Marqeta, Inc.

in our filings with the SEC, which are available on our investor relations website, including our annual report on Form 10-K for the period ended December 31st, 2022, and our subsequent periodic filings with the SEC. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of the time of this call, and the company does not assume any obligation or intent to update them, except as required by law. In addition, today's call includes non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliation 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 first quarter call for 2023. Our first quarter results further demonstrate our ability to innovate at scale to drive growth while delivering operational efficiency. Our net revenue, gross profit, and adjusted operating expenses were better than we expected. Total processing volume, or TPV, increased 37% compared to the same quarter of 2022 and represented the first time our volume surpassed $50 billion for a quarter. Our net revenue of 217 million in the quarter represented 31% growth year over year. Gross profit was 89 million in the quarter, a 19% increase versus Q1 2022. Our adjusted operating expenses were 94 million, a 10% increase versus Q1 2022. We are pleased with our Q1 numbers and look forward to delivering even more with our great product market fit, market trends that play in our favor, and clear strategic focus. The operational changes we started continue to improve our execution and ability to capture our full potential in the coming quarters. Let me start with strategy and the big picture. Our industry is witnessing a major shift, one that plays directly into our strength. The expansion of the market to include embedded finance in addition to FinTech is accelerating. First and foremost, let me explain what embedded finance means. We define embedded finance as companies whose primary business is not banking nor finance. It's companies that offer financial services to their consumers through seamless integration into their existing products. Embedded finance takes banking to consumers versus asking consumers to go to the bank Marketa conducted a global survey of over 4,000 consumers this past quarter the survey revealed that 47% of consumers would now consider using a non-traditional financial service provider our platform which is comprehensive with debit credit and money movement, risk control, and program management is well positioned to serve this market, and we're already seeing a strong response from our prospects and customers. This shift is already evident in our numbers, as more than 50% of our sales in the past year came from embedded finance customers. What is most exciting about embedded finance is the number of companies that can choose to participate in the opportunity are almost limitless. The solutions can span multiple verticals, company sizes, and geography, creating demand for our services in a horizontal and global fashion. One of the embedded finance solutions we're excited about is accelerated wage access. Not only does it enable workers to access their wages sooner, but it also drives employer loyalty and goodwill without straining a company's working capital. This is a perfect match for Marketo as it uses multiple aspects of our platform, including card issuance and banking as a service capabilities. Accelerated wage access has already started contributing to our gross profit growth. not only has the number of active users quadrupled from the end of Q3 2022 to end of Q1, but TPV growth from the fourth quarter of 2022 doubled into the first quarter on a sequential basis. In addition, our pipeline for accelerated wage access is also rapidly growing. Another area where we're seeing traction in embedded finance is within marketplaces. This is an environment where money is constantly moving between supply and demand, creating the perfect scenario for financial tools to keep the ecosystem running smoothly. Marketa makes a great marketplace partner because of the myriad of solutions we can offer. Seller financing, accelerated seller payouts, bonus sale lending for consumers, co-branded cards, and banking as a service, just to name a few. During the quarter, we signed a partnership with an online employment marketplace where healthcare job seekers are matched with employers. Marketas powering a spending card linked to a loyalty program for workers based using the platform. In addition to driving loyalty, the program enables better tracking of placement data. Also, employers only need to fund the cards when they're used to make a purchase. optimizing their working capital outlet. In addition to online marketplaces, we also see our products helping in-person marketplaces, also known as brick-and-mortar retail. During the quarter, we signed two deals with very large enterprises, one of whom was already a customer on our platform. These customers are using our capabilities to deliver innovative, in-person bonus sales solutions that make things like authentication and just-in-time financing a much more seamless customer buying experience. There are a few reasons why Marketa was chosen. These customers required a partner with significant scale and expertise in card issuing. Also, in both cases, the customer is using the Marketa solution with an existing workflow requiring extreme flexibility. Now let me turn to execution. First, our integration of Power Finance is ahead of schedule, and we expect to complete the process by the end of the quarter. With intention, we sought an asset whose technology was built in a similar way to Marketra so we could combine these two solutions quickly. Our prospects have responded well to the combined solution. In addition to the demand for co-branded cards, which we actually anticipated. We're seeing demand for commercial credit cards, especially in a high interest rate environment that has made access to working capital difficult for small businesses. Second, in terms of how we go to market, the changes we made to the sales organization over the past six months continue to pay off. After a strong end to 2022, our bookings in Q1 exceeded our targets. The number of deals closed in Q1 was approximately the same as the number of deals we closed in the entire second half of 2022, a testament to the built-up demand for our services, our strong competitive position, and improvement in sales operations, all accomplished without a material increase in headcount. While it usually takes six months, to 12 months to translate these bookings into material gross profit, the strength of our bookings gives us good leading indicators of growth for 2024. Two-thirds of the deals we closed in the quarter were expansion with existing customers, which speaks to our customers' affinity for the Marketo platform and our land and expand go-to-market strategy. These expansion deals fell mainly into three categories. the launch of a new product, expanding into a new geography, and the addition of managed services. In terms of new products, we signed two deals for point-of-sale lending this quarter, as I mentioned earlier. A new geography, we had two of our top 10 customers, one in e-commerce and the other one in on-demand delivery, signed expansion deals to take successful products to new markets in the EU and Latin America. both of these customers have previously used us to expand into other geography which is a testament to how seamless the process is on our platform our work with western union is a great example of how customers expand on our platform after a successful wallet launch in certain european countries western union plan to launch its U.S. debit and prepaid card with Marketo as part of the company's U.S. wallet launch. On the managed services side, the deals we signed for the quarter are for addition of risk control, a real-time fraud detection platform, and dispute management, as customers sought Marketo's expertise to help them grow. While we're excited about expansion deals and our ability to serve our top customers, we are also focused on growing our customer base to diversify our revenue and gross profit growth. No single deal signed this quarter represented more than 15% of the total bookings value for the quarter. In addition, about one third of our net new deals for the quarter came from the EU, which helps us diversify the geographic mix of our business. Lastly, The net new deals we saw in this quarter were also a healthy mix across our use cases, with digital banking and expense management both having multiple deals in the quarter. Now let me turn to operational and capital efficiency. This is an era where I feel our commitment and focus as a business is really starting to pay off. Let me give you some examples of our increased operational efficiency. We were able to renegotiate multiple contracts as well as optimize the usage of certain technology tools. As a result, we're able to save over 10 million of annualized expenses. At the same time, our focus on operational efficiency does not mean we're sacrificing the reliability of our platform. In fact, we are improving our reliability while also managing increased scale. During the quarter, our authorizations increased by 9% from the fourth quarter of 2022 as our business continued to grow at scale. However, at the same time, our success rate improved by six basis points over the same time period. We were able to accomplish this without significant headcount additions by focusing on increased rigor and automation around engineering development. While our focus is and has always been serving our customers and capitalizing on the tremendous market opportunity. We believe that the best way to accomplish these goals is by making Marketa itself a more efficient company, a path we've already made great progress on. In Q2, we will accelerate our focus on efficiency and take focused action to reduce our adjusted operating expenses by 40 to 45 million on an annual run rate basis. Unfortunately, this will result in approximately 15% reduction in headcount and marketer. This is not a decision we've made lightly, but it's a targeted move to help us capitalize on the tremendous opportunity in front of us in the most aggressive and disciplined way possible. Based on the opportunity we're seeing unfold, along with improved execution, we believe our stock is undervalued, and our board has authorized a $200 million share buyback program. Before turning it over to Mike, our CFO, I would like to reiterate our commitment to capitalize to capitalizing on the growing embedded finance opportunity while serving our traditional FinTech and engaging with large financial institutions, modernizing their offering. We intend to achieve these goals through innovation at scale and laser focus on operational and capital efficiency. Our platform is a perfect fit for this market, and we're fully committed to serving our growing list of customers. to rapidly grow and diversify gross profits while we progress on our path to sustainable profitability. We're well on our way in this journey. Now, over to you, Mike.

Thank you, Samen, and good afternoon, everyone. Marquetta delivered a great quarter to start 2023 with net revenue growth of 31%, gross profit growth of 19%, and adjusted EBITDA margin of negative 2%. All three performance indicators were above our expectations, driven by stronger volume growth from several of our top customers, as well as accelerated execution of our cost efficiency efforts. Q1 TPV was $50 billion, growing 37%, continuing to demonstrate our ability to grow at scale. Growth was stronger in the first two months of the quarter before slowing by several points in March, driven by two factors. Last year's comps were easier early in the quarter because of the Omicron outbreak, but became more difficult when the post-pandemic recovery started later in the quarter. Also, spend per active card was stronger in the first two months of the quarter this year, which aligns with the shifts in consumer confidence. Looking at our TPV performance by vertical, growth in the financial services vertical continues to be the highest contributor to growth, decelerating by a few points versus Q4, but growing a little faster than the company as a whole. This was fueled by Cash App's rising card penetration among their rapidly growing users and increases in direct deposit usage driving higher spend per card user. Lending growth, including buy now, pay later, accelerated a little versus Q4, driven by several customers expanding their use cases and merchant categories, with travel-related spending being particularly strong. Overall, BNPL continues to be hampered by Klarna's migration of a portion of one program in the third quarter of 2022, excluding Klarna the NPL growth was roughly similar to the overall company growth. Expense management TPV grew significantly faster than the company as a whole, but growth did slow compared to prior quarters due to tougher comps. Four of our top six customers are growing faster than 75%. Q1 net revenue was $217 million, an increase of 31%, consistent with last quarter. Block continues to be a strong contributor to growth, driving our revenue concentration to 76% in Q1, up about two points from Q4. The increased concentration is mostly driven by the strength of Cash App as well as slower BNPL growth. Revenue growth remains strong within our managed by Marketo business, including the on-demand delivery vertical. The net revenue take rate was slightly lower than last quarter and two bps lower than Q1 2022. When comparing the take rate to last year, it is higher in three of the four major managed by Marketo verticals. However, that is more than offset by the volume mix shift toward the power by Marketo business. Q1 gross profit was $89 million, growing 19% with a gross margin of 41%. The margin is lower than Q1 of last year due to an increase in block revenue concentration, which has a margin almost one-third of the rest of the business and the Klarna volume migration, partly offset by the positive impact of our value-added services not directly tied to DPV. Our Q1 gross profit growth, excluding Block and Klarna, is almost three times higher than the overall company growth. While the Block revenue concentration has steadily increased over the past four quarters, the Block gross profit concentration has remained consistent. This is due to less favorable volume mix within the Block business for both purchase and ATM transactions, combined with improving margins in the rest of the business. The improving non-block margins are primarily driven by better pricing from multiple bank partners, higher incentives with one network partner, and a large card fulfillment benefit in the quarter. Q1 adjusted operating expenses were $94 million, essentially flat for the last three quarters, but a year-over-year growth of 10%. Approximately one point of which is inorganic driven by the inclusion of power starting in February. Our adjusted expense growth decelerated versus Q4 in each of our major expense categories due to realized efficiencies and the benefits of platform scale. We continue to exercise discipline in hiring as our automation and tooling efforts improve efficiency. We have also reached a healthy investment capacity. As a result, The incremental investment required to fuel our future growth and innovation is relatively small, given the major platform expansions are behind us. Scale, optimization, and vendor negotiations are helping our technology tool-related expenses, as our transaction growth of 45% is almost 20 points higher than our technology expense growth. We further reduced expenses by actively managing our use of external resources and better leveraging our internal expertise. Q1 adjusted EBITDA was negative $4 million, a margin of negative 2%. This result was better than we expected, driven almost equally between higher gross profit due to business performance and accelerated execution of our cost management effort. Interest income was $12 million, driven by continued rising interest rates. The Q1 gap net loss was $69 million, including a $32 million one-time non-cash post-combination compensation expense related to the closing of the power acquisition. Similar to prior quarters, we had positive cash flow excluding the closing of the power acquisition, including operating cash flow if you amortize bonus payouts. We ended the quarter with approximately $1.5 billion of cash and marketable securities. Our board has authorized a share repurchase program of up to $200 million. We believe that our current valuation does not properly reflect the following. the expansion of our market opportunity with the emergence of embedded finance. Two, our differentiated product platform with the comprehensive offering of debit, credit, money movement, risk control, and program management for consumer and commercial use cases. Three, sales momentum driven by our renewed go-to-market motion. And four, increasing expense discipline and a healthy investment capacity that will limit future expense growth. At our current valuation, This attractive growth path, combined with our strong balance sheet and limited cash burn, make this buyback program a great opportunity to reduce dilution as we continue to manage the business for the long term. We expect this program to be roughly equivalent to both the stock-based comp shares vesting and issued in 2023. Now let's shift to our Q2 and full-year outlook. As a reminder, although a block renewal is a top priority for us, and we would like to secure renewal in 2023, The various block contracts run beyond this year. Therefore, we cannot indicate a potential impact to our financial performance until renewal is done and have assumed current contracts are in place throughout 2023. Q2 is off to a solid start. April TPV growth was consistent with March, with the managed by Marquetta business accelerating a bit, offset by the powered by Marquetta business decelerating on a consistent trajectory we have seen as the comps toughen due to the rapidly growing base. We expect Q2 net revenue growth to be between 17% and 19%, consistent with the expectations we shared on our last call. The two more significant factors driving the slowdown in growth versus Q1 are approximately five points is driven by Q1 performance we don't expect to continue, specifically the stronger spend per user in January and February that did not sustain, as well as a large card fulfillment benefit. The results in Q2 last year benefited from a higher net revenue take rate due to favorable volume mix, both in terms of merchant mix as well as PIN versus signature debit mix, as well as the beginning of more robust usage of our additional services not tied directly to TPV and a resurgent corporate travel environment coming out of the pandemic. We expect Q2 gross profit growth to be in the 1% to 3% range. This is a slightly bigger step down in growth versus Q1 than we expect in revenue, primarily for two reasons. First, a drop in the average transaction size that started in late March, which pressures our gross profit due to the interplay of the transaction and volume-based components of interchange and network fees. Second, the timing of incentives. Remember, Q2 is the start of our annual incentive contracts that run April to March. Therefore, the incentive benefits are lower as the volume tiers reset. As we discussed last quarter, We lost some of the full VISA incentives we were previously receiving, which will cause the step-down incentives to be more significant than what we experienced last year. In Q2, typically is our lowest gross profit margin quarter for the year, as the net revenue does not follow the same seasonality as incentives. As Simon mentioned, we plan to take further actions to reduce our operating expenses with a restructuring in Q2, which will reduce our workforce by approximately 15%. This is part of the current management team's broader prioritization of organizational efficiency in order to put our company on a sustainable, long-term path to profitability. We expect this will result in a 40 to 45 million reduction in our annual adjusted operating expense run rate, as well as lower future share-based compensation. We do not anticipate any impact to our service, products, and operations, primarily for three reasons. One, We plan to be hyper-focused on a relatively limited number of opportunities we feel will generate the most value for customers and therefore the highest return on investment. Second, the major components of our platform are already in place. Debit, credit, risk and authentication, and banking and money movement solutions. And third, we've made significant progress on our automation and tooling efforts that make us less dependent on large numbers of people to complete important tasks. We plan to execute the restructuring in the next few weeks, so there will be a small benefit to Q2 adjusted operating expense. We expect Q2 adjusted operating expense growth to be in the low to mid single digit. We will also incur a one-time restructuring charge of $9 to $11 million. Therefore, we expect Q2 adjusted EBITDA margin to be negative 4% to 6% on an organic basis, excluding a one-point negative margin impact of the power acquisition. Our expectations for the full year 2023 largely remain unchanged with the exception of our adjusted EBITDA margin. Although the Q1 outperformance gave us a small boost for the full year, we still expect 2023 net revenue growth to be in the low 20s given the level of macroeconomic uncertainty caused by the rising interest rates, tightening credit, and banking turmoil. We expect Q3 growth to be similar to Q2 before accelerating into the low 20s in Q4, once we have fully lapped the CLRNA volume migration and we begin to lap the impact of heavy renewal activity. Similar to revenue, we still expect 2023 gross profit growth to be in the mid-teens. We expect Q3 growth to be in the mid-teens and then accelerate into the low 20s in Q4 in alignment with accelerating revenue growth. Before taking into account the cost benefits of restructuring, we expect the 2023 adjusted EBITDA margin to be negative low single digits on an organic basis, excluding the approximately one point negative margin impact of the power acquisition. This is a result of our increased cost discipline as well as our realized efficiencies and platform scale. Including the revised cost base post-restructuring, we now anticipate our 2023 adjusted EBITDA margin will be around breakeven. We expect adjusted EBITDA margin to be slightly positive in Q3 and positive mid-single digits in Q4. To wrap up, our strong Q1 performance across both financial and operational indicators has us on track to accomplish our goals for this year. Marketo is at an inflection point in 2023 with exciting progress on several dimensions. I would highlight three in particular. First, improvements to our go-to-market approach are driving a significant acceleration in bookings, which coincides with the massive broadening of our market opportunities due to the emergence of embedded finance. While we will still focus on specific fintech verticals, Embedded finance is a horizontal trend cutting across a wide variety of industries, making almost any company with an engaged user base a potential customer. Our highly flexible and configurable platform, operating at a scale for consumer and commercial use cases, is tailor-made to serve the demand. The bookings will take several quarters to impact the P&L, but are a strong indicator of future growth. The integration of Power's credit program management capabilities by the end of June less than five months after completing the acquisition, is a foundational addition to our single-stack platform. We will serve the full spectrum of credit, including B2B seller financing, consumer credit building, charge cards, transaction underwriting, and revolving credit. Our pipeline suggests the opportunity to innovate is large and moving quickly. Again, another positive sign for future growth. Lastly, we are making meaningful progress on operational efficiency reducing waste and the use of professional services, leveraging our scale and optimizing technology usage, and incorporating automation and tooling efforts, all to accelerate our path to profitability. Our restructuring in Q2 will only enhance our focus on key priorities to sustainably deliver customer and shareholder value. I will now turn it over to the operator for questions.