CompoSecure Inc. Q1 2023 Earnings Call

Speaker 1: You you.

Speaker 1: eating

Speaker 2: Good day and thank you for standing by. Welcome to the Confless Acura Q1 earnings conference call. At this time, I'm all participants on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the questions during this session, you will need to press star 1-1 on your phone.

Speaker 2: You will then hear an automated message advising that your hand evade. To address your question, press star 11 again.

Speaker 2: Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speech today, Sean M. Thurie, Composicure's external director of Investor Relations. Please go ahead. Good evening, and thank you for joining us to review Composicure's first quarter 2023 financial results.

Speaker 2: With me on the call tonight is John Wilk, Comforcie Cures Chief Executive Officer, and Tim Fitzsimmons, Chief Financial Officer. They will begin with prepared remarks, and then we will open the call for Q&A.

Speaker 2: During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy and our ability to maintain existing and acquire new customers as well as other statements regarding our plans and prospects. Forward-looking statements may often be identified with words such as, we expect, we anticipate, or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date.

Speaker 2: We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ from material from our expectations.

Speaker 2: For discussion of material risks and other important factors that could affect our actual results, please refer to the information in our annual report on Form 10K and other reports filed with the SEC, which are available on the Investor Relations section of our website at CompoSecure.com.

Speaker 2: presentation available on the Investor Relations section of our website.

Speaker 2: Thank you and with that said let me turn the call over to John to discuss our first quarter results.

Speaker 2: Thanks, Sean. Good evening, everyone, and thank you for joining us for our first quarter conference call. 2023 is off to a solid start following a record 2022.

Speaker 3: despite the challenged macro environment. More to come on this later in the call. Now onto our key highlights from the first quarter on slide three. We achieved net sales of 95.3 million, which was up 13% versus last year, driven by strong sales execution and demand from traditional card issuers and fintechs for our premium payment cards. I'll expand on this in a few slides. We also reported net income of 10.7 million compared to 26.9 million in Q1 of 22.

Speaker 3: Net income in the first quarter was primarily impacted by non-cash expenses, including $13.4 million related to the fair value of our warrants, earn-out consideration, and derivative liabilities.

Speaker 3: and 4 million of stock-based compensation. As a reminder, the fair value adjustments fluctuate quarter to quarter relative to our share price performance.

Speaker 3: Year to date, our stock price was up more than 50% as of Market Close on May 1, 2023. The Justin Ibiza came in at 35.5 million, up 6% year over year, and we generated 25 million of operating cash flow in the quarter. In March, we were thrilled to announce the extension of our American Express contract to continue manufacturing their premium metal payment cards through July 2026.

Speaker 3: Looking at card issuer trends, our largest customers continue to report strong card acquisition growth and have indicated positive outlooks for 2023 while increasing investment in programs that drive customer acquisition, retention, and spending.

Speaker 3: Regarding Arculus, we continue to invest in our platform as well as marketing.

Speaker 3: to address the growing need for better multifactor authentication as consumers, businesses, and card issuers look to reduce fraud and protect identity and assets.

Speaker 3: As mentioned in our press release earlier today, we are reaffirming our guidance for 2023, which calls for net sales in the range of 400 to 425 million, with adjusted EBITDA ranging between 145 and 155 million.

Speaker 3: Turning to slide 4. On the left hand side, you'll see that our largest customers reported another solid quarter of 14% purchase volume growth.

Speaker 3: Although this growth has tempered over the past several quarters, it remains in the double digits.

Speaker 3: It's worth noting that these are year over year comps, so hitting double digit growth against the 30% comp in Q1 of 22 remains very impressive from our standpoint.

Speaker 3: Moving to the right side of the slide, American Express recently reported strong card acquisitions with a record 3.4 million new customers added, which translates to 13% year-over-year growth.

Speaker 3: MX also increased marketing and business development spend by more than 20% year over year.

Speaker 3: which we believe speaks to their confidence for future card issuance volumes.

Speaker 3: This is all publicly available information and we update this chart every quarter to provide insight into our customers guidance. Moving on to slide 5.

Speaker 3: which is data that informs our metal payment card business. Issures continue to offer elevated levels of incentives and rewards.

Speaker 3: to acquire and retain customers.

Speaker 3: Some card issuer programs can amount to thousands of dollars of value in rewards and incentives.

Speaker 3: Metal payment card cost only reflected the minimus portion associated with customer acquisition and retention costs.

Speaker 3: positioning our offering as a compelling and cost effective part of these continued investments in marketing programs.

Speaker 3: On slide 6, you can see the US consumer remains healthy and resilient.

Speaker 3: As mentioned, our partners continue to remain positive.

Speaker 3: with many outlining continued marketing spend to drive resilient growth and highlighting the lack of any notable consumer and small business pullback in the first quarter, despite slower macro economic growth. Moving on to our security and authentication solutions on slide 7.

Speaker 3: I want to spend some more time discussing the clear demand being signaled for more secure payment and authentication solutions. The amount of global debit and credit card fraud continues to set new records.

Speaker 3: and is nearly four times the cost for each dollar of fraud loss.

Speaker 3: These dynamics are spurring meaningful demand for passwordless, multifactor authentication.

Speaker 3: including some combination of biometrics, pins, and secure tokens.

Speaker 3: Industry experts anticipate this market will grow at a 17% Kager through the end of the decade. If you flip to flight 8, you get a sense of the market opportunity for authentication and the expected market growth over the next seven years.

Speaker 3: As you can see, the market opportunity for authentication solutions is tremendous, and we believe Arculis is the right solution at the right time to help address this growing need.

Speaker 3: Let me discuss that further. On slide 9, you can see how arculus can deliver secure log-in or step-up verification.

incorporating seamless, multifactor authentication to address the passwordless market I just outlined. Simply tapping your metal card to the back of your phone adds another layer of security and authentication on top of providing a pin and or a biometric. We believe that added step should lead to both better customer security.

and a lower cost burden for issuers. On Slide 10, we outlined some of the use cases for tapping your metal card to the back of your phone, including strong customer authentication for customer service.

Authorizing high dollar transactions like wires or Zell transactions

authenticating a new device, or turning internet payments into card present transactions.

On slide 11, you can see the broader solution set for arculous that we have shared with you historically.

Now, turning to some company highlights on Slide 12, we continue to execute on our stale goals with multiple new program launches.

for both nettle premium payment cards and arculus.

On the metal payment card side, Rocket Mortgage launched a new card created to make home buying easier and more accessible through everyday spending. HEB, a privately held supermarket chain in the Southwest, launched a metal card with cash back rewards.

and UMB is delivering a metal card for their private bank.

with cash rewards and incentives toward travel, just to highlight a few examples on this page.

On the Arculis front, we continue to build market awareness for our B2B secure authentication and cold storage offerings.

On the Archaealist front, we continue to build market awareness for our B2B secure authentication and cold storage offerings through industry trade shows and marketing campaigns.

All said, these efforts have driven a solid pipeline of opportunities.

to name a few that are progressing well. Let me start with NBC Bank. Let's start with a few that are progressing well. Let's start with a few that are progressing well. Let's start

health custody, hardware, cold storage wallet, powered by arculus.

And we've also seen Invesco offer their cold storage wallet powered by Arculus for customers in Latin America.

We've also made progress on the pilot with a major crypto exchange that I discussed on the prior call. From a B2C perspective,

We commenced Arculus cold storage wallet sales in Canada and we anticipate additional international availability including Australia in the UK in the coming months.

We continue to technically enhance the Arceus platform for both B2B and B2C. This now includes being able to cryptographically support more than 10,000 coins.

With that, I'll hand it over to Tim to review our financials before returning for closing remarks.

Unless stated otherwise, all of the comparisons and variance commentary is on a year-over-year basis. Net sales increased 13% to 95.3 million compared to 84.2 million.

As John mentioned, the increase was driven by strong sales execution and demand from traditional financial institutions as well as fintechs for our premium payment cards.

Gross margin for the quarter was 56%, compared to 58% in prior year. While this was due to higher material costs, it is in line with our previously mentioned and long-term gross margin expectations of being in the mid 50% range. That income was 10.7 million.

compared to $26.9 million. Net income in the first quarter of 2023 was impacted by non-cash expenses, including $13.4 million related to the fair value of companies' warrants, earn-out consideration, and derivative liabilities, which was driven by the improvement in our stock price.

It also was impacted by $4 million of stock-based compensation.

Adjusted EBITDA Q1 was 35.5 million, up 6% compared to 33.3 million last year.

and adjusted EBITDA margin in Q1 was 37% to pair to 40% in the first quarter of 2022.

The decrease in adjusted EBITDA margin was driven by lower gross margins and our continued investment in the Oculus business and building out infrastructure.

Adjusted EBITDA includes the net expense investment in Oculus of 4.5 million. However, it excludes both the non-cash evaluation adjustments which were driven by our strong stock price and stock compensation expense.

Looking at the split between domestic and international, you can see we continue to have strong domestic sales.

Increasing 18% compared to the first quarter of 2022 to 74 million.

Again, due to the strength of our sales execution and favorable industry trends.

International net sales for the first quarter of 2023 was 22 million returning to a roughly 20% mix and in line with our long range view of this business.

Turning to our balance sheet at March 31, 2023, which we'll find in the appendix, we continue to build our inventory stocks based on the strong demand we are seeing and to stay ahead of any supply chain issues. We have a track record of turning out inventory over 10 times each year will be absolute value in quest grow-ers.

We had cash and cash equivalents of $23 million and total debt of $363 million, which includes approximately $233 million of term loans and $130 million of exchangeable notes.

This results in a total net debt of 340 million.

We want to provide both our overall debt leverage and our bank agreement's secured debt leverage as our bank agreement is calculated with slight differences.

At March 31st, our overall leverage ratio improved to 2.5 times based on a net debt of 340 million and trailing 12-month adjusted EBITDA of 138 million.

This compares to 3.7 times at March 31, 2022, with the improvement driven by a combination of paying down debt and growing adjusted EBITDA.

At March 31, 2023, we had a bank agreement, secured debt leverage ratio of 1.6 times.

based on a total secured debt of 233 million and trailing 12-month adjusted bank even that of 146 million.

This compares to 2.5 times that March 31st, 2022.

Taking a look at our cash flow statement, as John mentioned, we generated operating cash flow of $25 million during the first quarter.

We continue to believe how cash balances, cash flow generation, and debt facilities provide us with more than enough adequate working capital to fund our operations.

I want to turn now to earnings per share. As a reminder, our method under GAAP for calculating basic and diluted EPS allows us to allocate changes and adjustments of the mark-to-market instruments among the public company and the operating subsidiaries to better reflect

the actual economic impact of conversion of such instruments on the net income on a per-share basis.

Having said that, let me run through the EPS calculations. Gap EPS for the three-month-end in March 31st, 2023, was 13 cents per basic share and 11 cents per diluted share.

This compares to 23 cents per basic and diluted chair in the year ago period.

As I mentioned earlier, the decline was primarily attributable to a change in the fair value of our warrants, earned-out consideration, and derivative liabilities, which was driven by the appreciation in our stock price. You can read through the footnotes on the slide that take you through the complexities of the allocation of net income due to the FCE structure.

and the shares that are included in the basic and diluted calculations. Note that the fair value adjustments in the quarter have been allocated among the companies that come to pre-allocation net income.

Now for non-GAP earnings for share. On slide 17 and in our MDNA, we are also providing a non-GAP adjusted net income and adjusted EPS, which excludes the impact of non-CAS fair value adjustments on our warrant, earn out evaluations, and stock comp.

We believe that this provides a clearer picture of the economics of the company's operating results. Please note that these non-cash adjustments can have both a positive and a negative impact on net income.

With that background, our non-GAP EPS VQ-1-20-23 was 27 cents per basic share and 23 cents per diluted share. This was flat compared to 27 cents per basic share and 23 cents per diluted share in the year-ago period.

In the appendix, you'll find a reconciliation between the gap and non-gap net income used in these calculations. I'll now hand it back over to John for a final summary before we take questions.

Thanks, Tim. Now, turning to slide 18. As I mentioned earlier, we expect another year of solid growth in 2023, and we are reiterating our previously issued guidance with net sales in the range of 400 to 425 million.

And adjusted EBITDA between 145 and 155 million.

As a reminder, these targets reflect the expectation of continued sales execution in our metal card business as well as net investment in arculous.

at or below our net investment in 2022. In addition, this guidance takes into consideration some of the continuing uncertainty of the macroeconomic environment.

And we continue to monitor these dynamics and our customers closely. And we believe we are well equipped to drive shareholder value.

On 5.19, I want to end where I began. 2023 is off to a solid start following a record 2022.

Demand for our premium metal cards remain strong, and we continue to execute on our sales goals and objectives for both new and existing programs. Sentiment from our largest clients also remains positive as consumer and business spending has proven to be resilient despite more challenging macro conditions. With Arculis, we are well positioned to deliver enhanced...

your time today and I look forward to your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and what your name and white number' and then follow the verbal

To a draw to your questions, press star one one again. You can't buy a while, but you can buy the Q&A roster. Our first question comes from a line of John Tadaro from Nealham and Company. The line is open, John .

Great, thanks for taking my question. I just have one here and that relates to Apple. So Apple's been pushing more into consumer finance. Just wanted to get some commentary from you guys. Is there an increase in concern whether it's Apple Pay or some of the other products that challenge cards offers? Or is there actually an opportunity here to add Apple and some other similar companies as customers?

you know, struggling to sort of find their way. I think they have had some success on the savings side. We have not seen trends on the Apple Pay side that cause us any greater concern. It's something we monitor, but as I've said on these calls prior.

We think cards are going to be around a long time and that view hasn't changed.

are going to be around a long time and that view hasn't changed. Great. Thanks so much, Ryan.

Thank you. Our next question comes from the line of Reggie Smith from J.P. Morgan. Go ahead, Reggie.

I'm going to get even a gentleman, a congrats on the quarter. Two quick questions for me. First, I know you guys are stepping into some pretty difficult, global reconpairs in this quarter, and I was hoping you could shed some light.

on this kind of quarterly revenue cadence and maybe what the growth rate could look like the next few quarters.

And then secondarily to that, you kind of alluded to it, recognize it.

seeing the potential strain in the financial markets and the banks, but I was curious how you are thinking about metal quad growth longer term, if you still see it as a double-ditch grower, and whether your view has moderated or changed then right above.

potential strain in the financial markets and banks, but I was curious how you are thinking about metal quad growth longer term. Do you still see it as a double-dish grower and whether your view has a change in light of where we are in the cycle?

So thanks for the question, Reg, I'm going to take those in reverse order and just talk about kind of the macro overall and then address the revenue cadence. So as we look at the macro overall, we tried in the presentation to give some perspective on what we're seeing in the market based on publicly available data.

to help provide some sentiment, which is, our view is that our clients and others

still see strong purchase volume growth. They're still investing in card acquisition. And they're still looking at the kind of back half of the year, fourth quarter, trying to understand what will unfold. But generally, as we looked at earnings releases, they all seemed generally positive on the growth that is important to us as a company.

As we think about the revenue cadence, we haven't broken it down by quarter for you guys, Reggie. We've stuck to the 400-425, and you can begin to do some math based on where we are coming out of this quarter at what the rest of the year.

You know, could look like...

Got it. So I guess kind of assume similar seasonality to previous years.

is the takeaway there. What do we?

Yeah, we don't see, I think it's less seasonal for us, Reggie, more...

See, I think it's less seasonal for us Reggie more just related to

timing of orders and deliveries and shipments and other things, versus necessarily expecting a specific quarter to be up or down based on time of year.

Understood. If I could sneak two more in. And just to clarify, if I'm remembering correctly, most of your bank partners are kind of top 10 banks. I know the top two, your two largest partners are pretty massive, but I guess I just wanted to...

frame I guess the potential regional bank exposure like I would imagine is pretty small piece of your business. Is that fair?

Yeah, I want to actually address it even more directly if I could. Reggie, we have no direct exposure to...

kind of the banks that have been taken over in that we have

No deposit relationship, we have no lending relationship, and not in our lending facility. And we have no outstanding receivables or card sales to any of those specific banks.

Chase, American Express, Capital One and others. We've talked on prior calls about us opening up Wells Fargo as a new client as well. So yes, the smaller regional banks make up a very small percentage. You know at the same time we'd like to grow with them over time.

But you know what's happening with With those regional banks today is not impacting our business I just did if I can get one more in and I promise this would be my last question You highlighted a payment plus authentication

pilot that you're doing with the crypto partner. I was just hoping you could kind of talk about what are the steps in that pilot and how does that play out? When could it actually become a real account or revenue contributor? If you follow my questions. I do. The timeline of how that plays out. Thank you.

Sure. And Reggie, thank you for the questions. We appreciate it. So I just want to make sure I'm highlighting what it is again, which is.

If you think about the crypto space, we play a lot in self-custody or cold storage.

The authentication capabilities actually let an exchange lock down their hot wallet. So, you know, a customer instead of using a username and password to log in would use our card and a combination of Biometric or PIN to log in and secure the hot wallet. And that's the pilot that we're ramping up.

And for them, it is kind of ramping up the customer pilot, being able to observe that data and then roll it out further from there. I would suggest to you that that will ramp up in the back half of the year and we would anticipate if that goes well, that the impact of that one would more be a 24 impact.

Thank you so much. Thank you. Our next question comes from the line of Chase White from Compass Point Research and Trading. Go ahead, Chase. Thanks. So, a couple of questions. First of all, so what drove American Express...

Yeah, so I'm going to reiterate, we were very pleased to extend the American Express contract through the middle of 26. There are a variety of reasons why some of our issue partners look to extend contracts.

I'm not going to comment specifically on this one. You know, I apologize, but I'm not going to get more detailed, but we're very pleased to, you know, have three and a half years, three and a quarter years remaining on that agreement. And we think it's a testament to.

the partnership that we have and really have had for over 20 years with American Express.

With respect to the chase agreement, I commented last time that for us, we look at that as, you know, we're renewing in the normal course of business and, you know, I expect to have an update as we give you results perhaps next quarter.

Got it, that's helpful. And then, how should we think about the impact of the international expansion on the Arculis business in the near to intermediate term, and when should we think about starting to see the impact of the authentication use cases outside of crypto gold storage in Arculis?

So we think we're making progress on both sides in terms of some of the partnerships that we had announced in earlier quarters, starting to get launched and ramp up both on the cold storage and the authentication side. So we hope to start to see progress on both towards the second half of the year. So we hope to see progress on both sides in terms of some of the partnerships that we had announced in earlier quarters.

And we're pleased with the pipeline there in terms of the opportunities that we're discussing and we'll continue to update you guys on progress as we make it. Consistent with my comments, the level of investment.

and what we're doing there, we said would be at or below the levels of last year and our view is it's trending that way as we reported for first quarter numbers.

Thank you. Thank you. I appreciate the question. Thank you. Our next question comes from the line of Hal Goch from B Riley. Go ahead Hal. Hey, good afternoon guys. I wanted to ask you about Arculus and your investment. I think you mentioned.

and asking what if this takes off, if you get more product market fit, if you get more traction, will there be a lessening of those losses in investments then or will investments then have to ramp if traction improves? Just trying to figure out what is the direction of the drag.

success and then all of you have to see it also to hit a kill switch and reduce it even further. Thank you for the question and welcome to the calls. I'd say we anticipate the direction going down in terms of the number that we give you so that I'm clear.

is the net impact of revenue and investment. So it's sort of the net of the two. We haven't broken out revenue, we haven't broken out expense. We're giving you the net of the two. And so the net of the two last year being about 21 million, we said the net of those two this year will be less.

you know, where are you at in discussions with larger regional banks, and where are they ahead at using metal cards to differentiate versus large national money center banks and credit card issuers like Capital One which...

spent a tremendous amount of money on marketing.

outside of Chase and Amex.

I've talked about folks like Tapita One, I've talked about folks like Bank of America who is a client but on the smaller side we think there's still tremendous opportunity. Wells Fargo who we've opened up as a new client and then yes to your point there are a whole set of regional banks that while today

aren't a huge part of our business we think have potential over time.

And when I say over time, my point there isn't that we think what's going on there will impact this year's performance. As we look out a number of years now, we'd like to see more of those banks as clients. Today we do business with folks like US Bank.

And there are a handful of others that we would put in that list and we'd like to see that grow over time and add that on to the international growth story, our growth story with FinTechs. And we think those come together to compliment the overall growth that we've been able to deliver in the market.

Okay. Thank you very much. Thank you. Appreciate it. Thank you for your questions. I would now like to turn it back to John Wilk for closing remarks.