward to seeing how that plays out. And then just a little more clarity around Plaid, perhaps. Can you talk about the KPIs in that business? Is that going to be predominantly digital? Is that predominantly going to be an interchange-driven business? It sounds like maybe there's some SaaS component to that relationship. I'm just trying to understand exactly how that compares with the issuing business.
spk11: Yeah, well, they do two core things for us. I mean, number one is help us accelerate our go-to-market strategy and then bolster banking and money movement offerings for us. Again, most consumers know their username and password for their bank, not necessarily their ABA routing number and account number. And the fact that Plaid works with 12,000 financial institutions and their commitment to both information security, tokenized account verification process is just far more secure. And that allows us to get more money in faster onto our platform through our customers and And then we make money through interchange. So they are connected. They're in some ways sort of directly connected because the more volume that ACH delivers from banks onto our platform and the more money that is spent on cards obviously generates more interchange for us. So this is about how do we speed up not only the ACH verification process, but how do we make it really easy for our customers to build better experiences for their customers on our platform?
spk12: Got it. That's helpful. Sorry, I'm a little remedial, so I appreciate it.
spk11: No, that's okay. I mean, think about this. This allows us to really diversify our product offerings and bring more extensibility of our platform to our customers and just make it easier for them to make money.
spk12: Yep. Makes sense. Thank you.
spk11: You're welcome.
spk13: Our next question is from Andrew Bao with SMBC Nico. Please proceed with your question.
spk02: Hey guys, thanks for taking the question and a nice set of results here. The first one is more of a technical point. I see that there's some investments in due diligence around potential acquisitions. So can you give us a sense of what you guys are looking at or what kind of solutions you'd like to kind of bring to the platform that could help the offering?
spk11: Yeah, I'll start with our goal is to maintain our first keyword manage by leaning into product and tech. I mean, we are a product-led company, which means the product is at the center of our customer roadmap and our customer experience and our customer journey. So how we think about that is, you know, where can we unlock value for our customers? You know, we recently added to our corporate development team as we plan to become more active. You know, we're both... strategically and opportunistically look at M&A to launch new products and verticals. We definitely view M&A as a way to get to the market more quickly and where we don't have a core competency. And then also, obviously, expanding globally. Our business is pretty unique in that card issuing processing is, monocard issuing is a global phenomenon, but it's different in every single country. So as we go into our country, especially countries where we see great opportunities both in card growth and other payment-type growth, not only for Marketa and the local companies in that specific, whether it's a continent or a country, but also for our customers. So we'll look to really M&A to either fill gaps on our roadmap or to accelerate our product roadmap.
spk15: And if I was just to add one thing to that, I think the more reasonable valuations in the space are certainly helpful, and we have a strong balance sheet, so... We'll be disciplined about it, but we certainly think there could be opportunities for us to accelerate our plans, as Jason said.
spk02: Yeah, and probably could be a good new talent acquisition lever as well. My follow-up is, thinking about the partners added post-2019, is there a good way that we can dimensionalize the growth in that part of your business? And what I'm trying to get at is, is you have a lot of these new partnerships and relationships coming on, and I would assume that you're kind of slow to ramp those up to their full run rate. I guess what inning are we on some of the new things that you have coming out and maybe call it like a wallet share gain type metric with your existing partners in that world?
spk11: So I've talked about this in the past, and certainly Mike would appreciate this, is the unique thing about Visa and MasterCard is they have interconnected every merchant in the world, whether online or offline, that wants to accept payment cards. So that solves, or what Marketo solves for monocard issuing is really that last mile. And we have seen a lot of customers and very well-known names of customers come on our platform. And these were verticals that even five years ago, we weren't really using as household terms like on-demand delivery or buy now, pay later, or even expense management. And we've identified those verticals early. We think there's a number of other verticals out there as companies begin to grow while servicing the existing verticals, which is how do we help a customer like a firm spread their wings throughout the world so and shorten the time to market for bringing merchants onto their platform, whether online or offline. So I don't know if there's a way to, and we obviously don't break out specific verticals in regards to their growth, but I think if we, you know, the numbers might throw out about, you know, 2019 around our growth of three and a half times net revenue in 2021 and 2019 as we've seen the success of those verticals. Now, we've gotten tailwinds from the pandemic as consumer choice really changed in regards to not only how they order groceries and food, but how they actually shop. Now, there's a number of other verticals out there where both modern card issuing and other payment types are really important, not just here in the U.S., but other places international. So We've talked about this in the past, and I think I've talked about it in the beginning here. We process less than 1% of the carded volume in the U.S., which is $6 trillion, and then far less than that globally, which is $30 trillion. So if you think about where we're at today, to your point, still very early innings in regards to not only the growth that we believe will happen on our platform, but the growth internationally, both on existing customers, new customers, and new verticals.
spk15: I was just going to add one thing. I think we still would expect for the growth to continue to accelerate from those newer cohorts. So it does take maybe a year or hopefully less to get onto the platform, and then it takes several quarters to ramp up. So we still see a lot of growth from those newer customers. Obviously, they're growing really fast and and contributing more and more, but there's still more to come.
spk02: Got it. Thanks, Mike, and congratulations on the new role. Thank you.
spk13: Our next question is from Bob Napoli with William Blair. Please proceed with your question.
spk09: Thank you. Good afternoon, and welcome, Mike, to the call. You're there one month, and you deliver a phenomenal quarter. Two weeks. That's a nice job. You know, a lot of great questions have been asked. And I mean, I'm really intrigued by the, you know, by the the partnership with Plaid and open banking. And is there and it seems like it is that a global relationship with Plaid? There's a lot going on in open banking and in Europe. I mean, is this will this enable you to get deeper into open banking? Is it a channel? Will Plaid be a channel partner as well, I guess?
spk11: They're a channel partner today for just the U.S. right now. But, yeah, I've actually I've known Zach for many, many years. We've talked about probably a number of times that we're going to work together. We finally found a way to work together, which is how do we create a much better customer experience for our customers? And we're also big believers in open banking. You know, as we see both neobanks becoming sort of on par with with you know, existing large financial institutions, this allows our platform to help those companies build more products and extend their wings. And our goal is to obviously spread more international. I've talked about before a company named Lydia, which is a digital bank based out of France using us. So as we can bring more of Plaid's technology to other parts of the world in the 39 countries that we operate in, we'll certainly do that.
spk09: Thank you. And I'd like to know which new verticals you're going to invest in before you and not tell the world so I can invest in some of those companies privately. But if you look at your pipeline today. you know, of new business? How does it look versus, you know, like the mix? Is there more international, more new verticals or, you know, how do you, the size of the pipeline versus of new business? I mean, you guys have just had a steady stream of announcements since your IPO. But, you know, how does that pipeline look today and how is it different from maybe a year ago or a couple of years ago?
spk11: Well, it's different in that. So let me talk about three different vectors. One vector is our existing customers and where they want to go and maybe some of the new things that they want to build. So we're building out new features, new functionality to do that. Number two is where are we building out in specific verticals like credit and where can our platform based on new customers or existing customers. This is either through a partnership with FMBO or a partnership with Reserve to help those companies scale and grow. And then third is really the international focus. I think, and we made these mistakes in the very early days of when we went to Europe, we brought our US playbook and we were told pretty clearly that your playbook doesn't apply here. So when we go into new countries, We find different modalities of payments being used, and we find that both there's customers that are in that specific area that want to use us and use our technology, but we also discover basically new modalities, like account-to-account transfer, for instance, that is something, hey, should we be looking at this and potentially using it within our platform? Again, our goal is to really unlock value by bringing tools to both customers and prospects to help them build more. So going back to the pipeline, you know, again, there's different ways we can go and look at this. I think number one is we're less than 1% of the card market in the U.S., much less than that internationally. So the vectors of growth are pretty significant.
spk09: Great. Thank you. Appreciate it.
spk11: You're welcome.
spk13: Our next question is from Ashwin Shirvaikar with Citi. Please proceed with your question.
spk08: Hey, guys. Jason, Mike, good results. And, Mike, welcome. I guess let me start with... you know, what the right way is to think about sort of net revenue retention in 2022. It's a, you know, obviously a very robust level that you guys have. And then the maybe related question from a margin perspective is your visibility into full year gross margins given mix, et cetera.
spk15: Yeah, so I can take that one, Ash, and I think that, you know, if you look at the revenue retention that we've had, right, in 2020, the number was, you know, 200%, and a lot of that was, you know, fueled by on-demand delivery, right, was booming at that time. 2021, you know, more BNPL related, and then some additional ramp in digital banking, for example. Um, and so we still think that if you look at our, our client base and the way that they're expanding and then they're even diversifying, you know, as Jason mentioned earlier, when talking about BNPL sort of, there'll be different flavors of, of BNPL and different ways to approach it to continue to expand that offering. And so we still feel that, you know, that, that number will come down just like, you know, revenue growths come down, you know, as the base gets larger and larger. But, um, You know, we still have an existing customer base that's growing incredibly quickly, looking to expand into new geographies, as Jason has also mentioned, and diversify their offerings. Those are all things that we're helping them with. So we see this as something where, you know, this rate, retention rate can, you know, remain quite high. I mean, you know, likely will come down as the base gets bigger, but still a very high number, you know, compared to, you know, most companies would enjoy. And then your second question in terms of our visibility on the gross profit margin. Yeah, I mean, I think that it's harder to project in the, you know, in the short term because you don't know sort of what the mix of volume is going to be. But if you look out over a longer period of time, like in this case, sharing what we expect for, you know, all of 2022, then, you know, then a lot of those shorter term impacts, you know, kind of move away and you're getting a much bigger mix of volume that is a little bit more predictable. So, you know, there still could be some variability there. But when we look at the size of our business, the behavior that we've seen to date and where we expect our customers to expand, we feel like we have a reasonable ability to project it. And then obviously as each quarter goes by, we'll share details as things change.
spk08: Got it. And I really appreciate the cadence comments that you had. But just to put a finer point on it, As I think of Q1 versus Q2, could you quantify the tax impact? And looking further out, the true-up impact from network incentives versus upside due to BNPL, because I think the latter might discontinue, whereas the true-up, obviously, one time in nature.
spk15: Yeah, so I think if you look at the tax impacts, you know, it's hard to know exactly, you know, when people will file and get their refunds. But, you know, we are already starting to see that earlier than what we've seen last year. So, you know, right now I guess our assumption is it'll sort of roughly be split between the two quarters, you know, as some of it will come in in late February and March. You know, some people won't file until the deadline, right? And so then you get the benefits of that in more April and early May. So, you know, that's what we're expecting. But it's, you know, it's really, I guess what we've assumed is maybe what I should say. But, you know, it's a really hard thing to know because it really is based on, you know, how quickly people will, you know, decide to file.
spk08: Got it. Thank you.
spk13: Our next question is from Josh Beck with KeyBank Capital Markets. Please proceed with your question.
spk03: Hi, this is Alex. I'm for Josh. Thanks for taking the question. I wanted to check back in around the crypto vertical. I may have missed it. I don't think we heard anything in the prepared remarks. We just appreciate any thoughts around fourth quarter momentum and kind of what you're excited about in this vertical looking into the 22. Yep.
spk11: Thanks, Alex. So as we talked about in our last quarter was our platform acts as a gateway between fiat and cryptocurrencies for partners like Coinbase, Backfold, Shakepay. And we're seeing a lot of incoming interests about this capability, even as we see pretty large swings in the price of crypto, a number of types of crypto in the market. Using the market as a platform, crypto innovators now enable their customers to make these fiat purchases. And we're now finding that they are wanting to, you know, consumers are finding that this is a nice product to have, especially holders of crypto. For instance, Coinbase users can swipe a Marketa-powered card at the point of sale, and we send an authorization for notification to Coinbase to check the user's crypto balance. Once they approve, Coinbase sells the crypto for fiat and funds the transaction. All this happens in real time, really creating a seamless experience for Coinbase users to spend their funds directly from their wallet. with having the transfer funds. So we don't break out specifically how each customer is doing. I will say is we are seeing significant traction from these customers. You know, revenue from these customers is now in the millions, whereas last year it was almost non-existent. And much like we did for verticals like on-demand delivery and buy now, pay later, they're using our JIT funding or just-in-time funding technology to go build this. So we're excited about the vertical. We're investing more in it. as we see demand increase. And as we've heard, you know, in the last couple of days, President Biden, you know, signing an order to look more and more at regulation. I'm somebody who thinks that, you know, regulation in the crypto market is actually important and in some ways is going to unlock more value for companies like Marketo and their customers.
spk03: Great. I appreciate all the thoughts there. Maybe just lastly, you know, with respect to the Citi relationship, Do you view this as more or less representative of the kind of size and scope of the opportunities in the FI pipeline, just kind of thinking about the initial land opportunity?
spk06: Yes.
spk11: Easy answer. This is, yeah, just to put a finer point on that, I mean, we've talked about, you know, during the roadshow in the last few quarters, you know, large financial institutions is an important part of our strategy. you know, and we're in the pitch and shovels business. You know, we powered and we had this DNA match really with commerce disruptors where they needed pitch and shovels to go build their businesses. You know, now we've attracted different types of companies, especially now in the large financial institution space where they're wondering, hey, you know, how do we use Marketo's technology to help us, you know, build new features, new functionality, and new businesses? So it's something that is a strategic imperative for us and something that we will be focusing on and talking about more in the future perfect thanks guys you're welcome we have reached the end of the question and answer session and I will now turn the call over to Jason Gardner for closing remarks Thank You Kyle thank you to Mike two weeks on the job joining us for q4 of 21 earnings also thanks to Stacy and Thank you to everyone that asked questions. Thank you for everyone joining the call. Have a great 2022. We very much look forward to talking about our Q1 of 22 results, and we'll let you know sometime in the future when that's going to happen. So thank you again, and stay safe. Take care, everybody. Bye-bye.
spk13: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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Disclaimer

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Q4MQ 2021

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