Business Breakdowns
· Parsa Kiai
[00:00:00] S1: This is probably the most important question in breaking down this business and thinking about it long term. And it really was the biggest concern we had when we first invested in CompoSecure before Dave Cote's involvement. As I mentioned, it is a real important and interesting topic. And it's worth thinking about the disintermediation risk by mobile wallets and Apple Pay. But I'll address it in two ways. The first is back when we first invested in the company, the company was valued as if no one was going to use a credit card in three or four years. The company was trading at five times normalized free cash flow. When we did our work then, we came away with the conclusion that cards were going to be around for at least five years, and we were going to make good money on this investment because it was priced as if you were disintermediated in the near term, while cards were still growing double digits. Of these new fintechs and neobanks were all looking to get into the premium card business. That was a different story then. Fast forward a few years to now, it's still an important question. But the data shows that the premium metal card has become increasingly important, not the other way around. Even as Apple Pay, mobile wallets, and other things have taken off, you're seeing that that customer response is getting stronger, not weaker. Take a look at American Express. When they did one of their first big product refreshes back in 2016 and they introduced a brand new shiny American Express card with a higher annual fee, net new accounts acquired went up by 50% over the pre-refresh period. When American Express just introduced the new product refresh earlier this year, you saw that net new account acquisition went up by 2x. So the customer response was double in 2025 what it was in 2016, even though mobile wallets, Apple Pay, and everything is more prevalent today. So customers are still showing that they want a top of wallet physical card and the status and prestige that that brings among your friends. The second point is when you look at even digitally native companies that have some aversion to physical assets like Coinbase, Robinhood, Gemini, all of them are coming out with brand new premium cards that are physical metal cards as a customer acquisition tool, and they are all CompoSecure customers.
· Parsa Kiai
So even these companies that are at the leading edge of everything digital, they are manufacturing and distributing cards to their customers, and instead of giving you 4% cash back, they'll give you 4% in Bitcoin back. It shows that this tool is still incredibly important. Third, when you look at Apple itself, Apple was one of the first ones to try a card that did not have a physical card and it was only digital. And the Apple card program did not take off the way people anticipated that it would. It really did not resonate with the high end consumer. And the reports have been that Goldman Sachs has lost quite a bit of money on it and now trying to transfer that over to maybe J.P. Morgan. So the experiment that you've had with a purely digital card has not taken off yet. And then lastly, while I do think that in 20 years or some long time period this does become a bit of a risk, you have to also consider that the third most frequently used form of payment even today is cash, not mobile wallets or anything. So credit cards are number one at 35%, debit cards are at 30%, and 17% of transactions are still done with cash. And it's incredible to people who live in New York or San Francisco, but there's plenty of places that forget about accepting metal or plastic. They don't accept anything but cash. So the tail for physical credit cards is going to be longer than expected rather than shorter. This is a risk, and you've got Dave Cote and his team here to address that and to put the company, whether it's with the security and authentication at Arculus, whether it's with M&A, whether it's with other things, really get ahead of this risk in the long term.
· Matt Reustle
[00:00:00] S0: It's a really interesting theme. I would have put myself in the camp of expecting physical cards to shrink near term, medium term. But as you dig deeper and you look at the actual data and the precedent, and then consider cash or checks, the amount of checks that I still have to write and the amount of checkbooks that I still have to receive, it's still a piece of the payments infrastructure system, and that does a lot. So interesting to hear about how you frame that risk as being real over 20, 25 years, but near term, the signals are pointing in the other direction. I wanted to transition a little bit to the margin side of the equation. Now that they're public, it's out there for the world to see. We see some companies who maybe fear going public because then that would release those margin numbers to their customer base. Talk about what those actually look like. How good of a business is this in terms of what they're driving inside the financial statements?
· Parsa Kiai
[00:00:00] S1: Our first fear was when the company came public, we're like, oh my God, everyone's going to see that you have 50% gross margins, 40% EBITDA margins. American Express and Chase are going to see this, and all of this is going to go down. And I think when you really dig into their competitive position and the advantages that they have from the technology, the manufacturing, and the customer relationships, they've been able to maintain those margins even as all the competitors see it, even as the customers see it and renew contracts. You got a nice glimpse into the business when they published their 2024 10-K. They broke out the segment financials for the first time and they separated Arculus from the core metal card business. And you could see that the metal card business has 53% gross margins and core EBIT margins of 40%. Very little in the way of capex and depreciation with EBITDA margins of 42%. One of the fascinating things is that there's virtually no marketing spend at the core metal business because you're really the dominant player in the industry. And you're so well known to the largest and most important issuers that you don't need to convince them to use you, and others come to you as well. So if you think about the business in 2024, did a little over $400 million of revenues, and they sold about 31 million cards. So the average was about a $13 ASP for your card business. Gross margins are a little over 50%. Each card costs you about $6.20 per card. That's six times more expensive than what your general plastic card looks like. And that's because of all of the technology and the raw materials and all the quality that goes into that card. So you've got your EMV chip that could cost a dollar a card. You've got incredibly sophisticated materials, stainless steel. They make certain cards for different co-branded partnerships. They've used recycled aluminum from a Boeing 737 fuselage to make a Delta co-branded card. They've used Corning Gorilla Glass to make a glass card. It really is a sophisticated manufacturing process. So between the manufacturing, the EMV chip, and the technology, you get around a $6 unit cost for the card, and that gets you your 50% gross margins. It's a pretty efficient business. Thereafter, have 40% EBITDA margins and a really, really attractive business on a unit basis.
· Parsa Kiai
They also showed the unit economics on the Arculus side. This was a real interesting thing because up until then you really didn't know. They would tell you a little bit Arculus was a double-digit net investment or what it was. But you saw that Arculus has 80% gross margins and that its revenues had grown from less than $2 million in 2023 to almost $11 million in 2024. When we think about the use cases, how big that TAM can be, and a business that could be cross-sold and have all this integration into your existing high-end issuer base, we think 80% gross margins, long runway for growth, security and authentication being so much more valuable in the future. We think Arculus has a lot of potential as well, even though it is not providing a ton in terms of segment EBIT or anything like that. But it's a really fascinating business, and that glimpse of the unit economics was very important.
· Matt Reustle
[00:00:00] S0: It's amazing to hear about the usage of some of those unique metals and then being able to keep the margin, because I would imagine it's a pretty efficient manufacturing process to do what they're doing. And then to introduce some of those unique products like the gold and the glass that you mentioned is quite interesting. Probably speaks to something on the manufacturing side of things. When you put it all together, just from a top-line perspective, I had that number of net new cards but also just card growth in my head. But when you put everything including Arculus and the legacy business together, what does a reasonable top-line growth look like, whether it's traditional GDP environment or anything along those lines? How do you think about the revenue growth in some term of trajectory?