CompoSecure Inc (CMPO) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the CompoSecure Fourth Quarter and Full Year 2021 Earnings Call. (Operator Instructions) Please be advised today's conference may be recorded. (Operator Instructions) I'd now like to hand the conference over to your host today, Marc Griffin, Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today to review CompoSecure's Fourth Quarter and Full Year 2021 Financial Results. With me on the call this afternoon is Jon Wilk, CompoSecure's Chief Executive Officer; and Tim Fitzsimmons, Chief Financial Officer. They will begin with prepared remarks, and then we'll open up the call for Q&A.

During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers and other statements regarding our plans and prospects.

Forward-looking statements may often be identified with words such as we expect, we anticipate or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations.

For discussion of material risks and other important factors that could affect our actual results, please refer to the information in our annual report on Form 10-K and other reports filed with the SEC, which are available on the Investor Relations section of our website at composecure.com and on the SEC's website at sec.gov.

Please note that during today's discussion, today's call will include certain non-GAAP financial measures as defined by the SEC, including adjusted EBITDA. The company believes these nonfinancial -- non-GAAP financial measures form our useful information to management and investors regarding certain financial and business trends impacting the company's conditions and for operations. These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measures derived in accordance with U.S. GAAP and may be different from similarly tighter non-GAAP financial measures used by other companies.

A reconciliation of GAAP to non-GAAP measures is available on our press release and earnings presentation available on the Investor Relations section of our website. With that, let me turn the call over to Jon for our first earnings call as a public company. Jon, go ahead, please.

Thanks, Marc, and good evening, everyone. Thank you for joining us tonight as we discuss our fourth quarter and full year earnings release. We appreciate your interest, and thank you for participating.

2021 was an exciting year for CompoSecure in which we became a newly listed public company, achieved record net sales and launched a best-in-class 3-factor authentication product for securing digital assets called Arculus. It's important to me to take a moment to recognize our more than 700 employees who made this possible. I'm extremely proud of what we have achieved as a team this year, and I thank them for their dedication and support.

As mentioned, CompoSecure completed its business combination with Roman DBDR Tech Acquisition Corp. in December of 2021. It is a newly listed public company on NASDAQ. I also want to thank the team at Roman for their partnership during the merger process and look forward to their continued support. We are excited about being public and about how that will support the ongoing growth and success for CompoSecure customers, employees and shareholders.

Now let me summarize our operating results for the fourth quarter and full year as well as discuss our strategic growth initiatives before turning it over to Tim Fitzsimmons, our CFO. The headline message is that we delivered results for the year and the quarter in line with our guidance for revenue and EBITDA and have very strong momentum as we begin 2022.

In the fourth quarter, we demonstrated strong net sales of $75 million, achieving 40% year-over-year growth, and our adjusted EBITDA for the fourth quarter was $21 million, which includes the impact of our Arculus investment for which Tim will provide some additional context. This is consistent with our messaging that we would start to see increased sales growth in the back half of '21, and we delivered on that.

For the year, we finished 2021 with record net sales of $268 million; guidance, if you remember, was $267 million to $269 million. And our adjusted EBITDA for the year was just over $102 million, with guidance being between $97 and $102. So we were at the top end of the range for EBITDA. I'm pleased with these results and even more excited about our opportunities heading into 2022.

Let me share further context and color around the drivers of these results. I'll start by saying our premium card business is being led by strong sales execution as well as our deep customer relationships. We are also leveraging the trends of increased solicitation by card issuers and growing demand for premium cards as the economy emerges from the challenges of the pandemic. We expect these positive trends to continue well into 2022.

In addition, we are being very thoughtful about how we are running the business and remain focused on margins, while simultaneously accelerating our critical investments to capture long-term opportunity and value. This is clearly reflected in our adjusted EBITDA numbers, which you can see were impacted in the second half by our more than $20 million that we invested in Arculus and still met the high end of the guidance range for the year.

The combination of strong sales performance and continued industry trends gives us the confidence going into 2022. And with that, we are reaffirming our 2022 guidance in the range of $336 million to $376 million for net sales and $100 million to $110 million of adjusted EBITDA.

As this is our first earnings call, I thought it would be helpful to provide a brief overview of CompoSecure for those less familiar with our story. CompoSecure is a leading provider of financial payment cards and cryptocurrency storage and security solutions. Our products serve 2 main markets; the premium payment card market and the growing market for securing digital assets. The company has been around for more than 20 years. We're not a start-up. As you can see from Slide 3, we produced 22 million metal cards last year with strong margins. We serve 100-plus card programs across the globe, including 7 of the top 10 U.S. issuers, and we have very long tenure with our largest clients.

On Page 4, the company was built and continues to be driven by our ability to innovate. We've led the creation and growth of the metal card form factor through our expertise in material science and technology. And we've been at the forefront of embedding emerging payment technology, for example, the evolution of tap-to-transact, and we're now accelerating that innovation in digital assets and authentication technology.

As you can see on the lower right, this is supported by a very strong patent portfolio that helps create competitive moats around our business. Now that I've given you a quick overview of the business, I want to contextualize the market opportunity and trends that we are seeing.

So on the next page, when you look at the total addressable market on the left side of Page 5, you'll see the TAM for the metal card payment business. As I mentioned, we issued 22 million metal cards last year. We believe there were approximately 4 billion payment cards issued worldwide on an annual basis. So we estimate that we currently have only 0.5% of penetration of the total addressable market for our existing premium card business, so plenty of runway for growth.

In the middle, we highlight the total addressable market in crypto cold storage as well as security and authentication on the right, where we're seeing exponential growth in the number of users. You can also see on the right side the growing need for better security around digital assets as the number of threats and hacks increases and the broader security and authentication market continues to grow. The bottom line for us is that we think the total addressable market for the payment card business is tremendous, and we believe the total addressable market for crypto and authentication could be even bigger.

I'll provide further details on how our Arculus platform meets these market needs in a moment. But first, let me cover some of the trends that we're seeing in the payment card marketplace in the next slide.

So on Page 6, as we finish 2021 and we move into 2022, we expect continued robust growth in the premium payment card business, driven by strong sales execution and supported by 3 elements that you can see laid out on Page 6; increased card solicitations, increased applications by consumers and increased acquisitions that we're seeing in the market. You can see those elements highlighted in all 3 charts that were produced from publicly available data.

Strong customer demand is returning to and even exceeding prepandemic levels, and we are well positioned to capture the opportunity as our metal cards are an attractive value proposition for card issuers, and we have long-standing blue chip clientele, and we're establishing relationships with some of the leading fintech clients in the world.

On Slide 5, we highlighted the market opportunity for our payment card business and the digital authentication platform. But if you look at Page 7, we've got the road map for where we're going and where we're bringing together payment cards and digital authentication. You see on the left side of this slide, today in market, we've got our payment card business and the Arculus Cold Storage product. But in the middle, we bring together Payments plus Digital Authentication.

The example here is most people log in to their banking and investment accounts using a user name and password. We've seen hundreds of millions of user names and passwords compromised over the last few years, and we intend to address that challenge by bringing together a traditional debit or credit card with the Arculus authentication capabilities, turning your credit or debit card into a security token. We also have the ability to add those same authentication capabilities to our crypto cold storage product, and this would enable a customer to have increased security on their existing hot wallet in addition to offering enhanced security and control of their private keys for cold storage.

And finally, we intend to bring together payment plus authentication plus cold storage into one product. This functionality, we believe, will be available in 2022, and we intend to pilot payment card plus digital authentication in Q2 and Q3 with clients that we are currently in active and advanced conversations with.

To give further specifics on our Arculus platform road map, I also want to share some new features and functionality that are key priorities in the first half of the year. If you look at Slide 8, we've always been a customer-centric company, and our priorities are informed by what we're hearing and seeing in the community and across the market. And as such, we are focused on: number one, incorporating the ability to include NFTs and View NFTs in your Arculus wallet.

We've seen the rise in explosion of the NFT market across a whole variety of industries. We are continuing to increase the number of currencies. We added 10 new currencies in January and today support approximately 75% of the crypto market cap with our current portfolio of supported currencies, and we'll continue to expand that list. And lastly, we've heard a strong desire from the crypto community to integrate and enable the Arculus Wallet to operate with the broader D5 ecosystem. And we will be including the capability through WalletConnect to enable the Arculus customers to do that.

I know that you're interested in hearing our progress on sales and marketing for Arculus. So I'd like to take a moment and update you on our current momentum. I'm excited to announce that we launched our first Arculus third-party sales distribution channel through amazon.com at the end of February. This is the first of several third-party distribution channels that we will begin to ramp up. And this is in addition to the ability to sell direct to consumers through getarculus.com, our Consumer Direct sales website.

Second, we've completed our first 25,000 card co-branded Arculus product for shipment later this month for the Bitcoin 2022 Conference in Miami in April. This is one of the leading crypto conferences in the world where we'll get exposure to some of the most influential names of the industry and put our product directly in the hands of the crypto leaders who are at the forefront. As part of this partnership, we'll be making 2,500 customized specially designed VIP cards that will operate as Whale Passes for the conference as well.

And third, we are in advanced conversations with a number of B2B partners that include car design and technical integration work including crypto cold storage and payments plus authentication. We will provide further updates as deals get finalized, and we expect to announce a broader update with our Q1 results.

We discussed in our press release that we also recently enhanced our organizational strength with key leadership appointments. Joining our senior leadership team, we have our new Chief Revenue Officer, Amanda Gourbault. Amanda has more than 25 years of experience in payments and security, leading global sales, products and service teams for the financial sector. Under her leadership, we're already beginning to scale up our sales and marketing efforts. We've also included in our press release hires in product, marketing and software development. I've been impressed with the level of talent that we've attracted to the business in a generally competitive labor market for blockchain and crypto.

With that, let me hand it over to Tim to walk through the financials in more detail.

Thanks, Jon, and good evening, everyone. I'll provide an overview of our fourth quarter and full year 2021 financial performance and then briefly turn it back to Jon before we end up -- we take questions from the audience. Before I jump in, I want to reiterate Jon's opening comments that we hit the guidance that we had shared with you prior to closing the SPAC merger. So we had come right in on the guidance that we had indicated at that point in time.

The fourth quarter net sales grew 40% to $75 million, up from $54 million in the same quarter of the prior year. Jon and I have spoken about the impact of COVID quarters in the prior -- in our prior communications. Our experience has proven out that Q4 of 2020 was the low point of the impact of COVID. If you look at our quarterly trend, we were up 14% Q4 over Q3, showing the growth trend that we were expecting.

Importantly, growth in Q4 was driven by executing against all facets of our sales strategy, that is, continued growth from existing and new domestic customers, international expansion and growth about fintech customers. Publicly available data, as you saw on Slide 6 shows that large issuers are experiencing increased demand. We are seeing this trend as well as we saw our backlog of booked orders grow in Q4.

Moving on to gross margin. Our gross margins were 52% in Q4 of 2021 versus 48% in Q4 of 2020. This was driven by production efficiencies, product mix and supply chain savings. We had adjusted EBITDA of $21 million in the fourth quarter of 2021, which was up slightly compared to the prior year and resulted in an adjusted EBITDA margin of 28% compared to 37%. This margin was impacted by our $13 million investment in the launch of Arculus in Q4 of 2021.

So now let's turn to the full year results. For the full year of 2021, net sales grew 3% to $268 million, up from $261 million in 2020. Our margin story is also one of growth. Our gross margins were 54% in 2021 versus 51% in 2020. This increase was driven by the same factors that was driving Q4, production efficiencies, our product mix and supply chain cost savings that we managed to negotiate.

We produced adjusted EBITDA for the year of $102 million in 2021, which was a decrease of $14 million from 2020. But this decrease includes the impact of the $21 million investment in the Arculus business that we made. And that decrease was partially offset by margin improvements within the payment card business.

Looking at our international versus domestic sales, our international sales increased by $2 million or 4% year-over-year. The net sales trend that you see in this chart shows that the quarter growth trajectory was what we were expecting for 2021 with the emergence of the impact of COVID on the first half of the year. I'm going to turn to the balance sheet and cash flow now, which are located in the appendix of this presentation. And if you look at the cash flow, it shows a free cash flow from operations of $73 million for 2021. We derive that by taking operating cash flow of $78 million less the capital spending of $5 million. This free cash flow includes our $21 million investment in Arculus.

As of December 31, we had secured debt of $265 million. That was made up of a $250 million term loan and a $15 million revolver. We also had unsecured convertible debt of $130 million, which arose out of the SPAC merger. We had cash on the balance sheet of $22 million, and this results in a secured net debt ratio of 2.4x and a total net debt ratio of 3.6x on the $102 million of adjusted EBITDA. This senior credit facility provides a revolving loan of up to $60 million with $15 million drawn at the year-end. The company forecasted results and the debt facility are anticipated to provide adequate working cash flow to fuel our growth in the coming years.

With that, let me turn it back to Jon so he can finalize some comments.

Thanks, Tim. Before we move to Q&A, I want to close by summarizing a bit of what we talked about today. So on Page 13, I think we highlight again that we are affirming our guidance for 2022 with revenue in the range of $336 million to $376 million and EBITDA between $100 million to $110 million.

We are very pleased with our fourth quarter and full year results. We're in a strong position to capitalize on the trends and momentum in our premium card business, including strong sales execution, increased solicitation, increased customer applications and increased number of new customers acquired.

As we accelerate our Arculus business, we believe the merger of the physical card and security and authentication technologies is inevitable as the demand rapidly increases for storage solutions and for access to crypto for real-world transactions as that continues to grow. Arculus is well positioned to enable this transformation by partnering with our existing relationships as well as working with new partners in gaming, crypto exchanges and other digital markets.

With that, I want to thank you all for taking the time to join us today. We very much appreciate your attention and look forward to updating you throughout the year as we progress. With that, we'll open the call to questions.

(Operator Instructions) Our first question comes from Steve Moss with B. Riley Securities.

Jon, maybe just starting with the -- what you mentioned in terms of partners that you're engaged in technical integration here. Kind of wondering, are those the same partners you're referring to on that you're going to have client pilots on Page 7? Or could you size up how many partners are advanced at this point, a number of partners that are advanced at this point and maybe the size of those potential white label clients.

Yes, Steve, thank you for the question. We are not sizing individual opportunities for you guys at this point. I'm just trying to give you context for -- it's not that we're having conversations across a variety of industries. We're having advanced conversations at this point. When we get into card design back and forth, that's when the conversations reach more advanced stages and people look at different ways, Steve, if they want to use our wallet or an SDK to integrate with us. Those are examples of the kinds of technical integration choices that I'm highlighting.

So I'm messaging out to you and to the market that we are in advanced stages with a number of those B2B conversations. And we think that will help demonstrate to you and to the market, sort of the progress that we're making in that space.

Okay. And then just to tie in terms of the announcement -- potential announcements, you seem to indicate the announcements of white label partnerships will come with the first quarter earnings. Did I hear that correctly?

Yes. So we'll announce things as we're able to, meaning there are times where partners will want to get out and announce something. And in those cases, we'll announce it. If it is at Q4 -- or excuse me, Q1 earnings or before we want to help you and others in the market understand our progress and momentum around Arculus.

Great. That's helpful. I appreciate that. And then one question on the metal card business here. As we look at the metal card revenue outlook, do we think about it as steady growth throughout the year? Or could it be weighted to one half of the year versus the other? Just kind of any color there would be helpful.

Thanks, Steve. So there's not typically seasonality in our business. So if you want to think about it in terms of the run rate that we exited the year in some sequential growth off of that as you look to sort of model out the full numbers for the year.

Okay. Great. Thank you very much. Appreciate all the color.

Thanks, Steve.

(Operator Instructions) I'm showing no further questions in queue at this time. That will conclude today's question-and-answer session. This concludes today's conference call. Thank you for participating. You may now disconnect.