Q1 2024 CompoSecure Inc Earnings Call
Operator: Good day, and thank you for standing by. Welcome to CompoSecure's first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Steve Fetter, General Counsel and Corporate Secretary. Please go ahead.
Good day and thank you for standing by welcome to accomplish the curious first quarter 2024 earnings call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you'll need to press star one one on your telephone.
Then here an automated message advising your hand is raised.
Or withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to Steve <unk> General Counsel and corporate Secretary. Please go ahead.
Steve Fetter: Good afternoon, and thank you for joining us to review CompoSecure's first quarter 2024 financial results. With me on the call is John Wilk, CompoSecure's Chief Executive Officer, and Tim Fitzsimmons, Chief Financial Officer.
Good afternoon, and thank you for joining us to review capital secured its first quarter 2024 financial results with me on the call is John Walk Cabo secures Chief Executive Officer, and Tim could Simmons Chief Financial Officer. They will begin with prepared remarks, and then we will open the call for Q&A.
Steve Fetter: They will begin with prepared remarks, and then we will open the call for Q&A. 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 processes. 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.
Steve Fetter: 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 actual results to differ materially from our expectations. For a 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 10-K and other reports filed with the SEC, which are available in the Investor Relations section of our website at composecure.com and on the SEC's website at sec.gov.
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.
Coming these statements reflect our views only as of today and should not be considered our views as of any subsequent date, 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 materially.
From our expectations for a 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 10-K, and other reports filed with the SEC, which are available on the Investor Relations section of our website at <unk> Dot com and on the Sec's website at SEC Gov.
Steve Fetter: Please note that the discussion on today's call includes certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, and adjusted EPS. The company believes these non-GAAP financial measures provide useful information to 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.
Please note that the discussion on today's call include certain non-GAAP financial measures, including adjusted EBITDA adjusted net income and adjusted EPS. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting the company's financial condition and results of.
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.
Steve Fetter: A reconciliation of GAAP to non-GAAP measures is available in our press release and earnings presentation, available in the investor relations section of our website. Thank you, and with that said, let me turn the call over to John to discuss our first quarter results.
Relations section of our website.
And with that said, let me turn the call over to John to discuss our first quarter results.
Jonathan C. Wilk: Thank you, Steve. Good afternoon, and thank you for joining us for our first quarterly conference call. Our momentum from the end of last year carried into the first quarter as we generated our third consecutive quarterly net sales record, driven by sustained growth in our domestic business, which was up 26% compared to the year-ago period. During the quarter, our customers launched several new high-profile card programs that garnered significant attention in the marketplace. This includes the introduction of the Robin Hood gold card and a new limited edition Delta Reserve card in white made from an airplane.
John: Thank you Steve Good afternoon, and thank you for joining us for our first quarter conference call.
John: Our momentum from the end of last year has carried into the first quarter as we generated our third consecutive quarterly net sales record.
John: Driven by sustained growth in our domestic business, which was up 26% compared to the year ago period.
John: During the quarter, our customers launched several new high profile card programs garnered.
John: Garnered significant attention in the marketplace.
John: This includes the introduction of the Robinhood gold card.
John: And a new limited edition Delta Reserve card in White made from an airplane.
Jonathan C. Wilk: I'll discuss these new programs in greater detail later in the call, but I'm proud to see the effort and execution from our team to introduce innovative new technology and card constructs that continue to drive demand for metal payment cards. Now, I will summarize our financial results on slide three. Net sales in the first quarter increased 9% to a record $104 million, driven primarily by continued growth in our domestic business, offset by lower international net sales.
John: Ill discuss these new programs in greater detail later in the call, but I am proud to see the effort and execution from our team to introduce innovative new technology and card contracts that continue to drive demand for metal payment cards.
John: Now to summarize our financial results on slide three.
John: Net sales in the first quarter increased 9% to a record 104 billion driven.
John: Driven primarily by continued growth in our domestic business offset by lower international net sales.
Jonathan C. Wilk: Looking at our bottom line, Q1 adjusted EBITDA was up 6% to $37.8 million, reflecting our team's continued focus on profitability while simultaneously driving investments to capture long-term opportunity and value. Our card issuers continue to express a positive outlook for the consumer and have expressed intentions to maintain or increase their payment card marketing spend compared to the prior year. For Arculus, we continue to see positive momentum and remain on track for our total net investment to be lower than 2023, with the expectation of turning positive for fiscal year 2025, as mentioned in our last quarterly call.
John: Looking at our bottom line Q1, adjusted EBITDA grew 6% to $37 8 million.
John: Reflecting our team's continued focus on profitability, while simultaneously driving investments to capture long term opportunity and value.
John: Our card issuers continue to express a positive outlook for the consumer and have expressed intention to maintain or increase their payment card marketing spend compared to prior year.
John: For <unk>, we continue to see positive momentum and remain on track for our total net investment to be lower than 2023.
John: With the expectation of turning positive for fiscal year 2025 as mentioned in our last quarter's call.
Jonathan C. Wilk: I would also like to take a moment to comment on the announcement we made today regarding our capital allocation framework. We have continued to generate meaningful free cash flow and closed out the quarter with a cash balance of $55 million, which is more than doubled from one year ago. Given our cash position, our board has declared a special cash dividend of $0.30 per share for our Class A shareholders, along with a corresponding distribution to Class B unit 11.
John: I would also like to take a moment to comment on the announcement, we made today regarding our capital allocation framework.
John: We have continued to generate meaningful free cash flow.
John: And closed out the quarter with a cash balance of $55 million.
Which is more than doubled from one year ago.
John: Given our cash position our board has declared a special cash dividend of <unk> 30 per share for our class a shareholders.
John: Along with a corresponding distribution to class B unitholders.
Jonathan C. Wilk: This reflects our confidence in the sustainability of our cash flow generation, as well as our commitment to rewarding share holders. We are pleased to incorporate another means to enhance CompoSecure shareholder value into our capital allocation framework, which includes investment in organic growth. GetPayDown.
John: This reflects our confidence in the sustainability of our cash flow generation as well as our commitment to rewarding shareholders.
John: We are pleased to incorporate another means to enhance accomplish secure shareholder value into our capital allocation framework.
John: Which includes investment in organic growth.
John: Debt Paydowns.
Jonathan C. Wilk: Securities Repurchases, and consideration of future special and recurring dividends. Finally, as mentioned in our press release earlier today, we are reiterating our full-year guidance, which calls for net sales to range between $400 and $800. $428 million, and Adjusted EBITDA ranging between $147 and $157 million.
John: Securities repurchases.
John: And consideration of future special and recurring dividends.
Finally as mentioned in our press release earlier today, we are reiterating our full year guidance, which calls for net sales to range between 408.
John: $428 million.
John: And adjusted EBITDA, ranging between 147 and $157 million.
Jonathan C. Wilk: These targets reflect our expectation for continued strength in our business as we execute on our growth and profitability objectives. Moving on to slide four, we wanted to share several new metal card programs that we have launched since our last call. Robinhood launched a very exciting card program last month with the Robinhood Gold Card, which is a gold-colored metal veneer card weighing 17 grams. As part of the program, we also created a limited edition card made from 10 karat gold weighing 36 grams.
John: These targets reflect our expectation for continued strength in our business as we execute on our growth and profitability objectives.
John: Moving on to slide four.
John: Wanted to share several new metal card programs that we've launched since our last call.
John: Robin Hood launched a very exciting card program last month with the Robinhood gold card.
Which is a gold colored metal veneer card weighing 17 grams as.
John: As part of the program. We also created a limited edition card made from 10 karat gold weighing 36 grams.
Jonathan C. Wilk: Amex and Delta have announced a new limited edition Delta Reserve card made from a recycled airplane. You may remember AMEX launched a limited edition version in black with great success in 2022. The new version, which was launched last week, is white and is already generating buzz in the market. You can see several additional customer launches on this slide, including Lloyds Bank in the UK, Rogers Bank in Canada, and Bradesco in Brazil. Turning to slide five.
John: Amex and Delta announced a new limited edition Delta Reserve part made from a recycled airplane.
You May remember Amex launched a limited edition version and black to great success in 2022.
John: The new version, which was launched last week is white and already generating buzz in the market.
John: You can see several additional customer launches on this slide including Lloyds Bank in the UK Rogers Bank in Canada, and Bradesco in Brazil.
John: Turning to slide five.
Jonathan C. Wilk: I mentioned card issuer trends earlier, and I'd like to provide further insight. This information is based on quarterly reported public information. Our largest customers are continuing to drive strong purchase volume in 2024. Additionally, we've seen continued strong card acquisition trends, as well as sustained business development and marketing investment. Looking at the overall payment card market, we've highlighted several customer and partner quotes on slide six. Across the board, issuer sentiment remains constructive on the state of the consumer and the long-term opportunity in the payment space.
John: I mentioned card issuer trends earlier and I'd like to provide further insight.
John: The information is based on quarterly reported public information.
John: Our largest customers are continuing to drive strong purchase volume in 2024.
John: Additionally, we've seen continued strong card acquisition trends as well as sustained business development and marketing investments.
John: Looking at the overall payment card market, we've highlighted several customer and partner quotes on slide six.
John: Across the board issuer sentiment remains constructive on the state of the consumer and the long term opportunity in the payment space.
Jonathan C. Wilk: Our issuers report intentions to sustain or increase program spend compared to 2023, with several citing the intention to lean into solutions to capture high-quality customers. I always like to take the opportunity to outline our RTO platform on every call to provide clarity around our product capability. As mentioned earlier, we continue to see positive momentum and remain on track to achieve our net investment target. From a capabilities perspective, we recently added multi-card support for Arculous cold storage, which allows our customers to split their assets across multiple Arculous cards operating on the same device, and expanded support for different blockchains, including XTC, Providence, and Stellar, in addition to adding support for ONDO tokens and Polygon NFTs. I'll now hand it over to Tim to review our financials before returning for closing remarks.
Our issuers reported intentions to sustain our increased program spend compared to 2023 with.
John: With several citing the intention to lean into solutions to capture high quality customer accounts.
John: I always like to take the opportunity to outline our <unk> platform on every call to provide clarity around our product capabilities.
John: As mentioned earlier, we continue to see positive momentum and remain on track to achieve our net investment target.
From a capabilities perspective, we recently added multi card support for Oculus called storage, which allows our customers to split their asset across multiple <unk> cards operating on the same device.
John: And expanded support for different block chains, including XTC Providence and seller. In addition to adding support for Ondo tokens and polygon and Ftes.
John: I'll now hand, it over to Tim to review our financials before returning for closing remarks.
Timothy W. Fitzsimmons: Thanks, John, and good afternoon, everyone. I'll provide a more detailed overview of our Q1 2024 financial performance and then turn it back to John before we open the call for questions. Unless stated otherwise, all comparisons and variance commentary are on a year-over-year basis. For example, in Q1, net sales increased 9% to a record level of $104 million, compared to $95.3 million. The increase was primarily driven by continued domestic growth in our metal payment card business. Gross margin for the quarter was 53%, compared to 56% in the prior year. The decrease in gross margin was primarily due to inflationary pressure on wages as well as product mix.
Tim: Thanks, John and good afternoon, everyone I will provide a more detailed overview about Q1 2024 financial performance and then turn it back to John before we open the call for questions unless stated otherwise all comparisons in variance commentary are on a year over year basis in.
Timothy W. Fitzsimmons: That income for the quarter increased 59% to $17.1 million, compared to $10.7 million in the prior year. The increase was driven by higher net sales and a $4.3 million net differential in non-cash items from the revaluation of warrants, earn out consideration, and derivative liability driven by a change in our stock price. Adjusted EBITDA in Q1 increased 6% to $37.8 million compared to $35.5 million in the prior year, and our adjusted EBITDA margin was 36% compared to 37% in the first quarter of 2023.
Tim: In Q1, net sales increased 9% to a record level of $104 million compared to $95 3 million the.
Tim: The increase was primarily driven by continued domestic growth and our metal payment card business.
Tim: Gross margin for the quarter was 53% compared to 56% in the prior year the.
Tim: The decrease in gross margin was primarily due to inflationary pressure on wages as well as product mix.
Net income for the quarter increased 59% to $17 1 million compared to $10 7 million in the prior year.
Tim: Increase was driven by higher net sales and a $4 3 million net differential and noncash items from the revaluation of warrants earn out consideration and derivative liability driven by a change in our stock price.
Tim: Adjusted EBITDA in Q1 increased 6% to $37 8 million compared to $35 $5 million in the prior year and our adjusted EBITDA margin was 36% compared to 37% in the first quarter of 2023.
Timothy W. Fitzsimmons: The adjusted EBITDA was driven by greater net sales, partially offset by $1.8 million of net investment not. Looking closer at the split between our domestic and international business, you can see that our first quarter domestic net sales remain strong at $93 million, up 26% year-over-year and surpassing our record domestic quarter in Q4 of 2023. John highlighted earlier that our domestic business was offset by lower international net sales.
Tim: Adjusted EBITDA was driven by greater net sales, partially offset by $1 8 million of net investment not to us.
Tim: Looking closer at the split between our domestic and international business you can see that our first quarter domestic net sales remained strong at $93 million up 26% year over year and surpassing our record domestic quarter in Q4 of 2023.
Tim: John highlighted earlier that our domestic business was offset by lower international net sales international net sales for the first quarter of 2024 were $11 million, which was down from $22 million in the comparable period last year.
Timothy W. Fitzsimmons: International net sales for the first quarter of 2024 were $11 million, which was down from $22 million in the comparable period last year. As we have stated previously, our international business can be more variable due to the customer mix and smaller sales. We continue to expect our international business to account for roughly 20% of our annual total net sales. For perspective, international net sales were 18% of our total net sales mix in 2023 and were 22% of our mix in 2022.
Tim: As we have stated previously our international business to be more variable due to the customer mix and a smaller sales base. We continue to expect our international business to account for roughly 20% of our annual total net sales mix for.
For perspective International net sales were 18% about total net sales mix in 2023 and were 22% of our mix in 2022.
Timothy W. Fitzsimmons: Moving on to the balance sheet, at March 31st, 2024, we had cash and cash equivalents of $55.1 million and total debt of $335.6 million, which includes $205.6 million of term loans and $130 million of exchangeable notes. This resulted in a total net debt of $280.5 million. Looking at our leverage ratio, we provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio, as our bank agreement is calculated with slight differences.
Tim: Moving on to the balance sheet at March 31, 2024, we had cash and cash equivalents of $55 1 million and total debt of $335 6 million, which includes $205 6 million of term loan and $130 million of exchangeable notes. This resulted in total.
Tim: Net debt of $285 million.
Tim: Looking at our leverage ratios, we provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio as a bank agreement is calculated with slight differences.
Timothy W. Fitzsimmons: At March 31st, 2024, our overall leverage ratio was 2.28 times based on total debt of $335.6 million and trailing 12-month adjusted EBITDA of $147.3 million. This compares to 2.35 times at December 31st, 2023, with the improvement driven by paying down debt and increased TTM adjusted evenly. At March 31st, 2024, we had a bank agreement secured debt leverage ratio of 1.34 times, based on a total secured debt of $205.6 million and trailing 12-month bank-adjusted EBITDA of $153 million. This compares to 1.39 times at December 31, 2022.
Tim: At March 31, 2024, our overall leverage ratio was 2.28 times based on total debt of $335 6 million and trailing 12 month adjusted EBITDA of $147 3 million. This compares to 235 times at December 31 2023.
Tim: With the improvement driven by paying down debt and increased TTM adjusted EBITDA.
Tim: At March 31, 2024, we had a bank agreement secured debt leverage ratio of 134 times based on a total secured debt of $205 6 million and trailing 12 month bank adjusted EBITDA of $153 million. This compares to $1 three nine times.
Tim: At December 31, 2023, as John mentioned earlier, we have accumulated a robust cash position supported by sustainable strong cash flow generation. Given this our board has decided to allocate a portion of our capital towards a special cash dividend of 32.
Timothy W. Fitzsimmons: As John mentioned earlier, we have accumulated a robust cash position, supported by sustainable, strong cash flow generation. Given this, our board has decided to allocate a portion of our capital towards a special cash dividend of $0.30 to our Class A shareholders and an equivalent distribution to our Class B unit holders. Both the dividend and the distribution will be payable on June 11th to Class A shareholders and Class B unit holders of record as of May 20 and will be funded by our cash and our balance. The total amount of cash to be dispersed is expected to be approximately $24.2 million. Turn to our cash flow statement on slide 12. Net cash provided by operating activities increased 36% to $33.8 million compared to $24.9 million in the prior year quarter.
Our class a shareholders and an equivalent distribution to our class B unit holders, both the dividend and the distribution will be payable on June 11th to class a shareholders and class B unit holders of record as of May 20, and will be funded by our cash on our balance sheet.
Tim: Total amount of cash to be disbursed is expected to be approximately $24 2 million.
Tim: Turning to our cash flow statement on slide 12.
Tim: Net cash provided by operating activities increased 36% to $33 8 million compared to $24 9 million in the prior year quarter.
Timothy W. Fitzsimmons: 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 in adjustments of mark-to-market instruments among the public company and the operating subsidiaries to better reflect the actual economic impact of the conversion of such instruments on our net income and on a per-share basis. GAP EPS for the three months ended March 31st, 2024 was 20 cents per basic and 17 cents per diluted share.
Tim: 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 mark to market instruments, among the public company and the operating subsidiaries to better reflect the actual economic <unk>.
Tim: <unk> of the conversion of such instruments on our net income on a per share basis.
Tim: GAAP EPS for the three months ended March 31, 2024 was <unk> 20 per basic and 17 cents per diluted share.
Timothy W. Fitzsimmons: This compares to $0.13 per basic and $0.11 per diluted share in the year-ago period. The increase was driven by greater net sales, as well as changes to the fair value of the warrants, earn out consideration, and derivative liabilities, primarily due to the change in outstock. On slide 13, you can read through the footnotes on the slide that take you through the complexities of the allocation of the net income due to the underlying structure and the shares that are included in the basic and diluted calculation.
Tim: This compares to <unk> 13 per basic and <unk> 11 per diluted share in the year ago period.
The increase was driven by greater net sales as well as changes to the fair value of the warrants and earn out consideration and derivative liabilities, primarily due to the change in our stock price.
Tim: On Slide 13, you can read through the footnotes on the slide that take you through the complexities of the allocation of the net income due to the up sea structure and the shares that are included in the basic and diluted calculations.
Timothy W. Fitzsimmons: On slide 14, we're also providing non-GAAP adjusted net income and adjusted EPS, which excludes the impact of non-cash fair value adjustments to the warrants, the earn out revaluations, and stock compensation. We believe that this provides a clearer picture of the economics of the company's operating results. With that background, our non-GAAP EPS for the first quarter of 2024 was $0.29 per basic share and $0.25 per diluted share. This compares to $0.27 per basic share and $0.23 per diluted share in the year-ago period. In the appendix, you will find a reconciliation between the GAAP and non-GAAP net income used in these calculations. I'll now turn it back to John to discuss our guidance and give closing remarks.
Tim: On Slide 14, we're also providing non-GAAP adjusted net income and adjusted EPS, which excludes the impact of noncash fair value adjustments to the warrants the earn out revaluations and stock compensation. We believe that this provides a clearer picture of the economics of the Companys.
Tim: Results.
With that background, our non-GAAP EPS for the first quarter 2024 was 29 per basic share and 25 per diluted share. This compares to <unk> 27 per basic share and 23 per diluted share in the year ago period.
Tim: In the appendix you will find a reconciliation between the GAAP and non-GAAP net income used in these calculations.
Tim: I'll now turn it back to John to discuss our guidance and give closing remarks.
Jonathan C. Wilk: Thanks, Tim. As I mentioned earlier, we are reiterating our 2024 guidance and continuing to expect net sales to range between $408 and $428 million, and adjusted EBIT data to come in between $147 and $157 million. In closing, on slide 16, I'd like to highlight a few points we covered on our call this evening. 2024 is off to a strong start as we achieved another quarter of record net sales, driven by the sustained momentum in our domestic operation.
John: Thanks, Tim as I mentioned earlier, we are reiterating our 2020 for guidance and continue to expect net sales to range between 408 and $428 million.
John: And adjusted EBITDA to come in between 147 and $157 million.
John: In closing on slide 16.
John: Like to highlight a few points we covered on our call. This evening.
John: 2024 is off to a strong start as we achieved another quarter of record net sales driven.
John: Driven by the sustained momentum in our domestic operations.
Jonathan C. Wilk: We're excited to see the launch of several high-profile customer programs that have received significant attention in the marketplace. Global issuers are reporting intentions to sustain or grow their marketing program spend in 2024 and continue to see a resilient consumer despite inflationary headwinds. For Arculus, we see positive momentum and remain on track for our total net investment to be lower than 2023, with the expectation of turning positive for fiscal 2025. We continue to generate strong and sustainable free cash flow, which has enabled us to accumulate a robust cash position on our balance.
John: We're excited to see the launch of several high profile customer programs that have received significant attention in the marketplace.
John: Global issuers are reporting intention to sustain or grow their marketing program spend in 2024 and.
John: And continue to see a resilient consumer despite inflationary headwinds.
John: For Oculus, we see positive momentum and remain on track for our total net investment to be lower than 2023 with the expectation of turning positive for fiscal 2025.
John: We continue to generate strong and sustainable free cash flow, which has enabled us to accumulate a robust cash position on our balance sheet.
Jonathan C. Wilk: As a result, today we announce that our board has declared a special cash dividend to reward our shareholders and to equip us with another tool to deliver shareholder value as we continue to execute on our growth and profitability objectives in the year ahead. With that, I'd like to open up the call to questions.
John: As a result today, we announced that our board has declared a special cash dividend to reward our shareholders.
John: And to equip us with another tool to deliver shareholder value as we continue to execute on our growth and profitability objectives in the year ahead.
With that I'd like to open up the call to Q&A.
Operator: As a reminder, to ask a question, please press star 1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1 once again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Todaro with Needham.
John: As a reminder to ask a question. Please press star one one on your Touchtone telephone and wait for your name to be announced.
John: Or withdraw your question. Please press star one again.
John: Please standby, while we compile the Q&A roster.
John: Okay.
Speaker Change: Our first question comes from the line of.
John Todaro: John Todaro with Needham.
John Todaro: Hey, thanks for taking my question and congrats on the quarter. Great numbers here.
John Todaro: Hey, Thanks for taking my question and congrats on the quarter great numbers here.
John Todaro: I guess two questions for me. One, did domestic growth kind of surprise you? Was there, you know, when we think about this quarter versus the rest of the year, I guess trying to understand, can we expect kind of more growth there again and to almost frame it differently if international bounces back? Do you beat that the guy that you that you're issuing? First question, and then just the second one, I didn't really hear a call out on multi-factor authentication outside of the Arculus wallet or crypto. Just, you know, hopeful to get some color and thoughts on that part of the business as well.
I guess two questions for me one.
John Todaro: The domestic growth.
Surprise you.
John Todaro: When we think about this quarter versus the rest of the year.
John Todaro: I guess I'm trying to understand can we expect kind of more growth there again to almost frame it differently international bounces back.
John Todaro: You beat the guide that you put your issuing.
Speaker Change: First question and then just second one.
Speaker Change: I didn't really hear a callout on multifactor authentication outside of the Oculus wallet or crypto.
Speaker Change: Hopeful to get some color and thoughts on that part of the business as well.
Jonathan C. Wilk: Thanks, John, for both questions. So, let me try and take those in order.
Speaker Change: Okay.
Speaker Change: Thanks, John for both questions. So let me try and take those in order.
Jonathan C. Wilk: In terms of the domestic business, the domestic growth. Yes, it was strong. We felt really good about it. Again, delivering a record quarter of domestic growth and performance. International definitely came in light, consistent with
Speaker Change: In terms of the domestic business the domestic growth.
Speaker Change: Yes, it was strong.
Speaker Change: We felt really good about it again, delivering a record quarter of domestic growth and performance.
Speaker Change: International definitely came in light consistent with.
Jonathan C. Wilk: What we've talked about in the past, and Tim highlighted in his prepared remarks in terms of the customer base, some of the macros affecting the international business, as we look at the full year. We do expect International to, you know, account for roughly 20% of sales over time. So you've just got some timing there where I think we'll see some of that more in the second half. And then overall, John, we feel, you know, comfortable with the ranges that we've given and aren't making updates to them at this time.
Speaker Change: What we've talked about in the past and Tim highlighted in his prepared remarks in terms of the customer base. Some of the macros affecting the international business as we look at the full year.
Speaker Change: We do expect international to.
Speaker Change: For roughly 20% of sales over time, so you've just got some timing there where I think we will see.
Speaker Change: Some of that more in the second half and then overall, John we feel comfortable with the ranges.
Speaker Change: That we've given and aren't making updates to it at this time, but off to a strong start in our view.
Jonathan C. Wilk: But off to a strong start, in our view overall. With respect to the second question on Arculus Authenticate, you know, it is one of the things clearly giving us confidence in the net investment continuing to improve versus last year and positioning us for a positive sort of net investment for the full year of $25. So I'd say we are seeing momentum, both with the authentication solution as well as the cold storage solution and continuing to manage investment on that side as well.
Speaker Change: Overall.
Speaker Change: With respect to the second question on Oculus authenticate.
Speaker Change: It is one of the things clearly that is giving us the confidence in the net investment continuing to improve.
Speaker Change: Versus last year and positioning us for a positive sort of net investment for the full year of 25%. So I'd say seeing momentum both with the authentication solution as well as.
Speaker Change: The cold storage solution.
Speaker Change: And continuing to manage it.
Speaker Change: <unk> on that side as well.
Jonathan C. Wilk: Great. Thanks. Thanks, Sean.
Speaker Change: Great. Thanks, Thanks, Sean.
Mark Anthony Palmer: Our next question comes from the line of Mark Palmer with Benchmark.
Speaker Change: Our next question comes from the line of Mark Palmer with benchmark.
Mark Anthony Palmer: Yes, good afternoon. Thanks for taking my questions. A couple of questions. First of all, just to follow up on the international front. Is it the case that some of your customers, seeing what's going on in the macro environment, are simply delaying or deferring the launch of different programs such that they could be coming online in the second half, hence your confidence in approaching 20% of total sales from international?
Mark Anthony Palmer: Yes. Good afternoon, thanks for taking my questions.
Mark Anthony Palmer: A couple of questions first of all just.
Mark Anthony Palmer: To follow up on the international front.
Mark Anthony Palmer: Is there isn't the case that some of your customers, they're seeing what's going on in the macro environment or simply deferring or delaying the launch of different programs.
Mark Anthony Palmer: Such that they could be coming online in the second half.
Mark Anthony Palmer: Your confidence in approaching the 20%.
Mark Anthony Palmer: Total sales from international.
Jonathan C. Wilk: Thanks for the question, Mark. Yes, somewhat.
Speaker Change: Thanks for the question Mark.
Speaker Change: Yes somewhat.
Speaker Change: So we've got.
Speaker Change: We think pretty.
Jonathan C. Wilk: So, you know, we've got, we think, pretty good visibility with opportunities that we see and know that help give us a view on kind of what the rest of the year looks like. That, you know, approximately 20 percent. Some years it's been 22. I think last year it was 18 in those ranges. But we do believe it normalizes over time, and yes, we've seen some of that with orders coming in on the international side for later in the year.
Good visibility.
Speaker Change: With opportunities that we see it now.
Speaker Change: That helped give us the view on kind of what the rest of the year. It looks like that approximately 20%. Some years. It's been 22 I think last year was 18 in those ranges.
We do believe it normalizes.
Speaker Change: Overtime.
Speaker Change: And yes, we've seen some of that with.
Speaker Change: Orders coming in on the international side for.
Speaker Change: Later in the year.
Mark Anthony Palmer: Thank you. Very good. And just to follow up a question with regard to the announced special cash dividend. It is, by definition, special, but it's also based on the company's increased confidence in the sustainability of its free cash flow. Should we be thinking that if the free cash flow trends continue as they have, a more permanent or common dividend may be in the works?
Speaker Change: Okay. Good.
Speaker Change: Just a follow up question with regard to.
The announced a special cash dividend.
Speaker Change: It is by definition special.
Speaker Change: But it's also based on the company's increased confidence and the sustainability of its free cash flow.
Speaker Change: Should we be thinking that if the.
The free cash flow.
Speaker Change: Trends continue as they have.
Speaker Change: That more.
Speaker Change: Permanent or common dividend.
Speaker Change: Maybe in the works.
Jonathan C. Wilk: You know, Mark, we said in the release, and I'd point you to that, which is, you know, we will consider future dividends, which include special or recurring. So the board looked overall at the capital allocation framework and how we wanted to try to reward shareholders and felt like the special dividend was the appropriate tool to be able to deliver value to shareholders at this time. And our overall message is, from a capital allocation framework, to continue to invest in growing the business organically, paying down debt, repurchasing securities, and, you know, returning capital to shareholders in these ways, and we'll use any and all of these tools, as the company and the board deem appropriate. So, certainly consideration in the future. Thanks very much.
Speaker Change: Mark we have said in the release and I had pointed out which is we will consider future dividends, which includes special or recurring.
Speaker Change: So the board looked overall at the capital allocation framework and how we wanted to try to.
Speaker Change: Reward shareholders and felt like the special dividend was the appropriate tool.
Speaker Change: To be able to.
Speaker Change: Deliver value to shareholders at this time.
Speaker Change: And our overall messages from a capital allocation framework, it's continue to invest in growing the business organically paying down debt.
Speaker Change: Repurchasing securities.
Speaker Change: And returning capital to shareholders in these ways and we will use any and all of these tools.
Speaker Change: As the company and the board deem appropriate so certainly consideration in the future.
Mark Anthony Palmer: Very good. Thanks very much.
Speaker Change: Very good thanks very much.
Speaker Change: Thank you.
Joe Flynn: Our next question comes from the line of Joe Flynn with CompassPoint.
Speaker Change: Our next question comes from the line of Joe Flynn with Compass point.
Joe Flynn: Hi guys, thanks for the question. First, on the Routed Car Program, I was hoping you could provide any color on the details there, and ultimately, if you see this as an opportunity to maybe leverage Arculous products as well on the cold storage front.
Joe Flynn: Hi, guys. Thanks for the question.
Joe Flynn: First on the Roto Carb program.
Joe Flynn: And if you could provide any color on the details there.
Joe Flynn: And ultimately if you see this as an opportunity to maybe leverage Argos products as well on the cold storage front.
Jonathan C. Wilk: So look, on the broader program, right, they've made a big splash in the market with the gold card launch that they announced, and the core of that program has a strong value proposition, our metal veneer, a gold metal veneer card that we make for them. In addition, they announced a limited edition solid gold 10 carat card. And, you know, I think they're very excited about the program. We're very excited to partner with them as well.
Speaker Change: So look on the broader program right, Dave made a big splash in the market with the gold card launch that they announced and the core of that program has.
Speaker Change: Our strong value proposition and.
Speaker Change: Our metal veneer of gold medals in your card that we make for them.
Speaker Change: In addition, they announced a limited edition solid gold 10 karat card.
Speaker Change: And I think they're very excited about the program, we're very excited to partner with.
Speaker Change: With them as well.
Jonathan C. Wilk: I'm so excited to see what that holds. And with regard to the second, Joe, I'm not going to comment specifically on Robin Hood. I'm going to tell you that you can presume that we are talking to, you know, all of our customers and prospects about, you know, both our card capabilities and authentication solutions and or cold storage where appropriate.
Speaker Change: So excited to see what that holds.
Speaker Change: And with regard to the second Joe I'm, not going to comment specifically on Robinhood I am going to tell you that you can presume that we are talking to.
Speaker Change: All of our customers and prospects.
Speaker Change: About.
Speaker Change: Both our card capabilities and.
Jonathan C. Wilk: It's not always appropriate, but you can presume if it is. You know, we are having those conversations. So beyond that, I'm not going to comment more specifically.
Speaker Change: Indication solutions, and or cold storage, where appropriate it's not always appropriate but you can presume. If it is we are having those discussions.
Speaker Change: Beyond that I'm, not going to comment more specifically.
Speaker Change: Great. Thanks Thats helpful.
Joe Flynn: Great. Thanks. That's helpful. And on the capital allocation front, is there any more – has there been any more internal discussion in regard to, you know, potentially unlocking value from moving from the offseed to just regular C-Corp, or, you know, I think going forward, it was primarily going to be through dividends and buyback?
Speaker Change: On the capital allocation front.
Speaker Change: Is there any more.
Speaker Change: Any more internal discussion in regard to potentially unlocking value from moving from the <unk> to regular C Corp.
Speaker Change: I think going forward, it was primarily going to be through dividends and buyback.
Jonathan C. Wilk: Look, Joe, we've talked about over time how we anticipate seeing that structure change as, you know, as B units are sold into the market, but nothing There's nothing about that structure that changes with this announcement. You know, we understand the perspective out there in the market on it. And I'd say, you know, we've taken this step of providing a special dividend to deliver value to all shareholders. And, you know, we think it's a great demonstration of the capability and power of this company to be able to do that. And I go back to my comment earlier, Joe. We will use, you know, any of the tools in our tool set to be able to deliver value to shareholders over time.
Speaker Change: Look we've talked about over time.
Speaker Change: <unk>.
Speaker Change: We anticipate.
Speaker Change: Anticipate seeing that structure change.
Speaker Change: As.
Speaker Change: Is b units are sold into the market.
Speaker Change: But nothing.
Speaker Change: There's nothing about that structure.
Speaker Change: That changes with this announcement.
Speaker Change: We understand perspective out there in the market on it and I'd say we.
Speaker Change: We've taken this step with providing a special dividend to deliver value to all shareholders.
Speaker Change: And we think it's a great demonstration of the capability and power of this company to be able to do that.
Speaker Change: And I'd go back to my comment earlier, Joe we will use any of that.
Speaker Change: Tools in our tool set to be able to deliver value to shareholders over time.
Joe Flynn: Great, thanks. That's all for me.
Speaker Change: Great. Thanks, that's all for me.
Operator: As a reminder, to ask a question, that is star 11. Our next question comes from the line of Reggie Smith.
Speaker Change: As a reminder to ask a question that is star one one.
Reginald Lawrence Smith: Hey, good evening. Thanks for taking the question. Congratulations on the quarter.
Speaker Change: Our next question comes from the line of Reggie Smith.
Reginald Lawrence Smith: With J P. Morgan.
Reginald Lawrence Smith: I had a question, kind of housekeeping, but I was curious, you know, for a deal like Robinhood, I would imagine it was a while ago, thinking about the revenues. I'm curious if there was anything, I guess, episodic, like the launch of programs like that, and will revenues recognize, you know, both in the fourth quarter of last year and maybe the first quarter of this year. Maybe talk a little bit about how those REVs, I guess, for the initial shipment, kind of flow through.
Reginald Lawrence Smith: Hey, good evening, Thanks for taking the question congrats on the quarter.
Reginald Lawrence Smith: Question kind of housekeeping, but I was curious.
Reginald Lawrence Smith: So a deal like Robinhood I would imagine it was inc.
Reginald Lawrence Smith: A while ago thinking about their revenue I'm curious if there was anything I guess is it episodic like the launch of programs like that and where revenues recognized both in the fourth quarter of last year and ended the first quarter of this year, maybe talk a little bit about how.
Reginald Lawrence Smith: Those rates I guess for the initial shipment.
Reginald Lawrence Smith: And then, secondarily to that, I know you guys mentioned a couple of pretty exotic card forms. I think you mentioned the gold that's actually in the Robin Hood card and then the Delta card that was made from recycled airplanes. And I also noticed that the gross margins were a little lower this quarter. Is there any relationship between those two factors or an appreciable difference in, say, how the margins on some of the more exotic cards compared to your, I guess, let's say, classic metal card?
Reginald Lawrence Smith: Flow through and then secondarily to that I know you guys mentioned, a couple of pretty exotic card.
Reginald Lawrence Smith: I think you mentioned like the goal thats actually in that and the.
Reginald Lawrence Smith: Robyn Hitchcock and the Delta card that was made from recycled.
Reginald Lawrence Smith: The airplanes.
Speaker Change: And I also noticed that the gross margins are a little lower this quarter is there any relationship between those two factors.
Appreciable difference in Macau the margins on some of the more exotic cards compared to the year.
Speaker Change: I guess, that's a classic metal card.
Jonathan C. Wilk: Yeah, so let me take, that's okay, I think I got it. I'm going to try and take those in reverse order, and I'm going to start with the gross margin, in general, Reggie, if I could. So, on the gross margin, what we've said is that we believe gross margins in our business should be north of 50%. And, you know, coming in at 53%, certainly in line with our expectations about where gross margins should be in our business, and we think those are strong, especially combined with EBITDA margins in the high 30s.
Speaker Change: Yes, So let me take it.
Speaker Change: Okay, I think I got it I'm going to try and take those in reverse order and I'm going to start with the gross margin in general Richie I could.
Speaker Change: <unk>.
Speaker Change: So.
Richie: On the gross margin what we've said is we believe gross margins in our business should be north of 50%.
Richie: And.
Richie: Coming in at 53.
Richie: Certainly in line with.
Richie: Our expectations about where gross margins should be in our business and we think those are strong.
Especially combined with EBITDA margins.
Jonathan C. Wilk: So that just as a baseline for the story of our business. Second, with respect to why it's down year over year, you know, there are two factors that Tim talked about and I'd reemphasize. One is, you know, we have seen some impacts from inflationary pressures due to things like wages that, you know, have had some impact on the gross margin. And the second does relate to, as we launch new card constructs, it just typically takes a little bit of time to get those up and running at a level of efficiency that we expect to see over time.
Richie: In the high Thirty's so.
Richie: Not just as a baseline for the story of our business.
Richie: With respect to why its down year over year.
Richie: There are two factors that Jim talked about and I'd reemphasize. One is yes, we have seen some impacts from inflationary pressures due to things like wages.
That have had some impact on the gross margin.
The second does relate to.
Richie: As we launch new car construct.
Richie: It just typically takes a little bit of time to.
Richie: Get those up and running at a level of efficiency that we expect to see over time. So yes, we will see kind of lower margins as those products ramp up that stabilize we think in the levels that we expect overall in the business. So.
Jonathan C. Wilk: So yes, we will see kind of lower margins as those products ramp up, and we think that they stabilize at the levels that we expect overall in the business. So yes, when we're launching a bunch of new things, you see some of that impact. And we talked a little bit about it last quarter, and Tim highlighted it a little bit this quarter as well. And, you know, we think over time, those sort of normalize out to more stable levels for us. With respect to Robin Hood generally, I'm going to comment just broadly on how this works.
Richie: So yes, when we are launching a bunch of new things.
Richie: You see some of that.
Richie: And we talked a little bit about it last quarter.
Richie: <unk> highlighted it.
Richie: Little bit this quarter as well.
Richie: And we think over time, those sort of normalize out.
To more stable levels for us.
Richie: With respect to Robin Hood.
Richie: Generally.
I'm going to comment just broadly how this works.
Jonathan C. Wilk: Someone like that is ramping up a program. Reggie, there are a couple of different ways they can do it. One is, you know, with a large upfront order and then steady volume to follow or just steady volume as they build. And it's just really a preference of the buyer and the company themselves. So I'm not going to comment specifically on how they're doing it and how their revenue will grow but, you know, presume that.
Richie: Someone like that is ramping up a program strategy. There are a couple of different ways. They can do it one is.
Richie: With.
Richie: Large upfront order and then steady volume to follow or just steady volume as they build.
Richie: And it's just really a preference of.
Richie: The buyer and the company themselves.
Speaker Change: So I'm not going to comment specifically on <unk>.
Speaker Change: How they're doing it.
Speaker Change: And how their revenue will grow but.
Speaker Change: I.
Speaker Change: Presume that.
Jonathan C. Wilk: Generally, anytime you see a program like that, it's certainly a good thing, and we like to see that build over time, and as you and I have talked about, when those programs build, Reggie, over time, you'll see kind of three or four different levers. New acquisition. You know, over time, you'll see loss stolen, you'll see natural reissue a few years later, you know, and all of those build to, you know, we think that kind of sticky relationship that we want to see with customers. So I am excited about the launch and the opportunity.
Speaker Change: Generally anytime you see a program like that.
Certainly a good thing.
Speaker Change: And we like to see that build over time and as you and I have talked about.
Speaker Change: When those programs build Reggie over time, Youll see kind of three or four different levers new acquisition.
Speaker Change: Over time, Youll see lost stolen Youll see natural reissue a few years later.
Speaker Change: And all of those build too.
Speaker Change: We think the kind of sticky relationship that we want to see with customers over time, so excited about the launch and the opportunity.
Reginald Lawrence Smith: Got it. And if I could ask one more question, Now, I've known you long enough; I know you're not the type to raise guidance after the first quarter, so I'm not going to ask you about that, but I guess thinking about, you know, where results came in the first quarter versus your expectations, you need maybe the pipeline, maybe you could talk a little bit about how both of those are today relative to what you were thinking when we spoke two months ago. Any color there would be helpful. Thanks.
Speaker Change: Got it.
Speaker Change: Can I ask one more.
Speaker Change: They have 19 logging if I know you are not.
Speaker Change: The site to raise guidance after the first quarter, so I'm not going to ask you about that.
Speaker Change: <unk>.
Speaker Change: I guess thinking about where our results came in first quarter versus your expectations, maybe in the pipeline and if you could talk a little bit about how both of those are today relative to what you were thinking when we spoke two months ago.
Speaker Change: Any color there would be helpful. Thank you.
Jonathan C. Wilk: Yeah, so Reggie, I appreciate the question. And yes, you are getting, we're getting to know each other better as we move through these. You know, look, if you look at the guidance range that we issued, you know, we're spot on out of the gates to kind of be right in those ranges. We will always look to do better. But we're right where we wanted to be, right where we expected to be with the business, and I think, from looking at it, what if a company starts and they need a huge hockey stick to be able to achieve their results? Someone sitting in your chair always looks at it skeptically. You know, we're right on where we need to be performing in this business and just very pleased with the start that we're off to.
Speaker Change: Yes, so reggie.
Reginald Lawrence Smith: I appreciate the question and yes.
Reginald Lawrence Smith: You're getting we're getting to know each other better.
Speaker Change: As we move through the Asa.
Speaker Change: Look if you look at the guidance range that we issued.
We're spot on out of the gates to kind of be right in those ranges.
Speaker Change: We will always look to do better.
Speaker Change: But we're right, where we want it to be right, where we expected to be.
Speaker Change: With the business and I think from.
From looking at it.
Speaker Change: If a company starts.
And they need a huge hockey stick to be able to achieve the results someone sitting in your chair always looks at it skeptically.
Speaker Change: We're we're right on where we need to be performing.
Speaker Change: In this business and just very pleased with the start that we're off to.
Reginald Lawrence Smith: When I do the math on just the seasonality, looking at your first quarters in the previous three years, using that kind of range, I kind of get toward the high end of your guidance already just based on what you did in the first quarter. So that was the impetus for the question.
Speaker Change: <unk>.
Speaker Change: Well when I do the math on different seasonality looking at your first quarter Creagh is like three years.
Speaker Change: Using that kind of range or kind of get towards the high end of your guidance already just based on what you did in the first quarter.
Reginald Lawrence Smith: It just seems like you guys are off to a good start, which you said, but I wanted to I guess hear it again. That's all I have. Thank you.
Speaker Change: So that was it.
Speaker Change: The impetus for the question. It seems like you guys are.
Speaker Change: After a good start.
Speaker Change: What you said, but I wanted to hear it again.
Reginald Lawrence Smith: I appreciate it. Thank you, Reggie.
Speaker Change: That's all I have thank you.
Speaker Change: I appreciate it thank you rich.
Operator: That concludes today's question and answer session. This will conclude today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: That concludes today's question and answer session.
Speaker Change: This will conclude today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Okay.
[music].
Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].