Business Breakdowns
· 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?
· Parsa Kiai
[00:00:00] S1: If you think about the drivers of the revenue growth, you're going to have the units on the premium metal card side, you're going to have ASP on the card side, and then you're going to have Arculus. We'll try to tackle each one of those things. We actually think within the metal card business, units are probably going to go faster than the ASP as you've got so many more really incredible card issuers, neobanks, and fintechs fighting for this customer acquisition tool. We think that the premium metal card business will grow at a high single-digit to low double-digit basis on a unit level. Now within that, as that volume grows, we anticipate that the average selling price for high-volume issuers like American Express and Chase will probably go down. You make 13 million cards for Chase and for American Express. If you start making 20 or 25 million, I anticipate that your ASP goes down. You flip it over to a Robinhood Gold card and some of these cards that cost $50, $100, or $500 per card on smaller volume, that's going to be what I think will grow your ASP at a low single-digit rate. Interesting mix within that, and you see a glimpse of some of this in the customer agreements. But as you've had the ASP for American Express and Chase go down a little bit, the aggregate ASP has gone up because of these new customers. We anticipate that the premium metal card business can get you to the double-digit organic growth rate. And then the Arculus side, it's going to be a lot higher than that. It's tough to tell what it could be. But when you think about the cross-selling opportunities, for example, on the Chase Sapphire card, you're using the EMV technology, but you really have not incorporated all of the security and authentication tools yet. And given the long relationship between CompoSecure and Chase, that could be an opportunity for future growth. And you look at all the other use cases for Arculus, we can look at a couple of companies. For example, there's a cold storage competitor called Ledger. They're not public, but there's some data that suggests they have maybe $70 million of revenue selling crypto cold wallets. Then you look at a company like Yubico, which is a security dongle company in Sweden. They have something like $250 million in revenues selling security devices for enterprise customers.
· Parsa Kiai, Matt Reustle
Arculus could provide both of those and perhaps be a cleaner and more efficient tool. You're looking at $300 plus million of revenue right there. We're not sure when and how that evolves, but it's going to be additive to the overall growth rate. I would say as a baseline we anticipate 10% organic growth, and then you add Arculus, and then you add potential M&A from Dave Cote, and we could see this having a lot higher growth from that. [00:00:00] S0: The Arculus business is quite interesting because there's obviously numbers out there, but it's hard to appreciate how quickly it might be adopted or over what timeline that looks like. For any listeners, cold wallets are just moving something off of the internet. Most crypto wallets are connected to a bunch of digital things, and that could increase security risk. This gives you something that's offline. Worth mentioning that part, but interesting to frame it in that regard, and particularly some of the pickup you could also see from some of the legacy customers. I know they split this business out on its own, but it does feel like there could be potential overlap in terms of how they're targeting customers in the future together with the legacy business. That's quite interesting. I did want to get some understanding. Are there competitive threats beyond Apple Pay? Are there other competitors in the metal card space? You mentioned some of the cold wallets, but what would you say that landscape looks like?