Q3 2022 CompoSecure Inc Earnings Call
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Good day and thank you for standing by welcome to the Commvault secure accused Q3, 2022 earnings call.
At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone. Please be advised that today's conference is being recorded I would now.
I would like to hand, the conference over to your speaker today, Shawn Mansouri. Sir. Please go ahead.
Thank you Jonathan on our call today, we have CEO accomplished secure John Wilke as well as the company's CFO .
Please note that the discussion on today's call include certain non-GAAP financial measures as defined by the SEC, including EBITDA adjusted EBITDA adjusted net income and adjusted EPS.
The company believes these non-GAAP financial measures provide useful information for management and investors regarding certain financial and business trends impacting the company's financial condition and results of operations.
These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measures derived in accordance with U S. GAAP and may be different from similarly, titled non-GAAP measures used by other companies.
A reconciliation of GAAP to non-GAAP measures is available in our press release and earnings presentation available on the Investor Relations section of our website.
Due to the forward looking nature of the adjusted EBITDA guidance, we will provide in this call specific quantification of the charges excluded from forward looking adjusted EBITDA, including with respect to depreciation amortization interest and taxes that would be required to reconcile the non-GAAP financial measures included in such guidance to GAAP measures are not available.
So it is not feasible to provide accurate forecasted non-GAAP reconciliation without unreasonable effort.
As a result, no disclosure of estimated comparable GAAP measures is provided and no reconciliation of forward looking non-GAAP financial measures is provided.
And with that let me turn the call over to John to discuss our third quarter results John .
Thanks sure.
Good evening, everyone and thank you for joining us for our third quarter 2022 earnings call. We're excited to announce that we have achieved another record quarter and continue to build upon our momentum from the first half of the year.
Before we share some of our highlights I want to recognize our more than 800 team members, who delivered an outstanding quarter for our shareholders.
Now onto our results on slide two.
For the third quarter, we achieved net sales of $103 million, which was up 56% versus last year as we continue to see strong demand for premium metal card products, both domestically and internationally.
And we capitalized on this through strong sales execution and deep customer relationships and partner channels.
We also reported net income of $22 million up 17% year over year and.
And adjusted EBITDA was higher than expected at $33 million for the quarter up 33% year over year due to a combination of our ability to drive significant economies of scale, our focus on operational excellence and efficiency and managing investments based on the.
<unk> ramp up expectations and timing.
Our growth trajectory is supported by positive card issuer trends, including high consumer and business demand for premium cards.
<unk> spending in such areas as travel entertainment and services and.
And growth in new customer card acquisitions for card issuers I'll provide some additional detail on this in a few slides.
It's important to note that as of today, we have not seen any major impact from larger economic issues. However, we're closely monitoring our customers the market and macro economic factors.
If economic indicators evolve.
We believe we are well equipped to respond similar to how we executed throughout the pandemic.
When we grew both top and bottom line. Despite a challenged economy overall and in particular challenges in the credit card market.
Moving on to <unk> progress, we are announcing a number of new partnerships and continued progress with names previously mentioned.
And we believe the <unk> platform is well positioned to support today's growing security payment and authentication needs across a variety of industries.
That said the overall ramp up remains slower than expected with the continued uncertainty in the digital asset market.
And we are managing our spend accordingly.
<unk> increased our focus on executing our beta be sales and marketing efforts, which we believe can deliver greater scale at a lower cost.
To be more specific going into 2022 we shared that our projected full year net impact from our keyless was forecasted to be around $33 million negative.
Which encompassed total anticipated net sales minus expected operating and marketing expenses.
Based on our strategic business decisions and spending discipline.
Driven by uncertainty in the market, we now anticipate the net impact for the full year to be more in the range of 20 to 22 million negative.
Which has a positive impact on our adjusted EBITDA for the year.
Coming back to our overall outlook for the year and based on the outperformance in the metal payment card business. We are updating the 2022 net sales range to the high end of our previously announced guidance.
And now expect net sales for the year between 370 and $380 million.
We are also raising our 2022 adjusted EBITDA guidance and now expect it to be in the range of $130 million to $137 million.
Given our continued margin expansion profitability and spending discipline.
Adjusted EBITDA guidance is up nearly $20 million from the midpoint of last quarter's guidance.
And up nearly $30 million from the midpoint of our guidance issued last December .
Now moving to slide three.
We have seen strong growth in paint in the payment card business, including new clients across bank gaming.
Gaming Entertainment.
Fintech and exchanges.
For example, we've seen cards launched this year from Venmo and Paypal, while owned by the same company that launched distinct metal card programs.
We've also launched programs with additional fin tax, including vital mercury and BHG, which target different aspects of the fintech landscape.
On the gaming side, we have manta, which is a neo banking platform designed for video gamers and is offering a metal debit card. So gamers can earn rewards for purchases at gameplay.
We've got continued expansion with E Toro, a social investment in multi asset brokerage company that offers a debit card tied directly to an E Toro money cash accounts.
Last we have a unique innovation, we're bringing to market with U S Bank, where we're piloting and leidy metal payment card.
The card is truly distinct with the bank logo on the face and that card lights up when a contactless transaction is initiated once again highlighting carbo secures.
Card form factor innovations.
I also want to highlight some of the progress we're seeing on the <unk> side.
Coin zoom, which announced a partnership with visa in June as.
As a U S based crypto exchange that can leverage their visa partnership to deliver crypto to eligible customers in 194 countries.
They plan to combine their current metal payment card, which we provide.
With fido to authentication capabilities, starting early next year.
Legacy volt App is a cloud based platform that delivers security for managing and preserving valuable information related to legal and financial family planning.
With an archaeologist fido to enabled metal card they expect to deliver enhanced device level security.
We mentioned a best go last quarter, we're excited about our progress which includes a premium.
Metal card plus <unk> digital authentication.
And separately white labeling our <unk> cold storage wallet, we are tracking well and anticipate a launch in the first half of 2023.
Change also mentioned last quarter as a defy app with half a million users.
At empower people to become their own digital bank and they are working to offer the arduous cold storage solution for their mobile wallet.
Finally, as I mentioned earlier, we're increasing our focus on executing b to B sales and marketing we had a strong showing at money 2020, and we're encouraged by the conversations we had.
With potential and current costs.
Yes.
Adjusted are we still connected.
Yes, Sir.
Justin I think we lost can you hear me, yes, John we can hear you now where did you lose me.
Yeah.
We are showing our largest customers purchase volume growth based on publicly available data, which remains well above pandemic levels.
Despite general mixed signals within the broader economy, we continue to hear positive messages from our clients.
Card issuers are experiencing record spending levels by their customers supported by travel entertainment and goods and services.
For example, Amex stated that millennials and Gen Z spending was up 39% year over year in the quarter and.
In the U S SME spending grew 17% in the quarter.
I also noted that offline spending was back above pre pandemic levels, highlighting that consumers are out shopping and spending.
Which takes me to the right side of the chart.
As you can see tap to pay with cards.
Is the fastest growing method of in store transactions for consumers and remains well above digital wallets and growing at a much faster trajectory.
A positive indicator for our market that reinforces the demand and usage of card products.
As well as the ability to enable premium brand experiences for our clients.
On slide five.
You can see that American express reported strong.
Card acquisition numbers for the quarter. They added $3 3 million new proprietary cards during the quarter, an all time high for quarterly card acquisitions at the same time, they are tracking well for their planned investment for marketing and business development growth.
<unk> Express recently referenced the marketing portion of the spend for the third quarter, which was one 5 billion on track with their expectation to spend over $5 billion in 2022.
They also stated that investments to drive customer engagement acquisition and retention continue to generate results with card member spending at near record levels in the quarter and highlighted the fact that the strength of the rebound in travel spending has exceeded expectations throughout the year and total TD.
Spending was up 57% in the third quarter from a year earlier.
This is all publicly available information and we update this chart every quarter to try and give some additional insight and understanding based on our customers' guidance.
Regarding the <unk> platform.
I'd like to take an opportunity to dive deeper into our Telus and share the diversity and strength of the platform.
Each time, we've talked about <unk> I've highlighted that it is a security and authentication platform.
With opportunities across a variety of verticals and we will continue to frame that for you.
On the right side, we have our direct to consumer Oculus cold storage product, which was the first vertical application for our platform.
On the left side, we're showing our <unk> solutions that deliver security authentication identity verification and or cold storage across a variety of verticals, including financial institutions Fintech gaming gambling telecom crypto.
Exchanges et cetera, when we talk about secure authentication this.
This helps better protect the login process, whether it's for banking and investment accounts gaming or gambling. This is our direct response to the password problem and <unk> allows for the use of two or three factor authentication to support enhanced secure.
<unk>.
As we move to slide seven I want to provide a little more context for the massive scale of the password problem.
You can see that over 90% of internet users worry about getting their passwords hacked.
And that 57% of people, who have been scammed don't change their passwords.
This is a burgeoning security crisis in many organizations are trying to move beyond password and we believe that <unk> is the ideal solution.
On slide eight you can see how the <unk> portfolio can turn a metal credit or debit card into a physical security token, which reduces reliance on passwords and combat fraud.
It is also something that you carry with you everywhere and are used to using multiple times a day already.
With <unk>, we can also add step up authentication for such actions as high value transactions customer service or authenticating a device.
Moving to slide nine.
I spoke to the uncertainty in the digital asset market in general and how we're better timing our <unk> investment.
As you can see hacks and thefts and the Christo crypto market persists.
Year to date, the industry has seen more than 3 billion worth of crypto currency stolen and hacks.
From various services. In addition, we are seeing exchanges still freeze customers' digital assets due to liquidity challenges or some of these platforms.
This uncertainty persist these challenges continue to drive greater consumer awareness and are encouraging and.
And exchanges are encouraging.
Offering solutions to protect customer assets, such as cold storage and authentication.
We see strong interest in <unk> cold storage and we are encouraged by the positive conversations we're having with many platforms and exchanges across the world.
This climate actually drives an increased need for consumers to control the private keys to their digital assets. This is what the oculus cold storage wallet and our offering was made for and we believe we will benefit from this market market turbulence in the medium and long.
Term.
You can see a few screenshots of the arguments of cold storage wallet.
Which shows our advance three factor authentication, how we leverage NFC to better security as opposed to Bluetooth or plugging a dongle into your computer and.
And we provided added layer of authentication, when sending or receiving digital assets.
In addition businesses can white label, our cold storage offering and provided to their customers as a better way for them to secure their digital assets.
As I mentioned, we're already working with several exchanges and platforms.
We are still on track to deliver all in one capability of payment card as authentication and cold storage storage early next year.
With that let me hand, it over to Tim for a deeper discussion on our financials.
Thanks, John and good evening, everyone I will provide a more detailed overview of our third quarter 2022 financial performance.
Ill turn it back to John before we open the call for questions.
Unless stated otherwise all of the various commentary is on a year over year basis.
Third quarter 2022, net sales grew 56% to $103 million compared to $66 million last year.
The increase was driven by strong domestic and international growth of our metal card business for both new and existing customers.
Gross margins for the quarter increased to 60% versus 55% in the third quarter of 2021, we are benefiting from higher card issuance volumes as well as operating efficiencies. Despite the challenge of managing global chip and metal supply chain issues.
Net income for the quarter of 23rd quarter of 2022 was up 17% to $22 million.
This includes a $1 million benefit from fair value adjustments associated with the mark to market of warrants and earn out as well as a $10 million charge from our completed arbitration in the quarter.
This arbitration contingency has been disclosed in our financial reporting year to date.
Adjusted EBITDA for the quarter was $33 million up 33% compared to Q3 2021. This was driven by strong growth on the top line gross margin expansion and lower than planned spend and oculus.
Similar to last quarter, the Oculus revenue and investment resulted in a net impact of approximately minus $5 million in the third quarter.
And as John said earlier, we now expect the full year net impact.
Investment and oculus to be in the negative $20 million to $22 million range.
We add back noncash fair value adjustments to arrive at adjusted EBITDA of 33 million note that this includes the impact of the onetime arbitration charge of 10 million I referenced a moment ago.
Excluding the one time charge, our adjusted EBITDA margin would have been up 400 basis points to 41%.
Let's turn to our performance through nine months of the year.
Net sales were up 48% to $285 million driven.
Driven by momentum in our premium metal card business across banking gaming Fintech entertainment and exchanges in the U S and internationally.
Adjusted EBITDA through nine months of the year was up 30% to $106 million, which excludes the $38 million benefit from fair value adjustments. However, it does include the impact of the $10 million for the arbitration charge.
Okay.
Taking a closer look at our net sales trends you can see that we are generating strong growth both in the U S and internationally with each up 62% and 35% respectively U.
U S growth was driven by the strength of our sales execution and favorable industry trends, while international was up due to the expansion of our international sales team continued distributor growth and strong customer demand year to date International net sales is up 79% versus the prior year and represents.
24% of the total net sales.
Before I turn to EPS, let me take a few moments to discuss our cash flow and balance sheet, which can be found in the appendix of the presentation.
Looking at our cash flow statement year to year to date, we had operating cash flow of $91 million versus $48 million. During the same period of 2021.
As of September 30, we had secured debt of $243 million that was made up of $233 million of the term loan plus $10 million on our revolver and unsecured convertible debt of $130 million, we had cash of approximately $15 million on the balance balance sheet, resulting in a total.
Net debt of $358 million.
We are pleased that our leverage ratio is now $2 92 based on $123 million in trailing 12 month adjusted EBITDA calculated as proud Bank agreement.
This ratio was down from $3 two nine on a $118 million in trailing 12 month adjusted EBITDA from last quarter.
This was achieved through a combination of paying down debt and growing EBITDA and is consistent with our stated strategy.
The secured debt facility provides a revolving loan of up to $60 million with $10 million drawn as of September 32022, we believe our cash balance cash flow generation and debt facilities provide adequate working capital to fund our growth plans.
I want to turn now to earnings per share as I mentioned last quarter. We have adopted an alternative method under GAAP for calculating basic and diluted EPS. This method allows us to allocate changes in fair value adjustments of mark to market instrument, among the public company and the operating subsidiaries.
To better reflect the actual the actual economic impact of the conversion of such instruments on our net income on a per share basis.
The reason we are doing this and that we believe this method better reflects the economic impact for shareholders.
Q2, and Q3 EPS numbers as reported are consistently calculated under this GAAP measure.
Having said that let me run through our EPS calculations.
<unk> GAAP earnings per share for the quarter was 18 for basic and diluted shares basic GAAP earnings per share for the nine months ended September 32022 was $1 three for basic and <unk> 94.
Per diluted share.
You can read through the footnotes on the slide they take you through the complexities of the allocation of net income due to the up sea structure and the shares that are included in the basic and diluted calculations.
Note that the fair value adjustments in the quarter and the year to date have been allocated among the operating companies to come to pre allocation net income.
On slide 13, and in our MD&A. We are also providing an adjusted net income and EPS that takes out the impact of the noncash fair value adjustments stock based compensation and the effect of the up sea structure.
We believe that this provides a clearer picture of the economics of the Companys operating results.
With that background on non-GAAP earnings per share for the quarter was <unk> 26 per basic share and 22 per diluted share for the nine months of 2022 non-GAAP earnings per share was <unk> 86 cents per basic share and 74.
Per diluted share in.
In the appendix you will find a reconciliation between the GAAP and non-GAAP net income used in these calculations.
I will now hand, it back over to John to address our updated guidance and for our final summary, before we take questions.
Thanks, Tim.
As mentioned, we've updated our guidance we are narrowing the 2022 net sales range to the high end of our previously announced guidance. We now expect sales for the year between $3 70, and $3 80.
Reflecting an approximate 40% increase from 2021 at the midpoint.
We're also raising our 2022 adjusted EBITDA guidance and now expect it to be in the range of $130 million to $137 million, representing an increase of approximately 31% from the 2021 midpoint.
At the midpoint as always I'd like to share our strategic priorities with this audience as you can see on slide 15.
We achieved another outstanding quarter that has us set up for a strong finish for 2022.
And our strong performance validates our strategic business decisions in particular, our approach to the timing of our Oculus investment has enhanced margins for the quarter and the year and ensures that we are managing investment appropriately in order to drive long term growth and profitability.
We continue to see increased demand for our metal payment card offering from both new and existing customers driven by strong sales execution deep customer relationships and market momentum.
The <unk> portfolio, we believe is well positioned to support today's growing security payment in cold storage and authentication needs across a variety of industries and we are focused on executing our sales <unk> marketing efforts.
We are working to better time investment to growth by adjusting the investment timing for Oculus due to the current uncertainty in the marketplace.
While we have not seen any major impact from macroeconomic issues as of today, we're monitoring our customers the market and macroeconomic factors and are well equipped to respond.
We're proud of what we have achieved in the last nine months.
And we believe we have differentiated differentiated ourselves from many other companies that went public in 2020 and 2021.
By delivering strong results with revenue growth, 40% adjusted EBIT growth north of 30% and EBITDA margins north of 30%.
With that I want to thank you all for taking the time to join US today, we very much appreciate your attention and we'll now open it up to questions. Thank you as a reminder to ask a question you will need to press star one on your telephone please standby with compile the Q&A roster again that is star one one.
If you would like to ask question and our first question comes back to one moment for our first question.
And our first question comes from John Todaro from Needham. Your line is now open.
Great. Thanks for taking my question congrats on the quarter everyone.
Two questions here first off as we think about gross margin and the expansion you guys have been able to do there.
Can we just get a little bit of maybe youre thinking of upper limit on unlocking efficiencies there.
As we move longer term in the 'twenty three 'twenty four.
And then I have a follow up question SG&A.
So John Thanks for the question.
We think about gross margins, we've guided sort of long term call. It.
Mid <unk>.
We've been fortunate in that we have been able to.
Offset rising supply chain costs and labor costs with the efficiencies.
That Tim outlined.
As we look forward, we tend to be conservative around.
The market environment the potential for competition.
A whole series of factors, so I'd say, we're comfortable with guidance previously given.
Got it and then just.
A quick follow up to that.
I believe the margin profile for <unk> on a gross margin basis.
Even kind of higher than that 60% level can you just be reminded on that and is it fair to say as Oculus does ramp that gross margin could expand more.
Yes that is a fair point that we've made before.
Would agree with that we think our unit economics.
Or perhaps even stronger on the <unk> side, and yes, I think we have the ability to.
Deliver gross margins that would be in line to hire.
Great. Thanks, those are my questions I'll return the queue. Thanks.
Sure.
Thank you.
And one moment for our next question.
And our next question comes from Reggie Smith from J P. M. Your line is now open.
Hey, good evening gentlemen, congrats on the quarter.
Just two quick questions for me I know.
You guys have a pretty good look look ahead in terms of.
This advance orders for payment cards and such my question is as you stand here today.
How does your.
Backlog look or compare to maybe a year ago.
Obviously things can change the economy is is.
Isn't question right now, but just curious what you're seeing from a.
Advance booking perspective, and then I have a follow up thanks.
Thanks Rajiv.
When we look at the backlog it's strong.
Consistent with my comments, we have not seen impacts from some of the macro economic things happening around us and consistent with messaging that others have delivered an earnings that we're continuing to push forward.
Pending too.
Wanted to drive growth and believe that we can if that changes, we will adapt but our backlog as well as communications with customers at this point.
Still give us.
Positive indications.
Okay.
Got it and then just a follow up.
It sounds like the payment plus authentication card will be ready sometime in early 'twenty three.
Just remind us kind of how the new product rollouts occur and my question is.
I guess, what I'm curious about is have you already received orders for those like how should we think about the.
The initial deployment of that technology cannot currently enrolling out thank you.
Thanks, Rajiv so just a clarification so.
The payment plus authentication is available now so we.
We can deliver that to the market, we got visa and Mastercard.
Approval for that and.
That is.
Work that we have the ability to deliver that to the market now.
What I had the comment I had made is our ability to deliver payment plus authentication was cold storage.
It's something that we would deliver early next year. So the conversations I highlighted for example, with Invesco.
Sure.
Some of the other potential partners cover that payment plus authentication. So we're essentially selling that now and looking to deliver that.
Does that makes sense.
Yes, it does I appreciate that.
Yeah, Thanks for clarifying that.
Just lastly, you guys.
Great I appreciate it thank you.
And I am showing no further questions I would now like this concludes today's conference call. Thank you for participating you may now disconnect.
Thank you.
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