Marqeta, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Marketo's first quarter 2022 earnings conference call. As a reminder, the conference is being recorded. I would like to turn the conference over to Stacey Feinerman, Vice President of Investors 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 annual report form 10-K for the period ended December 31st, 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 of the time of this call, and the company does not assume any obligation or intent to update them except as required by law. In addition, today's call includes non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials. which are available on our investor relations website. Hosting today's call are Simon Koloff, Marketa's CEO, and Mike Miletic, Marketa's Chief Financial Officer. With that, I'd like to turn the call over to Simon to begin.

Thank you, Stacey. And thank you, everyone, for joining us for Marketa's fourth quarter 2022 earnings call. I'll briefly touch on our results for the fourth quarter. and for the year 2022, and then share our top priorities for 2023. We ended the year in a position of strength. Once again, demonstrating our ability to grow and innovate at scale. Total processing volume, or TPV, was 47 billion in the fourth quarter, a 41% increase compared to the same quarter of 2021. and two and a half times the TPD in the fourth quarter of 2020. Our net revenue of $204 million in the quarter grew 31% year over year with financial services empowered by Marketo as the fastest growing segment. Gross profit was $87 million in the quarter, a 15% increase versus Q4 2021. This growth with 16 percentage points lower than net revenue as we left the incredible ramp in the buy now, pay later business we had in Q4 last year. Our gross margin for the quarter was 43%. The full year 2022 was another great one for Marquette. Total processing volume, net revenue, and gross profit grew 50%, 45%, and 38% respectively. We attribute our success to our great product market fit, where our scaled platform has been adopted by many of the innovators in this changing digital economy. As a result, we have strong growth among our customers and continued satisfaction with our products which is evident in our healthy net revenue retention of 144% compared to 2021. This revenue retention is consistent for both our block and non-block business. While I'm pleased with where we ended 2022, I'm actually more excited about the opportunities ahead of us. The embedded finance market is rapidly expanding and evolving. Marketo, has powered embedded finance for years, one application at a time. We started with on-demand delivery, enabling an entirely new commerce use case by minimizing fraud. Then we moved to neo-banking, introducing engagement features such as instant issuance. Next, we enabled buy now, pay later, alleviating the time and cost required to build merchant acceptance. And then moved into expense management, to help digitize B2B payments. Going forward, there are several new large opportunities in front of us, such as wage disbursement, accelerated wage access, flexible accounts payable, and point of sale lending. In addition, over the last several quarters, we've seen demand change from narrowly focused FinTech to larger, more established companies looking to embed financial services into their offerings. Their goal is to drive more loyalty among their large user base and create additional revenue opportunities. We do expect that trend to continue and drive further demand for Marketo as our solution is ideal for this market. First and foremost, with a cloud native and an API first, making us easily embeddable into our customers' workflows. Second, our solution is comprehensive with support of debit, credit, money movement, coupled with program management, making us a natural choice for this market segment. Our customers won't need to stitch together disparate solutions from multiple vendors. Finally, our scale gives our customers the confidence in our ability to support their growth on a global basis. Given this renewed focus on our path to profitability, let me share our three priorities for 2023. Number one, to integrate our power acquisition. Number two, to continue to accelerate sales. And number three, to drive innovation within our economies of scale. We began making progress on the last two focus areas in the second half of 2022. So this doesn't really represent a departure for the company, rather they represent an acceleration through sharper focus. Our first priority is power integration. Reddit represents a huge addressable market that is currently held back by the constraints of legacy technology that has not kept up with how companies engage their consumers. At Marketo, we have provided credit processing for two years, but we've leveraged program management from partners. While this approach has had its successes, such as the launch of the green light credit card, our prospects have been clamoring for more from us in terms of a solution that combines both processing and program management That is on par with our debit and prepaid offerings. That's what the power acquisition delivers. Our customers will be able to create credit card programs that are unique and personalized in significantly less time than it would take with multiple platforms. Let me give you an illustrative example. Our customers will be able to create personalized and dynamic rewards that are suited to an individual end user based on their specific transaction and not just your typical cash back or travel rewards. The possibilities extend far beyond consumer programs as we see multiple commercial use cases in expense management, e-commerce, and a variety of marketplaces. In fact, since the announcement, we've already engaged with well-known retail brands, B2B providers and marketplaces that are excited about our combined solution. As far as FIT is concerned, we honestly found the perfect match in power. The platform was built using very similar architecture as Marketo. They focused purely on program management within credit using a partner for processing while we did the exact opposite. Therefore, there's very little overlap between the two platforms, and we anticipate the integration, which is already underway, will be completed in Q3 of this year. Moving on to our second priority is to accelerate our sales motion with greater focus and improved efficiencies. Over the years, Marketo has grown fast and achieved scale partnering with high growth syntax. we expect these customers will remain a base of profitable growth as they use Marketa to grow, launch new products and expand into new geographies. However, we were slow to adapt to the evolving market, which in late 2021 started shifting from FinTechs to more established brands looking to bring embedded finance solutions to their existing user base. As a result, Our new bookings in late 2021 and through Q3 2022 did not meet our internal expectations. These sales challenges have only just started to impact our financial performance, as it roughly takes 12 to 18 months for customers to onboard and ramp their car programs. Unfortunately, we will feel most of that impact in 2023. The good news is we believe that this problem is now behind us. As I expanded my role in the summer to include managing go-to-market, we reorganized into modular teams focused on specific segments. We also integrated solutions and sales engineering into the modular teams, giving leaders end-to-end account ownership and sustained relationships based on deep account knowledge and payment expertise. In conjunction with the changes, we properly aligned our sales incentives to our growth objectives. We are very pleased these changes have already began producing the desired outcomes. In fact, our Q4 bookings were extremely strong, totaling more than the first three quarters of 2022 combined. The use cases for our recent sales are extremely diverse. highlighting the breadth of our platform for both consumer and commercial customers. One customer is a large expense management provider who's using us to expand their business to Canada. Another is looking to offer financial wellness services for immigrants. A more specific example of a unique partnership we close is our win with Rakuten France and MasterCard, to launch an integrated payment solution for their loyalty program, which has over 12 million members. The first time an e-commerce platform offers a digital payment method linked to a cashback system. To do this, Marketo will enable the issuance of a single-use virtual card and provide additional managed services to improve the security of each transaction. In addition to the organization and go to market, we also focus on signing longer term contracts with customers. Since the second quarter of 2022, we've renewed four of our top eight customers and about half of our top 30 customers. Approximately 80% of these contracts were renewed at a longer duration than our previous typical duration of three years. In fact, Over a third of these renewals were done for five years. I'm confident that this improved sales trajectory will continue and even accelerate given the sharpened focus and team alignment. Moving on to the third priority is innovating within our economy's scale. In 2022, we had two sizable product launches. First one is risk control to minimize fraud and charge development. And the second one is Marketa for banking to offer additional money movement capability. A recent addition of credit program management with power is yet another significant platform extension. Over the next year, we will invest in enhancing our platform capabilities, scale, resilience, and security. However, this increase in investment will be significantly smaller than in previous years. there are three main reasons we're confident we can continue to innovate while achieving economies of scale. First, we've built an outstanding product and technology team over the last few years. Given the current scale of our platform and organization, we have sufficient capacity to innovate and launch multiple enhancements quarterly with limited incremental headcount. As we mature, we have automated some tasks that we traditionally use headcount for. Onboarding our customers would be a concrete example of that. And third, since we no longer have major solution gaps to fill, we plan to leverage our existing platform and focus our efforts on small and strategic unlocks to solve our customers' problems in highly innovative ways. In closing, Our industry is undergoing another evolution. The FinTech boom led to an unbundling of the banking industry, leaving it to customers to piece together disparate systems into a suboptimal solution. Embedded finance customers simply will not tolerate that. Neither will Marketo. We're extremely positioned to serve the needs of this customer base as a global cloud native an API-first platform going very deep with a fully bundled offering, debit, credit, risk management, money movement, and program management. We consider ourselves the only issuer-focused company with a bundle that truly meets where payments are going. I am confident we will capitalize on this tremendous opportunity. With that, I'll turn it over to Mike for a more detailed look at our results for the quarter, as well as our financial outlook for 2020. Thank you, Simon, and good afternoon, everyone. Q4 was a strong finish to a great year for Marketo, with Q4 TPV growth of 41%, net revenue growth of 31%, gross margin of 43%, and adjusted EBITDA margin of negative 4%. The net revenue growth and gross margin were both on the high end of our expectations, while adjusted EBITDA was better than expected as we continued to slow incremental investment by leveraging improvements in our efficiency and effectiveness. I will cover the Q4 highlights before spending more time detailing our current expectations for 2023. Q4 TPV was $47 billion, growing 41%, once again demonstrating our ability to grow fast at scale. Let me put the rapid scale of our TPV in perspective. In Q4, we had over 50 days when we processed over 500 million in volume compared to over 30 days in Q3 and less than 20 days in Q2 of this year. And Q4 TPV of 47 billion is more than our first three quarters of 2020 combined. Looking at our TPV performance by vertical, growth in the financial services vertical was consistent with Q3 growing a touch faster than the overall company, fueled by Cash App's rising card penetration among their rapidly growing users and engagement driving higher spend per card user. On-demand delivery has been relatively consistent all year, growing double digits, driven by merchant category expansion and steadily rising consumer demand. Lending, including buy now, pay later, growth slowed this quarter, but did remain in the double digits. The growth is atypically low for three reasons. First, One customer migrated a portion of one of their programs to another processor in Q3 for diversification reasons. If you adjust for this migration, this vertical's growth would have been a little shy of our overall TPV growth. Second, the 2021 holiday season was exceptionally strong for BMPL, creating a very difficult comp. We saw a nice surge in holiday spending this year with sequential growth for BMPL from Q3 to Q4 in the mid-20s. but that falls well short of 2021 when the sequential Q3 to Q4 growth was over 50%. Finally, many of our customers tightened credit requirements in Q4 given the evolving macroeconomic environment. Since managing TPV more than doubled year over year, the growth is lower than prior quarters due to rapidly rising comps as well as the uncertain macroeconomic environment causing businesses to manage their spending more closely. Powered by Marketo, Q4 TBB more than doubled year over year, reaching almost 20% of our total TBB, up more than five points from Q4 last year. This growth is fueled mostly by expense management use cases in the U.S., as well as international growth. Q4 net revenue was $204 million, growing 31%. Block continues to be a strong contributor to growth, driving our revenue concentration to 74% in Q4, up about one and a half points from Q3. This is mostly driven by cash app with after pay and the seller card also contributing. Another factor is our slower revenue growth in BNPL due to the reasons I shared earlier. Our Q4 net revenue outside of block and BNPL is growing several points faster than our total company growth. The net revenue take rate was one BIP lower than last quarter and three BIPs lower than Q4 21, mostly due to the growth of our powered by Marquetta business, whose share of total TVB continues to steadily increase. Remember, the TPV growth of the Powered by Business affects the net revenue take rate much more than the gross profit take rate. Q4 gross profit was $87 million, growing 15% with a gross margin of 43%. The margin improved one point from Q3, mostly due to higher network incentives as volume increased, but also was helped by our value-added services not directly tied to TPV. The margin is lower than Q4 last year due to the lower contribution of BNPL as well as an increase in block concentration, given block's lower margin profile than the rest of the business. Two additional points about our gross profit dynamics. First, although our block revenue concentration is up five points since Q2, block's gross profit concentration remains unchanged during that time. This is due to less favorable volume mix within the block business, as well as improving margins elsewhere, in part due to increasing network incentives. BNPL also significantly impacted our Q4 gross profit growth as a result of the slowing volume growth. Our gross profit outside of block and BNPL in Q4 is growing over three times faster than our total company growth and more than 10 points faster than the revenue growth outside of block and BNPL. Q4 adjusted operating expenses were $95 million, growing 27%. Our expense growth was slowed meaningfully each quarter in 2022, due to a significant amount of investing in 21 that we did not repeat, identified efficiencies, and continued discipline in hiring only for roles critical for growth. As a result, the incremental year-over-year investment required to fuel our future growth and innovation is shrinking. Q4 adjusted EBITDA was negative 7.5 million, a margin of negative 4%. This result was 3 to 4 million better than we expected, driven mostly by our decision to slow the pace of hiring during the quarter. Interest income was $11 million, more than 50% higher than Q3, driven by continued rising interest rates. We also recorded an $18 million gain on the sale of a private company equity investment. The Q4 gap net loss was $26 million. In 2022, we purchased 11.7 million shares for an average price of $6.77. Since the start of 2023, we have utilized the remaining $21 million of the $100 million the Board authorized from last September. With our recent acquisition of power and our belief that there will be other attractive opportunities to further accelerate our product roadmap through M&A, we don't plan to buy back more stock at this time, but may consider it again in the future. Similar to prior years, in 2022, we had positive cash flow, excluding all financing activities, including share buybacks, and the sale of the equity investment. Although our adjusted EBITDA was negative for the year, we are not burning cash, which further demonstrates the strength of our business. Now let's transition to our expectations for 2023. First, let me start with several important points. Based on the trajectory of our business over the last several months and the often conflicting macroeconomic indicators that suggest both strength and oncoming risks, we have assumed a modest slowdown in the trajectory of consumer and business spending as 2023 progresses, i.e., a relatively soft landing, not a significant decline in consumption and business investment that typically comes with a recession. Although a blocked renewal is a top priority for us and we would like to secure a renewal in 2023, The various block contracts run into 2024, and we cannot indicate a potential impact to our financial performance until a renewal is done. Therefore, we have assumed our current contract is in place throughout 2023. From May 22 through March 23, we will have renewed approximately 50% of our volume excluding blocks. Customers are opting to sign longer-term contracts which shows their conviction in Marketo as the partner of choice and solidifies a base of business for which we can drive sustainable, profitable growth in the future. In these renewals, our customers receive better economics as they get bigger, much in the same way that we benefit from our scale. Therefore, 2023 gross profit in particular, as well as net revenue growth, will face headwinds as we grow over old contracts with more favorable terms. There are two business factors weighing on our 2023 net revenue and gross profit growth that we believe are unusual and will only affect 2023 growth, not the subsequent years. First, sales bookings were below our expectations in late 21 and the first three quarters of 22 as we transitioned from supporting specific use cases to a solution-oriented enterprise platform with a structured and repeatable sales motion. Although we believe we have solved the sales challenges based on Q4 2022 bookings and progress so far in Q1 23, The previous lack of sales has reduced the number of customers who are ramping their card programs in 23. Second, earlier this month, we renewed our relationship with Visa to set ourselves up for long-term success. We feel great about the partnership with Visa and believe our agreement reflects our track record for achieving scale and growth. As we've discussed in the past, the level of our overall network incentives is based on the nature of the relationships between Marketo, the networks, and our customers. For two of our larger customers, shifts in these relationships are negatively impacting the level of incentives Marketa earns. While this type of change is rare, it will have a significant impact on our 2023 gross profit growth. For the full year 2023, we currently expect net revenue growth to be in the low 20s, with TPB continuing to grow more than five points faster than revenue due to the Powered by Marketa trajectory. The net revenue growth assumes modest macroeconomic pressure and is mostly fueled by volume growth of long-standing customers with a small lift from our risk control and market for banking products starting to get traction. The growth from new customers signed in the last two years is offset by more favorable renewal terms extended to customers initially signed prior to 2021. Given it takes roughly 12 to 18 months for new customers to onboard and rent their card programs, we don't expect much impact from our strong Q4 22 sales on our 23 revenue. We also do not expect a meaningful contribution from credit programs in 23, as the power integration will not be complete until Q3 this year. We expect 2023 gross profit growth to be in the mid-teens, which equates to a gross profit margin in the low 40s. The change in certain network incentives tied to specific customers should pressure our gross profit growth by over five points, lowering our gross profit margin by almost two points. Putting the block renewal aside, the combination of our rapidly improving sales, the availability of our complete credit offering, and the lapping of our renewal activity, we are very optimistic that our net revenue and gross profit growth will meaningfully accelerate in 2024. We plan to grow our 2023 adjusted operating expenses in the high single digits excluding the two points of additional expense growth for the addition of power. We plan to achieve this discipline and focus that began early in 2022, innovating within our economies of scale and continuing to drive efficiencies throughout the company. The organization as a whole has done a tremendous job finding more effective ways to deliver for our customers without the need for significant incremental investment. This minimal expense growth demonstrates our desire to progress towards our profitability goals while continuing to develop and deliver valuable solutions for our customers. Therefore, we expect 2023 adjusted EBITDA margins to be negative low to mid single digits, excluding negative approximately one point from the power acquisition. For Q1 2023, we expect net revenue growth to be between 26% and 28%, our highest growth quarter of the year, driven by easier comparisons as our cash app business started to accelerate in Q2-22. Q2 and Q3 are expected to grow in the high teens as the comps get tougher and the macroeconomic environment worsens a little, before accelerating in Q4 into the low 20s once we have lapped our BNPL customers' partial volume migration and we begin to lap the impact of all the renewal activity. Q1 gross profit growth is expected to be between 14% and 16% in line with our four-year expectations. Q3 should also be similar. Q2 is expected to be the lowest growth quarter in the mid-single digits, mostly due to the quarterly cadence of our incentives. Q4 growth is expected to be in the low 20s in alignment with accelerating revenue growth. Q1 and Q2 adjusted operating expense growth is expected to be in the low team on an organic basis due to technology, product, and sales headcount added in the second half of 22. In the second half of 2023, organic expense growth should fall to mid-single digits as we last the 22 hiring. All four quarters will also have an additional approximately two points of inorganic expense growth due to the inclusion of power. Therefore, Q1 adjusted EBITDA margin is expected to be negative 5% to 6%. In Q4, we expect to have a positive adjusted EBITDA margin as gross profit growth accelerates and expense growth remains subdued. In conclusion, although we expect our 2023 financial performance to have some challenges, we are excited about the momentum we have to drive sustainable, profitable growth for years to come. Our excitement and confidence is primarily driven by four factors. Marketta has great product market fit to serve companies looking to embed financial services into their offerings in the U.S., Europe, and beyond, a very large and rapidly growing market. Number two, In the first half of 2022, we became more focused on our investment and began to realize the cognitive scale within our expense space as we start down the path to profitability. Number three, in the second half of 2022, we expanded our product set, evolved and accelerated our sales motion in a sustainable fashion, and began securing large portions of our business with longer-term renewals. And finally, number four, earlier this month, we acquired power to expand our credit offerings which further enhances our differentiation as the modern-scale issuing platform that supports all card use cases for innovators. Therefore, Marketo has the team, the opportunity, the product market fit, the installed base, and the operational discipline to achieve significant long-term sustainable growth. We are excited to share our progress with you in the coming quarters. I will now turn it back over to the operator for questions.