Q1 2023 Marqeta Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to Marquette US first quarter 2023 earnings conference call.
As a reminder, this conference is being recorded I would like to turn the conference over to safety Feinerman, Vice President of Investor Relations to begin.
Thanks, operator, before we begin I would like to remind everyone that today's call may contain forward looking statements.
These forward looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations Web site, including our annual report on Form 10-K for the period ended December 31, 2022, and our subsequent periodic.
Filings with the SEC.
Actual results may differ materially from any forward looking statements we make today.
These forward looking statements speak only as of the time of this call and the company does not assume any implicate obligation or intend to update them, except as required by law.
In addition, today's call includes non-GAAP financial measure.
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 todays call are Simon cool off Marquette as CEO , and Mike Miller pitch, Mark Harris, Chief Financial Officer.
With that I'd like to turn the call over to Simon to begin.
Thank you Stacy and thank you everyone for joining us for <unk> first quarter call for 2023.
Our first quarter results further demonstrate our ability to innovate at scale to drive growth.
All delivering operational efficiency.
Revenue gross profit and adjusted operating expenses were better than we expected.
Do you need processing volume or TPB increased 37% compared to the same quarter of 2022 and represented the first time, our volume surpassed 50 billion U S dollars for the quarter.
Although our net revenue up $217 million in the quarter represented 31% growth year over year.
Gross profit was 89 million in the quarter, a 19% increase versus Q1 2022.
Our adjusted operating expenses were 94 million, a 10% increase versus Q1 2022.
We are pleased with our Q1 numbers and look forward to delivering even more with a great product market fit market trends that play in our favor and clear strategic focus.
The operational changes we started we started continued to improve our execution and ability to capture our full potential in the coming quarters.
Let me start with strategy and the Big picture.
Our industry is witnessing a major shift one that plays directly into our strength.
The expansion of the market to include the embedded finance in addition to a fintech is accelerating.
First and foremost, let me explain what embedded finance team.
We define embedded finance as companies, whose primary business is not banking nor finance companies.
Companies that offer financial services to their consumers through seamless integration into their existing product.
Embedded finance takes banking to consumers versus asking consumers to go to the bank.
Mark Keller conducted a global survey of over 4000 consumers. This past quarter. The survey revealed that 47% of consumers with now consider using a non traditional financial service provider.
Platform, which is comprehensive with debit credit money movement risk control and program management is well positioned to serve this market and we're already seeing a strong response from our prospects and customers.
This ship is already evident in our numbers as more than 50% of our sales in the past year came from embedded finance customers.
It's the most exciting about embedded finance is the number of companies that can choose to participate in the opportunity I'd almost limits.
The solutions can span multiple vertical company sizes and geographies, creating demand for our services.
As auto and global fashion.
One of the embedded finance solutions, we're excited about is accelerated wage access.
Not only does it enable workers to access to their wages sooner, but it also drives employer loyalty and goodwill without straining our company's working capital.
This is a perfect match for Marquette up as it uses multiple aspects of our platform, including card issuance and banking as a service capability.
Accelerated wage axis has already started contributing to our gross profit growth.
Not only has the number of active users quadruple from the end of Q3 2022, So end up Q1, but TPG growth from the fourth quarter of 2022 doubled into the first quarter on a sequential basis.
In addition, our pipeline for accelerated which access is also rapidly growing.
Another area, where we're seeing strength traction in embedded finance is within marketplaces.
This is an environment, where money is constantly moving between supply and demand, creating the perfect scenario for financial tools to keep the ecosystem running smoothly.
Mark Kedah makes a great marketplace partner because of the mirror is up solutions, we can offer.
Seller financing accelerator seller payouts bonus sell lending for consumers Cobranded cards and banking as a service just to name a few.
During the quarter, we signed a partnership with an online employment marketplace.
Healthcare job seekers are matched with employers Mark get us bothering spending card linked loyalty program for the workers placed using the platform in.
In addition to driving loyalty program enables better tracking of placement data.
Also employers only need to fund the card when they are used to make a purchase optimizing that working capital outlay.
In addition to online marketplaces, we also see our products, helping in person marketplaces also known as brick and mortar retail during the quarter. We signed two deals with very large enterprises, one of whom was already a customer on our platform. These customers are using our capabilities to dinner.
Our innovative in person bonus sales solutions that make things like authentication and just in time financing it much more seamless customer buying experience.
There are few reasons why mark that I was chosen.
These customers require to partner with significant scale and expertise in card issuing.
Also in both cases, the customer is using the Marquette a solution with an existing workflow requiring extreme flexibility.
Now, let me turn to execution.
Our integration of power Finance is ahead of schedule and we expect to complete the process by the end of the quarter.
With intention we sold an asset whose technology was built in a similar way to work together.
So we could combine these two solutions quickly.
Our prospects have responded well to the combined solution. In addition to demand for co branded cards, which we actually anticipated we're seeing demand for commercial credit card, especially in the high interest rate environment that has made access to working capital difficult for small businesses.
Second.
In terms of how we go to market. The changes we made to the sales organization over the past six months continued to pay off.
After a strong end to 2022, our bookings in Q1 exceeded our targets.
The number of deals closed in Q1 was approximately the same as the number of deals we closed in the entire second half of 2022 and estimate that they built up demand for our services, our strong competitive position and improvement in sales operations.
<unk> accomplished without a material increase in head count.
While it usually takes six to 12 months to translate these bookings into material gross profit less <unk>.
Strengths of our bookings gives us a good leading indicators of growth for 2024.
Two thirds of the deals we closed in the quarter, what expansion with existing customers, which speaks to our customers affinity for Merck get our platform and our land and expand go to market strategy.
These expansion deals that sell mainly into three categories. The launch of our new products expanding into a new geography, and the addition of managed services.
In terms of new products, we signed two deals for point of sale lending this quarter as I mentioned earlier.
A new geography, where two of our top 10 customers one in e-commerce and the other one and on demand delivery time expansion deals to date successful products to new markets in the EU and Latin America.
Both of these customers have previously used us to expand into other geography, which is a testament to how seamless the process is on our platform.
Our work with Western Union is a great example of how customers expand on our platform.
After a successful wallet launch in certain European countries Western Union plans to launch its U S debit and prepaid card with Mark it up as part of the company's U S wallet launch.
On the managed services side the deals we signed for the quarter are for addition of risk control, our real time fraud detection platform and dispute management as customers thought mark out his expertise to help them grow.
While we're excited about expansion deals and our ability to serve our top customers. We are also focused on growing our customer base to diversify our revenue and gross profit growth.
No single deal signed this quarter represented more than 15% of the total bookings value for the quarter.
In addition, about one third of our net new deals for the quarter came from the EU, which helps us diversify the geographic mix of our business.
Lastly, the net new deals we signed this quarter, but also a healthy mix across our use cases with digital banking and expense management, both having multiple deals in the quarter.
Now, let me turn to operational and capital efficiency. This is an area, where I feel our commitment and focus as a business is really starting to pay off.
Let me give you. Some example of how to increase operational efficiency.
We were able to renegotiate multiple contracts as well as optimize the usage of certain technology tool.
As a result, we're able to save over $10 million of annualized expenses.
At the same time, our focus on operational efficiency does not mean, we're sacrificing the reliability of our platform. In fact, we are improving our reliability, while also managing increased scale.
During the quarter, our authorizations increased by 9% from the fourth quarter of 2022 as our business continues to grow at scale. However at the same time, our success rate improved by six basis points over the same time period.
We were able to accomplish this without significant head Count addition, by focusing on increased sigur and automation around engineering development.
While our focus is and has always been.
Serving our customers and capitalizing on the tremendous market opportunity, we believe that the best way to accomplish these goals is by making a mark out of itself more efficient company a bath, we have already made great progress on them.
In Q2, we will accelerate our focus on efficiency and take focus action to reduce our adjusted operating expenses by $40 million to $45 million on an annual run rate basis.
Unfortunately, this will result in approximately 15% reduction in headcount and marketing.
This is not a decision we've made lightly but is it targeted move to help us capitalize on the tremendous opportunity in front of us.
And the most aggressive and disciplined way possible.
Based on the opportunity, we're seeing unfold along with improved execution. We believe our stock is undervalued and our board has authorized a 200 million share buyback program.
Before turning it over to Mike our CFO I would like to reiterate our commitment to capitalized to capitalizing on the growing embedded finance opportunity, while serving our traditional fintech and engaging with large financial institutions modernizing that offering.
We intend to achieve these goals through innovation at scale and laser focus on operational and capital efficiency. Our platform is a perfect fit for this market and we're fully committed to serving our growing list of customers so rapidly to rapidly grow and diverse.
<unk> gross profit, while we progress on our path to sustainable profitability.
We're well on our way in this journey now over to you Mike. Thank.
Thank you Simon and good afternoon, everyone Marchetta delivered a great quarter to start 2023 with net revenue growth of 31% gross profit growth of 19% and adjusted EBITDA margin of negative 2%.
All three performance indicators or above our expectations driven by stronger volume growth from several of our top customers as well as accelerated execution of our cost efficiency effort.
Q1, <unk> was 50 billion growing 37% continuing to demonstrate our ability to grow its scale.
Growth was stronger in the first two months of the quarter before slowing by several points in March driven by two factors.
Last year's comps were easier early in the quarter because of the omicron outbreak.
It became more difficult when the post pandemic recovery started later in the quarter.
Also spend per active card was stronger than the first two months of the quarter this year, which aligns with the shifts in consumer confidence.
Looking at our TPB performance by vertical.
Growth in the financial services vertical continues to be the highest contributor to the growth decelerating by a few points versus Q4, but growing a little faster than the company as a whole.
This was fueled by cash app's rising card penetration among their rapidly growing users and increases in direct deposit usage driving higher spend per card user.
Lending growth, including buy now pay later accelerated a little versus Q4, driven by several customers expanding their use cases and merchant categories with travel related spending being particularly strong.
Overall, the NPL continues to be hampered by client as migration of a portion of one program in the third quarter of 2022, excluding cleanup. The NPL growth was roughly similar to the overall company growth.
Expense management T. D V grew significantly faster than the company as a whole, but growth did slow compared to prior quarters due to tougher comps.
All of our.
Four of our top six customers are growing faster than 75%.
Q1, net revenue was $217 million, an increase of 31% consistent with last quarter.
It continues to be a strong contributor to growth driving our revenue concentration to 76% in Q1 up about two points from Q4.
The increased concentration concentration is mostly driven by the strength of cash app as well as slower NPL growth.
Revenue growth remains strong within our managed by Mark out of business, including the on demand delivery vertical.
The net revenue take rate was slightly lower than last quarter and two bps lower than Q1 2022.
When comparing the take rates of last year. It is higher in three of the four major managed by Mark out of verticals.
However that is more than offset by the volume mix shift toward the powered by mark out of business.
Q1, gross profit was 89 million growing 19% with a gross margin of 41%.
The margin is lower than Q1 of last year due to an increase in block revenue concentration.
Which has a margin almost one third of the rest of the business.
And the carnival in migration, partly offset by the positive impact of our value added services not directly tied to the T V.
Q1 gross profit growth, excluding blocking Florida is almost three times higher than the overall company growth.
While the black revenue concentration has steadily increased over the past four quarters. The block gross profit concentration has remained consistent this.
This is due to less favorable volume mix within the block business for both purchase and ATM transactions.
Combined with improving margins and the rest of the business the.
The improving non black margins are primarily driven by better pricing from multiple bank partners higher incentives with one network partner and a large card fulfillment benefit in the quarter.
Do you want to just adjusted operating expenses were $94 million essentially flat for the last three quarters, but a year over year growth of 10%.
Approximately one point of which is inorganic driven by the inclusion of power starting in February .
Our adjusted expense growth decelerated versus Q4 in each of our major expense categories due to realized efficiencies and the benefits of platform scale.
We continued to exercise discipline in hiring as our automation and tooling efforts improve efficiency.
We have also reached a healthy investment capacity.
As a result, the incremental investment required to fuel our future growth and innovation is relatively small given the major platform expansions are behind us.
Scale.
Optimization and vendor negotiations are helping our technology tool related expenses.
As our transaction growth of 45% is almost 20 points higher than our technology expense growth.
We further reduced expenses by actively managing our use of external resources and better leveraging our internal expertise.
Q1, adjusted EBITDA was negative $4 million a margin of negative 2%.
This result was better than we expected driven almost equally between higher gross profit due to business performance and accelerated execution of our cost management efforts.
Interest income was $12 million driven by continued rising interest rates.
The Q1, GAAP net loss was $69 million, including a 32 million onetime noncash post combination compensation expense related to the closing of the power acquisition.
Similar to prior quarters, we had positive cash flow, excluding the closing of the power acquisition.
Including operating cash flow, if you amortize bonus payout we ended the quarter with approximately $1 5 billion of cash and marketable securities.
Our board has authorized a share repurchase program of up to $200 million, we believe that our current valuation does not properly reflect the following.
One the expansion of our market opportunity with the emergence of embedded finance.
Our differentiated product platform with a comprehensive offering of debit credit money movement risk control and program management for consumer and commercial use cases, three sales momentum driven by a renewed go to market motion and for increasing expense discipline and a healthy investment capacity that.
Limit future expense growth.
At our current valuation.
This attractive growth path combined with our strong balance sheet and limited cash burn make this buyback program a great opportunity to reduce dilution as we continue to manage the business for the long term.
We expect this program to be roughly equivalent to both the stock based comp shares vesting and issued in 2023.
Now, let's shift to our Q2 and full year outlook.
As a reminder, although a block renewals a top priority for us and we would like to secure renewal in 2023, the various block contracts run beyond this year.
Therefore, we cannot indicate a potential impact to our financial performance until renewals done and I've assumed current contracts are in place throughout 2023.
Q2 is off to a solid start.
April TPB growth was consistent with March with a managed by Mark head of business accelerating a bit offset by the powered by Mark header business decelerating on a consistent trajectory, we have seen as the comps toughen due to the rapidly growing base.
We expect Q2 net revenue growth to be between 17% and 19% consistent with the expectations, we shared on our last call.
The two more significant factors driving the slowdown in growth versus Q1.
<unk> approximately five points is driven by Q1 performance, we don't expect to continue.
Civically the stronger spend per user in January and February that did not sustain as well as a large card fulfillment benefit.
The results in Q2 last year, a benefit that benefited from a higher net revenue take rate due to favorable volume mix. Both in terms of merchant mix as well as pin versus signature debit mix.
As well as the beginning of more robust usage of our additional services not tied directly to T V and our resurgent corporate travel environment coming out of the pandemic.
We expect Q2 gross profit growth to be in the 1% to 3% range. This is a slightly bigger step down in growth versus Q1, and we expect in revenue primarily for two reasons.
First a drop in the average transaction size that started in late March which pressures our gross profit due to the interplay of the transaction and value based components of interchange and network fees.
Second the timing of incentive.
Remember Q2 is the start of our annual incentive contracts that run April to March therefore, the incentive benefits are lower as the volume tiers reset.
As we discussed last quarter, we lost some of the full these incentives we were previously receiving which will cause the step down incentives to be more significant than what we experienced last year.
In Q2.
Typically is our lowest gross profit margin quarter for the year as the net revenue does not follow the same seasonality as incentive.
As Simon mentioned, we plan to take further actions to reduce our operating expenses with a restructuring in Q2, which will reduce our workforce by approximately 15%.
This is part of the current management team's broader prioritization of Oregon organizational efficiency in order to put our company on a sustainable long term path to profitability.
We expect this was result, and a $40 million to $45 million reduction in our annual adjusted operating expense run rate as.
As well as lower future share based compensation.
We do not anticipate any impact to our service products and operations primarily for three reasons.
One we plan to be hyper focused on a relatively limited number of opportunities we feel will generate the most value for customers and therefore, the highest return on investment.
Second the major components of our platform are already in place.
<unk> credit risk and authentication and banking and money movement solutions.
And third we have a significant we have made significant progress on our automation and tooling efforts that make us less dependent on large numbers of people to complete important tests.
We plan to execute the restructuring in the next few weeks.
There'll be a small benefit to Q2 adjusted operating expense.
We expect Q2 adjusted operating expense growth to be in the low to mid single digits.
We will also incur a one time restructuring charge of 9% to $11 million.
Therefore, we expect Q2, adjusted EBITDA margin to be negative, 4% to 6% on an organic basis, excluding a one point negative margin impact of the power acquisition.
Our expectations for the full year 2023, largely remain unchanged with the exception of our adjusted EBITDA margin.
Although the Q1 outperformance give us a small boost for the full year, we still expect 2023 net revenue growth to be in the low twenties, given the level of macroeconomic uncertainty caused by the rising interest rates tightening credit and banking turmoil.
We expect Q3 growth to be similar to Q2 before accelerating into the low Twenty's and Q4 once we have fully lapped the cleanup volume migration and we begin to lap the impact of heavy renewal activity.
Similar to revenue, we still expect 2023 gross profit growth to be in the mid teens.
We expect Q3 growth to be in the mid teens, and then accelerate into the low twenty's in Q4 in alignment with accelerating revenue growth.
Before taking into account the cost benefits of restructuring we expect the 2023 adjusted EBITDA margin to be negative low single digits on an organic basis, excluding the approximately one point negative margin impact of the power acquisition.
As a result of our increased cost discipline as well as our realized efficiencies and platform scale.
Including the revised cost base post the restructuring we now anticipate our 2023 adjusted EBITDA margin will be around breakeven.
We expect adjusted EBITDA margin to be slightly positive in Q3 and positive mid single digits in Q4.
To wrap up our strong Q1 performance across both financial and operational indicators has us on track to accomplish our goals for this year.
Our Canada is at an inflection point in 2023 with exciting progress on several dimensions.
I'd highlight three in particular.
First improvements to our go to market approach are driving a significant acceleration in bookings, which coincides with the massive broadening of our market opportunities due to the emergence of embedded finance.
We will still focus on specific fintech verticals embedded finance as a horizontal trend cutting across a wide variety of industries, making almost any company with an engaged user base or potential customer.
Our highly flexible and Configurable platform operating at a scale for consumer and commercial use cases is tailor made to serve the demand the bookings will take several quarters to impact the P&L, but are a strong indicator of future growth.
The integration of Power's credit program management capabilities by the end of June less than five months. After completing the acquisition is a foundational addition to our single stock platform.
What was your question from the queue.
Since using speaker equipment may be necessary to pick up your handset before pressing the sarkies one moment, please pull for your questions.
Our first question comes from the line of Brian keen with Deutsche Bank. Please proceed with your questions.
The result.
I just wanted to add.
<unk>.
And the checking quarter.
Seems to be a little bit lower than street expectations at one to three per cent, but yet you're reiterating it for the year. So I guess just trying to think about your expectations.
Going into the year did you think that the second quarter would be lower and have the same trajectory because again the guidance is still the same for fiscal year 2003 for gross profit growth and how much of the weaker.
<unk> transaction size is built into the model going forward in the back half of the year.
Yeah. Thanks for the question Bryan So a few things to unpack there. So the first thing is.
Last quarter, what we had expected our queue too gross profit growth was to be in the mid single digits, though it is a little bit lower what we're expecting now with a little bit lower than we thought a few months ago and and that's really due to two reasons. One is that the mixed up business within block.
Is not generating gross profit quite as as much as we had expected. So the margin is decreasing a little bit which is why is the revenue increases its not increasing the concentration of gross profit. So that's one factor in the second factor is this the lower ticket sizes, which we started to see in around the mid mid March time for.
Raymond continued through April and this just puts a little bit of pressure on our gross profit, but it's not something that we would expect to continue in January and February things were a little better than we had expected previously so.
It's not something that we've assumed will continue to pressure the second half.
And therefore.
We still expect that our full year numbers combined with our outperformance in Q1 will not not change if anything within the range that we shared last quarter for full year, we would stay where maybe on the higher end of those ranges than we were a couple of months ago based on that trajectory of business and the new new.
Things that are going to be coming onto the platform and the second half.
Got it and then just as a follow up when I look at the acceleration in booking.
The impact it's gonna have it looks like it starts maybe a little bit in queue for but probably mostly impacted in 20th and fiscal year 24, how do we think about.
Sean margins is there any kind of initial ramp up cost that might impact margins in fiscal year 2004, just from the strong bookings an acceleration of the revenue.
No. We don't expect that if anything you know it will help us I as I mentioned in my remarks, you know the the block margin is you know it was almost a third of the margin for the rest of the business and so as we diversify the revenue streams with the incredible sales.
That we've been you know closing and we expect to come on to the platform in the coming quarters that should help the overall blended gross profit.
Margin for the business. So we don't expect there to be any challenges related to that.
Other thing that I would mention related to in queue for we do expect gross profit growth to be over 20% and one of the reasons for that is that we had a lot of renewal activity last year as we mentioned last quarter. We had renewed about 50 per cent of our non block business in the last few quarters.
And so as we start to lap that the conscious get much easier for us to deliver deliver gross profit growth and so you know the.
What the business is going to look like in the fourth quarter with growth in revenue and gross profit in the twenties.
We think is a good good indication of where we expect to exit 2023.
Got it thanks for taking the question.
Thanks Man.
My next question comes from the lineup.
J P. Morgan. Please proceed with your question.
[noise] hey, thanks, Thanks, so much and it was a lot going on here. So assignment I thought maybe it just to ask you here you've been in the seat.
Now for what a quarter. So you Wanna give us a a.
A progress report on your impressions and.
Any surprises to call out that that's shaping your your call to action here. Thanks.
Thank you for the questions and actually the good news is that there are no surprises [laughter], so which is the great news here and that's part of the advantage of me being an insider taken <unk>. So I'd say the first thing is we are absolutely focused on the right thing.
And embedded finance the market is very receptive to our message and our bookings are showing that there is wide reception. So over 50% upfront bookings are embedded finance. So in addition to the two strong quarters of bookings, we have not depleted our pipeline quite the contrary so R.
Has increased 80% in the U S from Q4 and 40% in the E. U just sequentially. So we're meeting and exceeding the goals without draining the pipeline.
The third thing I'd say is we strengthen the management team what we've added a C. R O who's taken the homes of the go to market organization without missing the beach and also cheap legal officer. So we've got a very strong team and the last thing I'd say is the focus on efficiency is starting to pay off we're very happy.
With the operational efficiency, which is which is reflected in our operating expenses, but also the action. We announced today is further testament that this management team is committed to exactly what we said that will do which is scaling other business and this sustainable matters so through automation.
And as well capital and operational efficiencies. So all in all we all understood what the trajectory for 2023 is but as Mike.
Mentioned the bookings that we are seeing the customer reception as well as the laser focus of the company gives us a very strong confidence for for the tail end of 2023 and 2024.
Perfect No that's great. That's a segue to my follow up then on just the exit rate that.
You mentioned the 20% for gross profit growth is that a good.
Jumping off point to assume a baseline growth 342024, I know you're not gonna give you guidance under the block renewal is still standing, but just want to understand because there's so many moving pieces to the to the gross profit piece like for example, we have assumed we wouldn't expect another network incentive.
Surprise other than just the earn out peace as an example, just trying to understand the.
Puts in Texas, we we recast 424 23, yeah.
We think that's a good indicator finjan at least if you. If you think about even this year, even with a lot of renewal activity.
There are gross profit growth, we expect to be in the mid teens and and that includes as you mentioned roughly five points coming from the change in the visa incentive. So if you take that out we would have grown around 20% even with heavy renewal activity. So you know what you mean.
Look at going into next year with accelerated sales and diversifying our business work, where we feel good about growing at that rate if not a little stronger.
It's still our goal to grow gross profit on a regular basis of over 30%.
And obviously talk a lot about 2024 and a couple of quarters.
Thanks for clarifying.
Thank you. Our next question comes from the line of Timothy with credit.
What's your question.
Great. Thank you. So he gave some great context on the bookings with the Q1 bookings roughly equal to the second half of 2022, you talked about diversification by size G. O. There wasn't a lot of concentration there, but could you and maybe I missed it I apologize could you put some rough sizing on on the size of.
Maybe the volumes associated or potential volumes associated with that cohort of customers that came on in terms of that Q1 bookings group.
Even if just directionally.
Yeah, I mean, I guess I would say that.
I guess, a decent indicator would be that we said that our goals for this year and bookings were about 70% above last year. So.
Obviously that volume sort of comes in overtime and ramps, but it gives you a sense for the.
Sort of the size of the the increase in bookings that we're expecting the business will obviously get bigger in 2023, so that doesn't that doesn't mean, we're going to grow 70%, but as those new customers come in we would expect them to meaningfully contribute.
It's hard to tell you specifically right now.
Okay No problem I appreciate the context. He gave earlier and then the debris follow up is around is there anything to call out in terms of with the regulation in terms of having to have two unaffiliated Debbie networks for any of the debit card. So you're issuing that are that are being used online.
Mine is there any indication any implication there in terms of the interchange that you might earn.
Associated with those cards is there anything mechanically that you could call out there in terms of if any in any change at all.
Yeah, we've looked at this very closely studied it over the last several months and quarters and we do not expect to see a big impact as you know from prior experiences when changes like this are made one the the implementation of it tends to be relatively slow, but secondly, when we look at.
The the make up of our business and the different interchange categories that we could expect to potentially be qualifying for when changes are made we really don't expect to see a major impact to our business in 2023, and and obviously once we have a couple of quarters in our belt under our belt over then and then the second.
Half of this year will have a better indication, but at this point at least for 2023, we do not expect it to be significant.
Alright, great. Thank you for taking those two Mike.
Yep.
Thank you. Our next question comes in the line of crack Mar with S. D partner.
Your question.
Yeah, Hi, Thanks for taking questions first question is considering the refocus or do focus on embedded commands.
Space that you've actually seen.
And a lot of focus on over the last five to 10 years by other players in March and so I'm wondering.
Where you're seeing the most intense competition from it hasn't been a challenge coming back to this from a goose.
Again and secondly.
Wanted to ask if there's been any change in behavior that you've seen it all from block considering the scrutiny company when it comes to things like K y C.
With regards to the cash out business and are you concerned that any <unk>.
Potential regulation, along those lines cause kangaroo the business loans Marcela.
Sure. Thank you for the question, let me let me the rest of your first questions about embedded finance.
I would say there are no material changes in terms, if the expectations from from the customers quite the contrary. So are the comprehensiveness of the suite, we have actually eliminates a lot of competition, so and by comprehensive I mean, we can do credit we can do debit and then we can do <unk>.
<unk> and at the same time, we can do program management and we can do that in the United States and outside the United States. So it's no stood dimension that actually eliminate a lot of the additional competitors.
That that we tend to compete with in.
<unk> or pure <unk>, so it place actually to our strength.
The second questions, we don't see any change in their behavior.
A block.
Neither in terms of Ky C or any anything else I think Ah block has responded to the allegations and and we don't see any change in behavior.
Okay. Thanks for taking the questions.
Thank you.
Thank you. Our next question comes from the line of Darren Keller.
Sorry.
Your question.
Hey, guys. Thanks.
Maybe we start off with just a reminder of the mix of the business beyond obviously, the let's call. It 55% of gross profit from block I guess, helping us understand the the contribution from my vertical whether it's expense management <unk> or maybe on demand delivery and I guess more importantly, I mean some.
Those are going to have continued growth some of them are going to have a tough comps and decelerate and so I'd love to hear an update on the newer areas that you can find that you can see supplementing or replacing the areas that are going to decelerate, whether that's credit card now given the deal you guys just finished and you.
You talk about having a lot of really good pipeline in new verticals can you just give us some color on those areas.
Yes, they are and thank you for the question, there's quite a few but again part of what we're doing is focusing on if you use cases that can expand so I'd say the first one is accelerated wage access that's something that is starting to contribute to our gross profit growth and we expect that to two <unk>.
Connecticut plea increase the second thing is around credit. So we did talk about the Cobranded cards, which is something we anticipated, but the area, where we're seeing also really good traction and we expect that to be a growth contributor is commercial credit and especially.
<unk> mall businesses and seller financing and most of that is driven by the difficulty and the cost increase of working capital. So for example, if you are in let's say a seller that in your list your products or services on an online marketplace.
Do need financing.
And no one is better off understanding your potential other than the marketplace. So the marketplace working with us on seller financing is I think something we expect to see growth in so I'd say in the consumer space accelerated wage axes and co brand a strong on the commercial side seller financing and point of sale.
And everything would be would be areas, where we expect we respect good growth going for it and we're seeing corresponding fraction on the south side and.
In terms of the mix of the business Darren.
I would say two things one the the gross profit concentration of block is now.
Closer to 25 points lower than the revenue concentration.
And then when you look at the non block business, both for revenue and gross profit it's relatively similar in size for on demand delivery BNP L. An expense management, they're all roughly the same size as we've talked about with volumes, they're all over 10% of our volume.
And so.
They are all similar in size and then you have some small verticals that make up the rest, but but that's sort of the state of the mixed the business.
That's really up on my.
Thanks, guys just a quick follow up would be on the Proactivity, it's nice to see the productivity unexpected management now and the obvious focus on profitability as early as this relative to what we were kind of thinking is with wait until the block renewal before you got more proactive.
Proactive on that or at least outward on that when you think about <unk>.
<unk> drove the decision to start now does that signify anything on the coming block renewal and maybe just a quick update on your thoughts on timing on that for what it's worth.
Sure thing, Sir and again this assignment.
Let me give you a quick answer so I mean, we're running the business based on how we run the business. So we have we have scenarios and as Mike mentioned.
We will share those when we have a little bit more clarity in terms of what I would call sustainable path to profitability of course, given given the the concentration with block on gross profit even if it's significantly lower than revenue is still has an impact but in terms. If the measures. We've taken is to act.
Chili put us on the right path are much closer to the to the path that we believe would be the most rational path going forward.
In terms of a block and timing look we have multiple work things with block.
Daily for it to their system that ecosystem, we work with them with cash shop, we work with them with after Bay and we work with them on the on the sellers side and I would say that the the the majority of the of the contracts go beyond four quarters. So is there a.
The relationship we have with them is very dynamic just from my stay add Mark cut out right. We've had close to approximately about 20 change orders do the contract and to the to the products that have moved forward so to very dynamic relationship and our focus re.
Maine on making them very successful if you look at what they have you follow what they have announced last.
Last week.
I announced over 20 million cards. So this doesn't happen by accident I'd say, it's it's good execution on their part that also leveraging good partners like like ourselves. So something is going well, so and I think that that is something that will remain so in terms of timing.
It is a priority, but again the priority we have is.
Continued the wild success with them, Mike anything the only thing I would add in terms of the timing of the restructuring I think there's there's three components to it that that I would I guess added what Simon said.
One is we've made a lot of progress on on automation efforts. So we've been working on that.
Pretty pretty focused way for the last several quarters and we now feel like we're in a position.
<unk>, we're we're we're not quite as as people dependent and we can be a little more efficient and the operation and and not be concerned about the reliability and performance of the platform. So that that's one.
Second thing is.
That.
We when.
When we think about the the past the trajectory of the of the business. We're getting just a lot more focused right. So we know exactly where the large opportunities are which is informed by this growing pipeline and we can be a little more targeted and where our investments are going and that obviously allows us to be a.
Little more efficient.
In how we deplore deploy resources and the last piece that I would say that I also wanted to keep stressing is the anchor tenants of our platform are in place and that's not to say, we don't have improvements and enhancements to make but but you know the big anchors are there and that's quite helpful. Because we have even <unk>.
Restructuring, we're gonna have a.
Good amount of investment capacity to make those enhancements, but we're not doing you know.
Large new build at this time to meet the demands that are filling our pipeline.
Right.
Excellent guide.
Thank you. Our next question comes from the line of Ramzi <unk> with Barclays. Please proceed with your question.
Hi, Thanks for taking my questions. This evening.
You mentioned signing deals with two large customers using mark <unk>.
Deliver in person solutions.
Could you give us a little more color on those deals and also just how you view the broader opportunity or addressable market for you to actually provide in in store type solutions.
Absolutely Ramsey. Thank you for the question so yeah. So.
This is more in the in the line of just in time financing at the point of sale, it's kind of taking the BNP L. Use case, which is one form of kornafel lending and expanding do it exactly where the customer is which is at the at the checkout counter basically so.
Same way you can expedient sat in an online marketplace you would experience that at the point of sale terminal, let's say in a supermarket or the retailer, which is you'll get will get there and then you will actually scanning QR code and you're able to receive some form of just in time financing.
Does not have to be in a form of buy now pay later as in paying for it could be it could be something like that but also some form off the duration based loan that you qualify for that is something that is ideal with our platform because you're effectively not the underwriting a person.
You are underwriting the transaction, so the marketplace or the retailer in that case.
It's taking a little bit less risk than a revolver. So <unk>. So that's something that Ah, we expect that thing to to grow it does make sense for the retailer. It does make sense for the consumer at they're not filing up more.
And it it suits this economy very well because it also reduces that stack on the consumer so you're not effectively giving consumers pretty working capital to go spend anywhere they want that actually spending it in the marketplace and last but not least it adds loyalty so to make a long story short.
We do see this as as something that that we see the retailers be excited about.
Yeah, I would say a good parallels maybe think about is one of the reasons. Why these types of retailers are utilizing our platform is because they can get the customer experience they want without having to make changes to their own operations in point of sale. So if you think about how we support our BNP all customers today right.
The primary use case that we're serving was to allow a consumer to use BNP L. Without the merchant having to integrate two that BNP all providers platform right. So the consumer feels like they're using that platform, but actually behind the scenes that's not how it's working in our platform is sort of.
Bridging that gap and so if you think about that as a as an example, you can start to.
Think about how retailers would look at those kinds of capabilities and stay while I could start impacting what my customer experiences without having to fundamentally changed from my point of sale operate.
And once you kind of get there it can unlock a lot of innovation.
Interesting. Thank you.
A quick follow up for me, it's just more broadly on the credit pipeline.
You mentioned some credit sounding elements in the context of the market places opportunity.
Interwoven in some of the offerings that you're you're you're talking about today, but just how is the the credit pipeline shaping up.
It's actually very strong some of it we anticipated because in Marquette out I mean, we were in the end up credit business. We were simply not the program manager. So there was pent up demand I would say the positive surprise is the demand on the <unk>.
Commercial credit side, so we were expecting kinda like the the new <unk> to be.
To be alive and strong, but the pipeline, we're seeing in terms of Ah seller financing and in terms of commercial credit for small to medium sized businesses that are supported by large marketplaces or online providers that have very strong balance sheet. So that's something that.
Was a very positive surprise to us and and growing demand one.
The market quite understood what the combination of power and Mark at a given to them. So I mean for a sale financing seller financing creative economy financing labor marketplace folks, who do have Ah labor supply. So that's the area that we were.
Seeing some very good traction that I'd say, we were not expecting before.
Fantastic Thanks, a lot.
Thank you. Our next question comes from the line of Sanjay Suck Ronnie.
Can you. Please proceed with your question [noise].
Thanks, Good afternoon.
You see very encouraging you guys had a strong quarter of new business bookings I'm just curious.
There was something specific that drove the strength and how the pipeline looks from here for the rest of the year.
Thank you for the question Sanjay of course, yes, I mean, we started putting the changes in the <unk> market organization around the queue for a time frame, which is reorganizing our teams around pod and that gave them kind of the economy. So I and the bonds are very focused.
Right, they're focused on on the on the right segment and their focus on the right market. So in terms if the bookings themselves I mean, we've done to bang deals that are that are modernizing.
We've done to flip deal they moved off competitors. We've done two large retailers we've done two accelerated wage access. So so definitely we're seeing the attraction from embedded finance play in our favor because the company hence of nature of our <unk>.
For them. So you do have the improved organization. We also made changes to the compensation structure of our sales organization that also improved the operation and I'd say last but not least is having credit made our solution more comprehensive.
To the target market. So in terms if in terms of the.
The future or like I mentioned, we have beaten our internal targets, but we did not bring the pipeline quite the contrary art pipeline is very strong we've grown at 80% in the United States quarter over quarter on a sequential basis and we'd grown it's 40%.
In Europe on a sequential basis, so while we're beating our numbers would actually creating a lot of top a funnel and middle of final demand in order for us to continue that rejected it going forward.
That's impressive Mike just a couple of clarification questions for you. So you mentioned the share buyback offsetting the stock besting dilution.
Is there something.
Different about this year that maybe you could just help us what sort of the run rate of best thing is we we look beyond this year just to get a sense of what kind of dilution. We should think about in your in future years, and then secondly, just in terms of the guide and your assumptions on the macro did I hear that right that you're you're assuming.
Sort of no change to the macro or are you incorporating some of the weaknesses saw later in the quarter. Thanks.
Yeah. So thanks, Sanjay so on the on the dilution I think that with you. When you go back and look at what was happening kind of in late late 2021, and early 2022 I.
I guess, maybe the the height of the frenzy of fintech than it being very competitive for for the type of you know.
Subject matter expertise that we'd be looking for we were.
Issuing a lot of equity to two employees, both who are here and in new town, we're bringing to the organization. So I'd say in the last several quarters we've gotten.
Much more disciplined and and we intend to be more discipline going forward.
And.
<unk>.
For this year in 2023 for example, you know we we set a budget and said this is what we're gonna do based on what we're really.
Have for dilution because of the input and feedback we get for shareholders and our desire to drive shareholder value and we're going to live with live within those means so I think.
We have a little bit of a wave coming which we think we're going to.
Help offset with this buyback this year, but we are managing it much tighter for the Gulf War.
And in terms of the macro what we've assumed is we have we have assumed much change we're seeing things got a little a little bit weaker than in March and April but nothing to be concerned and that's what we've assumed going forward, we have an assumed a major slowdown or or the opposite.
Okay. Thank you.
Thank you our final question. It comes from the lineup Ashwin sure of acre what city. Please proceed with your question.
Oh, thanks to.
Mike.
Yes, it's been I look at.
How you maintain your non-GAAP operating expenses reasonably steady last <unk> three quarters.
And you know <unk>.
Incorporating the impact of the.
Of the restructuring.
Is that when we should be the primary benefit and can get the.
Corporately run data operating expenses down to kind of one part of the question and then kind of the second part of the question is.
With regards to the.
The big renewal, that's on deck, which lock.
Alright, I mean should we expect assuming it <unk> it should be.
Expect the impact of that is that kind of spread all across the piano or is it primarily a.
Haven't used impact on gross profit type of thing how should we think of you know come up with a <unk>.
Yeah. So so.
So thanks for your question Ashwin. So on the on the first one yes. The last three quarters are adjusted operating centers have been relatively flat after growing at a pretty good clip for several quarters before that so we feel good about even before the restructuring that we were starting to manage our our expenses quite well and getting more.
Ishant without.
Having any business impact and so we felt good about that the restructuring will drop that will drop that run right. So you know as we mentioned, we we estimate the impact you know to be.
Be in the $40 million to $45 million an annual basis. So you know you can think of that is 10 10 million roughly lower run right on the expenses and we would have had otherwise. So that's what you can expect from a from a block perspective, the biggest impact will be in gross profit because the.
The the deal our our costs are cost of revenue is based on our costs the banks and what we pay the networks and that won't change as a result of the deal so.
You will see it in revenue of course, it will assuming they would get a better price from us it will impact revenue, but I'd say the bigger impact is you'll see it in gross profit and and not really significant impacts in our expense space.
Got it got it and then does it announced the web pushed the reasoning product we came quite quite interesting with the instant tokenization a card into on it.
I'm, assuming that that sort of functionality.
Is kind of incorporated when you talk about.
Looking.
Embedded finance submitted bookings and so on so forth, but I just wanted to check with regards to any any comment on traction of the of the product anything.
Can provide data.
Yeah <unk> <unk>.
Absolutely so no question that Wedbush.
<unk> pushed provisioning actually expands the opportunity beyond I'd say.
The application on a mobile device you do have a lot of retailers that actually do not have an app.
So you.
You actually have to go to the mobile web site and then that's something that expands the market. So no no questions asked but this is helping but I would say in terms of in terms of what are the major technology changes that are that we're working on in terms of in terms of embedded finance.
The integration of credit, it's something that we should finish this quarter. We had ahead of schedule that will give us the full suite that is expected.
From us or an embedded finance perspective, and adding a single.
Program management, a layer on top with one place to do K Y E N K K Y b across credit across the debit and across the banking and money movement and.
So that helps a lot and the second thing I'd say is credit is not just your traditional consumer revolver card. There's a lot of things would adding on the commercial side, but even on the consumer side. There's a lot of innovation that we are building to allow I'd say.
The under bank or the new generation that is getting into the the financial independence.
To build credit.
From a simple debit program, so we kind of like thinking about credit as a comprehensive sweet.
And something that we will work with the consumers at the as they graduate into full financial independence, and we'll work with small businesses as they graduate to word really strong financial health of their businesses. So I think there's a lot that that we have.
Already built in terms of technology that will packaging in terms of solutions that we can take to the embedded finance market now that honestly. The aperture has open so much.
In terms of where we can take our solution given that the addition of upgraded.
Got it. Thank you. Thank you very much.
Thank you we have reached the end of our question and answer session and the conclusion of today's call. Thank you for your participation you may disconnect your lines and have a wonderful day.
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