Business Breakdowns
· 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.
· Parsa Kiai
[00:00:00] S1: For anyone who doesn't know Dave Cote, I would suggest reading his books. It really is an incredible masterclass on focusing on the long term and on the short term. So he has a book called Winning Now, Winning Later and another book called How to Be a Leader, and these are incredible books. And Dave took over as the CEO of Honeywell in 2003. If you go back then, 9/11 had just occurred. You had the dot-com bubble explode. Honeywell, they had the aborted merger with GE that was blocked by the EU. Honeywell was in a bit of a tough spot. I think the quarter before he took over, it had negative 4% organic growth. And by the time he left 15 years later, revenues were up 100%, EPS was up 400%, and the stock was up 500%, more than double what the S&P did. Then he became the chairman of a company called Vertiv, which provides liquid cooling systems for data centers. In the five years that he was chairman, that stock went up by close to 600%. And we've got a very good relationship with CEO Jon Wilk, and Jon has told us you've never met a guy that's more hard-charging and focused and relentless as Dave Cote. Not only on the operational improvement, but their approach to M&A is very similar. You guys have had Brad Jacobs on the Colossus podcast talking about the right approach to M&A. David Cote's approach is very, very similar, and it really comes with a few guiding principles. One of the first would be to build a robust internal pipeline of potential deals so you're not wedded or desperate on any single deal. So date a lot of people and have a lot of options out there. You really focus on good businesses with strong competitive positions that have not been run to their full potential, either because of underinvestment or lack of focus or something else. But you're not buying broken businesses. You're buying good businesses that should be better than they are and the willingness to pay a fair price but not to overpay. And you begin the integration process before the deal closes. As soon as you have an agreement, you are working with the teams to integrate that business. Take your best practices, what was the Honeywell operating system and is now the CompoSecure operating system, and integrate that. It's that M&A potential that people are excited about. And you mentioned Resolute Holdings.
· Parsa Kiai
This is a fascinating case study because if you take something like QXO, which is the new building products endeavor by Brad Jacobs, it receives a bit of a halo valuation because of Brad's incredible track record of creating shareholder value. At CompoSecure, we've done something a little different in that we've spun out the asset management side, we've spun out the capital allocation business into something called Resolute Holdings. And Resolute's job is to allocate capital, do strategic M&A for CompoSecure, and eventually on its own. But the initial view is that it's going to be focusing on M&A for CompoSecure. And it's quite fascinating because Resolute was spun out to shareholders of CompoSecure. Resolute Holdings, you've got an interest in both of these entities now. Resolute Holdings stock has done exceptionally well so that it is valued relatively richly today because you don't have much in the way of revenues. Resolute gets a 10% share, a 10% royalty, if you will, or management fee on CompoSecure's EBITDA. The stated goal is we are going to grow the EBITDA at CompoSecure by many, many fold, and the market believes that. Look at Mr. Cote's track record, we're going to do this. So right now the revenues at Resolute Holdings are something around $15 million, and that's basically the cost of looking for deals. We've got employees looking at the ground, doing due diligence, and that will grow as CompoSecure's EBITDA grows. So you have this symbiotic relationship where the team at Resolute Holdings is focused on growing the EBITDA at CompoSecure by 50% or double or triple, and the market is giving a halo valuation to Resolute Holdings. I don't think you really have priced that into CompoSecure yet. If you look at Resolute Holdings, it's valued at about a $700 million market cap. And if you look at a high growth asset manager multiple, it implies that CompoSecure's EBITDA should be double or more of what it is today. With Mr. Cote's controlling interest in both companies, you've got a strong alignment of interest. So really fascinating case study on what we're going to see in real time between capital allocation and M&A.