CPI Card Group Inc. (PMTS) Earnings Call Transcript & Summary

Thank you. Welcome to CPI's second quarter 2026 earnings call. My name is Alexandra and I will be your operator today. If you are viewing on the webcast, you may advance the slides forward by pressing the arrow buttons. The call will be open for questions after the company's remarks. If you would like to in the queue for questions please press star 1 to raise your hand to withdraw your question press star 1 again now i would like to turn the call over to davis barker head of investor relations.

Thank you, Operator. Welcome to CPI's second quarter and first half 2026 earnings call. As a brief introduction, I recently joined the CPI team and I'm incredibly excited to partner with CPI's leadership to share our compelling story with the investment community. Joining me on the call today are John Lowe, President and Chief Executive Officer, and Tara Grantham, Chief Financial Officer. Before we begin on slide 2, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the four local statements. For discussion of such risks and uncertainties, please see CPI's most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this During today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA margin, net leverage ratio, and free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Today's press release, as well as the presentation that accompanies this conference call and the Form 10-Q are accessible on CPI's Investor Relations website at investor.cpicardgroup.com. We will open the call for Q&A after our remarks. I would now like to turn the call over to John.

Thanks, Davis. Welcome aboard. We're excited to have you on the CPI team. Good morning, everyone, and welcome to the call. Before I begin, I'd like to officially congratulate Tara on her appointment as Chief Financial Officer. Since joining us, Joining CPI in 2017, Tara has been a key driver of CPI's evolution into a payments technology leader and after an outstanding job as interim CFO, I couldn't be more excited to have her in the role permanently. Turning to slide three, the CPI team delivered a strong second quarter and first half of 2026. We achieved revenue growth of 15% in the second quarter and 17% in the first half, resulting in a record first half revenue for the company. Performance reflected continued momentum in Secure Card solutions, including another quarter of strong execution from ROI, which continues to exceed our original expectations. completed another strategic acquisition, find an instant issuance solution known as TRISM, supports the expansion of our higher growth, higher margin, integrated pay tax segment. We also received tariff refunds in the second quarter, which benefited the P&L by more than $3 million. These successes were partially offset by some market choppiness in prepaid as we continue to see softness within that segment, which we expect will continue into late 2026. We delivered good profitability growth, exceeding our expectations with second quarter adjusted EBITDA, increasing 7% to 24 million, while generating a company record free cash flow of $36 million in the first half, strong performance in our Secure Card solutions is driving significant operating cash flow growth as higher volumes accelerate inventory optimization initiatives. Just as importantly, we continue to strengthen our balance sheet, reducing net leverage to 2.7 times and redeeming 26.5 million of our senior notes shortly after quarter end. These results reinforce the strength of our business model and our ability to consistently generate strong operating cash flow, deliver our balance sheet, and create a and create additional value through disciplined capital allocation. With our strong first half performance and visibility into the second half of the year, we are pleased to raise our full year revenue growth and free cash flow guidance while reaffirming all other guidance targets. Sarah will share more about her updated outlook shortly. Beyond the financial results, what What excites me most is the continued progress we're making executing our strategy and diversifying CPI. We continue to see strong momentum across our cloud-based and digital solutions, which are helping us generate new recurring revenue streams, deepen customer relationships, and expand our role in the payments ecosystem. During the quarter, we continue to build go-to-market momentum across our businesses. In our integrated PayTech segment, we're excited to expand the reach of our cloud-based push provisioning and cart-at-once solutions with Blossom, a lead-in solution for our customers leading digital banking and payments platform, serving 350 plus credit unions, and CU Answers, a leading core processing and digital banking provider, serving more than 400 credit unions across the US. We continue to be excited about the momentum we're building as we expand our reach into the payments ecosystem as a provider of digital solutions leveraging our tokenization capabilities. In our Secure Card Solution segment, we hit a new milestone with ArrowEye, where we executed our 25th new customer win since closing the acquisition in May of last year. We are also excited to have extended our relationship with Veracast, a data-driven fintech that services roughly 60% of U.S. commercial banks and credit unions and a customer relationship that spans more than two decades. On the prepaid side, while the current year remains choppy, we remain excited about our long-term opportunities in the open-loop market and the much larger closed-loop market. This quarter, we've continued to win share and are now serving all of the top prepaid program managers in the US, further strengthening our position the center of the prepaid market and creating new opportunities to deliver our secure packaging solutions. We are making good progress with CARTA on our joint pilot to launch prepaid packages with safe-to-buy chip-embedded technology at one of the largest U.S. national retailers, and we are seeing encouraging signs in the adoption of closed-loop, a market where we estimate is approximately five times the size of open-loop. Given our leadership position in prepaid packaging, chip-enabled solutions, and customer relationships, we believe CPI is uniquely positioned to capitalize on the prepaid market as it actions to reduce fraud. All together, these wins across our business are a great example of how CPI is leveraging both physical and digital payment solutions to create value for customers and drive profitable growth. Turning to slide four, let me briefly remind everyone of the foundation of our strategy. Everything we do is built around three core growth pillars. Our proprietary technology platform, our marketable base of thousands of customer relationships across the payments ecosystem. and our ability to deliver innovative payment solutions that evolve alongside market needs. These pillars continue to drive growth and diversification across the company, and our acquisition of TRISM Instant Issuance is an excellent example of that strategy in action. Turning to slide 5, TRSM expands our leadership position in the attractive U.S. instant issuance market and roughly doubles our instant issuance addressable market by enabling us to serve larger financial institutions that prefer an on-premise solution. The acquisition increases our instant issuance presence to nearly 20,000 locations across over 3,000 financial institutions. It's recurring revenue and long-term customer relationships and creates attractive cross-selling opportunities across CPI's broader portfolio. I met with the TRISM team last week and on behalf of the leadership team and all of CPI, we are excited to have TRISM as part of our team. POSM is expected to increase integrated paytech growth to approximately 20% in 2026, while maintaining a gross margin profile of over 50%, consistent with our existing integrated paytech business. Additionally, this acquisition had little impact on leverage, enabling us to complete the strategic acquisition while maintaining our disciplined approach to capital allocation. In summary, we delivered an excellent second quarter. We gained share, generated strong revenue growth and profitability expansion, delivered record first half free cash flow, and continued to improve our balance sheet. We are executing our strategy to grow and diversify the business, positioning CPI well for the second half of the year and beyond. With that, I'll turn the call over to Tara to provide more detail on our financial results and outlook for the remainder of the year.

Thanks, John. Before I begin, I'd like to thank John, our board of directors, and the entire CPI team for their confidence and support as I take on the CFO role. I look forward to continuing to partner with our leadership team as we execute our strategy, drive profitable growth, and create long-term value for our shareholders. shareholders. I'll begin with our consolidated revenue and profitability results on slide seven. We are pleased with our second quarter and first half financial performance. Our strong results for the second quarter were better than our expectations, although the mix of performance across the business evolved as the first half progressed. Strong performance in Secure Card Solutions helps offset a slower-than-expected start to the year in prepaid solutions. Revenue increased 15% in the second quarter to $149 million compared to $130 million in the prior year period, driven by increased volumes of contactless cards and higher personalization solutions, as well as contributions from the acquisition of ArrowEye. Excluding Arrow-Y, total organic revenue grew 12% in the second quarter reflecting the underlying strength of our business. Second quarter gross profit increased 21%, resulting in a gross profit margin of 32.5% in the second quarter, an increase of approximately 160 basis points from 30.9% in the prior year period, primarily driven by a benefit of more than than $3 million of tariff refunds. Second quarter adjusted EBITDA was $24 million, representing growth of 7% driven by revenue growth and the benefits of tariff refunds. Gross margin and adjusted EBITDA margins were impacted by unfavorable segment mix due to softness and higher margin prepaid revenue that was partially offset by continued growth in Secure Card Solutions, which, while profitable, carries lower margins than our prepaid business. SG&A expenses were $37 million in the second quarter compared to $31 million in the prior year period. The increase in SG&A was driven by airway integration expenses and investments in digital and technology as we fuel our efforts to grow and diversify in our higher margin, more recurring revenue businesses like Card It Once and Digital. Integration and transaction related costs primarily related to ERA-Y were nearly $3 million in the second quarter. expect these to be significantly lower in the second half of the year. We will have tourism integration expenses in the second half, but it's significantly lower spend levels. These investments have and will continue to support our long-term growth strategy through expanded capabilities and revenue and operating synergies. And as a reminder, these costs are not included in adjusted EBITDA, but do impact net income. We are driving initiatives designed to improve margins over time. During the second quarter, we progressed supplier negotiations, realized incremental acquisition synergies, including freight, scale efficiencies, advanced worksite optimization across our Secure Card Solutions footprint, and moved our automation initiatives forward. We also continued focus on expanding our growth in higher margin solutions, including metal cards, in our integrated pay tax segment. While some of these initiatives are already generating benefits, we expect a larger impact as we move through the year. Turning to our segment results on slide 8. In Secure Card Solutions, second quarter revenue increased 17% to $111 million, driven by increased volumes of contactless cards, higher personalization, and $5 million of ROI contribution. Excluding Arrow-Y, second quarter organic revenue in the Secure Card segment increased 13% with strong underlying growth in our largest segment. In prepaid solutions, second quarter revenue increased 18% to $23 million, primarily due to a change in accounting that was implemented in the second quarter of 2025, partially offset by comparisons with strong sales of higher value packages. and changing solutions in the prior year period. As I shared at the start of my remarks, we experienced a slower than expected start to the year in prepaid as customer ordering patterns remained uneven. While the recovery has been slower than originally anticipated, we continue to be well positioned to capture new revenue opportunities in this market, including in closed loop, where we are continuing to see strong customer interest and in our strategic partnership with Carta. Within integrated pay tech, second quarter revenue increased 4 percent, driven by increased card at once revenue and a very small contribution from the TRSM instant issuance acquisition which closed in late June. We continue to expect integrated pay tech to deliver approximately 20% growth for the full year, an increase from 15% expected at the start of the year. While this implies a significant increase in growth in the second half of the year, we have confidence in this expectation based upon continued adoption of our card at once and digital solutions. contributions from TRISM, and the benefits of favorable comps versus the prior year. We generated exceptional cash flow in the first half of the year. Cash flow from operating activities was a record $42 million in the first half compared with $10 million in the prior year period. Free cash flow was $36 million compared with $1 million in the prior year period, driven by lower working capital usage, including reductions in chip inventory, a strong Secure Card Solutions performance, accelerated inventory optimization initiatives. Our free cash flow through the first six months of the year is a record for the company. Capital expenditures totaled $6 million in the first half, down from $9 million in the prior year period, as capital spending last year included investments for our new Indiana production facility. We now expect full year capex to be slightly below our 2025 levels, driven by a reduction in certain equipment investments and lower software capitalization and plans. We are focusing CapEx on growing our digital solutions, enhancing our technology, driving automation, and other key growth investments. On the balance sheet, at quarter end we had $21 million of cash, $92 million of available borrowing capacity under our ABL Revolver, and $265 million of Senior Notes outstanding prior to our $26.5 million Senior Note redemption in mid-July. Net leverage ended the quarter at 2.7 times, down from 3.6 times at this point last year. The progress on our balance sheet reflects our commitment to deleveraging and reducing our interest expense while continuing to grow adjusted EBITDA. Wrapping up with our 2026 financial outlook on slide 10. As John shared at the beginning of the call, we are pleased to be increasing our 2026 financial guidance on revenue growth and free cash flow while holding our guidance on adjusted EBITDA and year-end net leverage. Our adjusted EBITDA outlook remains unchanged as the benefits from stronger Secure Card Solutions performance and tariff refunds are expected to largely be offset by continued investment in integrated pay tech and ongoing choppiness in our higher margin prepaid solutions segment. We now expect revenue growth of high single digits to low double digits. Adjusted EBITDA growth of low to mid single digits. Free cash flow ranging from 45 to $50 million and increase from our prior guidance of a conversion rate in line with 2025. 2025 pre-cash flow was $41 million. Year-end net leverage from 2.5 times to 3.0 times. As we already shared, we are raising our integrated pay tax segment revenue growth from 15% to approximately 20% helped by our acquisition of TRISM. Overall, our first half results keep us on track to achieve our updated full year objectives. We currently expect third quarter revenue and adjusted EBITDA to be slightly better than the second quarter as we progress toward our updated guidance. The actions we are taking to grow the business, expand our market opportunity, improve margins, and generate strong cash flow position us well for the remainder of 2026 and beyond. I'll now turn the call back to John for some closing remarks. John Lumpkin Thanks, Tara.

We delivered a strong first half of 2026, achieving double digit revenue growth and record free cash flow, while continuing to execute on our strategy to grow and diversify the business. We expanded our digital and cloud capabilities, secured exciting customer wins, another strategic acquisition and continued building momentum across our portfolio. At the same time, we strengthen our balance sheet, reduce debt, and maintain the flexibility to invest in future growth while creating value for shareholders. As I wrap up today's remarks, I want to recognize the CPI team for delivering a strong first half and positioning us for an even stronger second half of 2026. We have a robust sales pipeline, an increasingly high-quality recurring revenue customer base, and a clear focus on generating profitable growth. Operator, we will now open the call up for questions.

We will now open the call for your questions. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Peter Heckman with D.A. Davidson. Your line is now open. Please go ahead.

Good morning everyone. Good to see the nice strong first half results. I had a question on the TRISM acquisition. I inferred that this is a relatively small deal. I think in the original press release, you said that you didn't expect it to change your net leverage ratio at all. I did hop on a little bit late, so I apologize if you already covered it. But I guess in terms of thinking about like incremental revenue perhaps that you could pick up for 2027, should we be thinking about maybe something like for the full year, like $5 to $10 million in revenue? And then just in terms of the rationale for that deal, I don't think there's very many players in the instant card issuance market. And so absorbing this one should really help. your competitive position and can see you can talk a little bit about what what what attributes the deal brings to cpi.

Yes, Pete, good morning. Good question. No problem jumping on late. We can we can cover that. So just to start, you know, Trism is a great strategic acquisition for us. You think about our position in the instant issuance market broadly. We historically have been the market leader by far in software as a service, kind of cloud-based solution where you're servicing those small to medium banks that don't have the ability to manage their own technology. We would also compete against a couple other players that would have on premise solutions where they're typically servicing the larger banks with a greater number of locations that, you know, have large technology operations. They can manage things on their own, and they want that somewhat. They want to buy the software, but they want to manage it on site on their own. And so, Trism fits that. into that ladder mold. So it really grows our addressable market essentially double from where we were. And a great investment for us. That said, going to your other question, size-wise, you know, we talked about TRISM increasing our integrated pay tech segment guidance this year from 15% to 20%. If you just ran that math, that's roughly, you know, $3.5 million, $4 million is what we expect for the latter part of this year. That's a great investment for us. That said, that's because we're getting them kind of up and running under the CPI umbrella. We would expect that run rate to be double and probably a little bit larger in 2027, so don't want to necessarily give guidance yet, but I wouldn't expect just to be able to double that, and that's the guidance for 2027, put it that way.

Does that answer your question? Your next question comes from the line of Jacob Stefan with Lake Street Capital Market. Your line is now open. Please go ahead.

Hey guys, appreciate you taking the questions. First, maybe just kind of building off of that last one on TRSM. When I look at IPT, it grew kind of low single digits in the first half, but your fiscal year guide is 20%. I think TRISM is probably in the $3 to $4 million range. What's the other $10 million that you're expecting to ramp in the second half?.

in the second half. Yes, hey morning Jacob. So really three things you know one our card at once business we we do have strong confidence in kind of the second half of the year. we see the line of sight to greater growth there, and that's good for us. You add in tourism, that's, as I mentioned, a small percentage of the growth. And then if you just look at comparables, for 26 compared to 25, Q3 was a pretty good quarter in 26, Q4 in 26, and 26 or 25 was a little bit slower per quarter. So we would expect a fairly strong growth in Q3 for integrated pay tech segment and a very strong growth in Q4, 26 for integrated pay tech. So we're confident in the business and our line of sight to hit the 20% guidance for the year.

Okay, great. Maybe just on Securecard, you know, that was up 25% in the first half. I guess how much of the the incremental was, you know, ROI versus kind of your organic contactless personalization? And can that kind of maintain against, you know, as we look at the second half of the year?.

Yes, so I think if you look, Jacob, at our organic growth, it was also very strong in the first half of the year and in Q2. So overall for CPI, our organic growth for Q2 was 12 percent and for the first half was 14 percent. and the majority of that was driven by strong organic growth in Secure Card solutions.

Okay. Last one for me, you know, just on the free cash flow. obviously 36 million is outstanding in the first half. I guess, you know, with your guide, you know, being your commentary being 45 to 50, What kind of reverses in the second half and how much inventory kind of releases is left in the model?.

Well, Jacob, first I'd say I just want to thank the team. I mean, we had a tremendous amount of cash flow in the second quarter. That's a really first half is a record for us. the performance in the business is really driving what I would say significant volume growth, which ultimately drives inventory optimization, which we've been pushing to do for a period of time post-COVID. And so we knew we'd get to this point, but, you know, now we look forward and we're excited about the cash flow prospectively, but I'll let Tara come in.

cover kind of second half a little bit. Yes, so again, I'll echo what John said. Very happy with our our pre cash flow performance and in the first half. And a lot of that was driven by inventory. I would say acceleration of our inventory optimization. And I do want to say we actually, you know, continue to focus on that and we expect our inventory to continue to improve in the second half. But we do have some other items in the second half that will not be as positive in the first half, primarily kind of around our, you know, our AR and AP, which we did have some timing things there. So really good performance in the first half. And some of that was, you know, team efforts. and strong working capital management, but we also had a little bit of timing. And then we do expect a higher CapEx in the second half as well. But overall, we're very focused on, you know, continuing to drive cash flow, super excited about that strong performance and strong working capital management as we continue to go forward.

Okay, great. I appreciate all the color. I'll turn it over.

Thanks, Jacob. Your next question comes from the line of Peter Heckman with DA Davidson. Your line is now open. Please go ahead.

Hey, John, sorry about that. I was on mute and I did have a follow-up question, but your answer to the prior question on TRIS was very helpful. thinking about and again I apologize if I missed it but could you just go into a little bit of detail in terms of progress on anti-fraud packaging on closed loop prepaid cards. If you've had any, progress there and whether or not you have had any change in terms of your thoughts about the relative opportunity there over the next 18 months.

Yes, Pete, no problem. And good question. The prepaid market broadly is a we said this in the last couple of quarters. I think we're extremely well positioned for what may occur on a go for basis. You know, just like any other market, things change on a kind of a slow basis, if you know what I mean. So it's hard to put a specific date on changes, but if you think about the two big markets, right? Open loop, where we've been a leader for a long time. Closed loop, where we're just entering into closed loops about five times the size of open loop from a volume perspective. And the value of closed loop continues to rise as there's regulation changing in the states and retailers, merchandisers, essentially demanding greater packaging around closed loop cards. And that's where we're at. we fit in because we're the largest prepaid packager in the United States by far. And on the open loop side, when you add in our ability to take our chip expert expertise, if you will, that we have on the ScareGuard solution side, the IPT side. That is something that we're already in pilot with one of the largest national retailers in the United States. We're kind of in the second stages of that pilot. Seems to be going well. So just like anything else, you know, things take time. But we're excited about the opportunity and, again, wouldn't put a number on what that means for 27 or 28. But I will say we're happy about our position in the market and we're excited about what's to come in pre-bay broadly.

Okay, that's helpful. And then just last question on metal cards. I know it's a very small portion of your overall business, but I do think it's getting bigger. If I remember correctly, you had a pretty good year last year, and I think I've seen a couple of advertisements here and there. Can you talk a little bit about how your metal cards differ? from maybe the other major metal card provider and where you see some opportunities there?.