Delmaine Donson
Back in March, I lowered my rating on CPI Card Group (NASDAQ:PMTS) to “Sell.” With PMTS stock down almost -40% since then and tumbling on its earnings results, let’s take a closer look at is Q1 earnings report.
Q1 Earnings
For Q1, PMTS saw its revenue rise 8% to $120.9 million. The company surpassed analyst estimates calling for sales of $113.3 million.
Gross margins improved 40 basis points to 35.3%. Adjusted EBITDA jumped 11% to $25.1 million from $22.5 million a year ago. Adjusted EBITDA margins improved 50 basis points.
PMTS once again credited the margin improvement to higher operating leverage from higher sales which again more than made up for production inflationary pressures. It is notable that sequentially, gross margins were down -230 basis points.
By segment, Debit & Credit revenue rose 10.8% to $102.0 million. Gross margins for the segment came in at 37.4%, up 240 basis points year over year and down -60 basis points quarter over quarter. EBITDA for the segment was $32.2 million, an increase of 23.4%
Similar to last quarter, the company credited contactless cards as its main growth driver, as well as solid results from personalization services and its Card@Once instant issuance services. Eco-focused cards, however, were down year over year, as it lapped some large orders a year ago. Last quarter, the company saw 70% growth in this product.
Prepaid Debit revenue slipped -1.7% to $19.1 million. Segment gross margins were 34.7%, down -1,050 basis points year over year and -900 basis points sequentially. EBITDA for the segment plunged -34.5% to $4.3 million.
The company said the decline in margins was due to $1 million in costs associated with moving from a temporary work force to a full-time work force at tis prepaid production facility.
Overall, PMTS generated $3.9 million in free cash flow in the quarter. It ended the quarter with $271.8 million in net debt, which equate to trailing twelve month leverage of 2.9x.
The company also announced that Jeffrey Hochstad will take over as CFO effective May 15th. Former CFO Amintore Schenkel announced he would leave in March.
As for the quarter itself, revenue growth did slow and there was some margin compression in its smaller Prepaid Debt segment, but overall, it was generally solid.
2024 Guidance
Looking ahead, PMTS maintained its full-year guidance. It still expects mid-single digit net sales growth and mid-to-high single digit adjusted EDITDA growth. The firm still anticipates that its FCF will more than double and that it will end the year with leverage between 2.5-3.0x.
Discussing its outlook on its Q1 call, CEO Scott Scheirman said:
“Today we are affirming the financial outlook we provided in March. We believe continued strong performance from contactless cards, additional sales of end-to-end solutions, and further penetration of instant issuance will drive sales growth for the full year. However, there is more risk and uncertainty in the market. The banking industry stress that emerged following the collapse of Silicon Valley Bank in March has contributed to more cautious spending environment among issuers. Although we do not have any significant direct exposure to the three major banks that have failed, we have recently seen softening customer demand in our debit and credit segment, and consequently, do not expect second-quarter results to be as strong as the first quarter. Near term, it’s difficult to project the extent of the banking industry stress or how long it will continue to impact us. However, given the uncertainty, we have implemented various new initiatives to drive sales and manage expenses more tightly in 2023.
“Based on what we know today and the strong first-quarter performance, we have affirmed the full-year outlook we provided in March. Despite the near-term challenges, we continue to believe we operate in an attractive long-term growth market. Secular card trends have remained healthy, as evidenced by the 11% compounded annual growth rate on Mastercard and Visa US cards in circulation for the three-year period ending December 31, 2022, and the ongoing movements towards eco-focused cards and contactless cards should continue to aid growth. I would also remind you that the card business is reoccurring in nature with historically approximately 90% of payment cards issuance being for reissuance and replacements, so there is strong support for the market over time. We have successfully gained share and a growing market over the past five years by focusing on our key strategies, and we expect those to continue to be the foundation for our growth.”
While PMTS maintained its full-year guidance, management’s commentary wasn’t exactly re-assuring. It appears the company is facing a lot of headwinds at the moment. Given that the company almost went bankrupt a few years ago and hasn’t paid down much debt despite a rebound in its operational performance, it’s not much of a surprise that investors are taking a cautious approach with the name.
Valuation
PMTS stock trades at 5.6x the EBITDA 2023 consensus of $102.8 million. Based on the 2024 consensus of $115.9 million, the stock trades at a 5.0x multiple.
On a P/E basis, its trades at around 9.8x the 2023 consensus of $2.71.
Notably, PMTS only has one analyst that follows the company. That would be Jaeson Schmidt from Lake Street Capital, a small boutique firm from Minneapolis. His EBITDA estimates have been slightly lowered since last time I looked at the stock.
The stock trades at a lower multiple to its closest peer CompoSecure (CMPO), but PMTS has a bit more leverage.
Conclusion
While its results were pretty much in line with expectations and its full-year guidance reaffirmed, PMTS stock got hammered following its earnings announcement, down over -34% the session after its report. The talk of near-term challenges, softening customer demand, and that the second quarter would not be as strong as the first quarter, nonetheless, were not reassuring words to investors, who heavily sold the stock.
While PMTS likes to tout the recurring nature of its business, its results have largely been driven by margin expansion from contactless cards. If this trend slows or margins shrink, similar to what happened with EMV cards at a similar period of penetration, the stock could remain under pressure.
I think the smart thing for PMTS to do would have been to lower guidance, especially with a new CFO coming aboard. Instead, the stock has taken a hit, and while it’s talked about headwinds, the bar has not been lowered.
As such, while I gave heavy consideration to moving the stock back up to “Hold,” I’m going to keep it as a “Sell.”
