Marqeta, Inc. Q3 FY2024 Earnings Call

Ladies and gentlemen, greetings, and welcome to the Marqeta, Inc. Third Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stacey Finerman, Vice President of Investor Relations. 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, 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'd like to turn the call over to Simon to begin.

Thank you, Stacey, and thank you for joining us for Marqeta's third quarter 2024 earnings call. I will first briefly discuss our Q3 results at a high level followed by the progress we're making in our business to help transform payments and last, address the Q4 reduction in growth expectations. Marqeta's business is on solid ground and our fundamentals are strong. We have lapped the Cash App renewal, and as a result, the third quarter's net revenue, gross profit, and adjusted EBITDA now gives a more accurate view of our business trajectory as they demonstrated positive year-over-year gains. Total processing volume or TPV was $74 billion, in the third quarter, a 30% increase compared to the same quarter of 2023. Our net revenue of $128 million in the quarter increased 18% year-over-year. Gross profit was $90 million in the quarter, a growth of 24% versus the comparable quarter of 2023. Our non-GAAP adjusted operating expenses were $81 million, representing a 9% increase year-over-year, significantly below our gross profit growth rate. This resulted in an adjusted EBITDA of $9 million in the quarter. Now let me shift to talk about where we are in the transformation of payments. The modernization of payments started more than a decade ago on the acquiring side but has gained momentum on the more complex issuer processing side in the last five years. Despite the great progress we made, this transformation is still in its early stages. And Marqeta currently accounts for only about 2% of the issuer processing volume in the markets we operate. There is a long-term secular shift in financial services. The days are numbered for the status quo, as consumers and businesses want modern financial products. We're driving the shift and have the scale and track record as a trusted ally to innovators. But there is more we can do to accelerate this transition and reduce the overall time to value. We recently launched portfolio migration, a new product that simplifies upgrading existing card programs onto our platform, reducing complexity and minimizing disruption during the transition. This solution allows companies to migrate portfolios from competitor processors to Marqeta's modern platform, allowing customers the best of both worlds. A smooth transition combined with the ability to benefit from the increased capabilities our platform enables. This capability includes two main components: an automated migration tool that transforms and aligns card program data from the previous system to Marqeta's platform as well as operational processes to ensure a smooth transition. We believe this capability can accelerate the shift to our platform and reduce time to value. In fact, we recently completed the successful migration of millions of Klarna cards across Sweden, Germany, and the U.K. in October after starting the project earlier this year. The transition provided Klarna with greater resilience and stability, meeting Klarna's needs ahead of the holiday season. Millions of Klarna users now have the best technology powering their cards and enjoy rich functionality. This success serves as a strong proof point when offering similar migration services to other customers, showcasing a modern and seamless solution. We're also delivering ways to accelerate the launch of new card programs, as exemplified by the release of our UX Toolkit. This capability allows customers to create branded front-end experiences using a comprehensive set of pre-built UI components optimized for Marqeta's APIs. It enabled customers to build a Marqeta-powered debit and credit program with fewer development resources. This is particularly valuable in neobanking, where customers want a straightforward way to manage their money, and embedded finance where customers want payments to blend into their existing experiences and drive further engagement. We already have four customers adopting the UX Toolkit, integrating the features into their own existing products and the feedback has been extremely positive. Also, in keeping with the current regulatory climate, the toolkit was developed in a compliance-forward manner as these templates have been vetted by banks with specific regulations in mind. We're also enabling the shift to modern card-issuing by leveraging our unique scale and expertise, especially in Buy Now Pay Later or BNPL. Last week, we announced Marqeta Flex, a new solution that revolutionizes how BNPL payment options can be delivered inside payment apps and wallets, surfacing them when needed within the payment flow. Many years ago, Marqeta expanded the addressable market for BNPL using single-use virtual cards, eliminating the need for providers to directly connect with merchants in order to bring BNPL to the point of sale. With Marqeta Flex, we plan to expand BNPL's distribution even further by giving consumers access to personalized BNPL options inside of their payment apps of choice. We're excited about the participation of Klarna, Affirm, and Branch in the next innovation in the BNPL landscape. Together, these relationships are helping us create an experience that expands BNPL distribution and enhances the overall payment experience. We plan to roll out Marqeta Flex in mid-2025. In the meantime, we will gather additional participation from customers and partners to take part in this new approach to scaling BNPL. With all this great progress, why is our guidance for Q4 softer than expected? Well, last year, the regulatory environment changed among the smaller banks that support many of our customers' programs. As a company, we anticipated this change and invested in program management in general and compliance services in particular. We believe that these investments have positioned us well in the medium and long term and increased the moat around our platform, especially in embedded finance. However, we underestimated the increased operational burden these changes made on both Marqeta's and the bank's onboarding and compliance teams. The incremental scrutiny and rigor translated into delays in launching new programs. These delays have also been aggravated by the increased demand from new bookings in 2023 and the first half of 2024. On average, the time to launch new programs has grown 30% to 40% from 2023, and we expect that increase to remain for at least two additional quarters, as we and our bank partners become more agile in launching programs in this new environment. Given the standard ramp time for programs in our industry, these delays will cause volume and gross profit to be pushed out a few months. Now with a more complete understanding of the implications, we're taking a more holistic approach to ramping the programs we have already signed. We are also signing up new banks to add capacity and open up new choices for our customers while making our processes standardized across all banks we support. We are confident these changes will give us the agility we need. However, it will take a few months to completely solve the problem and drain the backlog that has been built up. We view the headwinds from the more challenging bank environment as short-term, merely slowing down our progress rather than a change in the trajectory of our business, nor impacting our path to profitability. In fact, we remain confident in our strategy, business trajectory, and execution. We've been a large contributor to transformation in the payments industry and a trusted ally to our customers who seek an engaging and compliant customer experience. We've done it with an eye on the horizon and a nose to the ground. Although the current banking environments have shifted the curve out, the fundamentals of our business are strong. Our pipeline continues to grow and we are confident in our ability to demonstrate strong long-term profitable growth. With that, I'll pass it on to Mike.

Thank you, Simon, and good afternoon, everyone. Our financial results in Q3 better reflect the growth trajectory of the business, now that we have lapped the Cash App renewal. Strong TPV growth continues to be broad-based across several use cases and geographies, fueling our gross profit growth. Nevertheless, TPV and gross profit growth were a little lower than we expected due to a smaller contribution from the launching of new programs, which I will cover in detail in a few minutes. Our path to profitability, however, remains on track as adjusted EBITDA was $2 million to $3 million better than expected due to the continued execution of efficiency and optimization initiatives. Q3 TPV was $74 billion, a year-over-year increase of 30%. Non-Block TPV grew more than 15 points faster than Block TPV growth due to strength across a large number of customers and use cases. Our Top 10 Non-Block customers grew over 30% and our remaining Non-Block customers grew over 50% year-over-year. Financial services, lending, including Buy Now Pay Later, and expense management all grew at roughly the same rate for the third quarter in a row, slightly faster than the overall company. Financial services continue to deliver strong growth despite being by far our largest vertical. Block continues to flourish and our newer neobanking and accelerated wage access customers are expanding rapidly, growing well over 100%, and are now contributing more than 10% of total company TPV. Lending, including Buy Now Pay Later, continues to be aided by the adoption of our BNPL customers' PayAnywhere card solutions as well as customers utilizing our platform in support of SMB lending solutions. Expense management growth has been very steady each of the last three quarters with several of our top customers maintaining robust growth fueled by new users. The growth of on-demand delivery, our most mature use-case, slowed into the single digits this quarter. Q3 net revenue was $128 million, growing 18% year-over-year. Net revenue growth is almost 13 points lower than TPV growth, a larger-than-typical gap, primarily for two reasons. First, strong TPV growth in recent quarters among many of our Powered By Marqeta customers has shifted the mix of our business. The powered by revenue take rate is much lower than managed by, as a result of there being minimal cost of revenue, which contributed a mid-single-digit impact when comparing revenue and TPV growth. This impact is less significant when comparing gross profit take rates for the powered by and managed by business. Second, the renegotiated platform partner agreement that went into effect in Q1 2024 drove a low to mid-single-digit headwind on a year-over-year basis. It's important to note that this change only impacts revenue, not gross profit as a result of the new Cash App revenue presentation and will lap in Q1 2025. Block net revenue concentration was 47% in Q3, consistent with last quarter. Non-Block revenue growth was over 10 parts higher than Block net revenue growth. Our net revenue take rate of 17 basis points was slightly lower than last quarter, primarily driven by a business mix from the increasing TPV contribution of Powered by and a few of our largest managed by customers. Q3 gross profit was $90 million, resulting in a 24% year-over-year growth and a 70% gross profit margin. Gross profit growth was approximately 2 points lower than expected as a result of lower contribution from new programs in the quarter. There are two reasons for this. First, 15 programs we expected to launch in the quarter were delayed by an average of 70 days. We were less efficient in working with our bank partners to launch new programs, which we attribute to the increased regulatory scrutiny over the last few quarters on the banking industry, particularly the smaller banks supporting fintech and embedded finance. Although we anticipated challenges as a result of the increased scrutiny, we significantly underestimated the impact of constrained resources and evolving processes. Now we have a backlog of programs to launch. Unfortunately, as a backlog builds and the ramp of programs is shifted out in time, there are bigger implications for Q4 and 2025, which I will cover in more detail in a few minutes. Second, our new programs that have already launched in aggregate are not performing as expected. Because we serve many innovators and disruptors, Marqeta has always viewed launch cohorts as a diversified portfolio of programs with customers achieving varying levels of success. Given the small sample size of new programs in 2024 as a result of the delays, the portfolio lacks diversification and therefore it may be a little early to evaluate. The cause of gross profit underperformance can happen for several reasons, including changes to the customers' level of investment or resource allocation, the value proposition needing refinement, or higher costs of revenue than projected. Our gross profit take rate was 12 basis points, 1 bps higher than last quarter, driven by higher incentives in Q3. This is the result of the annual reset of incentives in Q2 based on the contract years. Q3 adjusted operating expenses were lower than expected at $81 million, an increase of 9% versus last year. To fully benefit from our scale, we are focused on our hiring, continue to utilize multiple geographic locations to find the best talent, and are executing our efficiency and cost optimization initiatives as well. All of these scale benefits help deliver higher than expected Q3 adjusted EBITDA of $9 million, resulting in a margin of 7%. Interest income was $14 million; Q3 GAAP net loss was $29 million. In Q3, we repurchased over 9 million shares at an average price of $5.15 for $49 million. We ended the quarter with $1.1 billion of cash and short-term investments. Now let me walk through our latest outlook for Q4. We expect Q4 net revenue growth to be between 10% and 12% and Q4 gross profit growth to be between 13% and 15%, a 6 and 9-point reduction respectively, compared to what we shared in early August. The change in our expectations is primarily driven by two factors, both of which stem to some degree from the heightened regulatory environment from our bank partners. First, we now expect significantly fewer new programs will launch and ramp up in the second half of the year, lowering gross profit growth by approximately 6 points. We were not quick enough with solutions and new processes for our bank partners and they are more focused on maintaining current programs in the heightened regulatory environment than launching new programs. In some cases, this environment also delays our customers' launch plans. Now that we have a backlog of programs to launch, it will take time to work through it. Delays of a few months push launches into Q4 and the first half of 2025. Because of the ramp trajectory of TPV in the first year of a program, a few months' delay meaningfully impacts Q4. The impact is larger on gross profit than revenue since newer programs with subscale volume tend to have high gross margins until our customers work through the initial volume tiers in our contracts. Why does this change in assumptions seem so sudden? We have been very aware of the scrutiny and working through it with our bank partners, investing significantly more in our compliance efforts since the start of this year to raise our program management standards ahead of the rising tide. However, in the past two to three months, it has become clear we greatly underestimated the magnitude and time horizon for all parties to adapt to the new standards. We are actively executing the solution for this challenge, working closely with existing bank partners to optimize our processes to improve the efficiency of program approval and onboarding. In addition, we plan to onboard at least two additional bank partners to increase our bank supply to meet our growing demand. The second factor is a few highly sophisticated long-term fintech customers are moving quickly to take ownership of more of the program components in this heightened environment, lowering gross profit growth by 2 to 3 points. We have two customers quickly shifting their resources to take on more program management responsibilities, one customer bringing more risk services in-house and three customers connecting their platforms directly to their end-users to reduce their reliance on card usage. All of these actions reduce our volume or our take rate. We do not believe these types of customer actions will become broad-based because very few want to prioritize this type of work or have the scale and sophistication to execute in a way that is accretive to their business. Outside of these two factors, the business is mostly on the trajectory we expected several months ago. Based on our Q4 outlook, we expect full-year 2024 net revenue growth to be approximately negative 26% and full-year 2024 gross profit growth to be approximately 6%. Despite some setbacks to gross profit growth, we continue to execute cost optimization and efficiency initiatives to drive higher adjusted EBITDA, as shown in the Q3 outperformance. We now expect our Q4 adjusted operating expense growth to be in the high single digits with sufficient investment in resources, specific capabilities, and platform resiliency to best serve our customers and drive future growth. Therefore, we expect our Q4 adjusted EBITDA margin to be 5% to 7%, only 1 point lower than the expectations shared last quarter as a result of better operating discipline. Based on this Q4 outlook, we expect a full-year 2024 adjusted EBITDA margin of approximately 5%. While it is too early to discuss our 2025 expectations in detail, at this point, we believe Q4 2024 is a good indicator for 2025. Gross profit growth in 2025 could be similar to Q4 2024 as we solve for new program launch delays, pushing the ramp-up programs to later in 2025. Also similar to Q4, our expectations for 2025 adjusted EBITDA are not changing from what we shared at our 2023 Investor Day. Being ahead of schedule on our expense optimization work should enable us to deliver adjusted EBITDA of approximately $50 million in 2025 and remain on track to exit 2026 GAAP profitable. We believe these challenges with new programs are a short-term issue impacting the next several quarters as a result of shifting out the new program ramp curve, rather than a structural change in our business that impacts the growth trajectory beyond 2025. To wrap up, we had a strong quarter delivering robust gross profit growth combined with an improving adjusted EBITDA trajectory. We are beginning to realize the benefits of our scale, both in generating profitable growth, but also in the opportunities we are discussing with embedded finance prospects looking for a highly capable multinational partner to support several use cases. Although our gross profit growth in the coming quarters will be lower than our previous expectations, we are still a market-leading platform generating mid-teens growth with a rapidly rising adjusted EBITDA. Our underlying business remains strong and our differentiation in the market remains clear. The delays in launching new programs is a small setback on a long prosperous journey of modernization of issuer processing that Marqeta is well-positioned to lead. I will now turn it over to the operator for Q&A.

The first question comes from Ramsey El-Assal of Barclays. Please proceed.

Hi. Thank you for taking my question this evening. Can you comment on your visibility at this point, given everything that's going on in terms of these regulatory-driven sort of changes? Are you confident that you're seeing sort of a bottoming out of the pain here, or could we get to next quarter and see that things have deteriorated further? And I'm also just wondering whether there's a risk that some bookings may get terminated if the implementation timeline stretches out for too long.

Let me take that Ramsey and then pass it over to Mike. So what I would say is, we do have visibility because we have bottomed out. I would say that for multiple reasons. The rules have not changed; it's more the third-party oversight and scrutiny upon launching a program that have changed. For example, if we change something in the program, it goes back to the top of the queue versus being done in parallel. These are procedural changes rather than material changes. The regulators have a tough job, but I do believe we are over the hump when it comes to what we need to fix in order for us and our banking partners to go back to ordinary times to get a program out. It will take time to drain the backlog because it's not that our demand went down; it actually went up. So we have some backlog that we have to drain. In terms of your question about whether people will run out of patience as they are in the queue, we don't expect that. Both entities are committed to the partnership. There's a lot of work that goes into it from development to onboarding to risk management. So we're pretty quite committed, and so are our customers. They all understand the environment. We're not the only entity impacted by it. So we're working with them and on the contrary, they have been extremely supportive and continue to be excited about the programs that they want to launch. Mike, anything you'd like to add?

Yes, just maybe I'll give some color on the specifics on some of the delays, Ramsey. If you look at the first few months of 2024, the regulatory scrutiny had clearly ratcheted up with more than 10 consent orders affecting the banks in our space. What we saw was an initial spike in the time to launch that was more than double the average in 2023. So 2023 onboarding and delivery was typically around 150 days, roughly. In Q1 and Q2, that rose to over 300 days. This was expected given the initial changes and shock of all the changes happening. At the start of Q3, we expected things to get back to where we had been in 2023, but the new programs on average took about 30% to 40% longer to launch. The time still remained over 200 days when it had previously been about 150 days. This gives you a little more color on the magnitude of what's happening. To address your second question in terms of visibility, we had 15 programs that were delayed on average of 70 days. When you break that down into components, five of those 15 actually did launch in Q3, but just much later than expected. Nine programs are now expected to launch in Q4. So a little more than half are being pushed into Q4, and one is slipping into Q1 of 2025. We have good visibility now that we've started to implement some of the solutions to address these challenges. Of course, there are still some unknowns, but for the most part, we feel good about the projections we're sharing concerning our outlook.

Okay. Thank you very much for that. And just a quick follow-up. You also called out some new programs that launched that are not performing as expected. Can you give us a little more color there and also maybe comment on the degree to which you might be able to change the trajectory there? You mentioned things like refining the value proposition or maybe investment levels of your customers. Is it sort of like now that those cohorts are performing as they are, it's just the way it's going to be? Or could you see a change as time passes in terms of performance?

Yes. There are definitely ways to impact the trajectory, as I mentioned in my prepared remarks. The key is when we're looking at new program launches, we consider them a portfolio and look at them in aggregate because of the nature of the types of customers we serve. We're a bit of a hits-driven business where we'll have a few programs within a new launch cohort that achieve a lot of success, while some customers may not hit the mark and need adjustments. We typically see this type of outcome and we work with customers who are not experiencing as much success to implement changes, help refine their value proposition, and get those changes through the bank. This isn't that unusual. What's different is that because of all the program delays, the sample size is much smaller. With a smaller portfolio, you don’t have the balance you would normally have with a lot more programs going live. We'll continue to work with them and try to improve performance. Everyone's incentives are aligned in that regard.

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

Hi guys, thanks. Just a couple of follow-ups on this topic. I mean, I guess, number one, in terms of your confidence level that your current existing customers that haven't been yet impacted by this shouldn't be impacted by this going forward? Can you just help us understand what gives you any conviction around that? And then I guess, it's great to hear the visibility on the 15, that really was helpful in terms of the onboarding timing. But maybe just help us understand a little bit more about what gives you confidence that ongoing or other new customers don't change their mind about the operating business. Maybe just a quick follow-on would be, maybe help us with anything around verticals or where this fits into your business a little more. I understand it's partners with smaller banks that are acting as sponsored banks, but any more color on where this fits in terms of verticals or anything else would be helpful. Thanks, guys.

Thank you, Darrin. Let me take the first question and then hand it over to Mike. In terms of our existing customers, Marqeta has taken a lot of steps early on before the increase in regulatory scrutiny and consent orders to review all our programs and the procedures we put in place. I would say dating back to programs that have launched for two years, we feel comfortable that whatever is out there and launched is strong in terms of being able to sustain more rigor in the regulatory system. We have done a thorough review of everyone and said that these programs are solid. Whenever we have questions, we put our partners through the test. So we feel comfortable about that. In terms of your second question regarding customer retention despite the time it takes to launch these programs, we’ve kept in touch with them and have worked in lockstep with them through all the necessary changes. We have suggested reducing the number of changes in scope early on so they don’t fall back in the queue; they have been responsive. Our resources have also been mobilized to consult with our customers, ensuring they get it right the first time, based on our experience from the 400 programs that have launched. We believe discipline early on in the cycle is crucial. I'd be extremely surprised if we have customer fall-off given how invested our customers are in the solutions they are about to launch.

Yes, just one thing I’d add, Darrin, is that if you look back on our significant bookings over the last year and a half to two years, we’ve noted that more than half of those tend to be with existing customers doing new programs. They are very aware and can feel the change. They launched programs with us a year or two or three years ago, and they can see what's happening now. There is pretty good understanding that this isn't a Marqeta issue; it’s a broader industry change, especially if they talk to other banks or people in the industry. It's broad-based. Therefore, we’re not seeing customers questioning why this is happening. Everyone is feeling the impacts. Regarding verticals, this isn't limited to certain areas; it’s very broad-based. It’s a foundational change in onboarding processes affecting all use cases.

Yes. All right. I was going to just kind of add on to that specific topic, Mike, you mentioned about sticking to the construct. I’m assuming you guys have been able to talk with the underlying regulators to see if there are additional changes required?

We’re always communicating with everyone in the ecosystem, including regulators. They have a tough job. Most responses have been reactions to past events, not specific to Marqeta, but we exist in an ecosystem where one bad entity can ruin the whole landscape. Industry-wide scrutiny has ramped up against some of the smaller banks, resulting in increased third-party oversight. We anticipate this environment will continue as there’s nothing structural that would lead to additional changes. What we did at the beginning of the year is move bank vetting into the early pipeline stages, so we don’t enter contracts with anyone before banks have vetted the solution. This change increases our likelihood to go live and boosts our confidence by weeding out less viable solutions upfront, thereby improving efficiency in delivery.

Thank you. The next question is from the line of Tien-Tsin Huang from JPMorgan. Please go ahead.

Hi, thank you for going through all of this, and I appreciate your sticking with the 2025 EBITDA outlook. I just wanted to clarify that with all the work you’re doing to remedy the situation, I presume there would be additional costs or some deleveraging there. Am I misunderstanding that? Can you walk us through what you're doing on the remedy side and the impact on the P&L and why you're confident in protecting EBITDA?

Thank you, Tien-Tsin. The cost has already been incurred because we have invested heavily in compliance since early this year; this is the largest investment we made in late 2023 and into 2024. We've also automated many of our processes and onboarded more resources outside the U.S., like in Poland for risk management and compliance operations, and in Toronto for development. The uncertainty was whether banks would need to incur higher operating expenses to meet these changes, and we're comfortable with the investments they've made. In terms of what we're doing about it, the number one approach is to become more efficient with existing banks. I’ve mentioned sticking to existing constructs and focusing on use cases that have proven effective, limiting non-essential changes to avoid delays. We're also engaging additional bank partnerships to enhance our supply side and have deployed consultants to assist customers in ensuring success on the first attempt. We believe these steps will not only differentiate us but also strengthen our market position in the long term while helping drain the backlog without continually adding deals.

Just to add a couple more details, Tien-Tsin. Normally, we wouldn't comment a lot on 2025 this early, but we're being more transparent due to the circumstances. At this point, our view of 2025 gross profit from programs that launched prior to 2024 isn't changing much from what we thought a year ago. The changes we are seeing in 2025 are centered around new programs we’re launching in 2024. The typical ramp of TPV we assume is based on historical data we've collected on over 100 programs. Shifting this ramp a few months impacts our ability to realize revenue and gross profit significantly. This accounts for our confidence that by 2026, we should return to expected growth rates from our Investor Day, as we just need time to work through these challenges while addressing the backlog. We've made substantial progress on expenses, allowing us to meet our projected EBITDA figures of around $50 million.

One last thing I’d add, Tien-Tsin, is that we’ve been tracking this growth curve for over a year now. We haven't seen any statistically significant deviation from it with each program launch. Our confidence in these projections is quite high.

Thank you. The next question comes from the line of Timothy Chiodo from UBS. Please go ahead.

Thank you for your question. I want to summarize the key points. This question is directed at Mike. It appears that there are three main factors: the delay in the timeline for new programs, changes related to in-house sourcing by some of our more sophisticated customers, and the early performance of recently launched programs. I believe that's the correct order of importance. Could you please confirm that, Mike? Also, I'd appreciate it if you could elaborate on the sophisticated customers and the specific types of customers involved. You mentioned that some are taking on more work in-house, while others are handling more risk internally. It would be helpful to provide further details on that.

Yes, to confirm what you said, Tim, the main factor is indeed the timeline of these new programs, then the actions of sophisticated fintech customers conducting more tasks in-house, while early performance is smaller and part of the new program's impact. We do see this impact primarily stemming from two factors. As for our sophisticated customers, we have a couple of them managing their bank relationships directly. We are providing some program management capabilities, but they are now going to manage the relationships. Another customer is pulling more risk services in-house based on a solution they have built. Additionally, we also have three customers connecting their platforms directly to their end-users to reduce reliance on card usage. As you can understand, many of these actions will reduce our volume or take rate. While we don't believe these trends will become widespread, they are notable in this environment because several customers are changing simultaneously, which is why we've adjusted our expectations.

Thank you. The next question is from the line of Andrew Schmidt from Citi. Please go ahead.

Hi, Simon. Hi, Mike. Thanks for taking my questions and really appreciate all the detail here. It makes sense in terms of the increased scrutiny and elongated timeframes. But in terms of changes required on the Marqeta platform, could you comment whether there are any changes needed? We've heard things like more detailed transparency at the sub-FPO level, nothing that seems significant. But are there platform changes in addition to the process changes you're making?

Thank you, Andrew, for the question. The short answer is no significant changes are required that our compliance team hasn’t already started working on. There’s always room for improvement in areas such as automation and reporting dashboards, but conceptually, the requirements have not fundamentally changed. We've invested in building a great dashboard that could operate in near real-time on the compliance side, ensuring visibility for programs launching early. Nothing substantial needs to change that we weren’t aware we had to address previously, given our maturity and the scale our customers operate at now.

Got it. Thank you for that, Simon. And can I ask about the new sales environment? Obviously, the focus here is on working through the backlog. But have you seen hesitancy from new candidates in the pipeline, given what’s going on in the environment? More broadly, as you think about draining the backlog, do you shift some resources from new sales to implementation? I’m just curious about the new sales environment overall.

Great question. We have moved resources to help. However, we have primarily mobilized our delivery team to ensure our customers get their processes right the first time. We're also looking into mechanisms to prioritize things going through the pipeline. While the top of the pipeline hasn’t been affected, our customers are continuing to engage, and demand is growing. We have a continuously expanding pipeline, especially from embedded finance customers despite the challenges.

Thank you. The next question comes from the line of Andrew Bauch from Wells Fargo. Please go ahead.

Hi, thanks for taking the question. If we think about the six-point headwind to gross profit growth in the fourth quarter, is it fair to assume that the existing, same-store sales estimate within that is unchanged from where we were just three months ago? Meaning, is your macro assumptions embedded consistent with what we knew?

That's right. The only changes we're seeing relate to new programs. There are also a few programs taking some responsibility in-house, as mentioned, but outside of that, everything is as expected and consistent with our previous assessment.

To follow up with Simon, you said that demand actually went up in the quarter. Can you help us bridge which parts of the business are seeing that elevated demand offsetting these transitory changes in the onboarding process?

The demand has been growing, not just in the quarter. The backlog grew due to some programs not being cleared; however, in the areas where we see traction, I'd emphasize three sectors: neobanking applications that provide customers services; flexible payments, including Visa Flexible Credentials and our new product, Marqeta Flex; and software firms in financial automation are increasingly reaching out. Approximately two-thirds of our pipeline now consists of embedded finance opportunities that hold a substantial customer base compared to venture-funded fintechs.

Thank you. Ladies and gentlemen, that was the last question for our question-and-answer session. The conference of Marqeta, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.