Marqeta, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Marqeta operates a single-segment, cloud-based card issuing and payment processing platform. Figures below are in U.S. dollars; financial amounts are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $108.9 | $191.6 | $557.3 | $544.4 |
| Total processing volume (TPV) | $56.7 billion | $42.5 billion | $160.3 billion | $119.6 billion |
| Gross profit / margin | $72.5 / 67% | $80.1 / 42% | $246.3 / 44% | $232.9 / 43% |
| Operating loss | $(69.8) | $(59.5) | $(226.7) | $(155.5) |
| Net loss | $(55.0) | $(53.2) | $(182.6) | $(158.5) |
| Adjusted EBITDA | $(2.1) | $(13.6) | $(5.6) | $(34.3) |
- Q3 revenue declined 43% year over year, while TPV grew 33%. Nine-month revenue increased 2% and TPV grew 34%.
- Q3 gross margin rose to 67% from 42%; for the nine-month period it was 44%, compared with 43%. The quarterly comparison is substantially affected by a change in how certain Block program fees are presented.
- Operating expenses were $142.3 million in Q3 and $473.0 million for nine months, up 2% and 22%, respectively. Compensation and benefits were the largest expense and included acquisition-related compensation and share-based compensation.
- Operating cash flow was positive $4.6 million for nine months, compared with negative $27.9 million in 2022. Cash, cash equivalents and restricted cash fell $236.1 million during the period; financing cash use included $131.5 million for share repurchases and acquisition-related contingent consideration.
- At September 30, cash and cash equivalents were $947.7 million and short-term investments were $349.4 million, totaling about $1.30 billion before restricted cash. Management said available cash and investments should fund operations for more than 12 months. The balance sheet lists no borrowings or debt; total liabilities were $308.2 million.
Material changes and notable items
- Block contract amendments: An August 2023 amendment changed the Cash App program arrangement, effective July 1, so certain Issuing Bank and Card Network fees are deducted from revenue rather than reported in costs of revenue. Marqeta said this reduced Q3 reported revenue by $114 million and lowered its revenue growth rate by 60 percentage points. The change also reduced reported costs, so the revenue decline should not be read as a comparable decline in processing activity. The company reported that the revised relationship decreases gross profit and increases gross margin percentage.
- Block accounted for 50% of Q3 revenue, down from 73% a year earlier, but 72% of nine-month revenue, up from 69%. Q3 revenue from Block declined $84.4 million year over year, in part because of the presentation change. The company remains materially exposed to Block and to a small number of customers.
- In November 2023, after quarter-end, Marqeta and Block further amended their agreement: Cash App and Square Debit Card terms run through June 30, 2028, with automatic annual renewal thereafter unless terminated. The amendments provide reduced pricing; the November amendment also names Marqeta default provider for specified Block international markets, subject to exceptions. Management expects reduced pricing to weigh on reported revenue and says the overall revised relationship decreases gross profit.
- Marqeta acquired Power Finance on February 3, 2023. Preliminary purchase accounting recorded $123.0 million of goodwill and $41.0 million of developed technology, with a seven-year amortization period. The company paid $53.1 million of contingent consideration in Q3 after performance goals were achieved. Acquisition-related post-combination compensation contributed to expense.
- A Q2 workforce restructuring was substantially complete by September 30. Net restructuring charges were approximately $8.7 million for nine months; $14.3 million of severance and benefit payments had been made, leaving a $0.2 million restructuring liability.
- The company repurchased $131.5 million of stock during the first nine months under its programs. At September 30, $88.1 million remained available under the $200 million 2023 program.
Outlook, risks and contingencies
- No quantified forward-looking revenue, profit or cash-flow guidance is provided in the supplied filing text. Management expects operating losses for the foreseeable future, while stating that cash and short-term investments are sufficient for more than 12 months.
- Key risks include customer concentration and Block renewal economics, dependence on Sutton Bank (which settled 75% of Q3 TPV), competition, macroeconomic conditions and consumer spending, platform availability and cybersecurity, and extensive payments and privacy regulation. Non-cancellable purchase commitments totaled $198.9 million over five years, including $185.5 million of cloud-service minimum commitments.
- Disclosure controls were assessed as ineffective due to a material weakness in controls over Power Finance acquisition accounting, including purchase-price allocation review and oversight of third-party specialists. Management said the identified accounting error was corrected and the financial statements fairly present the periods shown; remediation was underway but not complete.
- A putative shareholder derivative and class action filed in Delaware alleges fiduciary-duty breaches in approving the 2023 share repurchase program. The court denied the plaintiff’s motion to expedite; motions to dismiss were filed, with no hearing set as of the report. The company said it would defend the litigation. Management reported no legal contingency matters expected to have a material adverse financial effect.
Important facts for investors to verify
- How the Block revenue presentation and reduced pricing affect comparable revenue, gross profit, and margins in subsequent quarters.
- Whether TPV growth translates into durable revenue and profit growth, given transaction mix, customer concentration, and the shift toward Powered By Marqeta arrangements.
- Progress in reducing operating losses and the cash impact of buybacks, acquisition-related payments, employee compensation, and cloud commitments.
- Completion and effectiveness of remediation for the material weakness in acquisition accounting controls.
- Developments in the Block shareholder litigation and the remaining authorization and future use of the share repurchase program.