Marqeta, Inc. Q3 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Marqeta Third Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Stacey Finerman, Vice President of Investor Relations, to begin. Please go ahead.

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 on Form 10-K for the period ended December 31, 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 Jason Gardner, Marqeta’s Founder and CEO; and Mike Milotich, Marqeta’s Chief Financial Officer. With that, I’d like to turn the call over to Jason to begin.

Thank you, Stacey. Good afternoon, everyone, and thank you for joining us for Marqeta’s third quarter of 2022 earnings call. I’ll start with a brief overview of our results for the quarter. Total processing volume, or TPV, was $42 billion in the quarter, representing a 54% year-over-year increase, continuing the rate of growth we saw in the first half of this year. Our TPV for the first nine months of 2022 was $120 billion, exceeding our TPV for the entire 2021 fiscal year of $111 billion. Our net revenue of $192 million in the quarter represents a 46% increase from the previous year. Growth was strong across multiple verticals in both our Managed by and Powered by Marqeta customers, particularly in digital banking and expense management. Block accounted for 72.5% of our net revenue, up from 69% in the second quarter as the Cash App Card continues to grow active users and drive engagement on the platform. Specifically, the Cash App users that also have a Cash App Card was 35% in the quarter, up from 31% at the end of the year; and a direct deposit inflows for $2 billion in September, up 65% year-over-year, which helps fuel card spending. These are both products that Marqeta provides to Cash App. As we look ahead at the many opportunities for Marqeta, the trend toward embedded finance is undoubtedly one of the biggest. According to Bain Capital, the value of embedded finance transactions is expected to reach $7 trillion by 2026. Our leading cloud-native, highly configurable API-first platform is well-positioned to power this trend. We enable our customers to create seamless and customized digital experiences for their users without the limitations and compromises that legacy financial platforms have imposed on innovators in the past. We can serve a wide range of companies looking to expand into financial services and existing financial institutions looking to increase customer engagement through innovation. Marqeta has momentum, and we succeed through our ability to rapidly expand our platform’s functionality to fuel continued growth. A testament to our strength in providing a flexible infrastructure for companies that look to offer embedded finance is our recent partnership with ONE, the independent fintech start-up backed by Walmart and Ribbit Capital. ONE has chosen Marqeta to enable the delivery of products that help customers get paid, spend, save, and grow their money. Specifically, we will start by powering their ONE Card, and Marqeta will look to support them as they expand to other products and services. Connecting payments with investing is an excellent use of embedded finance. We are doing exactly this as part of our work with Stash. Stash is focused on helping Americans invest, including small dollar amounts to build long-term wealth. Marqeta is supporting the company with their Stash, Stock-Back Debit Mastercard, enabling their customers to earn stock on almost every swipe of their debit card. The Stock-Back Debit Mastercard, built on the recently launched Stash Core, is a proprietary infrastructure platform of which Marqeta is a key piece, enabling Stash to unlock innovation in financial technology, including banking and, in the future, new capabilities in credit, savings, lending, and more. This launch will help Stash more easily welcome new customers and serve millions of everyday Americans who want to build long-term wealth. We also power the embedded finance evolution by enabling well-established financial institutions to offer their current customer base digitally enabled services to more effectively compete with neobank offerings. This quarter, we began our partnership with Raiffeisen Centrobank, a leading banking network operating throughout Europe, to help power their digital banking brand for Raiffeisen Digital Bank. The company’s customers want a simple digital solution, so they turn to Marqeta’s global modern issuing card platform to enable Raiffeisen Digital Bank’s customers to access their accounts across devices. We will initially roll out the solution in two countries, Poland and Romania, and with our single stack solution, Raiffeisen will be able to expand that rollout across Europe over time. We are pleased with our forward momentum to power new embedded finance customers, and we have been offering many of these capabilities for quite some time. Our expertise and scale mean our customers place significant trust in our platform to power their business. We expect these relationships to last many years into the future. In fact, this quarter, we renewed many key customers across different verticals, including Lydia in financial services; and Klarna in the buy now, pay later, or BNPL space. We continue to build upon our market-leading position and our track record of innovating in the BNPL space, one of the earliest examples of embedded finance. We recently signed a deal with Scalapay, Italy’s first unicorn. The company is a leading BNPL provider in Southern Europe and sought Marqeta’s expertise to modernize and simplify their offering. Previously, merchants had to be trained on how to use Scalapay and customers had to set up a new profile on the spot; Marqeta’s solution will allow Scalapay to seamlessly expand their network and allow customers to pay using a single-use virtual card. We also recently signed a Canadian expansion deal with Affirm, one of our long-standing customers. To maximize the opportunities in embedded finance, we’ve expanded our key banking services that our customers can use modularly, Marqeta for Banking, our portfolio of banking products that represents a significant expansion of our platform capabilities. Marqeta for Banking is a natural evolution from our modern card issuing platform as our customers and prospects look to provide a comprehensive package of innovative digital banking features and card offerings. Marqeta for Banking provides our customers with a suite of bank account and money movement features offered through Marqeta’s bank partners, including demand deposit accounts, direct deposit with early pay, ACH, cash loads and fee-free ATMs, bill pay, and instant funding capabilities. These offerings are modular, meaning customers can choose the features that best support their businesses and easily fit those building blocks into their product offerings. Because our innovative products come built into our modern card issuing platform, they create a seamless user experience on our modern platform that operates at a significant scale. We will continue to release additional Marqeta for Banking features and products in the future. Our modern card issuing products allow for fine-tuned control by enabling individual customer or transaction-level decisions. We brought the same level of control to the early pay feature, which can give account holders access to certain payments up to two days earlier than the ACH settlement date. Marqeta’s early pay feature provides our customers with a new level of control by deciding on a transaction-by-transaction basis on which deposits qualify for this benefit. The ability to leverage best-in-class modern card issuing and banking capabilities side by side is an attractive proposition for our customers looking to offer embedded finance. These are our modern card issuing platform alongside Marqeta for Banking. Our customer, Coinbase, for example, can achieve a level of engagement that benefits every part of their business. By adding a card to the Coinbase platform, they can increase engagement. By adding a deposit account that their customer can easily fund, they can create a more comprehensive customer experience. International expansion is another big opportunity for Marqeta, and we have experienced significant momentum in Europe in recent quarters. Many potential European customers have specific preferences concerning how data is handled, so we now offer data residency for our European customers, restoring the most sensitive elements of our customers’ data on European data services. We can now meet the high data residency standards adopted by many European businesses. For example, this was key to our opportunity with Raiffeisen Bank. This ability also bodes well for future business prospects, creating a playbook for offering data residency in new geographies. We believe we are very well-positioned to capitalize on embedded finance. We have been leaders in the embedded finance space for many years. We have numerous strong customer relationships in BNPL, neobank, and expense management verticals. Our Marqeta for Banking launch gives us enhanced capabilities to support our customers looking to provide embedded finance. Therefore, investors should expect to hear more about this trend from Marqeta in future announcements. With that, I will turn the call over to Mike for a deeper dive into our financials.

Thank you, Jason. Good afternoon, everybody. Marqeta continued to deliver very strong performance in Q3 with TPV growth of 54% and net revenue growth of 46%. TPV’s 8-point growth premium versus net revenue was almost entirely driven by our Powered by Marqeta customers, whose TPV continues to grow over 200%. The strong net revenue growth was broad-based with 20 of our top 30 customers growing at least 40% in the quarter, but led by Cash App in particular, fueled by their strong active user growth. Our gross profit margin was 42%, while adjusted EBITDA margin was negative 7%. Our adjusted expenses included an unusually large charge tied to an international processing indemnification cost that negatively impacted our adjusted EBITDA margin by 3 percentage points. Net revenue was more than $10 million higher than we expected, mostly due to Cash App outperformance, a favorable mix within the on-demand delivery vertical, and stronger-than-anticipated Powered by Marqeta TPV. Gross profit was over $80 million and was about $2 million higher than we expected, fueled by the revenue upside. However, a change in our expected business mix resulted in our gross profit margin being more than 1 point lower than we expected, as the revenue outperformance did not translate proportionately to gross profit. Although Block drove 72.5% of our net revenue in the quarter, their share of our gross profit is more than 15 points lower than their share of net revenue. Adjusted EBITDA was also about $2 million better than we expected, driven by the gross profit upside, which combined with the stronger net revenue, resulted in the adjusted EBITDA margin being more than 1 point better than expected. Q3 TPV was over $42 billion growing 54%, which is in line with our growth rate in the first two quarters of the year. This consistent growth is a testament to our ability to grow at scale as the year-over-year growth in TPV dollars has increased by about $1 billion each quarter this year as we grow over a sequentially increasing base. In fact, in Q3, we had over 30 days where we processed over $500 million in volume compared to less than 20 days in Q2. Let me share a few TPV performance highlights by vertical. Growth in the financial services vertical accelerated more than 10 points from Q2, but it still grew a little slower than the overall company. Within this vertical, spend growth in less discretionary categories continues to significantly outpace growth in all other categories. On-demand delivery growth was similar to last quarter due to continued increases in consumer demand and our customers’ expansion into new merchant categories. Lending, including buy now, pay later, grew strongly, although Q3 growth was a little slower than our overall TPV. Growth in this vertical slowed versus Q2 due to customers tightening their credit requirements, increasingly tougher comps from the previous year, and one customer migrating a portion of their volume within one of their programs. Expense management TPV nearly tripled year-over-year. The year-over-year increase in dollars was greater in Q3 than it was in Q2, but the rising comps last year did slow the growth rate in Q3 versus the prior quarter. Spending continued to be helped by the rebound in travel. Non-discretionary spend categories, such as supermarkets, drugstores, fuel, and utilities, remained approximately one-third of TPV this quarter. More discretionary categories, such as retail, travel, entertainment, and home improvement, remained approximately one-sixth of our Q3 TPV and continued to grow more than 10 points faster than other categories. Net revenue was $192 million, growing 46% this quarter. Our net revenue take rate was 1 basis point lower than last quarter and 3 basis points lower than Q3 2021, mostly due to the growth of our Powered by Marqeta business, whose share of our total TPV increased 2 points versus last quarter and has doubled since Q3 last year. As a reminder, in our Powered by Marqeta business, we primarily have a processing relationship with our customer. Therefore, the net revenue take rate is lower than in our Managed by Marqeta business, where we service the card program manager. Although the net revenue take rate is lower, the gross profit take rate is similar to several verticals in our Managed by Marqeta business. Q3 gross profit was over $80 million, growing 36%. In Q3 last year, we finalized a key network contract that resulted in a catch-up incentive payment. Without that payment, our gross profit growth would have been over 4 points higher this quarter. Gross margin was 42%, on par with the Q2 margin and lower than the comparable quarter last year due to the timing of incentive payments and less favorable business mix. Q3 adjusted operating expenses were $94 million, growing 46%. As I noted earlier, this includes an unusually large item tied to international processing indemnification costs. This item contributed 9 points to the growth of our Q3 adjusted operating expenses. Our expense growth has steadily slowed each quarter this year as we identify efficiencies, and the incremental year-over-year investment required to fuel our growth shrinks as the base of resources within Marqeta expands. We expect this to continue even as we invest in future growth opportunities. Excluding the unusually large item, roughly three-quarters of the adjusted expense growth continues to be directed toward technology and product resources and investment focused on broadening our capabilities and increasing our platform’s resiliency, reliability, and scalability. Q3 adjusted EBITDA was negative $14 million, resulting in an adjusted EBITDA margin of negative 7%. The indemnification costs included in adjusted EBITDA negatively impacted our margin by 3 points. Interest income was $7 million, triple the Q2 amount driven by rising interest rates. The Q3 GAAP net loss was $53.5 million. Late in the quarter, on September 14, our Board of Directors authorized a share repurchase program of up to $100 million. In Q3, we repurchased 1.96 million shares for $13.9 million at an average price of $7.05 per share. Now let’s shift to our perspective on the fourth quarter. At the time we provided second-half guidance back in August, we expected that the tailwinds that drove our first-half upside would continue, albeit with tougher comparables, especially in the fourth quarter. We also surfaced our concerns that customers signed since mid-2021, as well as crypto customers, might ramp their businesses more slowly as they cut back on marketing dollars and investments in growth. For the most part, these expectations have proven true. However, in August, we also highlighted that given that many of our customers are leaders within their verticals, it was possible our larger customers might thrive in this environment. For the most part, in Q3, that proved to be the case across each of our four major verticals, particularly financial services. Based on our performance in Q3 and October, we are increasing our expectations for Q4. We now expect Q4 net revenue growth to be between 29% and 31%. Remember last year there was a surge in holiday spending, particularly in BNPL, and the expense management vertical was ramping rapidly, which makes for a tough comp and not something we expect to repeat itself this year given the current macroeconomic environment. Q4 gross profit margin is expected to be 42% to 43% as our business mix shifts toward large customers who have better economics with us and the outsized growth of our financial services vertical, which carries a lower margin than other verticals. This is a several million-dollar increase in our Q4 gross profit expectation since August. Year-over-year expense growth will continue to slow. Therefore, we now expect Q4 adjusted EBITDA margin to be negative 5% to 6%. The improvement in adjusted EBITDA expectations since August is driven by higher gross profit as well as lower expenses due to realized efficiencies and targeted hiring. Our expectations for the full year 2022 have improved significantly as a result of our outperformance in Q3 and our raised expectations in Q4. We now expect 2022 net revenue growth to be 44% to 45% – 44.5%, gross profit margin to be 42.5% to 43%, and adjusted EBITDA margin is expected to be negative 6% to negative 6.5%. The opportunities for Marqeta to power the embedded finance evolution for both disruptors and incumbents in the U.S., Europe, and beyond are immense. As we move into the last quarter of 2022, Marqeta is on a great trajectory as we continue to diversify and scale the business. TPV in the first nine months of the year has already surpassed our total volume in 2021, growing over 50% each quarter in 2022. Our net revenue and take rate remained steady this year as we continue to add value for our customers with a highly configurable platform, expanded capabilities, and robust program management solutions. Gross profit margins remain right in the middle of our stated long-term range of 40% to 45%, reflecting our operating leverage as we expand. We continue to invest thoughtfully and with discipline in new capabilities and resiliency while finding efficiencies as the business scales, which reflects our commitment to improving our adjusted EBITDA margin as we grow and ultimately achieve our long-term target of over 20%. I will now turn it back over to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Tien-Tsin Huang from JPMorgan. Please go ahead.

Thank you so much. Thanks for going through all the detail. I actually wanted to ask on Marqeta for Banking, if you don’t mind, Jason. Just curious how ready that is for commercial applications. Are you primarily going to pursue de novo opportunities? Or is there an opportunity to work with existing players there? Just trying to get a better sense of how quickly that can ramp up.

Hey, Tien-Tsin, thanks for the question. So it’s both. Marqeta for Banking really just simply represents a natural expansion of modern card issuing. We believe companies, to some degree, will be financial competitors in this space. I’ve said that many times in the past, and that’s actually what embedded finance is. These are large companies, such as retail tech companies, and they want an integrated platform with card issuing as a way to monetize, as well as other services to provide stickiness and engagement. And so we approach these products and features in a very Marqeta way, which is modular in nature. Customers get to pick and choose the building blocks they need for their business. This is an extension of our modern card issuing platform. Whether it’s ACH or DDAs to facilitate spending on a card, that essentially drives funding onto the card, and then we obviously generate interchange as part of those cards being used. We’ve added extra features like early pay, which gives account holders access to their payroll up to two days earlier. We’re far from done expanding the list of features and functions we plan to provide. Like we’re continually building, so we’re going to hear a lot more about this. We would also look to potentially acquire Banking as a Service functionality if we find it the right fit, both opportunistic and strategic. But I can turn it over to Mike, if you have anything to add.

Yes. I think just from a financial perspective, right now, these capabilities are aimed at increasing card spend and supporting our customers. We look at this as a great incremental business to our current business. The goal is really to increase our win rate with customers by providing this holistic solution from us rather than our customers having to use multiple providers. Even the small amounts that we may make today will grow over time as more customers adopt this, and that will be highly accretive with these capabilities once they’re built. A little bit more revenue on the same transaction or volume with very low marginal cost.

Right. So if you don’t mind me just clarifying with a quick follow-up. Just with the – with ONE, which is a nice win, sorry, on the card side, right? I suppose there could be opportunity then to promote inflows and other types of cash movement. There could be an opportunity to expand that and obviously generate better outcomes for the ONE Card. Is that one way to think about it as an example?

Yes. That’s definitely a way to think about it. So the way our customers work is, obviously, if they’re de novo products, they get them up and running. They learn about their customer base and the features and functions they need because they’re already integrated into the platform. Once integrated into Marqeta, they can launch in every geography we’re operating in and create the features. They will add those features over time so that they can better drive engagement for their customers or their users and drive revenue for their business.

Thank you. Our next question comes from the line of Darrin Peller from Wolfe Research. Please go ahead.

Hey, guys. It’s great to see these results. Can we just touch on – outside of Block, the other verticals seems like you have pretty good strength continuing in areas like expense management and certainly in areas like on-demand delivery even still despite the size and the comps. And so maybe just touch on a little more of what you’re seeing there. And if we can get into a little more detail; you guys have done a great job being vertical-centric and really differentiating on an industry basis to win business. Are you seeing anything change on that front competitively in that or anything else? Thanks, guys.

Thanks, Darrin. No, we’re not seeing anything change. I mean, things are actually very stable. Like an on-demand delivery, I’ll start there. That is our most mature vertical. The growth was very consistent with last quarter. What we’re really seeing fueling the growth is our customers expanding in new areas, increasing their acceptance, particularly in drugstores, convenience stores, and retail, which has helped improve engagement. From a revenue perspective, it outperformed because we had a favorable business mix that improved the interchange relative to the customer revenue share. On the expense management side, that area of the business is just growing incredibly fast. It’s now in the mid-teens of our TPV. As I mentioned, it’s double the share from last year. We have six customers who have TPV over $100 million. It’s an area that’s growing very fast as businesses look to get more efficient and want their employees to have a more user-friendly and flexible experience, which is really fueling our success there.

Okay. No signs of change, it sounds like?

No.

That’s great to hear.

And in fact, as I mentioned, too, Darrin, just to reiterate, our expense management growth in dollars was actually even more than it was in Q2. It’s accelerating in terms of the spend on a year-over-year basis, but because the year-over-year comparison is also growing really fast, the growth is coming down, but it’s still almost tripled versus last year.

Thank you. Our next question comes from the line of Timothy Chiodo from Credit Suisse. Please go ahead.

Great. Thank you for taking the question. You sort of alluded to this a little bit earlier, Mike, but I wanted to dig into it, if we could get maybe just a range. I know it’ll be hard to put an absolute number on it. It’s early stages and there’ll be sort of a range of products. But generally speaking, it sounds like Marqeta for Banking will be a higher gross margin. In terms of gross profit as a percentage of revenue, it will be a higher gross margin business for you. Could you just put some directional numbers around that compared to current total company gross margins, how much higher this could be? Or maybe even just talk about it sort of as a percentage of volume? And how it might compare to the current core business, which is clearly much more tied to interchange.

Yes. So you’re right. We expect it to be significantly higher margin than our current business. A lot of these services might be charged on a per-user basis or a per-transaction basis. It really is just incremental revenue at a very low marginal cost on existing transactions and volume we’re already getting. We do expect this to be higher gross margin, and even in the cases where we provide it today, we have some customers using some of these services, and it is a much higher gross margin. It won’t necessarily be a huge revenue growth driver directly; it’s really about making our overall value proposition much more compelling and improving our win rate. Within that incremental revenue, it does come at a much higher margin, which is very beneficial for us on the bottom line.

Excellent. Thank you, Mike. And then the brief follow-up also on Marqeta for Banking. Safe to say that the closest competitor to this offering would be along the lines of services that are offered by Galileo? Would it be similar to some of the offerings within Fiserv and FIS or maybe just others that you could just mention that could contextualize what this looks like and if those are reasonable competitors to think about amongst others?

Yes. Those are reasonable competitors. If you think about – we’re all in the business of global money movement, and global money movement for Marqeta began with modern card issuing. We consider ourselves the leader in that. We created that category and have done really well in it over time. Our customers want to move money in many different ways, and we’ve created in a very Marqeta way, which is the native APIs are created. There are a number of different companies that have created similar offerings. We differentiate ourselves from other competitors by focusing on how Marqeta works with our customers. The ability to natively integrate these APIs into the platform can be advantageous as we continue to expand our global money movement capabilities.

Thank you, Jason, Mike. Appreciate both of those.

Thank you. Our next question comes from the line of Ramsey El-Assal from Barclays. Please go ahead.

Hi, thanks for taking my question this evening. I want to actually follow up on Tim’s question and just again on Marqeta for Banking, ask how the sales pipeline is developing. More specifically, if you could comment on the cross-sell opportunities and whether the genesis of the offering was sort of meeting the demand that you’re seeing in your existing customer base or more sort of a product suite that you think might be an unmet need in the sort of external marketplace.

Yes. We have a number of announcements to make in the coming quarters. We recently announced the deals with ONE. We’ve also talked about Uber and the card there. We have additional recent renewals like Lydia and Klarna. There are more exciting deals in the pipeline for credit, especially in international, as we talked about our growth within the EU. Discussions with large financial institutions are ongoing, and we’re getting to many other parts of that. We believe many companies are going to become financial services companies, and our strategy has always been platform-centric, allowing modular integration, which means we can capture many opportunities to move money into cards where our customers generate revenue and thrive.

Yes. I think, Ramsey, one thing we want to try to get in front of is if a customer says, 'Look, we have a very differentiated card issuing capability. But I really would rather use one platform.' So what we really want to do is provide a holistic solution for them. While we’re building those, we are constructing very flexible and configurable offerings, so they get our world-class card processing along with all other services.

Thank you. Our next question comes from the line of James Faucette from Morgan Stanley. Please go ahead.

Thank you very much. I wanted to follow up a little bit on the competition question. But clearly, you have your biggest customer that you’d like to renew when you can. Just wondering if we can get an update on that and kind of what you’re seeing from the internal efforts both from them as well as other customers and potential customers, thinking about those as potential competitors and if anything is changing in the landscape or what you need to do versus internally developed solutions.

Yes. I will start with Block. We have about 18 months left on the agreement. We’ll share something as soon as possible. When Block decides they want to go build something new, they build it with us. We enjoy that. We invested significantly in our platform to benefit customers like Block. When there’s more to share on that, we’ll definitely share it. Around the competition piece, our strategy has been working well. As the economy shifts, being the market leader, as Mike mentioned, we target top companies in each space, and we’ve done really well with that strategy, moving into digital banks, tech giants, and large financial institutions. Our strategy of renewing customers and landing new ones will continue.

Thanks.

Thank you. Our next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead.

Thank you. And congratulations on the good quarter. I was hoping you could kind of go back to the raise in outlook and kind of walk through the factors, maybe – is it possible to size or rank order them?

Sorry, Ashwin, can you size and rank order, what about our outlook?

The factors that led to the change in the outlook? Any importance of them. Yeah.

Yes. There are a few things. Last quarter, one of the key things we said was that we thought newer customers of ours would not invest as aggressively as they might have planned to in early 2022, particularly everything in the crypto space, and that largely did play out. But we speculated it could be that larger players would step in and capitalize on that lack of competition. A lot of it was strong performance by our largest customers, Block included. As we looked at that performance in Q3, we’re translating that to Q4; the difference is the incredible holiday season we had last year. If you look at the growth in retail spending and particularly in BNPL, that’s not something we expect to replicate. The growth rate is coming down, but it’s not necessarily a decline in performance.

Got it. So largely, you're just essentially taking the factors that helped in 3Q into 4Q and that’s really what it seems like, right?

That’s right.

Yes. The second question was if we have a downturn, would you expect vastly different trends in Powered by versus Managed by? Is there a macro preference element to how clients view those options?

Well, so we power a wide range of business models across consumer and commercial. Our net revenue isn’t overly indexed into discretionary spending. Roughly six of the volume in our platform is for highly discretionary items. But people still need to spend money on things like groceries, gas, and other essentials. So our volume growth is largely driven by customers displacing other forms of payment. In some cases, changes to the way people pay were accelerated by the pandemic. It may decelerate because of the potential recession, but there’s expense management and corporate cards, neobanks versus traditional credit. We don’t know what to expect; we feel we’re not overly indexed in one versus the other.

In terms of the Powered by versus Managed by dynamics, we add incredible turnkey solutions in our Managed by offering for customers that they value. Our customers often think of the cost and investment required to have those capabilities at the level of service we provide, which is a good price for them.

Thank you.

Thank you. Next question comes from the line of Rayna Kumar from UBS. Please go ahead.

Good afternoon. Thanks for all the helpful details on your call. Just any thoughts on when we can hear an update on your contract with Block and could you discuss how your conversations are progressing at this point? Thank you.

Yes, I mean, thanks for asking. We talk to Block every day. We obviously power a lot of products across the portfolio, both in Cash App and Square Card on the merchant side. There’s a lot of conversations we have regularly, and they’ve adopted many of our platform features. We have about 18 months left on the agreement. I’m not going to comment on the renewal discussions. As soon as we have an update, we will share it.

We won’t hold a lot on you. We promise.

Yes. We promise.

Got it. Thank you. Appreciate all the details.

Thank you. Our next question comes from the line of Josh Beck from KeyBanc. Please go ahead.

Thanks for taking the question. I would ask just about the level of visibility that you have at this point looking forward into next year. Obviously, a lot of your growth, I believe, in any given year is from existing customers. And it seems like you've dialed in certainly the growth rates within some of the verticals. And obviously, you have a pretty good handle on expansion plans at a customer level. So curious on how you would characterize just the visibility. And obviously, the macro is uncertain for everybody. And then just with respect to kind of embedded Q4 OpEx levels, how we should think about that as a jumping point for investment plans in future years would be super helpful.

In terms of your first question, we have very regular dialogue with our customers about what they're thinking because for many of them, we are a critical aspect of the service they’re providing or how they monetize their service. We’re in regular dialogue with them about how they manage their business and the implications for us. I would say we have fairly good visibility in that sense. However, it’s unclear about what things might be like in three to six months. We can get their perspective on how they're doing their business planning, but they consistently say, 'We'll see, and we're going to remain as nimble as possible.' In terms of OpEx for Q4 and what that means for next year, we have a couple of factors impacting our expenses. We just hosted Money 20/20, which is a big event that drives pipeline conversations and requires a significant marketing spend. We’ll also see increased costs related to our cloud costs and other tools as transaction counts rise during the holiday season. We are hiring selectively for key growth areas, aiming for a cautious approach towards investments in 2023 initially due to the uncertainty.

Very helpful context. Thanks, Mike.

Thank you. Our next question comes from the line of Mike Ng from Goldman Sachs. Please go ahead.

Hey, good afternoon. Thank you for the question. I just have two. First, I was just wondering if you could give us a little bit of color around TPV performance in the quarter by any top customer cohorts, whether that's top five, 10 or 20. And then second, just on the fourth quarter TPV outlook, is there anything you could talk about as it relates to industry vertical? What may be accelerating or decelerating? And perhaps you could remind us if there are any notable tough comps or anything like that, that we should be aware of. Thank you very much.

Yes. In terms of performance, by cohort, our top five customers are still growing at a premium to our additional customers, although the gap isn't quite as big as in quarters past. What we're seeing is smaller customers investing a little less and larger customers capitalizing on that. However, our non-top five customers are still growing faster. If we consider customers we signed in 2019 or later, they are growing about 4 times faster than those who have been with us longer, experiencing well over 100% growth. Even though our base keeps expanding, we’ve sustained TPV growth. For the fourth quarter, there are a few areas or verticals with significant lapping. The on-demand delivery growth remains consistent, but BNPL has a very tough comp. Last year, our Q4 BNPL volume was greater than our entire first half of 2021. Additionally, some customers in financial services that support more everyday spending saw acceleration in their growths. We don’t expect to see the same strength as last year's holiday season.

Excellent. Thank you for all that detail. That's very helpful.

Thank you. Our next question comes from the line of Andrew Bauch from SMBC Nikko Securities. Please go ahead.

Hi, thanks for the time. Wanted to touch upon the adjusted EBITDA margin performance in the quarter. Mike, you called out some targeted hiring and various efficiencies. Just trying to get a sense of – some of the headlines we've seen around Silicon Valley is presenting a more favorable hiring environment for you today than perhaps you're operating in, just say six to nine months ago and how that can kind of translate.

Yes. There's no doubt that that's something we think will be beneficial to us. We adjusted our plan back in February, early March, when we saw some macro warning signs. We decided to be cautious, which might have placed us ahead of other companies continuing aggressive hiring in the first half. As a result, we’re hiring now while the competition for key talent is declining. We hope to capitalize on this opportunity by bringing in talented individuals who may have been difficult to acquire six to twelve months ago.

Yes. I mean at the minimum, they're a governor on compensation growth in the near to medium term.

Agree. We expect lower attrition as well, which can benefit us as we aim to retain our key talent in 2023.

Thank you. Our next question comes from the line of Bob Napoli from William Blair. Please go ahead.

Great, thank you. Good afternoon, Jason, Mike, team. Nice numbers. Jason, I just wondered if you could give an update on your search, I guess, for a permanent CEO. It seems like you’re pretty engaged still at this point. And then just any thoughts on your credit platform. Is that an area we're likely to see an acquisition? Thank you.

Yes. Thank you. I am very engaged on a day-to-day basis. I love this company and have been running it for over 12 years. Regarding the CEO search, we've met many candidates over the past few months. I'm working closely with the Board and the executive team to evaluate a broad range of candidates from various backgrounds. I'm looking for someone to lead the company from one to infinity. While the market wants me to move quickly, we want to hire the best person possible. Regarding credit, we are looking at a number of different companies in that space. We think this area is crucial for Marqeta's future; we've been investing in it significantly. We started our credit journey about four years ago, and we now see customers up and running and using it like GreenLight. We'll have more to announce as we explore various businesses.

Thank you, Jason.

Thank you, ladies and gentlemen. We have reached the end of the question-and-answer session. I would now like to turn the conference to Jason Gardner, Founder and CEO, for closing comments.

Well, thank you, everyone, for joining us for Marqeta's Third Quarter of 2022 Earnings Call. Have a great rest of the year. Happy holidays, and I look forward to speaking with you all in 2023. Take care.

Thank you.

Thank you. The conference of Marqeta, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.