Marqeta Q1 2022 Earnings Review: another strong quarter, but the exciting stuff is still ahead
Marqeta ( MQ ), the issuer processor that powers cards of Square, Cash App, Afterpay, Klarna, Coinbase, and many other top Fintech companies, delivered another strong quarter. There were no major events during the quarter, no acquisitions, and no major new client onboarding, yet they still delivered a 54% revenue growth YoY. I believe there are plenty of opportunities for the company going forward, so it is really fun to follow its progress. Let’s break down this quarter’s results!
If you are new to Marqeta I suggest reading my review of the company’s Q4 and full-year 2021 results 👉🏻 “Marqeta Q4 2021 Earnings: a simple, boring business that's growing like a weed”
Total Processing Volume
Marqeta reported $36.6 billion in Total Processing Volume in Q1 2022, which represents a 53% increase YoY, and 11% sequentially. As per the company’s filing, the “increase in TPV was mainly driven by increases in processing volume from our financial services and buy-now-pay-later customers” (the company’s largest customers in these categories are Block, including Square, Cash App, and Afterpay, Klarna, Affirm, Coinbase, and J.P Morgan).
The chart above indicated a deceleration of growth, but my understanding is that this is driven by the high customer concentration in the mix. Thus, the company’s 10Q contains a disclosure that “TPV for our top five Customers, grew by 39%…, while TPV from all other Customers, as a group, grew by 168% for the three months ended March 31, 2022 compared to the same period in 2021.” Simply calculation suggests that the top 5 customers generated 89% of TPV and the rest of the customers generated 11% of TPV (more on that later).
Revenue and Take Rate
The company reported $166.1 million in Net Revenue for the quarter, which represents a 54% growth YoY, and 7% growth sequentially. In absolute terms, the revenue grew by $51.8 million, of which, as per the company’s disclosure, $31.3 was attributable to a single customer, Block (Marqeta powers Cash App, Square, and Afterpay cards).
Marqeta has a high revenue concentration with Block; thus, the company disclosed that “we generated 66% and 73% of our net revenue from our largest Customer, Block, during the three months ended March 31, 2022 and 2021, respectively.” This disclosure suggests that revenue from Block grew 39% YoY, while the revenue from all other customers grew 94% YoY. Thus, although the chart below indicates a deceleration of growth, the disclosure on Block and the TPV generated by the top five customers (above), suggests that outside of a few largest customers, Marqeta is growing at almost triple-digit growth.
Revenue growth is primarily driven by the growth in Total Processing Volume, as the Take Rate has been quite stable over the last two years. There is a minor fluctuation between the quarters, but this is most likely just a function of the transaction mix between different customers and products.
The company’s management guided for 46-48% YoY revenue growth in Q2 2022, which implies $178 - 181 million in revenue.
The company reported $74.7 million in Gross profit for the quarter, which represented a 57% growth YoY, and a 1.5% decline sequentially. The costs of revenue for Marqeta are primarily the fees charged by the card networks, as well as sponsoring bank charges. Most of the transactions are settled via a single issuing partner, Sutton Bank, but the company is working towards diversifying its partner base. Thus, concentration with Sutton Bank (as measured by TPV) decreased from 94% in Q1 2021 to 86% in Q1 2022.
Given the simple structure of the “costs of revenue”, the growth of gross profit primarily follows the growth of revenue (or rather the growth in TPV), and the deviation between the two is the result of the seasonality in the card network incentives.
Card network incentives are essentially performance-based rebates of the network fees (whereas the networks reimburse Marqeta part of the paid fees based on the achieved transaction volume). Marqeta’s management explained during the earnings call that the company’s incentive agreements run from April to March each year; and thus, incentives in Q2 are the lowest (i.e. Q2 2021 on the chart below). Last quarter (Q4 2021 on the chart below), the company beat its forecasts, and thus, the incentives drove the gross profit margin up.
The company’s management guided for a 40-41% Gross Profit Margin in Q2 2022, which, based on the revenue guidance, implies a Gross Profit of $71-74 million.
Operating expenses totaled $124 million for the quarter (up 105% YoY), resulting in an Operating loss of $49.3 million. The key components of Marqeta’s operating expenses are the “compensation and benefits” (including share-based compensation) and “technology” costs.
I believe you can easily guess from the chart below in which quarter Marqeta went public. The “technology” costs (third-party hosting fees, software licenses, and hardware purchases) naturally grew (102% YoY) with transaction volumes, but the growth in “compensation and benefits” (114% YoY) is a conscious decision by the company’s management to invest in product development. As you can see from the chart below, “compensation and benefits” expenses grew from 40%+ (of revenue) in 2020 and early 2021 to 60%+ (of revenue) after the IPO.
At this point, the company’s management feels confident to continue investing in ramping up the team, but given layoffs and hiring freezes across the technology sector, I would expect them to become more cautious in the coming quarters. During the earnings call the company’s management said layoffs and hiring freezes are not on the table, but those can be considered if the growth plans don’t materialize.
Net Income (Loss) and Adjusted EBITDA
The company finished the quarter with a Net Loss of $60.6 million (up from $12.8 million in Q1 2021), and a negative Adjusted EBITDA of $10.5 million. The adjustments primarily include share-based compensation and related taxes ($37.8 million), as well as a one-time non-recurring $11.7 million impairment of “an option to purchase the remaining equity of the company that Marqeta acquired last year”.
The company’s management guided for a negative Adjusted EBITDA margin of 10-11% in Q2 2022, which, given the revenue guidance, implies a negative Adjusted EBITDA of $18-20 million. As the chart below suggests, this would be an anti-record.
Mike Milotich, Marqeta’s CFO, finished his prepared remarks at the earnings call with a statement “in the long run, we remain confident the business will operate at a 20% plus adjusted EBITDA margin once we have captured more of the incredible opportunities in front of us.” Cheers to that!
Things to Watch in 2022
This quarter did not change my view of Marqeta’s business, and thus, I will just reiterate the things I am watching going forward:
Growth through acquisitions. The $1.2 billion that the company raised in its IPO gives it a lot of power to grow through acquisitions. Despite not being profitable, the company does not use much of its cash to fund operations, and as per the management comments, is actively looking to grow through acquisitions.
Global expansion. Most of Marqeta’s revenues come from US-based issuers. However, the company is expanding rapidly into other regions, including Europe and Asia. VISA and Mastercard are global card networks; thus, Marqeta’s product offering (with additional compliance requirements and certifications) should be scalable across the globe.
Growth of Marqeta’s clients. The growth of Marqeta’s clients, in particular, Block (Square, Cash App, and Afterpay), is a good proxy for the company's growth given the revenue concentration. However, as indicated above, other clients are growing their volumes at a much faster pace, so I am watching for another company of Block’s caliber.
Growth outside of the Fintech industry. As I wrote in my previous review, Marqeta is working primarily with Fintech and Technology companies. However, the largest card issuers in the world are still banks, and I believe this is a huge opportunity for Marqeta. Some of them are already moving their card infrastructure to the cloud, and Marqeta is well-positioned to capitalize on this trend.
In summary, it was a good quarter for Marqeta without any major events. I believe revenue concentration with Block overshadows the growth of other Marqeta’s clients (taking the blended growth rate down), so excluding Block the numbers would look even more impressive. The company has a lot of cash on its balance sheet (and hardly uses that to fund operations), so I would expect some exciting acquisitions ahead. And finally, I believe there are plenty of opportunities for the company internationally. Cannot wait for another quarter!
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Source of the data used in the chart above: Investor Relations
Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter (including Marqeta), as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.