Marqeta, Inc. Q2 FY2024 Earnings Call

Welcome to the Marqeta Second Quarter 2024 Earnings Conference Call. I would now like to turn the conference over to Stacey Finerman, Vice President of Investor Relations. Thank you. You may begin.

Thanks. Operator, before we begin, I would like to remind everyone that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website, including our annual report on Form 10-K for the period ended December 31, 2023, and our subsequent periodic filings with the SEC. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of the time of this call, and the company does not assume any obligation or intent to update them, except as required by law. In addition, today's call includes non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials which are available on our Investor Relations website. Hosting today's call are Simon Khalaf, Marqeta's CEO, and Mike Milotich, Marqeta's CFO. With that, I would now like to turn over the call to Simon to begin.

Thank you, Stacey, and thank you for joining us for Marqeta's second quarter 2024 earnings call. Our second quarter results came in ahead of expectations, and once again, we demonstrated significant discipline in operating expenses without compromising our growth trajectory, scale, service, or innovation. I'll now briefly discuss our quarterly results before diving into company updates. The second quarter's net revenue, gross profit, and adjusted EBITDA exceeded our expectations. Total processing volume, or TPV, was $71 billion in the second quarter, a 32% increase compared to the same quarter of 2023. Our net revenue of $125 million in the quarter contracted 46% year over year, which included a decrease of 60 percentage points from the revenue presentation change related to our Cash App contract renewal. Gross profit was $79 million in the quarter, a contraction of 6% versus the comparable quarter of 2023 primarily due to the Cash App renewal pricing. This will be the last quarter the Cash App renewal will affect our year-over-year comparison. We believe Q3 2024 will represent a turning point for our business, where our P&L will better reflect the true business momentum we see. Our non-GAAP adjusted operating expenses were $81 million, representing a 3% decline year over year due to effective cost discipline optimization and lower average headcount. This resulted in an adjusted EBITDA of negative $2 million in the quarter. Our second quarter results demonstrate the continued demand for what has differentiated Marqeta's platform, our ability to deliver solutions for diverse consumer and commercial use cases while continuously innovating and expanding value-added program management services, as discussed in our recent State of Payments report, which we released two weeks ago. Consumers continued to branch out in financial services, looking for alternatives to traditional banks. A third of consumers surveyed said they were using digital-only banks, with 63% of 18 to 34-year-olds saying they would be open to banking with non-traditional financial service providers. These trends have given modern and digital banks a genuine foothold in the market. These findings align with the volume growth we see on our platform, as second quarter TPV for our financial services customers, excluding Block, grew well over 100% year over year. Our track record of scale with customers like Cash App and One Finance in the U.S., as well as Lydia and Trade Republic in Europe, has served as powerful testimony to the level of personalization and innovation we can serve at scale for businesses looking to offer new bank-like services to their large customer bases. We anticipate more momentum to come in 2025. I'm thrilled to share that Varo Bank, which has 5 million cards in the market, recently chose Marqeta as their partner for its card processing business. Varo will trust us to migrate their customers over from their current processor in 2025 for a five-year exclusive contract. Varo is uniquely positioned as a tech bank with its own bank charter, giving it greater control over its product stack and user interface. To realize this advantage, Varo sought a nimble and sophisticated partner to help them innovate quickly as they look to offer their consumers real-time insights into their transactions. The TPV growth and momentum goes well beyond financial services. In fact, 10 of our top 20 customers grew over 50% year over year during the quarter. Their use cases include expense management, SMB working capital, buy now, pay later, in addition to financial services. This speaks to the strength of the Marqeta platform and its ability to support innovation at scale across a variety of use cases, solidifying Marqeta's platform play. While we have anticipated demand for consumer use cases, we are thrilled by the demand in the commercial space as well, especially with SMBs. The proliferation of marketplaces and platforms that help SMBs reach bigger markets has driven great business growth. However, these platforms have introduced many challenges, requiring these SMBs to ramp up their systems and access affordable working capital to handle the elasticity of demand coming from these marketplaces. This is where Marqeta solutions come into play. We offer solutions ranging from expense management to commercial credit and working capital to help these businesses operate with improved efficiencies and capitalization, allowing them to invest more in their business and have more time to execute and innovate, rather than managing antiquated back-office applications. This has driven the continued growth in expense management as TPV for this vertical grew slightly more than our average TPV growth during the quarter. To add to that growth, we have signed Zoho during the quarter. Zoho is a global technology company serving over 700,000 businesses, from SMBs to enterprises with a comprehensive suite of business management applications. Zoho chose Marqeta as their partner because of our expertise in launching card solutions that enable businesses to manage expenses efficiently. Marqeta was also chosen because of the breadth and depth of our platform, which enables businesses to accelerate growth globally. While digital banking and expense management continue to perform well on our platform, we continue to innovate in e-commerce and digital payments. We recently announced that we are the first U.S. issuer processor certified by Visa to support Visa Flexible Credentials. With some Visa Flex cards, consumers can allow a single card product to toggle between payment methods on each transaction, bringing multiple funding sources to one card. Cardholders can choose whether to use debit, credit, pay in four with buy now, pay later, or even pay using rewards points. Currently, we are partnering with Affirm, the first in the U.S. to offer Visa Flexible Credentials to enable this capability for their Affirm card. This reinforces Marqeta's commitment to innovation and provides us with further differentiation in the BNPL space. In the future, we believe this technology will be utilized more broadly by Marqeta's debit and credit customers, in use cases beyond BNPL. The combination of the innovation we power with the ability to execute at scale truly differentiates Marqeta. As our customer reach scale and the regulatory environment changes, the guidance we provide our customers becomes a true differentiator. That's why we continue to enhance both program management and compliance with the launch of our new office in Warsaw, Poland. We're now equipped to support more program management capabilities for our European customers, allowing us to deepen our successful offerings in the market. Program management is important to our long-term growth for the following reasons. First, increased services add incremental net revenue, typically with higher gross profit margins. In the second quarter, net revenue driven by our suite of risk solutions such as 3DS and risk control, increased by 61% year over year. Second, it improves our customers' speed to market and our time to realize gross profit. As an example, if a customer looks to secure a bank partner without assistance, this can take 9 to 12 months. However, with assistance, we can bring this time down dramatically. Third, it positions us well with companies looking to offer embedded finance. These companies can focus on their brand and customer experience while leaving cumbersome details around offerings such as dispute management to Marqeta. All these updates speak to our platform's breadth, depth, and scale, while our ability to innovate demonstrates our expertise in delivering solutions for consumer and commercial debit and credit in countries around the world with modern, flexible architecture. This is very appealing to both existing customers and new prospects. For example, we're already hearing from existing customers who want to leverage Visa Flexible Credentials for their business. In addition, our pipeline contains large digital brands with significant consumer adoption that are seeking a comprehensive and global payment solution encompassing debit, revolving credit, and BNPL. Before I turn it over to Mike, I wanted to mention one last milestone. We believe the second quarter represents the last quarter of negative adjusted EBITDA. We have now proven our ability to support TPV growth and our customers' innovation while managing our costs effectively. The results this quarter, combined with this improved financial profile, give us confidence that the company can grow in a sustainable and profitable way in the years to come. I will now turn it over to Mike to discuss our financials in more depth.

Thank you, Simon, and good afternoon, everyone. Our Q2 results demonstrate continued momentum, with all of our key metrics for the quarter exceeding our expectations. Broad-based TPV outperformance fueled by continued strength in financial services, expense management, and BNPL drove both net revenue and gross profit upside. In addition, our continued execution of efficiency and optimization initiatives, when coupled with higher gross profit, led to a significantly lower adjusted EBITDA loss in the quarter. Q2 TPV was $71 billion, a year-over-year increase of 32%. Non-block TPV grew more than 15 points faster than block growth. Financial services lending, including buy now, pay later, and expense management, all grew at roughly the same rate, slightly faster than the overall company, partially offset by on-demand delivery. Financial services, by far, our largest use case, continues to deliver strong growth despite its size. Our long-established customers continue to thrive, while some of our newer customers across new banking and accelerated wage access are experiencing rapid growth. TPV driven by customers who launched within the last two years is contributing about 10 points to the growth within financial services due to volume that is many multiples larger now than it was in Q2 last year. Strong in-city growth in lending, including buy now, pay later, continues to be helped by the adoption of our BNPL customers pay anywhere card solutions targeted at their consumers, which are now over 15% of our BNPL volume. Expense management growth accelerated slightly for the third straight quarter, as the seamless flexibility and control we enable for cards are helping to drive our customers' robust performance, especially among our top customers. On-demand delivery growth remained in the double digits. Q2 net revenue was $115 million, a contraction of 46% year over year. The most significant impact on net revenue growth was the 60-point growth headwind related solely to the revenue presentation change resulting from the Cash App renewal. As we've described before, this change in revenue presentation is related to the bank and network fees associated with the Cash App's primary payment network volume, which were included in net revenue and cost of revenue prior to Q3 2023. There is an additional nine percentage point decline in net revenue growth due to the Cash App renewal pricing. Block net revenue concentration was 47% in Q2, decreasing 2 points from last quarter. Non-block revenue growth accelerated by over 10 points as we lapped a few prior year renewals, and non-block TPV growth remains strong across several use cases. Our net revenue take rate of 18 bps is consistent with last quarter. Q2 gross profit was $79 million, a gross profit margin of 63%. Gross profit margin is generally low in Q2 compared to other quarters as two of our network incentive contracts run from April to March, meaning that our incentives reset in Q2 and increase over time within the contract year. On a year-over-year basis, our gross profit contracted 6%, consistent with last quarter. The Cash App renewal lowered gross profit growth by mid-20s percentage points. As a reminder, the Cash App revenue presentation change does not impact gross profit. Q2 was the last quarter impacted by the Cash App renewal. Therefore, our quarterly year-over-year comparisons will better represent our true business trajectory going forward. The Square renewal lowered Q2 gross profit growth by low to mid-single digits, which will start to anniversary in Q4. Our gross profit take rate was 11 bps, 1.4 basis points lower than last quarter, driven by the annual reset of incentives based on the contract year. This is consistent with the impact we see every year in Q2 and has no impact on an annual basis. Q2 adjusted operating expenses were $81 million, a decrease of 3% versus last year. This was mostly due to lower headcount for part of the quarter after our restructuring in May 2023. In addition, we continue to execute our efficiency and cost optimization initiatives well, which exceeded our expectations this quarter. Q2 adjusted EBITDA was negative $1.8 million, resulting in a negative margin of 1%. Interest income was $14 million, driven by continued elevated interest rates. Q2 GAAP net income was positive $119 million, which included a $158 million one-time benefit to stock-based compensation recognized in previous periods due to the forfeiture of the Executive Chairman long-term performance award. As we mentioned last quarter, this pre-IPO award included service requirements for Jason to be either the CEO or Executive Chairman. The award was forfeited once he stepped down from the Executive Chairman role in June. We have broken this out into a separate line item on our P&L to help isolate the one-time impact this quarter and going forward. In May, we received a new $200 million buyback authorization from the Board, which enabled us to repurchase 11 million shares at an average price of $5.39 for $59 million in Q2. We ended the quarter with $1.2 billion in cash and short-term investments. Now, let's shift to our second half and full-year outlook. As we move into Q3, we begin the first chapter of a new era for Marqeta, where we aim to deliver sustainable, profitable growth. We are returning to growth now that we have lapped the resetting of the large majority of our customer contracts and the Cash App renewal in particular. We have established longer-term partnerships with our customers where we can work together to drive growth with win-win outcomes. In addition, we expect to be adjusted EBITDA positive going forward at an increasing rate over time. Renewed expense discipline, a focus on efficiency and optimization, and the realization of our platform economies of scale as the business flourishes have put us on a clear path to GAAP profitability in the coming years. We expect both Q3 and Q4 net revenue growth to be between 16% and 18%, in line with what we indicated last quarter. Therefore, full-year net revenue growth is expected to contract 24% to 27%, again consistent with the expectations we shared last quarter. Q3 gross profit growth is expected to grow between 25% and 27%, while Q4 is expected to grow approximately three points slower than Q3. As a result, second-half growth is consistent with the expectations we shared last quarter. Both quarters are expected to benefit from non-block gross profit growth of over 30%, which is accelerating from the first half as we have now lapped heavy renewal activity, as well as the growing contribution from the ramping of new cohorts driven by improving sales last year. The gross profit growth slows a little from Q3 to Q4, mostly due to the difference in year-over-year comparisons, where Q3 has a slightly easier comp due to higher bank fees last year, while Q4 has a slightly tougher comp due to a strong 2023 holiday season, particularly in BNPL, as well as lapping a platform partner bonus. We expect the gross profit margin to be in the low 70s in both Q3 and Q4, and therefore, we expect full-year gross profit growth to be 79%, consistent with expectations we shared last quarter. Net revenue growth is expected to be 69 points lower than gross profit growth in Q3 and Q4, primarily for three reasons, all of which we have discussed earlier in the year. First, a renegotiated platform partnership with reduced pricing that went into effect in Q1 is leading to a revenue presentation impact as we pass through the proportional savings to Cash App based on the terms of our Cash App contract. This reduces net revenue growth by 3 to 4 points per quarter until it laps in Q1 2025 but has no impact on gross profit. Second, starting in Q3, we are optimizing the setup of a couple of programs that have been incurring unnecessary cross-border network costs. Since we often pass through the cross-border network fee premium to our customers, this optimization reduces net revenue growth by 2 to 3 points per quarter until it laps in Q3 2025 but has no impact on gross profit. Third, TPV growth in our powered by Marqeta business is growing significantly faster than our managed by Marqeta business. This materially impacts net revenue due to the lack of network and bank fees, but has a much lesser impact on gross profit. As we have previously discussed, while the net revenue take rate is lower for our powered by Marqeta business, the gross profit take rate is much closer to managed by. This is expected to contribute 1 to 2 points to the growth gap in Q3 and Q4. With our continued success in executing cost optimization and efficiency initiatives, we now expect our adjusted operating expense growth in both Q3 and Q4 to be in the mid-teens. This growth is a result of thoughtful reinvestment in specific capabilities to drive growth and enhanced platform resiliency underway since Q4 last year, following our restructuring in May 2023. Given our gross profit growth remains on track, while our adjusted operating expenses are trending meaningfully lower, we now expect our adjusted EBITDA margin to be 2 points higher than we shared previously. Therefore, our adjusted EBITDA margin is expected to be between 4% and 6% in Q3, 6% and 8% in Q4, and 3% to 5% for the full year. To wrap up, the business is at an exciting turning point as we enter into the second half of 2024. Our Q2 results demonstrate the continued momentum in our business. TPV growth remains robust at 32%, fueled by strong results across financial services, expense management, and BNPL use cases among both well-established customers, as well as those who are newer to our platform. As Simon mentioned, TPV for 10 of our top 20 customers grew by over 50% in Q2. Gross profit growth was weighed down by the Cash App renewal for the last time, and accelerating non-block growth signals the strong underlying growth of the business. Well-executed efficiency and optimization initiatives continue to lower adjusted operating expenses without sacrificing innovation or platform resiliency, compliance, and security. As we begin the second half of 2024, we expect TPV growth to remain over 30% based on the current trajectory and the newer programs that are still ramping. The variety of use cases across consumer and commercial in multiple geographies showcases the strength of our platform. With the large concentration of contract renewals behind us, the TPV growth is expected to translate into gross profit growth in the mid-20s, with some quarterly variation. Finally, the P&L should reflect the growth commensurate with the underlying strength of the business. The expected gross profit growth, combined with the disciplined adjusted operating expense trajectory, gives us the confidence to raise the adjusted EBITDA margin expectations to mid- to high single digits in the second half, well ahead of what we expected at the start of the year. This is a great start on our path to profitability. I will now turn it over to the operator for Q&A.

So the first question today comes from Timothy Chiodo with UBS.

You mentioned the Affirm partnership with Visa Flex credentials, but I was hoping we could also expand upon Affirm's role within Apple Pay, where they will be one of the key, or maybe for some time, one of the only options for buy now, pay later, as Apple sort of sunsets their own buy now, pay later efforts. So maybe you could just expand upon Marqeta's role when Affirm is used in Apple Pay, and if there is any broader role that Marqeta will be playing within the Apple Pay buy now, pay later ecosystem.

Hey, Tim, Simon here. Thank you so much for the question. So the trend is buy now, pay later migrating from merchant integration into integrating either having cards that have buy now, pay later features or integration into wallets, giving the ability to do buy now, pay later, anywhere is a trend that we've spoken about. So exactly what you have mentioned, we have two big initiatives that, from an ecosystem perspective, are going to fuel this movement. And I'd say both of these are going to provide Marqeta with phenomenal tailwinds. The first one is the Visa Flexible Credential, and that allows consumers to use a single card and toggle between debit and buy now, pay later without overburdening the merchants with integration. So that's going to create significant effectiveness in the ecosystem, and Marqeta has played a big role in that. So that's definitely going to give us nice tailwinds. The second one is Apple has decided to integrate, or take an ecosystem play, and make BNPL third-party providers offer their services inside Apple Pay without involving the merchants. We've seen the report that Affirm is going to take a prime spot in that, but as Apple mentioned, there are going to be others. So we expect that to benefit Marqeta significantly, and our role is substantially similar to what we have done, enabling BNPL anywhere. So I say both of these developments are an endorsement of the trend that takes BNPL anywhere without involving merchants, and it's a trend that Marqeta has supported early on.

Excellent. Thank you. Simon, the brief follow-up there is simply around your certification with Visa being the first on Visa Flex credentials. Maybe just a shorter follow-up there is that something that is extremely challenging and time-consuming, that others might struggle with? Or is that something that you expect over time, there will be many partners that are certified, including some of the more traditional or legacy competitors?

Sure, I'll be brief on this. Marqeta's platform is unique in a way that it is real-time and allows flexibility. That's what allowed us to move fast in order to support just-in-time switching from one card to another. I don't have great visibility into the legacy stacks, but I can say it's not going to be as easy for them. But at the same time, that's not going to be the only innovation out there, but I can clearly tell you that Marqeta is going to be one of the fastest to support all the innovations in that space, given that our platform is modern, real-time, and very nimble.

The next question comes from Tien-Tsin Huang with JPMorgan.

Just wanted to ask about the Varo Bank win, which is nice. I think this is the first conversion that you guys are working on, so correct me if I'm wrong, but I just want to understand the risk there. Are there any protections that you are going to provide? And also, is this a credit and debit flip? Thanks.

In fact, this will not be the first conversion. We're actually in the middle of a conversion that we expect to complete at the tail end of '24 or early 2025. So, this is a muscle that we have been building, and it's being tested as we speak, and it's going per our expectations. So, Varo is definitely very excited about it, and it's something that we have planned, and we will execute with the Varo team in 2025. For now, this is a debit deal.

Perfect. Now, if you can develop that mostly, I think it opens up a lot of opportunities. So, we'll be tracking on that. I think my follow-up question is an industry one. We've been hearing some concerns from some of the players out there on virtual card acceptance costs being a problem for some suppliers in the expense management world. Is this a trend that you've seen? It doesn't sound like it, because your expense management trends are doing quite well. But what are your thoughts around that adverse payment selection concerning virtual cards?

That is a challenge in the ecosystem, but it's not nothing new. I would say that has been around for some time, and just given our leadership in this area, the business maybe has more experience and possibly a few more bruises than maybe some others. But that's always been a part of this business, and at this time, it doesn't affect the trajectory of our business in the expense management space.

The next question comes from Darrin Peller with Wolfe Research.

I just want to follow up for a minute on the Varo win, just because it does seem like putting aside whether it's debit or credit, I mean, it seems like it's a further step into an area that, you know, Neo Banking, that you guys generally, I think you were really just working with Block on before. And so, this is definitely an incremental vertical. So maybe just a little more color on the differentiation that you were able to offer to win that business, combined with maybe a real quick update, again, a little deeper on embedded finance trends you touched on a bit in the prepared remarks. But, you know, just curious where we are on earned wage access and how much that can still deliver for the year or two ahead of us.

So yes, indeed, like I mentioned in my prepared remarks, the financial services space, which is almost Neo Banking, is actually taking off for us; excluding Cash App, the growth is over 100%. These are not small numbers. The experience we've built with Cash App and One Finance in the U.S. and Trade Republic and Lydia and many others have prepared us to demonstrate that to our customers. They can innovate at scale, and that's what they're looking for. The space is moving fast, and the value proposition is resonating with consumers, and we're also seeing conversions between the accelerated wage access space and neo banking. We expect that accelerated wage access will come in two flavors. One is smaller employers or labor marketplaces will work with these Neo banks so that they will become the accelerated wage access provider for these mid-market labor marketplaces and employers. While large employers or large labor marketplaces will have their own neobank, kind of like a credit union. So we're very well positioned there from every dimension you look at. We can provide all the features and functionality. We provide the scale, we provide the compliance. We can give them an upgrade path toward any form of credit, and the Visa Flexible Credential will allow us also to distribute our top BNPL partners into that application. So that's on that. Moving on to embedded finance. Look, the demand is growing extremely fast, and I'd like to probably take a minute, without going very deep, to give you color around what's driving this demand. First, as you mentioned or suggested, we have brands that want to be the bank for their consumers, whether it's their consumers or their employers. That's one. The second is brands that do want to have payment innovation, and we put BNPL in that bucket, and then you have, on the commercial side, these large marketplaces or aggregators that want to provide engagement to their suppliers, whether it's SMBs or so on and so forth, all of these are coming to us and saying, look, we need a solution that embeds this technology into our experience because we want an engagement play. We want to avoid any program management or compliance issues while having a full solution encompassing credit, debit, buy now, pay later, working capital, expense management, the list goes on and on, and we want to do it in the U.S. and across the globe. So that basically reduces the competitive set to a very small entity, and that's why this is beneficial for us.

Mike, can I just ask a quick follow-up on the profit side for a minute? I mean, you're obviously trending well. Just remind us on the roadmap on profitability, both non-GAAP and GAAP. And then I know you talked about, I think it was mid-teens growth in OpEx in the second half, so if you could just remind us where the underlying investments are going into there, it'd be great. Thanks, guys.

Sure. Just keep in mind that, I guess just to address that second part of your question first. What happened last year was in May, we did a restructuring. And like a lot of companies, when you do that, in many cases, you might reduce more costs than you want for the long run to give yourself some room to reinvest in some newer areas of the business where you might need different kinds of skill sets. And so, what that meant is in Q3, in particular, our expenses were sort of artificially low, and then by Q4, we started to execute that reinvestment plan. And a lot of that has been coming in all the areas we've talked about: credit, a lot of our banking services. We've also been significantly increasing our investment in compliance and program management capabilities, because we see that not only as the temperature or the scrutiny rising, but we also see that adding more and more value to embedded finance customers. So that's where a lot of the investment has been going. In terms of the roadmap, the margins are definitely doing a lot better. We started the year saying we'd be about breakeven on a non-GAAP basis adjusted EBITDA. And at the end of Q1, we said 1% to 3% margin. Now, we're saying 3% to 5% margin. So, we are definitely making great progress on efficiency without sacrificing growth on the top line and gross profit in particular. That margin should continue to improve at a pretty good clip going forward, maybe not quite at that pace on a quarter-to-quarter basis, but we expect the margin to continue to rise steadily. And from a GAAP perspective, we said that we would exit 2026 with GAAP profitability. So, we're a little ahead of schedule, but we don't think that meaningfully changes when we become GAAP profitable. But certainly, we're off to a good start in 2024.

The next question comes from Craig Maurer with FT Partners.

First, on Varo, if you could maybe characterize what convinced Varo to switch off of DPS. And do you expect the benefit of Varo to be fully realized by the end of fiscal year '25 and to have all the cards reissued? And secondly, from our calculations, it looks like the Varo deal implies maybe $10 billion to $15 billion in additional TPV. So, just some thoughts on that. Thank you.

Thanks, Craig. I'll take the first part and leave the rest for Mike. Regarding what convinced Varo, I would highlight two main points. The first is our ability to innovate at scale. The financial space is evolving rapidly, and we cannot overlook the speed of innovation coming from European neobanks like Revolut and Trade Republic, among others. To succeed, a platform must match that pace of innovation, which is what we provide. The second point is Varo's strong focus on product; I appreciate their dedication to delivering exceptional product experiences, such as a seamless user interface and real-time functionalities. They are targeting the TikTok generation that expects instant access, and that aligns with the real-time transactional experience they want to offer their consumers. So, I would emphasize scale, stability, and innovation as one key aspect. Additionally, the emphasis on great real-time features has played a significant role in forming this partnership. Mike, do you have anything to add?

In terms of the P&L impact, Craig, the exact timing details, we'll leave to Varo to share, but we do expect to complete the conversion in 2025, but it would be done throughout the year. So, we will get some benefit, certainly, in our 2025 P&L, but the full benefit won't be realized until 2026 based on at least preliminary timelines that we've discussed with them.

The next question comes from Ramsey El-Assal with Barclays.

Hi. Thanks for taking my question. I also wanted to ask about the Visa Flex certification. And I was wondering if you could comment on the broader timeline by which the opportunity for this product will convert into revenue for you guys. Aside from the Affirm card, should we expect to see any incremental benefit hit in '24? Is this more of a '25 and beyond-type of actual P&L opportunity? How will the pipeline convert?

We anticipate some benefits in 2024 as we have announced the immediate availability of this product. We expect to begin seeing the gross profit benefits around the fourth quarter. Our pipeline is strong in both the U.S. and EU, and we believe the gross profit from Flexible Credentials will start to come in around mid-Q4, in addition to what has been announced with Affirm, and continue into 2025. However, this product is available now, so there is no beta phase; we are fully prepared to proceed.

I would just add that this will require a mindset shift, and it may take some time for people to adapt. What this offers is the ability to use one credential for different payment methods, such as paying in full, revolving, or buy now, pay later. We believe this will be very powerful and appealing to our customers, but it's likely that not everyone will immediately embrace it. It may take some time for people to fully understand how to make the most of it. We're excited about the potential, but we anticipate it will be a couple of years before it sees widespread usage among customers.

I see. Separately, I guess I also wanted to ask, with the renewals behind you, how should we think about the growth algorithm balance between new customer versus existing customer growth? I think you guys have highlighted a lot of new opportunities on this call. I'm just kind of curious, in your mind, what is shaping up to be the more powerful drivers sort of today and in your projections between sort of harvesting growth from the clients you have today versus new customers that you think may drive kind of an incremental share of growth as we move forward?

Yeah, I'll give an answer and then hand it over to Mike. Ramsey, it is kind of yes and yes. So, we are excited that the new cohorts are on track to generate $20 million in revenue, which is what we've guided. So, we're on track with that, and again, speaks volumes to how fast we can onboard new customers and get them ramped up. So, that's a growth vector. Our customers also are growing, some of them geographically. Others, they're launching multiple programs. So, that also factors into our growth calculations. But Mike, you can give more color over the multiyear timeframe.

If you examine our bookings from the first half of the year, about half are expansions with our existing customers, compared to new customers. This shows a healthy balance between the two. We still have many established customers who possess significant growth potential, and we aim to increase our business with them while also acquiring new clients. Additionally, among the programs currently active with our existing customers, we are seeing substantial growth. We've indicated that 10 of our 20 customers have their total payment volume increasing by over 50%, with eight of those 10 exceeding 75% growth. Several customers have embraced something that resonates well in the market, leading to exceptional growth rates, even outside of our additional business. This positions us well for future growth from both new and existing customers in the upcoming quarters.

The next question comes from Will Nance with Goldman Sachs.

Hey, guys. Appreciate you taking the question. I wanted to ask about some of the cybersecurity events that happened recently with the Evolve hack. And just wondering if you could talk about maybe some of the ramifications for the broader ecosystem. And I guess, A, how that's impacting some of the partner banks in the ecosystem? And then, B, if there's any impact on pipelines or kind of new program upstarts that may be impacted by increased regulatory scrutiny?

Thank you for the question. The short answer is no. The longer answer is that the CrowdStrike event did not impact us, particularly since we operate mostly in a Mac environment. We had a customer at CrowdStrike, but thanks to the excellent efforts by our security team, we were not affected, and neither were our customers in any significant way. In terms of other security and regulatory scrutiny, I do not anticipate it creating medium-term or long-term challenges. On the contrary, I believe it will create many tailwinds for Marqeta due to the flight to quality syndrome. We have shown our ability to scale in a compliant manner. Regarding Evolve specifically, our business with them is not large, but they are a great partner. Most of the issues we have seen in the news do not involve Marqeta. The challenges we have read about, which we do not have detailed knowledge of, will not impact Marqeta because we have invested heavily in compliance around our solution, whether related to settlement or reconciliation. We have managed this well as we have scaled. Therefore, I would say that we are looking good, and this situation is actually favorable for Marqeta.

And then just a brief follow-up. You mentioned some optimization on the quarter side. I was just wondering if you could elaborate a little bit on some of the optimizations that you're doing and how you're able to affect those. Thanks for taking my questions.

Sure. I can cover that. I think I would say there are probably four primary drivers of the areas we're focused on where we're getting a lot of efficiency optimization, and I would kind of put these in order of magnitude. The first is in our tech tool usage optimization, right? To run our platform, we obviously use a lot of third-party providers, whether it's the cloud or data tools that are critical to our platform. And a lot of it has been really looking at how we are using each of those services and sizing any waste, and being much more thoughtful about how we're set up with each of those providers to make sure we're being as efficient as possible. So, that I would say is bearing the most fruit. The second one has to do with insourcing. So, you go back a couple of years, and I think like any younger fast-growing company, we had a lot of things that we were using third parties for. We've made a pretty concerted effort to reduce our contractors and professional services, hiring our own people, which tends to be much more efficient. The third is we've also then started to hire those people in lower-cost locations. So, prior to a year ago, we were essentially 100% U.S.-based in terms of both operation and maintenance. Now, we've started to hire in lower-cost locations, so we're doing hiring more cost-effectively. The last piece is we've renegotiated some contracts to get better terms. So, those, I would say, are the four big levers that we've been focused on to get the improvements we've seen so far.

The next question comes from Andrew Schmidt with Citi.

Hey, Simon. Hey, Mike. Thank you for taking my questions, and congrats on the sustained profitability flip here. If I could just go back to the November 2023 Analyst Day, I recall you had to make some assumptions around pipeline, conversion, and then which segments would grow at which rates. Maybe you could talk about how some of those key assumptions are trending. Obviously, some good wins announced in the quarter, so it seems fairly positive. But curious about how some of those key assumptions are trending and how that influences your visibility for gross profit growth in the out years. Thanks a lot, guys.

Thank you for your question. Overall, there are always some positives and negatives, and not everything goes perfectly. However, on a broader scale, we are aligning well with our expectations. We had anticipated generating $20 million in revenue from new customers who hadn’t launched before 2024, and we're on target to achieve that. This figure is expected to rise to $60 million next year, which gives us confidence that the new business we are bringing on board is progressing as planned. Regarding our existing business, it is performing about as we expected, although there is a slightly different mix compared to our predictions from a year ago. Simon has pointed out trends in financial services where many companies incorporating embedded finance are integrating neobank elements into their strategies to engage users and employees. We are actually observing more demand in this area than we had anticipated nine months ago, making it one of the early spots for heightened embedded finance activity. Overall, we believe we are largely on track and everything is proceeding as planned, with the notable exception being our success in managing costs, which has exceeded our expectations over the past nine months.

The next question comes from Andrew Bauch with Wells Fargo.

I guess I'll take a shot at the back-half guidance here. Showing strong momentum coming out of the second quarter, the guidance is relatively unchanged. I know that the business is pretty predictable here, and you kind of mentioned a lot of everyday spend. But maybe if there are certain elements of the model that could lead to upside or incremental risk on the downside, maybe if you could just walk us through what those potentially could be.

Sure. Thank you for your question, Andrew. I think the sources of upside, I would say that, as we've mentioned, our existing customers really are growing at a very fast clip. We do our best to project that forward, but I would say we could be surprised to the upside. There are several customers who just seem to be defying gravity, and that could be a source of upside. We also have several customers in our pipeline that are eager to move quickly. So, the more we talk to very sophisticated technology businesses, their timelines are a little different. So, that could be a source of upside, as well as cross-selling certain capabilities to our existing customer base. Not necessarily new program launches, although we did have an existing customer launch a program, I think, 10 weeks earlier this year, but also selling. We’re doing disputes for a few customers that we weren't a year ago. Simon mentioned our risk product is growing about 60%. So, there are some things that can be cross-sold that could help to the upside in the second half. If I were to look at downside, I think the biggest one would be something macro-related that impacts the overall spend trajectory of our business. At this point, especially as we get closer to the holiday season, people don’t want to disrupt their payments platforms and their checkout experiences. So, there are only a couple more months that changes could be made. So, to see any downside would have to be something that’s more macro-related.

Understood. And then my second question, I just want to touch upon the European and international opportunity. Last quarter, you highlighted the launch of Trade Republic, which I think had 4 million users you called out. Some European fintechs on the private side made some splashes in the quarter about pretty hefty valuations. So, just want to get a better understanding of how you sit today from a competitive standpoint in Europe and internationally broadly.

Yeah. Let me take a stab at that. So, very favorably, I'd say, because we have demonstrated that we can scale fast with these customers. That's number one. Number two, as you mentioned, a lot of these fintechs have global aspirations and not just EU aspirations, definitely cross-border applications. So, that's what they look at Marqeta in terms of a long-term partner. I would say, to be perfectly honest, that they want more from Marqeta, not less. And we are getting a lot of our services program management enabled in Europe because this is a great opportunity for us to upsell and service our customers better. We've also made some strong hires in Europe and strengthened our team in order to support the territory, and we've opened up offices in Poland, in Warsaw. It's a lower-cost location, but also, from a time zone perspective, can help support our EU customers. The last thing I'd say is there isn't a single vertical in Europe that is growing fast. I'd say all of them are growing fast, including neobanking, expense management with some really cool customers we have, in addition to short-term working capital to SMBs. All are hitting it on all cylinders from a volume growth perspective.

Yeah. If I was going to add something, I would just add two things. I think it's really significant that we're bringing our program management capabilities to Europe. I think our solution, although we have a great processing platform, obviously, what we could service was relatively limited in Europe, and we've had a lot of success. But with a more comprehensive solution, particularly as things shift more to embedded finance, we think we'll make a big difference. So, that's something significant. The other thing that I think really helps us in Europe is that because the economics are so different in payments there, engagement is really everything to the European businesses. You're not going to be successful unless you have a very good engagement strategy, and the user experience is very strong. That's where the flexibility of our platform and the ability to embed this really becomes more of a differentiator there than in the U.S., where there's just more monetization available. So, those two things are serving us well.

The last question today comes from Bryan Keane with Deutsche Bank.

Hey, guys. Congrats on the solid results here. Simon, just looking for an update maybe on the Power Credit platform. Is that ramping? Or how do you see the pipeline for that business?

Hey, thank you for your comments. So, it's going well. As we've mentioned, our goal for this year is to launch two programs, and we're on track to do that in H2. Everything's going on track. So, we're very excited about this. Second thing I'd say, like we mentioned, that we were positively surprised by the demand in commercial credit. But overall, I'd say most of the folks we engage with are actually embedded finance customers that are looking for engagement, as Mike mentioned. And engagement means top-of-funnel acquisition. So, they're not just looking, honestly, for just a co-brand card; they're looking for a full solution that can drive that engagement. The brands we're talking to are predominantly digital tech brands that have wide distribution, and they don't want to leave anybody behind. So, they're looking for our full suite of solutions. So, debit, buy now, pay later, and credit. That's given us great momentum on the consumer side. And on the commercial side, most of our engagements are with either aggregators or large marketplaces that either have creators or SMBs or suppliers. Honestly, I'd say that the stars are aligning in terms of our unified solution set coupled with great program management is driving our pipeline versus having a separate credit pipeline. So, those two trends give us great comfort around our overall solution.

This concludes our question and answer session and concludes our conference call. Thank you for attending today's presentation. You may now disconnect.