NASDAQ:CMPO CompoSecure Q1 2024 Earnings Report $11.30 +0.25 (+2.26%) Closing price 05/2/2025 04:00 PM EasternExtended Trading$11.30 +0.00 (+0.04%) As of 05/2/2025 04:05 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast CompoSecure EPS ResultsActual EPS$0.25Consensus EPS $0.24Beat/MissBeat by +$0.01One Year Ago EPSN/ACompoSecure Revenue ResultsActual Revenue$104.01 millionExpected Revenue$98.20 millionBeat/MissBeat by +$5.81 millionYoY Revenue GrowthN/ACompoSecure Announcement DetailsQuarterQ1 2024Date5/6/2024TimeN/AConference Call DateMonday, May 6, 2024Conference Call Time5:00PM ETUpcoming EarningsCompoSecure's Q1 2025 earnings is scheduled for Monday, May 12, 2025, with a conference call scheduled on Monday, May 5, 2025 at 5:00 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by CompoSecure Q1 2024 Earnings Call TranscriptProvided by QuartrMay 6, 2024 ShareLink copied to clipboard.There are 7 speakers on the call. Operator00:00:00Good 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 speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. Would now like to hand the conference over to Steve Feder, General Counsel and Corporate Secretary. Operator00:00:36Please go ahead. Speaker 100:00:39Good afternoon, and thank you for joining us to review Composecure's Q1 2024 financial results. With me on the call is John Wilk, Composecure's Chief Executive Officer and Tim Fitzsimmons, Chief Financial Officer. They will begin with prepared remarks and then we will open the call for Q and 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 prospects. Forward looking statements may often be identified words such as we expect, we anticipate or upcoming. Speaker 100:01:18These 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 ks and other reports filed with the SEC, which are available on the Investor Relations section of our website atcompassure.com and on the SEC's website atsec.gov. Please note that the discussion on today's call includes certain non GAAP financial measures, including adjusted EBITDA, adjusted net income and adjusted EPS. Speaker 100:02:07The company believes these non GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting 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. Speaker 100:02:41Thank you. And with that said, let me turn the call over to John to discuss our Q1 results. Thank you, Steve. Good afternoon and thank you for joining us for our first quarter conference call. Our momentum from the end of last year has carried into the Q1 as we generated our 3rd consecutive quarterly net sales record, driven by sustained growth in our domestic business, which was up 26% compared to the year ago period. Speaker 100:03:09During the quarter, our customers launched several new high profile card programs that garnered significant attention in the marketplace. This includes the introduction of the Robinhood Gold Card and a new limited edition Delta Reserve Card in white made from an airplane. 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 from metal payment cards. Now to summarize our financial results on Slide 3. Net sales in the Q1 increased 9% to a record $104,000,000 driven primarily by continued growth in our domestic business, offset by lower international net sales. Speaker 100:04:05Looking at our bottom line, Q1 adjusted EBITDA grew 6% to $37,800,000 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 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 quarter's call. 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 $55,000,000 which has more than doubled from 1 year ago. Speaker 100:05:17Given 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 unitholders. This reflects our confidence in the sustainability of our cash flow generation as well as our commitment to rewarding shareholders. We are pleased to incorporate another means to enhance Composecure shareholder value into our capital allocation framework, which includes investment in organic growth, debt paydowns, 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 $408,000,000 $428,000,000 and adjusted EBITDA ranging between $147,000,000 and $157,000,000 These targets reflect our expectation for continued strength in our business as we execute on our growth and profitability objectives. Moving on to Slide 4, we wanted to share several new metal card programs that we have launched since our last call. Speaker 100:06:43Robinhood 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. Amex and Delta announced a new limited edition Delta Reserve card made from a recycled airplane. You may remember Amex launched a limited edition version in black to great success in 2022. The new version which was launched last week is white and already generating buzz in the market. Speaker 100:07:24You 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 5, I mentioned card issuer trends earlier and I'd like to provide further insight. The 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. Speaker 100:08:05Looking at the overall payment card market, we've highlighted several customer and partner quotes on Slide 6. Across the board, issuer sentiment remains constructive on the state of the consumer and the long term opportunity in the payment space. 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 customer accounts. I always like to take the opportunity to outline our Arculus platform on every call to provide clarity around our product capabilities. As mentioned earlier, we continue to see positive momentum and remain on track to achieve our net investment target. Speaker 100:08:56From a capabilities perspective, we recently added multi card support for Arculus Cold Storage, which allows our customers to split their assets across multiple Arculus 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. Speaker 200:09:32Thanks, 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. In Q1, net sales increased 9% to a record level of $104,000,000 compared to $95,300,000 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. Speaker 200:10:12The 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 $17,100,000 compared to $10,700,000 in the prior year. The increase was driven by higher net sales and a 4,300,000 dollars net differential in non cash items from the revaluation of warrants, earn out consideration and derivative liability driven by change in our stock price. Adjusted EBITDA in Q1 increased 6% to $37,800,000 compared to $35,500,000 in the prior year. And our adjusted EBITDA margin was 36% compared to 37% the Q1 of 2023. Speaker 200:11:01The adjusted EBITDA was driven by greater net sales, partially offset by $1,800,000 of net investment in Oculus. Looking closer at the split between our domestic and international business, you can see that our Q1 domestic net sales remained strong at 93,000,000 dollars 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. International net sales for the Q1 of 2024 were $11,000,000 which was down from $22,000,000 in the comparable period last year. As we have stated previously, our international business to be more variable due to the customer mix and a smaller sales base. Speaker 200:11:52We continue to expect our international business to account for roughly 20% of our annual total net sales mix. For perspective, international net sales were 18% of our total net sales mix in 2023 and were 22% of our mix in 2022. Moving on to the balance sheet. At March 31, 2024, we had cash and cash equivalents of $55,100,000 and total debt of $335,600,000 dollars which includes $205,600,000 of term loan and $130,000,000 of exchangeable notes. This resulted in total net debt of $280,500,000 Looking at our leverage ratios, 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. Speaker 200:12:50At March 31, 2024, our overall leverage ratio was 2.28x based on total debt of 335 point $6,000,000 and trailing 12 month adjusted EBITDA of $147,300,000 This compares to 2.35 times at December 31, 2023, with the improvement driven by paying down debt and increased TTM adjusted EBITDA. At March 31, 2024, we had a bank agreement secured debt leverage ratio of 1.34 times based on a total secured debt of $205,600,000 and trailing 12 month bank adjusted EBITDA of 153,000,000 dollars This compares to 1.39x 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 $0.30 to our Class A shareholders and an equivalent distribution to our Class B unitholders. Both the dividend and the distribution will be payable on June 11 to Class A shareholders and Class B unitholders of record as of May 20 and will be funded by our cash and our balance sheet. Speaker 200:14:15The total amount of cash to be dispersed is expected to be approximately $24,200,000 Turning to our cash flow statement on Slide 12. Net cash provided by operating activities increased 36% to $33,800,000 compared to $24,900,000 in the prior year quarter. 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. GAAP EPS for the 3 months ended March 31, 2024 was $0.20 per basic and $0.17 per diluted share. Speaker 200:15:15This 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 our stock price. 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 Upsea structure and the shares that are included in the basic and diluted calculations. 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. Speaker 200:16:13With that background, our non GAAP EPS for the Q1 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. Speaker 100:16:43Thanks, Tim. As I mentioned earlier, we are reiterating our 2024 guidance and continue to expect net sales to range between $408,000,000 $428,000,000 and adjusted EBITDA to come in between $147,000,000 $157,000,000 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 operations. 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. Speaker 100:17:43For 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 sheet. As a result, today we announced 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 Q and A. Operator00:18:49Our first question comes from the line of John Todaro with Needham. Speaker 300:18:55Hey, thanks for taking my question and congrats on the quarter. Great numbers here. I guess two questions for me. One, did domestic growth kind of surprise you? Was there any 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? Speaker 300:19:17And to almost frame it differently, if international bounces back, do you beat the guide that you're issuing? First question. And then just second one, I didn't really hear a call out on the multi factor authentication outside of the Arculus wallet or crypto. Just hopeful to get Speaker 200:19:37some color and thoughts on that part of the business as well? Speaker 100:19:41Thanks, John, for both questions. So let me try and take those in order. 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 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. Speaker 100:20:17As we look at the full year, we do expect international to 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 comfortable with the ranges that we've given and aren't making updates to it at this time, but off to a strong start in our view overall. With respect to the second question on Arculus Authenticate, it is one of the things clearly that is giving us the 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 2025. So I'd say seeing momentum both with the authentication solution as well as the cold storage solution and continuing to manage investments on that side as well. Speaker 300:21:36Great. Thanks. Thanks, John. Operator00:21:42Our next question comes from the line of Mark Palmer with Benchmark. Speaker 400:21:50Yes, good afternoon. Thanks for taking my questions. A couple of questions. First of all, just a follow-up on the international front. Is it the case that some of your customers there seeing what's going on in the macro environment are simply deferring or delaying the launch of different programs, such that they could be coming online in the second half, hence your confidence in approaching the 20% of total sales from international? Speaker 100:22:30Thanks for the question, Mark. Yes, somewhat. So we've got, we think pretty good visibility with opportunities that we see and know that help give us the view on kind of what the rest of the year looks like that approximately 20% and some years it's been 22%, I think last year 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. Speaker 400:23:13Very good. And just a follow-up 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 that a more permanent or common dividend, maybe in the works? Speaker 100:23:50Mark, we've said in the release and I'd point you to that, which is we will consider future dividends, which includes 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, it's continue to invest in growing the business organically, paying down debt, repurchasing securities and 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. Speaker 400:24:46Very good. Thanks very much. Speaker 100:24:49Thank you. Operator00:24:52Our next question comes from the line of Joe Flynn with Compass Point. Speaker 500:24:58Hi, guys. Thanks for the question. First on the Robinhood car program, I was hoping if you could provide any color on the details there. And ultimately, if you see this as an opportunity to maybe leverage ArQoS products as well on the cold storage front? Speaker 100:25:18So 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 and our metal veneer gold metal veneer card that we make for them. In addition, they announced a limited edition solid gold 10 carat card. And I think they're very excited about the program. We're very excited to partner with them as well. Speaker 100:25:55So excited to see what that holds. And with regard to the second, Joe, I'm not going to comment specifically on Robinhood. I'm going to tell you that you can presume that we are talking to all of our customers and prospects about both our card capabilities and authentication solutions and or cold storage where appropriate. It's not always appropriate, but you can presume if it is, we are having those discussions. So beyond that, I'm not going to comment more specifically. Speaker 500:26:36Great. Thanks. That's helpful. And on the capital allocation front, is there any more has been any more internal discussion in regard to potentially unlocking value from moving from the Up C to just regular C Corp? Or I think going forward it was primarily going to be through dividends and buyback? Speaker 100:26:56Look, we've talked about over time, we anticipate seeing that structure change as B units are sold into the market. But nothing there's nothing about that structure that changes with this announcement. We understand perspective out there in the market on it. And I'd say, we've taken this step with providing a special dividend to deliver value to all shareholders. And we think it's a great demonstration of the capability and power of this company to be able to do that. Speaker 100:27:48And I go back to my comment earlier, Joe, we will use any of the tools in our tool set to be able to deliver value to shareholders over time. Speaker 500:28:00Great. Thanks. That's all for Operator00:28:10Our next question comes from the line of Reggie Smith with JPMorgan. Speaker 600:28:18Hey, good evening. Thanks for taking the question. Congrats on the quarter. I had a question, it's kind of housekeeping. But I was curious, for a deal like Robinhood, I would imagine it was 8 a while ago. Speaker 600:28:33Thinking about the revenues, I'm curious if there was anything, I guess, is it episodic like the launch of programs like that? And were revenues recognized both in the 4th quarter of last year and maybe the Q1 of this year? Maybe talk a little bit about how those revs, I guess, for the initial shipment kind of flow through? And then secondarily to that, I know you guys mentioned a couple of pretty exotic card forms. I think you mentioned like the gold that's actually in the Robinhood card and then the Delta card that was made from recycled airplanes. Speaker 600:29:11And I also noticed that the gross margins were a little lower this quarter. Is there any relationship between those two factors or appreciable difference in like how the margins on some of the more exotic cards compared to your, I guess, let's say classic metal card? Speaker 100:29:28Yes. So let me take no, it'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. Speaker 100:29:40So on the gross margin, what we've said is we believe gross margins in our business should be north of 50%. And 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. So that just as a baseline for the story of our business. 2nd, with respect to why it's down year over year, there are two factors that Tim talked about and I'd reemphasize. Speaker 100:30:241 is, we have seen some impacts from inflationary pressures due to things like wages that 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. 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 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. Speaker 100:31:21And we think over time, those sort of normalize out to more stable levels for us. With respect to Robinhood, generally, I'm going to comment just broadly how this works. When someone like that is ramping up a program, Reggie. There are a couple of different ways they can do it. 1 is with a large upfront order and then steady volume to follow or just steady volume as they build. Speaker 100:31:58And 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 presume that 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 3 or 4 different levers. New acquisition, over time, you'll see loss stolen, you'll see natural reissue a few years later. Speaker 100:32:47And all of those build to, we think, the kind of sticky relationship that we want to see with customers over time. So excited about the launch and the opportunity. Speaker 600:33:00Got it. And if I could ask one more. I've known you long enough, I know you're not the type to raise guidance after the Q1, so I'm not going to ask you about that. But I guess thinking about where results came in Q1 versus your expectations, maybe the pipeline, maybe could you talk a little bit about how both of those are today relative to what you were thinking when we spoke 2 months ago? Any color there would be helpful. Speaker 600:33:28Thank you. Speaker 100:33:31Yes. So, Reggie, I appreciate the question. And yes, you are getting we're getting to know each other better as we move through these. 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. 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. Speaker 100:34:06And I think from looking at it, 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, 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 600:34:32Fair. When I do the math on just the seasonality, looking at your 1st quarters in the previous like 3 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 Q1. So that was the impetus for the question. 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. Speaker 600:34:58Thank you. Speaker 100:35:00Appreciate it. Thank you, Reggie. Operator00:35:04That concludes today's question and answer session. This will conclude today's conference call. Thank you for participating. You may now disconnect.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallCompoSecure Q1 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) CompoSecure Earnings HeadlinesMetaMask Launches Groundbreaking Metal Debit Card for Direct Crypto SpendingMay 4 at 3:31 PM | finance.yahoo.comCompoSecure Partners with Baanx and MetaMask to Launch Revolutionary Metal Payment Card for Seamless Crypto TransactionsApril 30, 2025 | nasdaq.comTrump wipes out trillions overnight…Is there anybody more powerful than Donald Trump right now? In a single tariff announcement, he wiped out nearly $5 trillion in wealth from the S&P 500 and $6.4 trillion from the Dow Jones… Not to mention the countless trillions of dollars lost in every market around the world… leaving the major political powers scrambling in fear of Trump’s next move.May 4, 2025 | Porter & Company (Ad)CompoSecure Schedules First Quarter 2025 Conference Call for May 12th at 5:00 p.m. ETApril 29, 2025 | globenewswire.comNew MetaMask Metal Payment Card: Self-Custody Crypto Card With Direct Payments Unveiled by CompoSecure, Baanx and MetaMaskApril 28, 2025 | globenewswire.comCompoSecure integrates Arculus with MoneyGramApril 22, 2025 | markets.businessinsider.comSee More CompoSecure Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like CompoSecure? Sign up for Earnings360's daily newsletter to receive timely earnings updates on CompoSecure and other key companies, straight to your email. Email Address About CompoSecureCompoSecure (NASDAQ:CMPO) manufactures and designs metal, composite, and proprietary financial transaction cards in the United States and internationally. Its primary metal form factors include embedded, metal veneer lite, metal veneer, and full metal products. The company also offers Arculus Cold Storage Wallet, a three-factor authentication solution, which supports specific digital assets, including Bitcoin, Ethereum, non-fungible tokens and others. In addition, it offers Payments + Arculus Secure Authenticate, white-labeled cold storage wallet, Payments + Arculus Cold Storage, and Payments + Arculus Authentication + Arculus Cold Storage. The company serves financial institutions, plastic card manufacturers, system integrators, and security specialists. 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There are 7 speakers on the call. Operator00:00:00Good 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 speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. Would now like to hand the conference over to Steve Feder, General Counsel and Corporate Secretary. Operator00:00:36Please go ahead. Speaker 100:00:39Good afternoon, and thank you for joining us to review Composecure's Q1 2024 financial results. With me on the call is John Wilk, Composecure's Chief Executive Officer and Tim Fitzsimmons, Chief Financial Officer. They will begin with prepared remarks and then we will open the call for Q and 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 prospects. Forward looking statements may often be identified words such as we expect, we anticipate or upcoming. Speaker 100:01:18These 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 ks and other reports filed with the SEC, which are available on the Investor Relations section of our website atcompassure.com and on the SEC's website atsec.gov. Please note that the discussion on today's call includes certain non GAAP financial measures, including adjusted EBITDA, adjusted net income and adjusted EPS. Speaker 100:02:07The company believes these non GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting 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. Speaker 100:02:41Thank you. And with that said, let me turn the call over to John to discuss our Q1 results. Thank you, Steve. Good afternoon and thank you for joining us for our first quarter conference call. Our momentum from the end of last year has carried into the Q1 as we generated our 3rd consecutive quarterly net sales record, driven by sustained growth in our domestic business, which was up 26% compared to the year ago period. Speaker 100:03:09During the quarter, our customers launched several new high profile card programs that garnered significant attention in the marketplace. This includes the introduction of the Robinhood Gold Card and a new limited edition Delta Reserve Card in white made from an airplane. 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 from metal payment cards. Now to summarize our financial results on Slide 3. Net sales in the Q1 increased 9% to a record $104,000,000 driven primarily by continued growth in our domestic business, offset by lower international net sales. Speaker 100:04:05Looking at our bottom line, Q1 adjusted EBITDA grew 6% to $37,800,000 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 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 quarter's call. 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 $55,000,000 which has more than doubled from 1 year ago. Speaker 100:05:17Given 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 unitholders. This reflects our confidence in the sustainability of our cash flow generation as well as our commitment to rewarding shareholders. We are pleased to incorporate another means to enhance Composecure shareholder value into our capital allocation framework, which includes investment in organic growth, debt paydowns, 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 $408,000,000 $428,000,000 and adjusted EBITDA ranging between $147,000,000 and $157,000,000 These targets reflect our expectation for continued strength in our business as we execute on our growth and profitability objectives. Moving on to Slide 4, we wanted to share several new metal card programs that we have launched since our last call. Speaker 100:06:43Robinhood 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. Amex and Delta announced a new limited edition Delta Reserve card made from a recycled airplane. You may remember Amex launched a limited edition version in black to great success in 2022. The new version which was launched last week is white and already generating buzz in the market. Speaker 100:07:24You 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 5, I mentioned card issuer trends earlier and I'd like to provide further insight. The 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. Speaker 100:08:05Looking at the overall payment card market, we've highlighted several customer and partner quotes on Slide 6. Across the board, issuer sentiment remains constructive on the state of the consumer and the long term opportunity in the payment space. 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 customer accounts. I always like to take the opportunity to outline our Arculus platform on every call to provide clarity around our product capabilities. As mentioned earlier, we continue to see positive momentum and remain on track to achieve our net investment target. Speaker 100:08:56From a capabilities perspective, we recently added multi card support for Arculus Cold Storage, which allows our customers to split their assets across multiple Arculus 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. Speaker 200:09:32Thanks, 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. In Q1, net sales increased 9% to a record level of $104,000,000 compared to $95,300,000 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. Speaker 200:10:12The 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 $17,100,000 compared to $10,700,000 in the prior year. The increase was driven by higher net sales and a 4,300,000 dollars net differential in non cash items from the revaluation of warrants, earn out consideration and derivative liability driven by change in our stock price. Adjusted EBITDA in Q1 increased 6% to $37,800,000 compared to $35,500,000 in the prior year. And our adjusted EBITDA margin was 36% compared to 37% the Q1 of 2023. Speaker 200:11:01The adjusted EBITDA was driven by greater net sales, partially offset by $1,800,000 of net investment in Oculus. Looking closer at the split between our domestic and international business, you can see that our Q1 domestic net sales remained strong at 93,000,000 dollars 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. International net sales for the Q1 of 2024 were $11,000,000 which was down from $22,000,000 in the comparable period last year. As we have stated previously, our international business to be more variable due to the customer mix and a smaller sales base. Speaker 200:11:52We continue to expect our international business to account for roughly 20% of our annual total net sales mix. For perspective, international net sales were 18% of our total net sales mix in 2023 and were 22% of our mix in 2022. Moving on to the balance sheet. At March 31, 2024, we had cash and cash equivalents of $55,100,000 and total debt of $335,600,000 dollars which includes $205,600,000 of term loan and $130,000,000 of exchangeable notes. This resulted in total net debt of $280,500,000 Looking at our leverage ratios, 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. Speaker 200:12:50At March 31, 2024, our overall leverage ratio was 2.28x based on total debt of 335 point $6,000,000 and trailing 12 month adjusted EBITDA of $147,300,000 This compares to 2.35 times at December 31, 2023, with the improvement driven by paying down debt and increased TTM adjusted EBITDA. At March 31, 2024, we had a bank agreement secured debt leverage ratio of 1.34 times based on a total secured debt of $205,600,000 and trailing 12 month bank adjusted EBITDA of 153,000,000 dollars This compares to 1.39x 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 $0.30 to our Class A shareholders and an equivalent distribution to our Class B unitholders. Both the dividend and the distribution will be payable on June 11 to Class A shareholders and Class B unitholders of record as of May 20 and will be funded by our cash and our balance sheet. Speaker 200:14:15The total amount of cash to be dispersed is expected to be approximately $24,200,000 Turning to our cash flow statement on Slide 12. Net cash provided by operating activities increased 36% to $33,800,000 compared to $24,900,000 in the prior year quarter. 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. GAAP EPS for the 3 months ended March 31, 2024 was $0.20 per basic and $0.17 per diluted share. Speaker 200:15:15This 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 our stock price. 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 Upsea structure and the shares that are included in the basic and diluted calculations. 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. Speaker 200:16:13With that background, our non GAAP EPS for the Q1 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. Speaker 100:16:43Thanks, Tim. As I mentioned earlier, we are reiterating our 2024 guidance and continue to expect net sales to range between $408,000,000 $428,000,000 and adjusted EBITDA to come in between $147,000,000 $157,000,000 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 operations. 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. Speaker 100:17:43For 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 sheet. As a result, today we announced 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 Q and A. Operator00:18:49Our first question comes from the line of John Todaro with Needham. Speaker 300:18:55Hey, thanks for taking my question and congrats on the quarter. Great numbers here. I guess two questions for me. One, did domestic growth kind of surprise you? Was there any 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? Speaker 300:19:17And to almost frame it differently, if international bounces back, do you beat the guide that you're issuing? First question. And then just second one, I didn't really hear a call out on the multi factor authentication outside of the Arculus wallet or crypto. Just hopeful to get Speaker 200:19:37some color and thoughts on that part of the business as well? Speaker 100:19:41Thanks, John, for both questions. So let me try and take those in order. 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 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. Speaker 100:20:17As we look at the full year, we do expect international to 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 comfortable with the ranges that we've given and aren't making updates to it at this time, but off to a strong start in our view overall. With respect to the second question on Arculus Authenticate, it is one of the things clearly that is giving us the 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 2025. So I'd say seeing momentum both with the authentication solution as well as the cold storage solution and continuing to manage investments on that side as well. Speaker 300:21:36Great. Thanks. Thanks, John. Operator00:21:42Our next question comes from the line of Mark Palmer with Benchmark. Speaker 400:21:50Yes, good afternoon. Thanks for taking my questions. A couple of questions. First of all, just a follow-up on the international front. Is it the case that some of your customers there seeing what's going on in the macro environment are simply deferring or delaying the launch of different programs, such that they could be coming online in the second half, hence your confidence in approaching the 20% of total sales from international? Speaker 100:22:30Thanks for the question, Mark. Yes, somewhat. So we've got, we think pretty good visibility with opportunities that we see and know that help give us the view on kind of what the rest of the year looks like that approximately 20% and some years it's been 22%, I think last year 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. Speaker 400:23:13Very good. And just a follow-up 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 that a more permanent or common dividend, maybe in the works? Speaker 100:23:50Mark, we've said in the release and I'd point you to that, which is we will consider future dividends, which includes 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, it's continue to invest in growing the business organically, paying down debt, repurchasing securities and 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. Speaker 400:24:46Very good. Thanks very much. Speaker 100:24:49Thank you. Operator00:24:52Our next question comes from the line of Joe Flynn with Compass Point. Speaker 500:24:58Hi, guys. Thanks for the question. First on the Robinhood car program, I was hoping if you could provide any color on the details there. And ultimately, if you see this as an opportunity to maybe leverage ArQoS products as well on the cold storage front? Speaker 100:25:18So 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 and our metal veneer gold metal veneer card that we make for them. In addition, they announced a limited edition solid gold 10 carat card. And I think they're very excited about the program. We're very excited to partner with them as well. Speaker 100:25:55So excited to see what that holds. And with regard to the second, Joe, I'm not going to comment specifically on Robinhood. I'm going to tell you that you can presume that we are talking to all of our customers and prospects about both our card capabilities and authentication solutions and or cold storage where appropriate. It's not always appropriate, but you can presume if it is, we are having those discussions. So beyond that, I'm not going to comment more specifically. Speaker 500:26:36Great. Thanks. That's helpful. And on the capital allocation front, is there any more has been any more internal discussion in regard to potentially unlocking value from moving from the Up C to just regular C Corp? Or I think going forward it was primarily going to be through dividends and buyback? Speaker 100:26:56Look, we've talked about over time, we anticipate seeing that structure change as B units are sold into the market. But nothing there's nothing about that structure that changes with this announcement. We understand perspective out there in the market on it. And I'd say, we've taken this step with providing a special dividend to deliver value to all shareholders. And we think it's a great demonstration of the capability and power of this company to be able to do that. Speaker 100:27:48And I go back to my comment earlier, Joe, we will use any of the tools in our tool set to be able to deliver value to shareholders over time. Speaker 500:28:00Great. Thanks. That's all for Operator00:28:10Our next question comes from the line of Reggie Smith with JPMorgan. Speaker 600:28:18Hey, good evening. Thanks for taking the question. Congrats on the quarter. I had a question, it's kind of housekeeping. But I was curious, for a deal like Robinhood, I would imagine it was 8 a while ago. Speaker 600:28:33Thinking about the revenues, I'm curious if there was anything, I guess, is it episodic like the launch of programs like that? And were revenues recognized both in the 4th quarter of last year and maybe the Q1 of this year? Maybe talk a little bit about how those revs, I guess, for the initial shipment kind of flow through? And then secondarily to that, I know you guys mentioned a couple of pretty exotic card forms. I think you mentioned like the gold that's actually in the Robinhood card and then the Delta card that was made from recycled airplanes. Speaker 600:29:11And I also noticed that the gross margins were a little lower this quarter. Is there any relationship between those two factors or appreciable difference in like how the margins on some of the more exotic cards compared to your, I guess, let's say classic metal card? Speaker 100:29:28Yes. So let me take no, it'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. Speaker 100:29:40So on the gross margin, what we've said is we believe gross margins in our business should be north of 50%. And 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. So that just as a baseline for the story of our business. 2nd, with respect to why it's down year over year, there are two factors that Tim talked about and I'd reemphasize. Speaker 100:30:241 is, we have seen some impacts from inflationary pressures due to things like wages that 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. 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 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. Speaker 100:31:21And we think over time, those sort of normalize out to more stable levels for us. With respect to Robinhood, generally, I'm going to comment just broadly how this works. When someone like that is ramping up a program, Reggie. There are a couple of different ways they can do it. 1 is with a large upfront order and then steady volume to follow or just steady volume as they build. Speaker 100:31:58And 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 presume that 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 3 or 4 different levers. New acquisition, over time, you'll see loss stolen, you'll see natural reissue a few years later. Speaker 100:32:47And all of those build to, we think, the kind of sticky relationship that we want to see with customers over time. So excited about the launch and the opportunity. Speaker 600:33:00Got it. And if I could ask one more. I've known you long enough, I know you're not the type to raise guidance after the Q1, so I'm not going to ask you about that. But I guess thinking about where results came in Q1 versus your expectations, maybe the pipeline, maybe could you talk a little bit about how both of those are today relative to what you were thinking when we spoke 2 months ago? Any color there would be helpful. Speaker 600:33:28Thank you. Speaker 100:33:31Yes. So, Reggie, I appreciate the question. And yes, you are getting we're getting to know each other better as we move through these. 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. 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. Speaker 100:34:06And I think from looking at it, 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, 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 600:34:32Fair. When I do the math on just the seasonality, looking at your 1st quarters in the previous like 3 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 Q1. So that was the impetus for the question. 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. Speaker 600:34:58Thank you. Speaker 100:35:00Appreciate it. Thank you, Reggie. Operator00:35:04That concludes today's question and answer session. This will conclude today's conference call. Thank you for participating. You may now disconnect.Read morePowered by