Marqeta, Inc. Q2 FY2021 Earnings Call

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Marqeta Second Quarter 2021 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks we will open the line for your questions. As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Stacey Finerman, Vice President of Investor Relations to begin.

Thanks operator. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including those set forth in our filing with the SEC which are available on our investor relations website including our prospectus stated June 8th, 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 may include 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 which is available on our investor relations website. Hosting today's call are Jason Gardner, Marqeta's founder and CEO and Tripp Faix, Marqeta's Chief Financial Officer. With that, I'd like to turn the call over to Jason to begin.

Thanks Stacey. Thank you everyone for joining us for Marqeta's first earnings call as a public company. It’s great to be connecting with you all. We had a very successful IPO. We've raised a lot of capital and we're off to a great start. Tripp and I are excited to share Marqeta's second quarter results as well as an overview of our business. I want to cover a couple of financial highlights about which Tripp will provide additional detail. Next, I will talk about three key themes for the quarter. And lastly, for those on the call who are less familiar with us, I'll provide some focus on Marqeta. With that, let's begin. Our second results demonstrate our solid product market fit and execution in this rapidly evolving digital payments landscape. $27 billion in total processing volume, a 76% increase compared to the same quarter of 2020, and $122 million in net revenue, also a 76% increase compared to the same quarter of 2020. There are three key themes that I want to highlight from the second quarter. First, we continue to land winners. Google chose Marqeta to power the launch of a digital card for Google Pay Balance users allowing them to instantly use their balance through a virtual card tokenized in Google Pay. Second, we continue to expand and grow rapidly with our current customer. We expanded our relationship with Square. Square announced Square banking services during the quarter, and we are proud to power the Square checking product. And third, we continue to build long-term relationships with our customers. During the quarter, we extended our agreement with Affirm until 2024. This is a confirmation of our enduring value of our platform and our robust partnership. Again, Tripp will provide more detail on our second quarter performance in a few minutes. Still, this is our first earnings call, and I'd like to spend some time providing you a brief overview of Marqeta, the industry tailwinds driving our growth, and a few of our strategic initiatives. Marqeta created modern card issuing, which is at the heart of today's digital economy. When you think of the cards in your wallet, they do very little and have seen little innovation in decades. Now, imagine a card that can take any form factor you want, solve significant payment problems at scale, and disrupt the entire industry, from authorizing transactions based on dozens of dynamic criteria, to allow you to pay in installments, to creating a brand-new consumer or commercial experience. These cards can be physical, virtual, or tokenized into a mobile wallet. They can be credit, debit, or prepaid, built by developers in days using cutting-edge tools instead of months. This is modern card issuing. When you order food using DoorDash or groceries using Instant Card, modern card issuing works in the background as money moves from the app to the delivery driver's card. When you buy a big screen TV and pay for it in installments using Affirm or Klarna, modern card issuing helps move money to the payment card used to pay the merchant seamlessly. Some of the most disruptive companies of the last decade, such as Square, Instacart, Uber, and Klarna use Marqeta technology at the heart of their product. We're the first modern card issuing platform built from the ground up by developers for developers, in the cloud with open APIs and best-in-class developer tools. We believe we are the first to market with multiple issuing and processing innovations including the first open API for building bespoke payment card solutions, just-in-time funding, and tokenization as a service. These innovations put the control of designing outstanding payment experiences in the hands of customers to enable them to launch unique payment card products in a fraction of the time they could on the legacy platforms. We believe that Marqeta is now the de facto modern card issuing platform and that our continuous innovation further cements and expands our market-leading position. We are deeply integrated with our customers in three ways: technical, experience, and partnership. Marqeta's technology underpins our customers core business, our support drives their core operations. Our people are their trusted partners, as our solutions drive their key processes. Our deep experience serving the most innovative commerce disruptors, technology giants, and financial institutions brings valuable issuing expertise to build and scale innovative programs. Additionally, we partner with our customers for long-term success. Our usage-based business model provides the win-win for our customers and Marqeta. As their businesses thrive on our platform, our net revenue grows. Moreover, our customers are incentivized to bring new volume and launch new card programs on our platform as they benefit from volume-based discounts via tiered pricing. As a result, we have long-term contracts that promote and maintain alignment. Customer success is at the core of everything we do and connecting with the customer is a core company value. The strength and durability of our customer relationships are evidenced by our second quarter year-over-year net revenue growth of 76%. We manage to support massive innovation for these customers at a considerable scale. Our platform operates at 99.995% uptime, and the volume through the Marqeta platform has increased 30x in the last four years. We operate in 36 countries and growing. We believe the opportunity within payments and modern card issuing is tremendous. There's a $24 trillion global money movement market and $30 trillion of international card issuing. The Marqeta platform processed $60 billion last year, a small fraction of the total card issuing opportunity. With the accelerating shift to digital payments, the market continues to expand. We believe Marqeta has the modern technology, deep experience, and momentum to capture a growing share of this market. We believe this is a vast ocean of opportunity ahead of us as everything moves to digital electronic transactions, changing the entire landscape of how the world is moving money in the future. Marqeta is well-positioned to capture this large opportunity in three ways. First, the shift to digital payment is accelerating; more and more transactions are moving online, and when they are in person, people worldwide are increasingly choosing not to pay with cash. They are choosing to pay with cards or with contactless payments. This has only accelerated during the pandemic. Second, payments are not only becoming more digital, they are also integrated more frequently into consumer and business applications. Think about the last time you used online food delivery, a messaging app, or a digital marketplace. Payments have become deeply embedded as part of the experience. Software companies continually partner with payment companies to provide simple, scalable, and configurable payment services to meet their end users' needs. Third, consumer trust in new payment technology is growing. Consumers are increasingly confident about the use of online shopping and digital payments for safety and convenience. While the pandemic may have encouraged the use of services such as Instacart, contactless payments have become a matter of safety. Once consumers experience these conveniences, we believe they are unlikely to change back. Because of the three tailwinds, as well as our 11 plus years of experience, we are confident in our ability to further expand our leadership position in modern card issuing. Our goal to be a generational business going forward is dependent on creating an atmosphere where Marqeta can do the best work of their lives. To do this, we have recently added two new leaders to the executive team, Darren Mowry, our new Chief Revenue Officer, and Randy Kern, our new Chief Technology Officer. Both Darren and Randy have tremendous hands-on experience in scaling large enterprise businesses. Darren comes to Marqeta from leading AWS through EMEA, a business known for the innovations that have powered it at scale and the same laser focus on customer success as Marqeta. Randy has spent almost three decades in engineering, nearly all of it at Microsoft and Salesforce, building the technical infrastructure to support substantial high-availability businesses. We are excited to see their impact on the company and have strong belief that these are the right people to have on our executive team as we focus on capturing the vast market opportunity in front of us. This quarter marks the first step in our life as a public company. We believe we are barely scratching the surface when it comes to modern money movement. We are excited about the options in front of us and look forward to our track record. With that, I will turn it over to Tripp Faix, Marqeta's Chief Financial Officer, to discuss our second quarter financial results. Thank you.

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

Thank you. We will now be conducting a question and answer session. Your first question comes from Tien-Tsin Huang with JPMorgan.

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

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

Yes. No, for sure. Then on the gross profit side, yep.

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

Got it. So you're moving away from some of the nuances you just mentioned. It's very clear. If you don't mind, I have one more quick follow-up for Jason. I was amazed to hear the statistic about Buy Now, Pay Later revenue being at 350%. I had to read that a couple of times to ensure I understood it correctly. Jason, you've probably seen many use cases take off, right? I'd love to hear your thoughts on Buy Now, Pay Later in general and what the Square Afterpay combination means for Marqeta if you could comment on that. Thanks.

Yes. As you mentioned, we've observed significant popularity for Buy Now, Pay Later on our platform, with revenue for this vertical increasing by 350% compared to the same quarter in 2020. The efforts of Square and Afterpay, both led by their founders and focused on providing excellent customer experiences, highlight that Buy Now, Pay Later is a highly favored payment method that we believe will persist. Additionally, Klarna, Affirm, and Sezzle are also among our customers at Marqeta. This partnership showcases that every aspect of the financial services value chain can be transformed, which aligns with our position as a leading card issuer. Buy Now, Pay Later initially gained traction in Europe with Klarna and subsequently entered the U.S. market through Affirm. We continue to support Afterpay in the U.S., which has been expanding steadily. The collaboration between Afterpay and Square is quite significant, and we anticipate ongoing growth in the Buy Now, Pay Later sector.

Good stuff. Thank you.

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

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

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

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

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

Congrats again. Thanks, team.

Thank you.

Next question, Ramsey El-Assal with Barclays. Please go ahead.

Hi. Thank you for addressing my question this evening. There are many factors influencing the Q3 forecast, including the timing of stimulus and the tax season. Could you please review those factors for us again? Additionally, how confident do you feel about the outlook for Q3? In comparison to a more typical year, do you believe you have the same level of revenue visibility now as you have historically in the business?

Thanks Ramsey. That's a multi-part question, so let me attack it from various ways I'll say. We believe we benefited from the tax season filing deadline shifting further into Q2 from April 15th to May 17th. We believe the effect of that filing delay resulted in more spending shifting into the second quarter. And when we normalize Q2 without this benefit, we believe net revenue growth would have been in the low 60s to mid 60s in Q2. Comparing this to our midpoint guide of 116.5 on a pro forma basis would be increasing sequentially quarter-over-quarter. You talked a little bit about visibility to Q3. I think everyone's kind of dealing with the lapping of stimulus payments from Q3 of 2020. But we feel very good about our midpoint guide of 38% year-over-year growth. Again, that's supported by our digital banking and strength in our BNPL vertical.

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

Maybe I'll clarify that one.

Yes, I can address that. We don't anticipate any changes regarding the Durbin Amendment in the immediate future. We continue to monitor the situation. The amendment was established to protect small community banks and consumers, so any modifications would be quite impactful for the industry. Nonetheless, we are watching various regulations and developments in the sector. On a positive note, we have a robust and expanding business outside the U.S. that doesn't rely solely on interchange. We've developed a successful business model in Europe, Australia, and New Zealand. If there are any shifts regarding Durbin in the coming years, we will carefully consider how to adapt our business model to sustain our growth.

Super helpful comments. Thank you.

Next question, Darren Keller with Wolf Research.

Hey, guys. Congrats on the first quarter out of the gate being strong on the revenue side. When we look at the…

Thank you.

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

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

Got it. It seems that this can continue when we address an additional question regarding the expansion of what you've been doing. You mentioned that your focus on credit cards really picked up in the last couple of quarters, and there has also been progress with incremental partnerships with banks. Can you discuss the opportunities, particularly on the credit card front, and the advancements made there? Thanks for having us.

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

Great. And we're looking forward. Thanks Jason, thanks Tripp.

Thank you.

Next question, Ashwin Shirvaikar with Citi.

Hey guys. Congratulations to a good start in your life as a public company.

Thank you.

I wanted to ask about Square. Any new work that you do for Square, would that necessarily, I guess, fall into one of the existing contracts? And if so, would it sort of benefit from Square's perspective? Square's perspective already benefits from the higher thresholds already hit. And obviously, I understand client confidentiality. So the second part of the question a genetic answer is fine if you can give that this conceptually trying to understand that?

We have several products associated with Square, which is a prime example of modern card issuing. They have a deep understanding of how to create excellent customer experiences, starting with the cash card and including the Square card on the merchant side. We're excited to discuss Square's banking services, which provide a comprehensive offering that includes higher savings, lending, and Square checking. Our technology supports multiple aspects of this, including Square checking and the Square debit card, along with account and routing numbers and FDIC insurance. Companies utilize our APIs to effectively address financial challenges at scale, and we encourage our customers to develop more products on our platform. This collaborative approach enhances our connection with customers and our market strategy, and we want them to keep expanding. We will achieve volume milestones based on their achievements, and Square's success directly contributes to our success, so we look forward to their continued growth.

Got it. Understood. And then as I, sorry to deliver this. But the sort of the Q2 to Q4 commentary was not super clear with regards to the fall off, so to speak as you're thinking of the next couple of quarters. Is it primarily caution? I mean, I get the tax piece. Is there anything beyond the tax fees plus caution in. And are you actually seeing as you look at current results the impact of Delta variant things like that?

Yes. I'll start us off, Tripp, and then I'll pass it over to you.

Sure.

I mean, everything we've talked about we've factored into our guidance. We believe we're only scratching the surface here. We have $60 billion in processed volume. And there's $6 trillion in the U.S. alone in volume on cards. So I will start with that and I will turn it over to Tripp.

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

Understood. Got it. Thank you.

Next question, Bob Napoli with William Blair.

Thank you. Good afternoon and let me add my congratulations to a successful IPO in your first quarter call and strong numbers out of the gate.

Thank you.

Jason, you've highlighted a significant opportunity internationally, not just in the U.S. but globally, which was a relatively small segment of your business, around 2% last year. You have several international customers. Could you share your thoughts on the potential for international growth and the timing? What steps are needed to expand this aspect of your business? I understand you recently hired a Senior Executive from AWS in APAC or EMEA, which may be part of your strategy.

Yes. Part of our strategy in bringing on Darren was his extensive experience at AWS, where he built a strong business throughout EMEA. International growth is crucial for us. Modern card issuing is a global trend, with the demand for payment cards increasing both online and offline. We see no signs of this changing and actually anticipate growth as cash usage declines. This represents a significant opportunity for Marqeta internationally going forward. Our business has had a global focus for a long time, transacting in nearly every country worldwide. The trends we've discussed are relevant to all major markets, not just the U.S. The shift from cash to card, followed by card to mobile, is a global movement. We'll enter new markets when it aligns with our long-term strategy and supports our existing customers' goals, ensuring favorable conditions to establish a strong local presence and hire quality talent. Our international growth plans are also influenced by our customers, such as DoorDash in Australia, Instacart in Canada, Klarna in Australia, Afterpay in the U.S., Canada, and Europe, and Uber in the EU. While only 2% of our revenue currently comes from outside the U.S., there is a $30 trillion global card issuing market, and we believe a significant volume is transitioning from legacy platforms to more modern ones. We see tremendous potential for growth in international markets. Each country presents unique challenges, including different networks and regulations regarding money movement and consumer data protection. Therefore, we approach entry into new countries with careful consideration, aiming to establish a solid business while supporting our customers as they expand globally.

Thank you. Appreciate it. And then just in the bank space itself from JPMorgan, Goldman, Marcus maybe I think and obviously the neobanks, you're pretty good with Square. I mean there's a lot of other neobanks out there, some of which you have, but a lot of what you don't currently. So just some thoughts on the large bank space? And then maybe the opportunities in the neobanks outside of Square. And is there anything in your contract with Square that prohibits you from working with certain other neobanks or certain other banks?

No. There's nothing in our contracts that precludes us from growing our business. Yes. So the space, the digital banking space is a big space for Marqeta. It's something that we're very hyper-focused on. Digital banking or neobanking or whatever label you want to apply to it is massively disruptive. We've seen Jamie Dimon talk about the disruption coming from neobanks or digital banks. We also hear and see growth from companies like Square in the cash app and the card that we have built and the other products that they've built on top of our platform. So, we have been very purposeful as a business. We start by getting commerce disruptors. We moved to digital banks. We moved to large tech giants and as you mentioned, JP Morgan Chase and Marcus by Goldman Sachs is how we're breaking into LFIs or large financial institutions, we'd like to refer to them internally. Those large financial institutions is where a majority of the volume today exists. And they are looking to modernize. They're looking to move from on-prem to the cloud. So on-premise managing hardware into the cloud. And that is core to our business. We know everything is moving to the cloud. We also know that the large financial institutions want to build on new platforms. It allows them to not only reduce total cost of ownership but allows them to build and iterate much faster and bring new products to market than much faster before. So, I'm breaking it down into four different areas, which is commerce disruptors, digital banks, large tech giants, which we also believe a lot of large tech giants want to become financial institutions in one way shape or form. And then the large financial institutions, or existing financial institutions, we have very clear precise strategies on how to not only grow our existing business but with more business within those specific landscapes.

Thank you. Very helpful.

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

Yes. Hi. Thanks for taking my question. I'll keep it brief. It's just a quick one. The acquisition of Afterpay by Square, does this trigger any material or adverse change clause in your contracts with either that might push a more aggressive renegotiation schedule? Thanks.

Thanks Craig. No. Both Square and Afterpay use multiple parts of our platform to power their businesses. Also, I'll note Afterpay is not a top five customer in terms of volume on our platform. Therefore we don't see this combination moving. Concentration risk significantly triggers renegotiations or the like. Also, both companies have long-term agreements with Marqeta into 2024.

All right. That's very helpful. Thanks.

You're welcome.

Next question, Dan Dolev with Mizuho.

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

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

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

Thank you.

Next question, Andrew Jeffrey with Truist.

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

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

Appreciate it. Thank you.

You're welcome.

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

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

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