MQ - NASDAQ

Ladies and gentlemen, greetings, and welcome to the Marqeta, Inc. Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stacey Finerman, Vice President of Investor Relations. Please go ahead.

Thanks, operator. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website, including our Annual Report on Form 10-K for the period ended December 31, 2023, and our subsequent periodic filings with the SEC. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of the time of this call and the company does not assume any obligation or intent to update them, except as required by law. In addition, today's call includes non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials which are available on our Investor Relations website. Hosting today's call are Simon Khalaf, Marqeta's CEO; and Mike Milotich, Marqeta's CFO. With that, I'd like to turn the call over to Simon to begin.

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

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

[Operator Instructions] The first question comes from the line of Ramsey El-Assal from Barclays. Please go ahead.

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

Now let me take that Ramsey and then pass it over to Mike. So what I would say is, we do have the visibility because we have bottomed out. And I'd say that for multiple reasons is that the -- we have anticipated the changes. What we have not anticipated is the impact on the onboarding process with our banks. So just to give you specific examples, it's not that I'd say, the rules have changed, it's more the third-party oversight and the scrutiny upon launching a program that have changed. So as an example, as we actually changed something in the program, it goes back to the top of the queue versus being done in parallel. So these are procedural changes versus, I'd say, material changes. So the regulators have a tough job, but I do believe we are over the hump when it comes to what do we need to fix in order for us and our banking partners to go back to, I'd say, the ordinary times to get a program out. It will take time to drain the backlog because it's not that our demand went down, it actually went up. So we have some backlog that we have to drain. And in terms of your questions about will people run out of patients as they are in the queue, we don't expect that. I mean, both entities like this is not a -- it's not an instant in which both parties are not committed to the partnership. There's a lot of work that goes into it from development to onboarding to risk management. So we're pretty quiet committed, so are our customers. And we have -- I mean, they all understand the environment. We're not the only entity impacted by it. So we're working with them and on the contrary, they have been extremely supportive and they -- and they continue to be excited about the programs that they want to launch. Mike, anything you'd like to add to?

Yes, just maybe I'll just give some color on just the specifics on some of the delays, Ramsey. So if you look at the first few months of 2024, the regulatory scrutiny had clearly ratcheted up with more than 10 consent orders affecting the banks in our space. And so what we saw was an initial spike in the time to launch that was more than 2x the average in 2023. So 2023 onboarding and delivery was typically around 150 days roughly. And in Q1, Q2, that rose to over 300 days. This was expected given the sort of initial changes and sort of shock of all the changes that were happening. But at the start of Q3, we expected things to get back to where we had been in 2023. But the new programs on average took about 30% to 40% longer to launch. And so the time still remained over 200 days when it had previously been about 150 days. So that just gives you a little more color on sort of the magnitude of what's happening. And to just address your second question in terms of visibility, so we had 15 programs that were delayed on average of 70 days. But when you break that down into components, so five of those 15 actually did launch in Q3, but just much later than expected. Nine programs are now expected to launch in Q4. So a little more than half are now being pushed into Q4 and then one is slipping into Q1 of 2025. So we have pretty good visibility now that we've started to implement some of the solutions to address these challenges. So we -- of course, there's still some unknowns, but for the most part, we feel good about the projections we're sharing in terms of our outlook.

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

Yes. So there is definitely ways to impact the trajectory as I mentioned in sort of my prepared remarks. The key is when we're looking at new program launches, we look at them as a portfolio and we look at them in aggregate because of the nature of the types of customers we serve, right? We're a little bit of a hits-driven business where we'll have a few programs within a new launch cohort that experience a lot of success and you have some customers whose value proposition doesn't quite hit the mark and needs to be adjusted. So we are, I guess, we typically see this type of type of outcomes and then we work with the customers who are not experiencing as much success to implement changes, help them refine their value proposition, and get those changes through the bank. So I would say it's not that unusual. I think what is a little bit different is because of all the program delays, the sample size is now much smaller. And with a much smaller portfolio, essentially, then you don't quite have the balance that you would normally have with a lot more programs going live. And so we'll continue to work with them and try to obviously improve performance. Everyone's incentives are aligned in that regard.

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

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

Thank you, Darrin. Let me take the first question and then hand it over to Mike. So I'd say in terms of our existing customers, we at Marqeta has taken a lot of steps early on before the increase in the regulatory scrutiny and/or consent orders in order to review all our programs and the procedures that put in place. I would say dating to programs that have launched for two years. So we're pretty comfortable that whatever is out there and launched is really good in terms of being able to sustain more rigor in the regulatory system. It's almost we've done the parking lot exercise. We looked at everybody and said, okay, no, these programs are solid. And then whenever we have questions, we actually put our partners through the test. So we feel comfortable about that. Now in terms of your second question as like -- hey, why are you confident that customers are not going to drop off, right, if the time it takes to launch these programs has increased? So number one, we've stayed in touch with our customers and we've worked, I'd say, in lock steps with them and all the changes that are necessary, number one. Number two is, we've spoken to them about reducing the number of changes as in reduce the scope, right? And don't iterate as much at the beginning. So we don't put them back at the end of the queue and they've been responsive to that. And the third thing we've done is, we moved some of our resources to actually consult with our customers. I hate to use the word get it right the first time, but it's almost that as in, hey, let's use the experience we have from the 400 programs that have launched and recognize that that's going to be the construct that is going to be working versus being extra acute to actually win a few points with consumer here and there. So probably the word discipline is what I would use early on in the cycle. But I would be extremely surprised if we have fall off given how invested our customers are in the solutions that they're about to launch.

Yes. Just one -- just one thing I'd add to that, Darrin, is just when you -- if you look at -- go back on -- since we started really a meaningfully increasing our bookings over the last year and a half or to two years, we've talked about that more than half of those tend to be with existing customers of ours who are doing new programs. So they're expanding into new markets or they're doing new use cases. And so they're very aware, they can feel the change very specifically, right? They launched a program with us maybe a year, two, three years ago, and then they can see what's happening now. And so I think there is a pretty good understanding from everyone involved that this is not a Marqeta issue or specific to the bank partner we may be working with, but this is a much broader change that's happening in the industry, especially if they speak to other banks or other people they know in the industry. It's pretty broad-based. And so we're not seeing customers questioning why this is happening. I mean, everyone sort of feeling the impacts. In terms of your last question about is it certain verticals? It isn't. This is very, very broad-based. It's more of a kind of foundational change in how we go through the onboarding process and it's really affecting all use cases. That said, just to reinforce something Simon mentioned, we are trying to encourage customers to stick to constructs that we know have been pre-approved and move through, so moved previous programs through. So limiting your changes and trying to get it live, and then going from there to maybe refine the value prop over time.

Yes. All right. I was going to just kind of add-on to that specific topic, Mike, you mentioned about sticking to the construct. But I mean, have you guys -- I'm assuming you guys have been able to talk touch base with the underlying regulators just to see and get a feel for if there's any more material incremental changes that are going to be required?

We're always -- we're always talking to everybody in the ecosystem, including the regulatory buddies. Like I said, they have a tough job. But I wouldn't say that like this is like, hey, incrementalism. It is more that most of the reactions have been to things that have happened in the past and not by Marqeta, but we live in an ecosystem in which a bad apple ruins the whole ecosystem. So as an industry, right, it -- what happened is the regulators came strong against some of the underlying banks and there is an overall increase in third-party oversight. But we don't expect that environment to change because there isn't anything I would say that is anything but banks and ourselves or the industry in general doing what they're supposed to do. The other thing -- what we've done, Darrin, is I'd say at the beginning of this year, we've moved bank vetting into early stages in our pipeline. So we do not go into contracting with anyone before the banks have vetted the solution. So that is a change that we've done in order to increase, I'd say, the chances of anything we sign to go live. So that also increases our confidence. And I think that helped in effectively weeding out the solutions that are not going to make it through the bank so that we become more efficient in handling delivery.

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

Hi, thank you for going through all of this and I appreciate the -- you're sticking with the '25 EBITDA outlook. So I just wanted to clarify here that with all the work that you're doing to remedy the situation, I ought to presume there'd be additional costs or maybe some deleveraging there. Am I misunderstanding that? Just can you walk us through what you're doing on the remedy side and the impact on the P&L and why you're confident in protecting EBITDA?

Thank you, Tien-Tsin. I would say the cost has already been incurred because as a company and I think we've spoke about it multiple times, Tien-Tsin, we've started the investment in compliance early on. Actually, it is the largest investment we've made tail-end of '23 and going into '24. But also we've automated a lot of our processes, number one. And we have decided to onboard a lot of more tenants outside the United States as well in Poland when it comes to risk management and compliance operations. And in Toronto, on the development and proptech side, so we're taking all these steps. The thing that are -- that we could not actually predict was whether the banks themselves had to increase their OpEx in order to meet those changes. And we're comfortable -- our compliance team is comfortable with the investment the banks have done themselves in order to meet this new reality. Now to answer your kind of what are we doing about it, right? The -- I'd say that number one thing we're doing is becoming more efficient without existing bank. I mentioned sticking with existing construct, looking at use cases that have worked, and reducing the tweaks that actually don't matter so that they don't go through the process. We are adding a couple of more banks to help with the supply side. And last but not least, we've placed some of our experts in the field to consult with our customers to get it right the first time. I do believe all of these steps give us the confidence that not only we'll be able to be differentiated and increase the moat on our solution in the medium and long term, but will be able to help us drain the backlog versus continuously add more deals to the backlog.

And just to add maybe a couple of details, Tien-Tsin, normally we wouldn't comment a lot on '25 at this time, but we're being more transparent based on the circumstances. At this point, our view of 2025 gross profit from programs that launched prior to 2024 is not much different than what we thought a year ago at Investor Day. So the change that we're seeing on 2025 is really centered around new programs that we're launching in 2024. And the way we look at that, just see you have a sense is there is a typical ramp of TPV that we assume based on historical data. So we've looked at literally over 100 programs that we've launched, we remove outliers both good and bad and you use that and you sort of see a trajectory of how a program grows over time. And it's that typical ramp that we used to project our business. And as you can imagine, in the first couple of months, the volume is pretty light as the program gets started. So in that first six months, 90% of the volume for that program happens in months four to six. So the first couple of months are pretty slow, months four to six, things start to pick up. Then -- and then from month seven to 12, the volumes are 6x larger than the first six months. So the curve starts ramping very steep and then months 13 to 18 is then 3x larger than months seven to 12. So when you start to look at that curve, what you start to kind of understand why I want to share that detail is if you just start shifting that a few months, it has pretty big implications into our ability to realize revenue and gross profit. And that's what is happening from a timing perspective. So that's why we're confident that by 2026, we should be back on the pace that we expected from our Investor Day. We just need a little time to work through these challenges and it's all for the backlog. But that's -- but that's kind of where we are from a gross profit perspective. And then because we've made so much progress on the expense side, we still believe that we'll be able to meet the EBITDA projections that we signed up for -- of about $50 million.

Yes. One thing I'll add, Tien-Tsin, is that we've been tracking this curve for -- I'd say, over a year now. And with every program we launch, we haven't seen any statistically significant deviation from the curve. So I think our confidence is pretty high that that's what programs on a cohort-by-cohort basis will look like.

Okay. Now that's encouraging. Thanks for going through that.

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

Great. Thank you for taking the question. So I just want to recap. So this question is for Mike. So it sounds like there are three factors. The first is the timeline push-out of new programs. The second one is some of the changes with a little bit of in-house or in-sourcing, if you will, from some of the more sophisticated customers. And then the third, and it sounds like maybe a lesser factor is the early performance of some of the more recently launched programs. I want -- I believe that's the stack ranked order. I would like to just confirm that. And then I was hoping, Mike, if you could maybe just dig in a little bit more around the sophisticated customers, the types of customers they are. You said some of them are doing a little bit more of the [indiscernible] in-house, some of them are doing a little bit more risk in-house. Maybe you could just dig into that more.

Sure. So just to confirm what you said, Tim, so yes, I would say it's more Q factor. So it's the timeline of these new programs and then it's some of our sophisticated fintech customers doing more things in-house. I would say, the early performance is kind of part of the new program impact and it's quite small. It's really not that significant. So I would say it's really two primary factors. And to give you a little more color on what we're seeing for our customers who are bringing more things in-house. We have two customers who are taking over the bank relationship. So although we're going to still provide some program management capabilities for them and services, they are going to manage the bank relationship directly. So that's one change or a type of change. We have another customer who is bringing more risk services in-house based on a homegrown solution. So this is a large sophisticated customer who has been building this for some time and is pulling this in. And then we also have three customers where they're connecting their platform directly to their end-users to reduce their reliance on card. So as you know, if you think about what we do in Buy Now Pay later, on-demand delivery, AP automation, in all those use cases, those customers can execute their business without issuing cards. What we've allowed them to do is dramatic -- scale them much faster. But in this case, in this environment, there are three customers that have done some direct connections and we're going to lose that volume and that's what's contributing to about two to three points of lower growth in Q4 than we had previously expected. And again, as I mentioned before, this is something that I would say individually, events like this have happened in the past and are part of our business. What's different here is that there is a concentration of this activity in a short period of time that's making it impactful. So none of these things in isolation, I would say, would be events. But the fact that they're all happening at once is what makes it more impactful, which is why we attributed at least to some degree to the overall environment that we're going through. That we're seeing customers move sort of quickly and in a timeframe that we haven't typically experienced and that's why we're having to sort of adjust our expectations in a relatively short order of time.

Thank you, Mike. And then a more brief one. So Visa said on their earnings, all around Visa Flexible Credential and I quote they said they have -- we have hundreds of issuers in the pipeline, several launches planned for 2025 for the new Visa Flexible Credential. Creatively, you've been one of the first to be certified to work with Visa Flex Credential. Is it safe to assume that of those hundreds that they mentioned that Marqeta should be working with some portion of them or any additional context you could provide there?

Yes. Thank you for the question. So yes, we were the first and I'd say that we are in the midst of a launch as and like going live and we expect that actually to happen either tomorrow or Wednesday and it starts into the ramp phase on the 15th of November. So the reception, as we said last time has been great and we're very comfortable with it. So yes, it has increased the demand on our services, both in the U.S. and the U.K. and the EU.

Thank you. The next question is from the line of Sanjay Sakhrani from KBW. Please go ahead.

Thanks. I guess, Mike, you mentioned or Simon did, that what you were seeing is not dissimilar to what others have seen in the industry. I mean, have you guys validated that? Have your competitors also seen similar product launch delays?

A good question. Actually, we -- as a team, we were at Money 2020 yesterday, I mean, last week, which is the confidence for a new financial services. And I'd say that the number one thing that was discussed was how everyone is now taking compliance and in general and regulatory compliance seriously. And everybody is talking about the delays, but they're also talking about the flight to quality, which is they're coming to Marqeta because we were the entity that has invested early on in the cycle. And also we heard a lot of folks that thought that they could use that players as kind of like an alternative to Marqeta, that actually has disappeared because a lot of folks mentioned that they're seeing almost these solutions fizzle out in terms of the ability to take on scaled programs. So yes, we're not unique into that -- into this environment, but I do believe we had a head-start in compliance and we will get over this hump in terms of the operational burden that ourselves and our -- a couple of our bank partners have faced.

Yes, Sanjay, we also have several programs in our pipeline for people who have been notified that they -- they're going to have to leave their bank, that the bank is even exiting the space or not terminating their partnership with whatever platform they're on. So there is -- I guess, several data points out there that suggest that this is not a Marqeta specific issue.

Okay. Just a follow-up question, Mike. You talked about the fourth quarter run rate revenue -- gross profit being good proxy for 2025. I guess, is that a worst-case scenario or could that be ratcheted down? And I guess like when we think about the deferral, let's just say, 60 days, like does that mean that you see a step-up in the second half of next year under that paradigm? Or is it more even -- I'm sorry, I know you're not giving 2025 guidance, but just understanding sort of the cadence of that. Thank you.

Yes. No, it's fair enough. I think the -- yes, we wanted to give some indication just as we're resetting expectations just to be transparent with all of you. So I think the -- it all depends, Sanjay, on how quickly we work through the backlog. So I think we feel good about the solutions we're starting to implement and we're seeing progress. So we kind of feel like we're maybe over the hump. We're not past it, but we're kind of over the hump. The question is then how quickly can we work through the backlog as we also had programs that were expected to launch in Q4 that are now kind of in the queue, if you will, so it all depends how quick -- how long they stack up. I think we'll determine what the quarterly trajectory looks like for 2025 and that's something that we'll obviously have a much better idea of in late February when we talk again and we'll be able to give a quarterly guidance -- cadence at that point.

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

Hi, Simon. Hi, Mike. Thanks for taking my questions and really appreciate all the detail here. So it makes sense in terms of the increased scrutiny, the elongated timeframes. But I guess, just in terms of changes that are required on the Marqeta platform, could you comment whether there is anything that needs to be changed? Obviously, we've heard things like more detailed transparency at the sub-FPO level, things like that, nothing that's significant. But I'm just curious as a result of this, if there are also changes to the platform as a result in addition to kind of some of the -- just the process changes you're making? Thank you so much.

Thank you, Andrew, for the question. I mean, the short answer is nothing that our compliance team has not started working on. I mean, we do -- there is always room for improvement in everything we do, especially when it comes to the automation side, the reporting consolidated dashboards. But conceptually, it's not that the requirements have changed. It's more -- do we increase doing something just to increase the visibility that our compliance and regulatory teams have? Just to give you an example, we -- the team is building a great dashboard that could operate in near real-time on the compliance side so that they're actually more in tune with some of the programs that are launching early. But I guess, the short answer is, there is nothing that we're changing that we did not know we have to change before because of the maturity and the scale at which some of our customers are operating at now.

Got it. Thank you for that, Simon. And then maybe I could ask on the new sales environment. Obviously, the focus here is working through the backlog. But have you seen hesitancy from new candidates in the pipeline, given just what's going on in the environment? And then just more broadly speaking, as you think about just draining the backlog, do you shift some resource of new sales to implementation? I'm just curious just overall on the new sales environment. Thank you very much.

It's a great question. It's a great question. We have moved resources to help. But I'd say what we've done the most of is having our delivery team user expertise and hired expertise to help our customer get the -- get it right the first time. I'd say that's the first step we've done. We're also looking at mechanism to decide how do you prioritize things going through the pipeline. So it's not a first-in, first-out also. The other thing we've done is we've taken on some of the vetting ourselves, so to help our bank partners. Now in terms of have we kind of like that's the top of the pipeline as the funnel, is it impacted as in, hey, because of the regulatory scrutiny, our customers shine away from this? I'd say it's quite the contrary and our pipeline continues to grow despite the bookings increase. And I can only point to growth in our pipeline, specifically from embedded finance customers.

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

Hi, thanks for taking the question. So if we think about the 6-point headwind to gross profit growth in the fourth quarter, is it fair to assume that the existing, call it same-store sales estimate within that is unchanged from where we were just three months ago? Meaning, is your macro assumptions embedded kind of consistent with what we knew?

That's right. So there -- the only changes that we're seeing is related to new programs. And then there is a couple of a couple of programs who are taking on a little bit more responsibility and they were actually six specific things that are happening that I highlighted. Outside of that, everything is as expected and consistent with what we thought last quarter.

And then to follow up with Simon, you said that demand actually went up in the quarter. So could you help us kind of bridge the -- what parts of the business are seeing that elevated demand that's offsetting these transitory changes to the onboarding process?

Yes. I mean, the demand has been going up. It's not that it has gone up in the quarter. So the backlog has gone up because we haven't been able to clear some of the programs, as might give you an indication out of the 15 programs that were supposed to launch, only five launched, which is 30% or 33%, 60% are targeted to launch in Q4. So the areas where we're seeing traction on the demand side, I'd say there are three areas. The first one is on the neobanking side and brands who want to offer banking services to their constituents. That's one. The second one is in flexible payments. I put the Visa Flexible Credentials, our newly announced product flex in that and co-brands. And last but not least, there is a lot of software companies that are in the finance automation, either AP automation, expense management, payroll management that are looking at the commercial banking suite and coming into us. And I'd say, two-thirds of our pipeline right now, if I'm not mistaken is embedded finance -- embedded finance customers. That are -- that have, I'd say, a large audience versus, I'd say, fintechs that are venture-funded and hoping to build an audience.