Q2 2023 Marqeta Inc Earnings Call
Yes.
Good afternoon, and welcome to the Mark had a second quarter 2023 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions.
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Please note that this event is being recorded I would now like to turn the conference over to Stacey Feinerman. Please go ahead.
Thanks, operator, before we begin I would like to remind everyone that today's call may contain forward looking statements.
<unk> statements regarding anticipated future financial and operating results and further changes in our developments regarding accounting treatment. Among others. These forward looking statements are subject to numerous risks and uncertainties, including the risks that our accounting treatment may be subject to further changes or development.
Fourth 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 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 material works.
There are available on our Investor Relations website.
A reconciliation of forward looking non-GAAP guidance is not available without unreasonable efforts due to the challenges in profitability with estimating some of the items.
Such as share based compensation, depreciation and amortization expense and payroll tax expense, the effective which could be significant.
Hosting todays call are Simon cool off our courtesy yeah, and Mike Military 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 our second quarter 2023 earnings call, we had a strong quarter and we just renewed our partnership with cash out for four years.
Our second quarter net revenue gross profit and operating expenses were better than we expected, resulting in positive adjusted EBITDA for the quarter. In addition, we have once again exceeded our sales bookings.
The cash wrap renewal represent the final major step in a year long effort to re establish long term sustainable growth for Merck at.
This effort started by sharpening our go to market operation expanding our product line through the acquisition and fast integration of bar finance and reducing our operating expenses I am proud of the tremendous progress we have made and I firmly believe that Mark <unk>.
<unk> well positioned to capitalize on the fast growing embedded finance market.
Let me go back to our financial performance total processing volume or TPB increased 33% compared to the same quarter of 2022.
This was the second consecutive quarter, where our TPB exceeded 50 billion.
Our net revenue of 231 million in the quarter represented 24% growth year over year gross profit was $85 million in the quarter and 8% increase versus Q2 2022, while our adjusted operating expenses were $84 million, a 5% decrease versus Q2.
2022, resulting in positive adjusted EBITDA for the quarter.
As we've done in the last few quarters, we continue to grow our business, while being very disciplined about our costs.
Now moving on to cash out.
We're excited to continue our partnership for another 40 years.
We believe this renewal as well as our renewal with Astro back.
Earlier this year demonstrates the value block six and our platform and our partnership with.
This value is exemplified by the scale flexibility innovation and myriad of services, we provide to cash app and block.
While this will impact our financial results in the short term, it's something we expected and proactively made decisions based on this outcome.
It also positions us well for the long term.
Extending our cash app partnerships through the middle of 2027, So we can focus on maximizing our growth for years to come.
By working together and continuing to expand the scope of what our two companies can do together, we can both capitalized on this amazing opportunity ahead of us.
In addition to the cash App renewal, we have steadily improved our execution across the company.
We've seen considerable sales momentum in the last three quarters after implementing the changes in our go to market organization in the fall of 2022.
Our bookings for the last three quarters combined grew 150% from the same period a year ago, notably we saw a 50 50 split between net new customers.
And expansion deals with existing customers setting us up for a durable growth into 2024.
On a sequential basis, our bookings for the second quarter grew 60% from the prior quarter driven by embedded finance, which accounted for two thirds of our bookings.
In addition, one third of the deals we signed in the quarter were flip deals, where we replaced an incumbent provider and that speaks to our superior platform and scale.
And similar to the first quarter, our international business continues to be a source of new customers as over 40% of net new customer bookings came from markets outside the United States.
We expect that international momentum will be a key growth driver going forward and represents a key advantage for mercado our single stack platform allows customers to easily launch in more than 40 countries Wennemer Marchetta platform is enabled.
The most recent expansion is in Brazil, with our new partner Foodbank. This partnership gives us a foothold into the largest fintech market in Latin America, and one of the fastest growing syntax market in the world and where many of our existing customers also have growth.
Aspirations.
We also continued to make headway with Disruptors looking to embed financial products into their platform with.
We recently signed a partnership with a well known cloud based HR.
Unemployment management solutions company. This company Salt, a new provider for their global expense management product to replace to replace an incumbent under Mark at a competitor who couldn't support them outside the United States.
This customers this customer.
Also is looking to move their new U S volume to work out a further vote of confidence in our platform.
Our focus on increased execution has not been limited to our go to market strategy. It's also evident in our ability to offer new products to our customers in a rapid manner.
As planned we fully integrated our acquisition of power into the market our platform in.
In late June we finished integrating power scope and as a result that Apis are now fully integrated.
We are on track to offer general availability of the <unk> credit platform before the end of 'twenty to 'twenty three with program management origination servicing back office and ancillary service for consumer and commercial card programs.
This improved execution is crucial as we look to unlock additional embedded finance opportunity.
As a matter of fact, Mark <unk> has been in the embedded finance game for over 10 years way before it was even a buzzword.
Given us both expertise and a nice competitive advantage our modern card issuing platform has been a foundational element for on demand delivery accelerated wage access mobile banking expense management and buy now pay later.
Our gains regarding improved efficiency mirror, our focus on execution.
We have reduced our operating expenses by $40 million to $45 million on an annual run rate basis.
In short while.
Delivering we're executing we're winning against the competition, all while being operationally efficient.
We're also innovating.
We're deploying generative AI tools, and our risk our customer service offering to streamline our support and risk operations.
We also used generative AI to make our product teams more efficient.
As an example, our credit and banking teams used generative AI to help generate codes, reducing the time spent on cogeneration and testing task by up to 75%.
We're also working on a purpose built generative AI tools created to reduce the time to launch for our customers using open at open AI large length language learning model.
It allows our customers to expedite the integration with Marquette is API and accelerate their time to market.
In summary, I'm happy with all we have accomplished this year.
We have renewed our partnership with cash App after bay and 50% of our non block volume, we significantly reduced our operating cost and solved our go to market problems.
All of this while winning against the competition acquiring the company and integrating its product in record time in in five months. These accomplishments not to mentioned our strong balance sheet position us exceptionally well as we look to deliver sustainable profitable growth.
In the near future.
With that I'll turn it over to Mike for his prepared remarks. Thank you Simon and good afternoon, everyone. We are excited about the catch up renewal as well as the progress we have made over the last year on both go to market and efficiency initiatives.
Before we discuss the financial aspects of the renewal, let me highlight our strong quarterly results.
Second quarter net revenue growth of 24% gross profit growth of 8% and a positive adjusted EBITDA margin were all above our expectations driven by stronger volume growth from several of our top customers as well as expense savings achieved through efficiency efforts, particularly within technology as well as our restructuring in may.
Q2, <unk> was 54 billion growing 33% year over year, continuing to demonstrate our growth at scale.
The financial services vertical continues to be the highest contributor to growth growing several points faster than the company as a whole. This was fuelled by cash ups continued growth in transacting active cardholders and higher spend per active user as well as customers with accelerated wage access use cases ramping rapidly.
Lending, including buy now pay later growth was boosted by increased travel spend as well as the relatively new offerings that deliver our customers. The NPL value proposition through a card that can be used at any merchant.
Excluding corner, which migrated a portion of one program in Q3 of 2022, the NPL growth was similar to the overall company growth.
Expense management TBD also grew in line with the overall company as a whole Boeing when compared to prior quarters due to tougher comps and maturity of the vertical.
Q2, net revenue was $231 million growing 24% year over year as growth remained strong across multiple verticals, including financial services and on demand delivery as well as our powered by Mark EDA business.
<unk> continues to be a strong contributor to growth as our net revenue concentration increased to 78% in Q2 up about two points from Q1.
Our net revenue take rate was consistent with last quarter and three bps lower than Q2 of last year.
The decline versus last year is mostly driven by a mix shift toward powered by marchetta volume as our managed by Markel to take rate increased two bps driven by increases in each of our major verticals except for NPL.
Q2, gross profit was $85 million growing 8%.
This growth is about five points faster than we expected roughly a third of which was driven by stronger volumes and the remainder driven by unexpected initiative.
Sensitive benefit that was a catch up from previous periods. Following the review with one of our network partners.
Gross profit growth was low in the quarter for four primary reasons.
One we renewed approximately 50% of our non block TPB between Q2 of 'twenty two in Q1 of 2023 lowering growth by mid to high single digits.
Two we lost a portion of our PPV from one corner program starting in Q3 last year lowering growth by mid single digits.
Three incentive timing as our incentive contracts run from April to March each year, meaning that every Q2, we're starting from zero and buildup our volume towards incentive tiers due to changes in decent incentives we filled the tiers slower in Q2 than we did last year lowering growth by low single digits.
Four we lost full these incentives for two of our customers at the start of 2023 lowering growth by mid single digits.
Finally, the unexpected incentive benefit in Q2 was partially offset by lower ticket sizes, which lowers gross profit because of the per transaction component of networks fees versus the person per transaction component of interchange.
The first three of these factors will no longer be impactful by the end of this year and we believe these were relatively unique situations that impacted us all at once because of how much our business accelerated coming out of the pandemic.
The fourth factor will lap in Q1 24.
And Shouldnt reoccur based on a new contract with visa.
Gross margin was 37% Q2 is typically our lowest margin quarter of the year because of the incentive timing.
While the block net revenue concentration has sterling steadily increased over the past four quarters. The block gross profit concentration has remained relatively steady.
This is due to less favorable volume mix within the block business and improving margins and our non block business the.
The increasing revenue concentration is weighing on our overall margin since our block margin is over 40 points lower than the rest of the business.
Our Q2 gross profit growth, excluding block quanta and normalizing for items like the unexpected incentive benefit is about two five times faster than the business as a whole driven by customers with higher margins growing faster than others, which is more than offsetting the impact from renewals, we are still lapping as.
Well as the loss of certain visa incentives at the start of this year.
Q2, adjusted operating expenses were $84 million, a decrease of 10% from last quarter and a 5% decrease year over year. Despite a one point of organic growth driven by the inclusion of power.
Our restructuring in late May reduced our workforce by approximately 20%, resulting in Q2 savings of $6 million.
On a run rate basis going forward, we expect quarterly restructuring savings of approximately $11 million. After we reinvest in new head count in priority areas, resulting in a net reduction of over 15% of the pre restructuring head count plan.
Our expense reduction in Q2 was not just the result of restructuring we have many efficiency initiatives underway.
Our technology expenses, which include cloud and SaaS tool costs were flat in Q2 versus last year, despite year over year transaction growth of over 40%.
We are leveraging automation and executing thorough reviews of our usage to improve efficiency, while simultaneously improving our uptime security and performance.
We also continue to be mindful of hiring as well as costs associated with head count such as travel and reducing our usage of contractors and consultants.
We recorded a one time restructuring charge of $8 million related to severance net of the release of bonus accruals and share based compensation forfeitures, all of which is excluded from adjusted operating expenses and EBITDA.
Q2, adjusted EBITDA was positive $1 million a margin of 0.4%. This result was better than expected driven by gross profit growth and cost management successes.
Interest income was $11 million driven by elevated interest rates.
The Q2, GAAP net loss was $59 million, including a 10 million onetime noncash post combination expense related to the power acquisition as well as the one time restructuring cost of $8 million.
During Q2, we announced the stock buyback of $200 million as.
As of quarter end, we purchased $10 2 million shares for an average price of $4 75.
For $48 5 million, we ended the quarter with $1 4 billion of cash and short term investments.
Now, let's shift to our Q3 outlook as well as the cash App renewal.
Let me set aside the cast of renewal for a minute and talk briefly about the business trajectory.
The underlying performance of the business is a little stronger coming out of Q2 than we expected a quarter ago.
In addition, some of the drags on gross profit growth in Q2 are dissipating in Q3, we expect high single digits percentage points less drag in Q3 versus Q2 from just two factors the lapping of the coroner volume loss and starting to lap some of the heavy renewal activity last year.
We will continue to see low single digit percentage point gross profit growth headwinds in Q3 from incentive timing as we ramp through the tiers more slowly in 2022, but that will correct itself by year end.
Moving on to the cash up renewal.
We are excited to extend our partnership another four years as both parties recognize the growth and innovation that we enable and the success we enjoyed together.
As we anticipated cash App is receiving improved economics, given their growth trajectory since our last renewal in 2021, we.
We believe the best proxy for our price and therefore, the way to measure the economic impact of the renewal is the impact to our gross profit take rate, which measures how much gross profit we earn for every dollar of cash out PPV.
Looking ahead to Q3 and Q4 of 2023, we expect the gross profit take rate, we earn on cash up volume to be approximately 40% lower as a result of the renewal. We believe this price is very fair for both parties commensurate with market rates for cash upscale while accounting for the additional services, we provide and our deferred.
<unk> platform capabilities, we are excited to move forward for the next four years.
The renewal has two structural changes that are important to note.
First the pricing construct.
We previously used a net interchange pricing construct where we aggregate the interchange and network fees and bank fees together and then determine the split between Marquette on cash App based on volume tiers and.
And the new pricing construct start starting from July 2023, we will charge cash up at price for the services. We provide based on volume tiers, while the interchange network and bank fees are passed directly to cash out.
This new contract more clearly defines the price we charge for the value, we provide while reducing volatility caused by several business mix factors.
We already use this pricing construct with a few other customers and in those cases it does not change how the business is presented in our P&L.
The second structural change is consequential to our revenue presentation.
As part of the renewal cash up is taking responsibility for the primary payment network relationship.
While we still provide cash up with the same level of support on every other aspect of the program. They will manage the primary payment network relationship.
Although we do not receive incentives on cash up volume from that network.
This change is significant because the costs associated with cash ups primary payment network volume will in substance no longer be reflected in our P&L.
Previously we responsible for this relationship and therefore these costs were presented in both our net revenue and cost of revenue.
That will no longer be the case, starting in Q3 2023.
To be clear this expected change in revenue presentation has zero impact on our gross profit.
But it will materially reduce our reported net revenue.
To put the net revenue impact in perspective in Q3, and Q4 of 2023 the impact of the accounting change will reduce our net revenue by approximately six times the amount of the price reduction tied to the cash up renewal.
Now, let's talk specifically about our Q3 outlook first let me reiterate that the underlying performance of the business is a little stronger coming out of Q2, and what we thought a quarter ago.
Second for each of the next four quarters, we plan to share the impact of the cash up renewal on our numbers given the significance.
Our expectations for Q3 are as follows net.
<unk> net revenue is expected to contract by between 49% and 51% with an approximately mid seventies percentage point decline due to the cash up renewal.
<unk>, 15% of the renewal impact as a result of the new pricing terms, while the remaining 85% is due to our anticipated shift in accounting treatment.
Gross profit is expected to contract between nine and 11% with an approximately mid to high twenties percentage point decline due to the cash app renewal.
Our gross margins should be in the low seventies.
Given the success of our efficiency efforts year to date as well as the restructuring completed in Q2, we expect adjusted operating expenses to decline by a high single digit percentage.
Therefore, adjusted EBITDA margin is expected to be negative, 12% to 14% on an organic basis, excluding the one point negative margin impact of the power acquisition.
This includes an approximately mid teens percentage point decline due to the cash up renewal almost half of which is due to the new accounting treatment because of the lower revenue denominator.
Consistent with what we thought a quarter ago, we expect our Q.
For performance to be a little better than Q3, as we continue to lap the impact of heavy renewal activity in 2022.
Compared to Q3, we expect net revenue growth to be one to two points better.
Gross profit to be three to four points better and adjusted EBITDA margin to be four to five points better.
We anticipate that the cash up renewal impact will be similar in both quarters.
Therefore full year 2023 performance is expected to be the following.
Net revenue is expected to contract by a low teens percentage with an approximately low 40 percentage point decline due to the cash up renewal. The large majority of which is due to the anticipated change in accounting treatment for cash app related revenue.
Gross profit growth is expected to be positive low single digits with an approximately low to mid teens percentage point negative impact due to the cash up renewal.
Adjusted EBITDA margin is expected to be negative low to mid single digits on an organic basis, excluding approximately one point negative margin impact of the power acquisition.
This includes an approximately mid to high single digit decline due to the cash up renewal.
This 2023 adjusted EBITDA margin.
Even with the negative impact of the catch up renewal and the expected new revenue presentation for half of the year is consistent with our expectations at the beginning of the year, excluding the block renewal this.
This is primarily due to our cost reduction efforts, which have been achieved while accelerating sales and without a slowdown in innovation.
Without the cash up renewal, we believe we would've been EBITDA positive this year, whereas now we expect to exit 2024 at a positive EBITDA run rate.
To wrap up we delivered a strong Q2 across all metrics and have been making significant progress to position the company for long term success.
Our bookings continue to show strong growth and momentum as we capitalize on the expanding admitted finance opportunities, which should help diversify our business with strong sustainable growth.
We made significant progress toward our operating efficiency goals with our restructuring efforts as well as our overall focus on reductions across all <unk> categories.
And of course, a renewal with cash up establishes a new baseline and sets us up for sustained long term profitable growth.
Where we go to Q&A, we understand the longer term trajectory of the business, including the cash up renewal impacts are a greater of great interest, but we will not be discussing 2024 performance implication during todays call beyond the fact that we will exit 2024 with positive EBITDA. However, we plan to host an investor day in Q4 to discuss the law.
Longer term with more details to follow.
Now, let's turn it over to Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
We're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
The first question comes from Tien Tsin Huang with Jpmorgan. Please go ahead.
Thanks, so much and good afternoon, and thanks for going through all the catch up.
Renewable stuff I know, we're all going to dig into the numbers.
You shared it but I'm just curious at a high level here.
Think about the benchmarking exercise here and I know, it's tough to negotiate and talk about it publicly too much but can you walk us through the the benchmarking exercise of.
The pricing and the new deal on the take rate and just the general fairness right.
To all stakeholders on the renewal.
I know a lot of people are lifting on competitors and other clients et cetera, but just love to understand a little bit more about the benchmarking exercise. Thank you.
Thanks, Tien tsin really reshaped the question and good to be talking again.
Let me put it this way.
We strongly believe the deal is extremely fair for both parties. It is actually a commensurate with that scale and by volume that cash App has achieved and also commensurate to the value the differentiation and the premium that mark EDA commands over kind of like what the market.
Price is so it is a very very fair deal for both bodies and honestly sets sets us up for the right amount of growth for the next four years as we baked into the existing renewal the right tiers that we believe we would be on.
As cash outgrowth.
Mike anything to add.
Perfect I appreciate that so just my quick follow up just just to verify the exclusivity on the deal is and just maybe visibility you just sit there Simon just thinking about visibility.
I'm here not only from from catch up but as you want to.
Reorient towards gross profit growth again can you talk to your visibility and what the growth algorithm is.
Starting with the second half of this year.
Sure Let me address the first part and then I'll hand, it over to <unk>.
In terms of exclusivity there are actually no changes to that part of the practice exactly what it was.
So, but I would say that there is two reasons companies actually diversify one of them is economical and the second one is more stability, which is kind of like.
You distribute your load on multiple multiple providers. So that you actually have some form of redundancy.
We've addressed both as in like in the agreement with Bayer the economic incentive for us to capture the vast majority of the volume right and we've done a lot of work on the redundancy and the.
The stability of the.
The platform and something we've demonstrated so there is.
Almost reduced the reasons for diversification almost do something non existent in terms of our gross profit, yes, that's fundamentally how we look at our business and we believe the gross profit growth is going to come from three areas. One is.
The bookings that we have.
We've been exceeding on are eventually going to translate into revenue and gross profit second one is our base will continue to grow and there is plenty of opportunity with growth with block through cash app through square and through after bank. So that's what we expect.
The gross profit growth to come from.
And the only thing I would add.
One is that when you think about whats weighing on our growth right now it really does stem from the incredible week growth that we saw sort of in the 2021.
Timeframe coming out of the pandemic many of our customers' business, just absolutely boomed and that meant that a lot of our deals needed to be adjusted because their businesses were just much bigger and thats that process started last year as we've talked about about 50% of our non block.
Volume, we renewed over a four quarter period, ending in Q1 of this year and then this year, we've renewed cash app as well as after pay so we've really now renewed a lot of the business.
Of that we had before.
That just incredibly grew and so once we get past that now we're in.
Good longer term contracts that we can grow the business on the with the customers. We already have and you combine that with the sales momentum we have because of just how differentiated our combination of modern flexible platform.
<unk> global in scale for both debit and credit.
It's just a very unique.
Value proposition and so that's where we think the growth's going to come from obviously the next four quarters is done there's going to be noise in the revenue.
Thanks, guys.
Yes.
Yes.
Take the first part and then I'll hand, it over to Simon to talk about after <unk> and square so.
The way to think about it Darrin is it's a 40% reduction in our price and by that.
Our price what I mean is the gross profit take rate. So the amount of gross profit we make for every dollar of volume, which really is the best measure in this case.
And the accounting change I guess, let me just take a minute to try to explain it in simple terms I mean essentially what.
What we used to do in our net interchange structure right as we took interchange and network fees and bank fees.
And combine that together and then said how should we split that between cash App and Marquette and obviously, they've got the bulk of it but when we were determining that split we knew we are responsible for those network and banking fees and that had to be incorporated in how much. We capped because we have a cost to pay in our cost of revenue and in the new.
New structure, what's happening is now the primary network fees or.
We're not going to be our responsibility and so what we essentially book and our revenue will no longer have to account for the fact that we're going to have to pay that cost and so what happens is our revenue is significantly reduced.
So as our cost of revenue and so.
So it's not impactful to the gross profit ultimately, but it will be very meaningful.
As I said to the revenue growth and we'll just do our best to help you.
Normalized for this impact over the next four quarters.
Okay, but net net 40% of what you would have otherwise earned in gross profit terms less than.
Going forward I guess lessened before correct.
That's exactly right. Okay. All right. That's clear. Thank you and then just on the other side Simon if you can get.
Yes.
Yes, we did renew the <unk>.
<unk> partnership.
Before we just reviewed cash up and Mike I think we said multiple times.
There is so much activity going on between block and ourselves. So it's a very fluid situation and salaries not due to be renewed until later in 2024.
We'll be working on that as well, but again between now and then I expect a lot of great work that will happen between us cash app after pay and seller.
It is a very symbiotic relationship it's a daily relationship.
The growth they have they have witness is fascinating and would actually celebrating every moment of that.
Okay, and just to be clear and I'll turn it back to the queue, but you got the seller well the cash app in the.
And the after pay combined as the vast majority of your gross profit contribution from.
That's right correct, okay. Good alright, congrats again guys. Thanks.
Thank you.
Our next question comes from Brian <unk>.
This all with Barclays. Please go ahead.
Hi, Thanks for taking my questions. This evening.
Following up a little bit on Dan's question.
Can you help us think through on sort of a hypothetical run rate basis, what the revenue and gross profit contract concentrations will be.
<unk> block versus non block I assume.
That might be the silver lining here that this deal will have block the lower concentration of your overall business on a percentage basis, but just wondering your thoughts there.
Yes, you are correct Ramsey, what we expect based on this is that our revenue concentration is likely to fall sort of in the mid to high 20 percentage.
Percentage points.
Gross profit concentration was likely to fall around 10 percentage points based on this deal going forward.
Terrific and then on.
I wanted to ask a question on bookings conversion you've had another terrific sales quarter.
Remind us again about the bookings conversion timing, you've now had three quarters of solid sales at what point are you going to really start to feel those.
Maybe the earlier sales in that in that three quarter period start converting to revenues is it still a 2024 kind of an event or can we start to see something start to show up here before the end of the year.
Thank you for the question it actually I think we're going to start seeing something before the end of the year just to guide you on average commercial programs take us between call. It 60 days to 180 days for them to go live and then data from their consumer program take about it.
Our year to launch and then and then start ramping from there. So the bulk is going to be seen less sustainable growth will be seen in 2024, but we're going to start seeing.
Some of those program accelerated and particularly in two words.
Tim on the 2023 and in Ramsey its a priority for us.
To accelerate delivery kind of like all eyes are on the delivery, giving this oversized bookings number so.
No pressure delivery team, but that's why we're working on.
Fantastic well congratulations on the renewal I appreciate your answers.
Thank you Ramzi.
Our next question comes from Ashwin <unk> with Citibank. Please go ahead.
Hi, Thanks.
And let me add my congratulations.
Congratulations on getting.
Getting this done.
In terms of just kind of thinking of thinking about the.
Gross profit margin range going forward.
Could you maybe add some color too.
What happens to that and part of the question is.
It's.
I don't know if I heard this right, but you are kind of as you've been signing these renewals and in the newer bookings you are leaning more towards just looking at things on a on a gross.
On a gross profit basis.
What percent of your total.
One you may feel that it.
Is on that basis today, if that makes sense.
Sure so the to.
To answer the first part of your question Ashwin.
I said that in Q3, we expect our margin to be in the low seventies.
We've talked about previously are our block margin is sort of.
Under 30%.
The rest of our business.
As over 70%, so there was a more than 40% gap.
The margin in a lot of that was <unk>.
Fueled by the.
The high network costs, and we've talked a lot about what made a block lower margin in the past and so.
By removing those costs from both therefore, our revenue as well as our cost of revenue then.
And then the margin now for the company is going to is going to be more reflective of the non block business in the past.
And so that's what you should expect to see.
Okay.
Understood and just kind of going back to some of your comment with regards to <unk>.
Embedded finance being.
It seems to me an overwhelming portion of the.
Of the newer bookings.
Could you maybe break that down for us in terms of.
The types of use cases and.
The types of functionality that you're bringing to the table.
For that.
Sure absolutely.
The good news here is that the use cases are diverse.
Based on the segment and also their diverse from a global perspective.
I'd say the there is few core use cases that are coming to us.
One from the retail and the broader retail in the marketplaces.
They're looking at us for three types of solutions. So the first one is your traditional co brand.
Basically a co brand card, but it interacts with the marketplace. So as consumers go.
To the marketplace and shop, the behavior of the car, especially in terms of rewards is actually changing so the card is alive.
Thing, they're looking for US is point of sale lending, whether it be NPL or something more creative like that whether they do it themselves or they do it with partners of ours and last but not least seller financing. So given that we can cover all these spaces because of our credit solution, we become attractive to.
The retail marketplaces in general.
The second I would say a use case, that's growing fast for us is accelerated wage access whether it's a shift or gig work or actually that.
Our in liquid marketplaces or in large retailers that do employ a large contingency workforce.
That actually use case accelerated wage access getting a P card that they get their wages immediately without burdening their working capital is something that I would say is is a very strong demand and its global third thing is <unk>.
Expense management and supplier payments and car defying those so using the card networks visa Mastercard and others in order to streamline and simplify supplier payments, even extending credit to some suppliers.
Given the economical situation I think that gives you some.
Some flavors of the the breadth and depth of the solutions that we're seeing there is a lot more.
And Ashwin I, just realized that I didn't answer the second part of your question in terms of looking at things on more of a gross profit basis. So you are right I think what we we don't look as much at the gross profit margin because for things like in the credit business. For example, you do have a little bit of a higher cost to deliver that product, but you can charge for it so the margin might be a little lower.
Then in debit, but the gross profit take rate. So how much money you are making in gross profit for every dollar volume is better and so that typically.
What we tend to really focus on that also helps us normalize the differences between our powered by and managed by businesses that have very different revenue structures, but on a gross profit basis, they're much more comparable so that's really the lens with which we evaluate the business and existing customers as well as new customers when we're.
Bidding on business.
Thank you for that.
Our next question comes from Craig Maurer with F. T partners. Please go ahead.
Yes, hi, thanks for taking the question.
Wanted to ask about the bin sponsorship and Brazil, Brazil is a pretty crowded market.
Strong.
Issuer processors wanted to ask what your expectations are for that market.
Whether or not youre seeing demand from players outside Brazil looking to issue in Brazil, and that might be part of the foundation. Thanks.
Great Great question.
And we agree Brazil is moving.
Moving very fast tracked.
<unk> to be to answer you directly most of the demand were seeing today, given kind of where our brand resonates is international customers that are expanding into Brazil, and that's where we're getting I would say the most traction that does not mean that since we are there we will not take.
What I call.
Domestic companies that are looking to grow but the vast majority of what we have in the pipe is is U S companies or European companies.
Setting that is on Brazil to expand and because it's so seamless Craig to do that on our platform, where we often find is with our some of our many of our multinational customers once they use us and expand in a few markets and they see just how seamless and easy it is than they had been.
Once they have done a couple then they say, okay, we need to sit down and talk about where else I want to go because.
We make it pretty pretty pain free and that's that's pretty unusual in our business that you could move from market to market and not have to do new integrations and new setups.
Thank you.
Our next question comes from Bob Napoli with William Blair. Please go ahead.
Thank you.
Simon Mike and yeah.
Good to get that deal.
Hygiene.
You had mentioned I wasn't clear though.
On EBITDA positive exiting 'twenty four is just any thoughts on I know you've been working on this deal for a long time and profitability post deal. So just any thoughts on what kind of.
When your EBITDA positive post this deal and what you think the long term.
Model looks like from a growth and profitability perspective now that this deal is behind you.
Yeah. Thanks for the question, Bob I think that the way we look at it is I think probably consistent we may have talked about in the past, which is as a platform business, we sort of naturally get the scale benefits and up until really I guess the power acquisition was the was the last piece last year.
We added our banking and money movement capabilities, we added are risk product suite.
Both of those were done sort of in the second half of 2022, and then we acquired power early this year and we really feel like that has.
Put all the key components of the platform or in place of course, we will still add capabilities, but the the foundations and the anchor tenants. If you will are in place and as well. In addition to that we've built up a good sized team where we feel like we have a lot of investment capacity to continue to support our growing <unk>.
And continue to innovate so what that means is we.
We can start lowering are slowing the pace of our incremental investment given that we have the platform is ready and were more just making improvements to it.
And we have a lot of capacity to do so and if you then see the new sales kicking in.
Lapping some of these all the renewal activity that we've done and we've said in the past that a lot of these deals are more than three years. So youre looking at deals that are pushing out 26 27 28.
We think the combination of those two factors means we're going to get back to an exciting growth and we will very quickly maybe adding profitability in chunks right. It's not going to be this slow ascent, we should be able to deliver.
Pretty strong gross profit growth without high expense growth at least for a year or two to make a lot of progress in the profitability we can deliver.
Okay.
Thank you I guess, just on and maybe following up on power and on the credit business, how and maybe any is a little bit more color on how.
Power is progressing our cross sell capability and just the outlook you see for your credit business.
Sure.
<unk> well, so would've done integrating the technology now our customers can get the Apis and start.
Testing so in terms of our cross sale. The nice thing here Bob is that Mark has been in the credit business. It has not been the program manager. So so our pipeline did not start right. After the acquisition our pipeline was actually booted up before so we have various <unk>.
<unk> deals in the pipeline and we're comfortable we're going to close a few strong partnerships in the next half of the year.
The thing I would also add Bob is I feel like we're also getting a little bit of a halo.
Benefit from the acquisition in the sense that we have customers or prospective customers, who may be looking to do debit first but they they know they might want to do credit in the future and the fact that they could do that seamlessly with us is a big benefit and vice versa customers, who may be looking for a credit product, but they say.
Might we do something in debit down the road, yes, and the fact that we can seamlessly do that with you as a big benefit and so I think that's also helping us just more broadly in our sales not just credit sales.
Thank you.
Our next question comes from Bryan Keane with Deutsche Bank. Please go ahead.
Hi, guys.
I'll also echo my congratulations on the deal just a clarification I wanted to try to isolate.
Business loss with block either going in house or any work going to competitors and then what new scope work is expected from the contract fulfillment.
Good good question.
I don't believe there's anything going in house.
That we know about.
So from a pragmatic perspective, it is continuing in strength strengthening our partnership.
Brian There is a lot.
Doing with block across the board.
And ranges from small changes to programs to some really cool and highly innovative products.
That will probably see the light of day in the next six months to 12 month early to talk about but there is a lot being worked on.
Got it got it and then once we get past we anniversary this contract renewal for just a block aspect.
In the second half of 'twenty for how long.
The contract grow with the grow by you know ketchup transaction growth or accounts or and will it will have positive growth.
The growth of the business.
Great question, Mike do you want to take it.
So yes, it will continue to grow we havent setup, where.
The best way to set up is these contracts that we believe Brian is to make it a win win so.
Way you try to set up the the pricing in the touring is that as they continue to get bigger.
It's still accretive to us, but they maybe get a little bit they grow a little faster than we do so they accrue a little bit more of the upside as they get bigger as they should but we still get nice growth as well and so that's really how we tried to set it up which aligns our interest in is a win for both parties.
Got it thanks, so much.
Our next question comes from Andrew Jeffrey with tourists and Securities. Please go ahead.
Hi, This is Julian Broche on for Andrew Thanks for taking the question.
Switching gears here from quite catch up questions.
What is your primary competition on earned wage access I know you touched about it.
On the call here, you said strong there was strong demand in global business. So kind of what is your primary competition there.
Yep.
Yep.
We've implemented accelerated wage axis is actually unique to <unk>.
Don't want to go into an extreme level of detail, but it's done in a way that the companies are not draining their working capital.
So.
There is no solution in the market today that does what we do know that something specific.
Now in broader terms.
There are.
Say independent software developers some of them based on where it got us amongst them others that taken independent approach like <unk>. They go to a labor marketplace and say I'll give you a solution so that that is there.
But also it depends on the size of the of the marketplace and we have some very deep relationship with some of those Isps like branch, we work very closely with them on an accelerated wage access there.
<unk> customer of ours, so I mean to summarize I'd say the way we've done it.
No one has done it this way.
But it doesn't mean that that.
There is other perspectives on how people can implement exxon at any wage axis again, what we're trying to do with the accelerated wage access is too.
<unk> the entity that gets the employee what they want without having the.
Burdening the balance sheet of the technical and Florida.
Got it thank you for the clarification Thats helpful.
Sure.
Okay.
Maybe time for one last question sure. Our next question comes from Jason Kupferberg with Bank of America Merrill Lynch. Please go ahead.
Hey, this is Cathy Chan on for Jason. Thanks for taking the question just quickly wanted to ask about July trends anything you can share there relative to June or the second quarter around T. T V or ticket size, maybe manage buy versus powered by <unk>.
Any color there. Thank you.
Yeah, I would say overall.
The trends are stable, we're not seeing.
A meaningful.
Change in the trajectory of the business so.
Yeah steady as it goes.
Okay, and if I could sneak in a quick follow up I know you guys are looking for the second quarter, you guys had some unexpected incentive benefit.
A little bit about that how much did that contribute to gross profit growth in the quarter and just to clarify youre not expecting that to continue into the third quarter correct.
That's correct so.
Our gross profit growth was about five points faster than we expected and roughly two thirds of that is driven by these unexpected.
Incentives and really how it came about is we're obviously in close contact with all the networks.
We're constantly talking about the business that we're doing together and as part of that we discovered that.
We had actually been owed more incentives than we had been paid in the past and so.
As part of that discovery.
Where we were I guess paid are appropriate compensation and so that was really just a one time catch up for prior periods that we benefited from so it's not something that will reoccur.
Great. Thanks, so much guys and congrats on the quarter.
Thank you maybe we do have time for one more.
Uh huh.
Questions in the queue.
Perfect Alright, so thank you our Q&A session has been concluded.
Thank you for attending today's presentation you may now disconnect.
Thank you.
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