(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. As discussed in the section titled "Note About Forward Looking Statements", our actual results may differ materially from those discussed in these forward-looking statements as a result of various factors, including those set forth under the section titled "Risk Factors" under Part II, Item 1A below.
Marqeta's modern card issuing platform, or our Platform, empowers our customers, or our Customers, to create customized payment cards that provide innovative payment experiences for their customers, shoppers, and end users. We serve customers in multiple industry verticals including financial services, buy-now-pay-later, and on demand services. Before the rise of modern card issuing, creating cards was slow, complex, and subject to mistakes. Marqeta helps solve these problems. Our Platform, powered by open APIs, enables businesses to develop modern, frictionless payment card experiences for consumer and commercial use cases that are either the core of, or in support of, their core business.
Our modern architecture allows for flexibility, a high degree of configurability, and accelerated product development, democratizing access to card issuing technology. Marqeta's open APIs provide instant access to our highly scalable, cloud-based, and configurable payment infrastructure that enables our Customers to launch and manage their own card programs, issue cards, and authorize and settle payments transactions.
Impact of COVID-19
The COVID-19 pandemic has had, and continues to have, a significant impact on the U.S. economy and the markets in which we operate. While the rate of vaccinations continues to improve, the potential for new variants and subvariants contributes to the continuing worldwide public health concern of the COVID-19 virus.
In response to the COVID-19 pandemic, we implemented measures to focus on employee safety and Customer support, while at the same time seeking to mitigate any negative impact on our financial position and operations. We implemented remote working capabilities for our entire company and, to date, there has been minimal disruption to our operations.
We believe the COVID-19 pandemic intensified the consumer need for virtual and contactless forms of payments, the need for greater flexibility with purchases, and for easy online financing options. Many of the providers of these services are our Customers and they are experiencing accelerated adoption of technologies that enable such payment experiences.
There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation, and fiscal and monetary policy responses from the federal government. Businesses continue to face difficulty in hiring and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak.
It is uncertain how the COVID-19 pandemic will evolve and what effect the lifting of pandemic-related restrictions, and the levels of infection, will have on our processing volumes, and on our future results of operations. We continue to monitor the situation and may take actions that alter our operations and business practices as may be required by federal, state, or local authorities or that we determine are in the best interests of our Customers, vendors, and employees.
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Key Operating Metric and Non-GAAP Financial Measures We review a number of operating and financial metrics, including the key operating metric set forth below, to help us evaluate our business and growth trends, establish budgets, evaluate the effectiveness of our investments, and assess operational efficiencies. In addition to the results determined in accordance with GAAP, the following table sets forth a key operating metric and non-GAAP financial measures that we consider useful in evaluating our operating performance. Three Months Ended March 31, 2022 2021 Total Processing Volume (TPV) (in millions) $ 36,626 $ 23,998 Net revenue (in thousands) $ 166,102 $ 107,983 Gross profit (in thousands) $ 74,726 $ 49,857 Gross margin 45 % 46 % Net loss (in thousands) $ (60,598) $ (12,838) Net loss margin (36) % (12) % Adjusted EBITDA (in thousands) $ (10,453) $ 1,647 Adjusted EBITDA margin (6) % 2 %
Total Processing Volume (TPV) - TPV represents the total dollar amount of payments processed through our Platform, net of returns and chargebacks. We believe that TPV is a key operating metric and a principal indicator of the market adoption of our Platform, growth of our brand, growth of our Customers' businesses and scale of our business.
Adjusted EBITDA - Adjusted EBITDA is a non-GAAP financial measure that is calculated as net income (loss) adjusted to exclude depreciation and amortization; share-based compensation expense; payroll tax related to share-based compensation; legal, financial, and tax due diligence costs related to potential acquisitions; income tax expense (benefit); and other income (expense) net, which consists of changes in the fair value of redeemable convertible preferred stock warrant liabilities (for periods prior to the IPO), realized foreign currency gains and losses, interest income from our marketable securities, our share of equity method investments' profit or loss, and impairment of equity method investments or other financial instruments. We believe that adjusted EBITDA is an important measure of operating performance because it allows management and our board of directors to evaluate and compare our core operating results, including our operating efficiencies, from period to period. Additionally, we utilize adjusted EBITDA as an input into our calculation of certain annual employee bonus plans. See the section below titled "Use of Non-GAAP Financial Measures" for a discussion of the use of non-GAAP measures and a reconciliation of net loss to Adjusted EBITDA.
Adjusted EBITDA Margin - Adjusted EBITDA Margin is a non-GAAP financial measure that is calculated as Adjusted EBITDA divided by net revenue. This measure is used by management and our board of directors to evaluate our operating efficiency. See the section below titled "Use of Non-GAAP Financial Measures" for a discussion of the use of non-GAAP measures and a reconciliation of net loss to Adjusted EBITDA Margin.
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Components of Results of Operations
We have two components of net revenue: platform services revenue, net and other services revenue.
Platform services revenue, net. Platform services revenue includes Interchange Fees, net of Revenue Share and other service-level payments to Customers. Platform services revenue also includes processing and other fees. Interchange Fees are earned on card transactions we process for our Customers and are based on a percentage of the transaction amount plus a fixed amount per transaction. Interchange Fees are recognized when the associated transactions are settled.
Revenue Share payments are incentives to Customers to increase processing volumes on our Platform. Revenue Share is generally computed as a percentage of the Interchange Fees earned or processing volume and is paid to Customers monthly. Revenue Share payments are recorded as a reduction to revenue. As Customers' processing volumes increase, the rates at which we share revenue generally increase.
Processing and other fees primarily include fees earned when end users use payment cards at automated teller machines and minimum processing fees if Customers' processing volumes fall below certain thresholds.
Other services revenue. Other services revenue primarily consists of revenue earned for card fulfillment services. Card fulfillment fees are generally billed to Customers upon ordering card inventory and recognized as revenue when the cards are shipped to the Customers.
Costs of Revenue
Costs of revenue consist of Card Network fees, Issuing Bank fees, and card fulfillment costs. Card Network fees are equal to a specified percentage of processing volume or a fixed amount per transaction routed through the respective Card Network. Issuing Bank fees compensate our Issuing Banks for issuing cards to our Customers and sponsoring our card programs with the Card Networks and are equal to a specified percentage of processing volume or a fixed amount per transaction. Card fulfillment costs include physical cards, packaging, and other fulfillment costs.
We have separate marketing and incentive arrangements with Card Networks that provide us with monetary incentives for establishing Customer card programs with, and routing volume through, the respective Card Network. The amount of the incentives is generally determined based on a percentage of the processing volume or the number of transactions routed over the Card Network. We record these incentives as a reduction of Card Network fees included in costs of revenue. Generally, as processing volumes increase, we earn a higher rate of monetary incentives from these arrangements, subject to attaining certain volume thresholds during a six-month or annual measurement period. For certain incentive arrangements with an annual measurement period, the one-year period may not align with our fiscal year. Additionally, unusual fluctuations in Card Network fees can occur in the quarter in which volume thresholds are attained as higher incentive rates are applied to volumes over the entire measurement periods, which can span six or twelve months.
Compensation and Benefits. Compensation and benefits consist primarily of salaries, employee benefits, incentive compensation, contractors' cost and share-based compensation.
Technology. Technology consists primarily of third-party hosting fees, software licenses, and hardware purchases below our capitalization threshold, and support and maintenance costs.
Professional Services. Professional services consist primarily of consulting, legal, and recruiting fees.
Occupancy. Occupancy consists primarily of rent expense, repairs, maintenance, and other building related costs.
Depreciation and Amortization. Depreciation and amortization consist primarily of depreciation of our fixed assets.
Marketing and Advertising. Marketing and advertising consist primarily of costs of general marketing activities and promotional activities.
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Other Operating Expenses. Other operating expenses consist primarily of indirect state and local taxes, insurance costs, employee travel-related expenses, employee training, charitable donations, and other general office expenses.
We expect our operating expenses to increase in absolute dollars as our business grows. We also expect to continue to incur increased expenses to operate as a public company including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, including regarding internal control over financial reporting under Section 404 of the Sarbanes Oxley Act.
Other Income (Expense), net
Other income (expense), net consists primarily of impairment of equity method investments or other financial instruments, changes in the fair value of the redeemable convertible preferred stock warrant liabilities (for periods prior to the IPO), realized foreign currency gains and losses, equity method investment share of loss, and interest income from our marketable securities.
Income Tax Expense
Income tax expense consists of U.S. federal and state income taxes and U.K. income taxes. We maintain a full valuation allowance against our U.S. federal and state net deferred tax assets as we have concluded that it is not more likely than not that we will realize our net deferred tax assets.
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Results of Operations The following table sets forth our results of operations for the periods presented: Three Months Ended March 31, (dollars in thousands) 2022 2021 Net revenue $ 166,102 $ 107,983 Costs of revenue 91,376 58,126 Gross profit 74,726 49,857 Operating expenses: Compensation and benefits 100,348 46,904 Technology 11,384 5,626 Professional services 4,770 4,196 Occupancy 1,115 1,086 Depreciation and amortization 979 907 Marketing and advertising 559 495 Other operating expenses 4,843 1,295 Total operating expenses 123,998 60,509 Loss from operations (49,272) (10,652) Other income (expense), net (11,677) (2,167) Loss before income tax expense (60,949) (12,819) Income tax expense (benefit) (351) 19 Net loss $ (60,598) $ (12,838)
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Comparison of the Three Months Ended March 31, 2022 and 2021 Net Revenue Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Net revenue: Total platform services, net $ 160,999 $ 106,453 $ 54,546 51 % Other services 5,103 1,530 3,573 234 % Total net revenue $ 166,102 $ 107,983 $ 58,119 54 % Total Processing Volume (TPV) (in millions) $ 36,626 $ 23,998 $ 12,628 53 %
Total net revenue increased by $58.1 million, or 54%, for the three months ended March 31, 2022 compared to the same period in 2021, of which increase $31.3 million was attributable to Block. The increase in net revenue was primarily driven by a 53% increase in TPV. Net Interchange Fees in the three months ended March 31, 2022 increased primarily due to the increase in TPV, partially offset by an increase in Revenue Share payments attributable to increased average Revenue Share rates, compared to the same period in 2021.
The increase in TPV was mainly driven by increases in processing volume from our financial services and buy-now-pay-later Customers. TPV for our top five Customers, measured by TPV in each respective period, grew by 39% for the three months ended March 31, 2022 compared to the same period in 2021, 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.
Costs of Revenue and Gross Margin Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Costs of revenue: Card Network fees, net $ 79,581 $ 49,829 $ 29,752 60 % Issuing Bank fees 7,301 6,451 850 13 % Other 4,494 1,846 2,648 143 % Total costs of revenue $ 91,376 $ 58,126 $ 33,250 57 % Gross profit $ 74,726 $ 49,857 $ 24,869 50 %
Costs of revenue increased by $33.3 million, or 57%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to increased Card Network fees as the result of the 53% increase in TPV and 51% increase in the number of corresponding transactions.
Card Network fees for the three months ended March 31, 2022 reflect an amendment to one of our Card Networks incentive arrangements that was executed in the third quarter of 2021 and included a provision that enabled us to earn increased incentives for volume processed through the Card Network commencing April 1, 2021. Also, Card Network fees for the three months ended March 31, 2021 reflect a $3.0 million annual cumulative adjustment to our Card Networks incentive that did not recur in the three months ended March 31, 2022 because the relevant milestones were achieved in March 2021 and December 2021. Network fees are presented net of monetary incentives from Card Networks for processing volume through the respective Card Networks during the period.
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Issuing Bank fees increased by $0.9 million, or 13%, in the three months ended March 31, 2022 compared to the same period in 2021, which was lower than the percentage of increase in TPV as a result of reduced Issuing Bank fees for certain of our Customers. Issuing Bank fees are typically determined based on volume tiers; as our processing volumes grow, these fees as a percentage of processing volume decline.
As a result of the increases in net revenue and costs of revenue discussed above, our gross profit increased by $24.9 million, or 50%, in the three months ended March 31, 2022 compared to the same period in 2021. Our gross margin decreased by 1% in the three months ended March 31, 2022 compared to the same period in 2021.
Operating Expenses Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Operating expenses: Salaries, bonus, benefits and payroll taxes 63,343 35,512 $ 27,831 78 % Share-based compensation 37,005 11,392 $ 25,613 225 % Total compensation and benefits 100,348 46,904 $ 53,444 114 % Percentage of net revenue 60 % 43 % Technology 11,384 5,626 5,758 102 % Percentage of net revenue 7 % 5 % Professional services 4,770 4,196 574 14 % Percentage of net revenue 3 % 4 % Occupancy 1,115 1,086 29 3 % Percentage of net revenue 1 % 1 % Depreciation and amortization 979 907 72 8 % Percentage of net revenue 1 % 1 % Marketing and advertising 559 495 $ 64 13 % Percentage of net revenue - % - % Other operating expenses 4,843 1,295 3,548 274 % Percentage of net revenue 3 % 1 %
Compensation and benefits expenses increased by $53.4 million, or 114%, for the three months ended March 31, 2022 compared to the same period in 2021. Salaries, bonus, benefits, and payroll taxes increased by $27.8 million predominately due to a $22.3 million, or 79%, increase in salaries. The increase in salaries was driven by the increase in average headcount, and the increase in compensation rates due to increased competition in the job market and inflation. Additionally, bonus expense increased $4.2 million, or 80%, during the three months ended March 31, 2022 compared to the same period in 2021 due to the increase in full time employees and the broadening of our corporate bonus plan to cover more employees. We expect rates of compensation to continue to increase in the future in part due to the labor market competition that is currently prevalent in the U.S. economy and inflation.
Compensation and benefits expenses also increased in the three months ended March 31, 2022 compared to the same period in 2021 due to a $25.6 million increase in share-based compensation expense, mainly because of the increase in the number of our employees and the CEO Long-Term Performance Award as detailed in the table below:
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Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Share-based compensation Restricted stock units $ 15,345 $ - $ 15,345 n/m Stock options 7,659 5,505 2,154 39 % CEO Long-Term Performance Award 13,121 - 13,121 n/m Employee Stock Purchase Plan 880 - 880 n/m Secondary sales of common stock - 5,887 (5,887) (100) % Total share-based compensation $ 37,005 $ 11,392 $ 25,613 225 % n/m = not meaningful
Technology expenses increased by $5.8 million, or 102%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was due to a $3.4 million increase in third-party hosting costs to support our continued growth and a $2.4 million increase in software licensing costs as we continue implementing new systems and tools.
Professional services expenses increased by $0.6 million, or 14%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was mainly due to a $0.5 million increase in recruiting fees.
Occupancy expense remained flat for the three months ended March 31, 2022 compared to the same period in 2021 as most of our employees and service providers continue to work remotely. We will continue to evaluate the need for additional office space.
Depreciation and amortization remained relatively flat for the three months ended March 31, 2022 compared to the same period in 2021.
Marketing and advertising expenses remained relatively flat for the three months ended March 31, 2022 compared to the same period in 2021.
Other operating expenses increased by $3.5 million, or 274%, for the three months ended March 31, 2022 compared to the same period in 2021 as a result of an increase in insurance costs of $2.1 million, and an increase in other miscellaneous operating expenses of $1.4 million.
Other Income (Expense), net Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Other income (expense), net $ (11,677) $ (2,167) $ (9,510) 439 % Percentage of net revenue (7) % (2) %
Other income (expense), net increased by $9.5 million, or 439%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase was mostly due to an impairment of $11.6 million of an option to purchase the remaining equity interests in an equity method investee, offset by a decrease in the expense related to the change in the fair value of the redeemable convertible preferred stock warrant liabilities of $2.3 million.
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.
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Use of Non-GAAP Financial Measures
Our non-GAAP measures have limitations as analytical tools and you should not consider them in isolation. These non-GAAP measures should not be viewed as a substitute for, or superior to, measures prepared in accordance with GAAP. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses similar to the adjustments in the presentation of our non-GAAP measures set forth under "Key Operating Metric and Non-GAAP Financial Measures". There are a number of limitations related to the use of these non-GAAP measures versus their most directly comparable GAAP measures, including the following:
other companies, including companies in our industry, may calculate adjusted EBITDA differently than how we calculate this measure or not at all; this . . .
May 11, 2022
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