Business Breakdowns
· 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?
· Parsa Kiai
[00:00:00] S1: There's definitely some competitors that are encroaching, a hodgepodge of competitors, mostly who have historically focused on the lower-end general plastic card. But if you look at the growth and the margins that CompoSecure has and coming from virtually a monopoly position, it's only natural to think that there's going to be some capitalistic instincts and some competitive threats. There is a good list of competitors that are in the manufacturing business and are looking to get into this. And you can think about Idemia and Thales in Europe. You could think about CPI Card Group, which is the largest card manufacturer in the general plastic card, and a host of others. We anticipate that all of them have been and are going to continue to try to get into this business. It is conceivable that some of them with the right resources do start producing metal cards for some more marginal issuers. We would not anticipate that Chase or American Express takes their business over, partly because of what we talked about. This is such an important business for them, and the cost of a CompoSecure card at $12 or lower for these issuers is not enough to risk a lower quality or less experienced supplier. So we don't worry about that. But if you do think about less well-capitalized card issuers coming into the space, we do know that Idemia and Thales, as probably the most well-capitalized and technically proficient companies, are probably going to start making some share. Idemia and Thales, interestingly, they're both competitors, but they're also actually resellers. CompoSecure manufactures some premium metal cards for them for different issuers in international and other areas. It could be because those companies have much larger sales forces. They can go out and reach certain issuers internationally that CompoSecure can't, but they don't have the technological expertise and the manufacturing know-how that CompoSecure does. In a way, they are resellers for CompoSecure. But any company that comes off with this much of a head start in market share, it's natural to think that you're going to lose a couple of things. But I would be surprised if they did not continue to grow with Chase, American Express, and the premier fintechs and neobanks like Robinhood and Coinbase and so forth.
· Parsa Kiai, Matt Reustle
But I would anticipate that Idemia, Thales, and some other producers like FCS and others will start to encroach as the new entrants into this business. [00:00:00] S0: Natural to attract that competition over time, and it'll be interesting to see how they compete. You've made a few references to Dave Cote's track record with M&A, and I think it's a perfect opportunity to introduce that. Maybe introduce Resolute Holdings and that interesting dynamic into this business. Maybe you can lay out the framing for how you think about Compo's potential to make acquisitions, how Dave's history plays into it, and then we can address Resolute in detail or follow up with questions that I might have around it.