Earnings Call Transcript - PMTS Q1 2026

Operator, Operator

Welcome to CPI Card Group Inc.'s First Quarter 2026 Earnings Call. My name is Carrie, and I will be your conference operator today. If you are viewing on the webcast, you may advance your slides by pressing the arrow button. The call will be open for questions after the company's remarks. If you would like to enter the queue for questions, please press star then 1. If you would like to withdraw your question, press star 1 again. Now I would like to turn the call over to Mike Phillips. Please go ahead.

Michael A. Salop, Investor Relations

Thanks, operator. Welcome to CPI Card Group Inc.'s first quarter 2026 earnings webcast and conference call. Today's date is 05/05/2026, and on the call today from CPI Card Group Inc. are John D. Lowe, president and chief executive officer, and Tara Grantham, interim chief financial officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI Card Group Inc.'s most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only. We undertake no obligation to update any statements to reflect events that occur after this call. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio, and free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Copies of today's press release as well as the presentation that accompanies this conference call and the Form 10-Q are accessible on CPI Card Group Inc.'s Investor Relations website, investor.cpicardgroup.com. On today's call, all growth rates refer to comparisons with the prior-year period unless otherwise noted. The agenda for today's call can be found on slide three. We will open the call for questions after our remarks. I will now turn the call over to John.

John D. Lowe, President & Chief Executive Officer

Good morning, everyone. Overall, we are off to a solid start in 2026 and are on track to achieve our full-year outlook. We are executing on our initiatives to deliver on our strategy of growing and diversifying the business by helping our customers win as we expand our proprietary technology platform, grow our marketable base of relationships, and evolve our payment solutions to meet market needs. We exceeded our expectations in the first quarter, delivering 20% revenue growth, which reflected another strong contribution from ArrowEye, as well as good growth across our other Secure Card Solutions businesses. This included strong performance from our contactless solutions, led by continued strength of contactless metal as we emphasize our offerings of value-driven metal solutions, and increased sales of personalization services. As expected, our Prepaid Solutions segment had a slow start to the year, but we continue to anticipate growth for the full year. Integrated Paytech grew only slightly due to comparisons with a strong prior-year quarter, and we continue to expect the segment to grow more than 15% for the full year. Adjusted EBITDA increased 9% in the quarter, and we generated strong cash flow with more than $10 million of free cash flow in the quarter. We also improved our financial position, ending the quarter with a net leverage ratio just below three times. Based on first quarter results and our current forecast, we are affirming the full-year financial outlook we provided in March. Tara will give you more details on first quarter results in a few minutes, but first, I would like to provide a brief strategic update on slide five. As I said before, we are executing on our strategy as we start 2026 and are fortunate to operate in multiple growing markets. In addition to ongoing increases in cards in circulation in the U.S. payments market, our business is supported by increased demand for digital solutions by financial institutions and an increased focus on security for prepaid cards and packages. As we discussed last quarter, our strategy is to continue providing payment technology solutions that help our customers win, driven by three primary growth pillars that underpin our value proposition. First, our proprietary technology platform with a vast reach into the U.S. payments ecosystem. Second, our marketable base of thousands of deep and broad relationships across the U.S. payments market. And third, our proven track record of delivering evolving payment solutions that reflect changing market needs. We continue to make progress on driving our strategy forward, laying more pipes to further expand our platform, expanding our marketable base of relationships, and introducing new solutions for the market. We mentioned at year-end that we had locked in a new referral agreement giving us the opportunity to significantly advance our marketable base for our Integrated Paytech segment. We are excited to share that we are actively marketing our solutions with the help of Fiserv and are seeing positive customer interest. And we continue to expand our pipes on our technology platform, creating further integrations and customer connections for our digital solutions. We have also expanded our solution set by delivering for the closed loop prepaid market, seeing strong closed loop revenue growth from Q4 2025 in the first quarter. And we continue to explore the viability of chip-embedded cards in the U.S. prepaid market, advancing our extensive pilot with a large national retailer testing Card Safe-to-Buy technology. We believe our strategic efforts and investments will continue to drive long-term growth, expanding our addressable markets and providing the solutions needed by the market as it continues to evolve, creating value for our company and our shareholders. We will continue to update you on progress throughout the year, but now I would like to turn the call over to Tara to take you through the first quarter results in more detail. Tara?

Tara Grantham, Interim Chief Financial Officer

Thanks, John. I will begin with the segment results on slide seven. Overall, as John said, we are pleased with our first quarter performance. First quarter revenue increased 20% to $147 million, led by our Secure Card Solutions segment. Secure Card Solutions revenue increased 35%, which included a $16 million contribution from ArrowEye. As John mentioned, we experienced strength across this segment in the first quarter with good growth from our contactless solutions and personalization services. Our Prepaid Solutions segment declined 17% in the first quarter, reflecting timing of orders from key customers, with the first quarter decline partially offset by better-than-expected incremental sales of closed loop cards. Integrated Paytech increased 1% in the quarter due to comparisons with a strong prior year while we maintained strong gross margins at over 55%. As John said, we still expect to grow revenue in this segment by more than 15% in 2026. Turning to profitability on slide eight, first quarter net income declined by 57% to $2.1 million, primarily affected by $3 million of pretax integration costs, while adjusted EBITDA increased 9%, driven by sales growth including the addition of ArrowEye. Integration costs were high in Q1, and we expect them to remain at similar levels in Q2 but drop significantly in the second half of the year. Our 2026 integration costs are meant to drive revenue synergies and lower operating costs and primarily result from go-to-market spending, technology investments, and certain vendor termination fees as we drive operating synergies. As a reminder, integration costs are not included in adjusted EBITDA but do impact net income. Gross profit margin declined from 33.2% to 30%, affected by lower sales and margins in our Prepaid segment and increased production costs including tariffs and depreciation, partially offset by benefits from increased sales from Secure Card Solutions. Production costs in the quarter compared to prior year included $2 million of increased depreciation primarily related to ArrowEye and the new Secure Card production facility and $1.2 million of tariff expenses. We expect Prepaid margins to improve in the second quarter with higher revenue levels, and we also expect overall company gross margins to be much stronger in the second half of the year. Margin comparisons with prior year should also improve going forward as ArrowEye depreciation and tariff primarily began impacting results in 2025. Overall, we anticipate full-year gross margins to be relatively consistent with prior-year levels. We have multiple initiatives in place to drive margin improvement over time, including targeted supplier negotiations, automation investments, production optimization across our sites, driving more favorable product mix, and achievement of ArrowEye synergies. We are also managing discretionary spending and driving operational efficiencies as volume increases, including in our new Indiana production facility, where we expect volumes this year to be 30% higher than 2024 levels in our old production facility. First quarter SG&A expenses increased $6.5 million from the prior year, primarily due to ArrowEye integration costs, the inclusion of ArrowEye operating expenses, increased employee performance-based incentive compensation, increased severance, and higher technology spending. Investment spending was less than anticipated in the first quarter, and we expect that to ramp over the remainder of the year beginning in the second quarter. Turning to slide nine, we had strong cash flow generation in the first quarter. Our cash flow generated from operating activities for the quarter increased from $5.6 million last year to $13.6 million, driven by strong working capital management. Free cash flow increased from $300,000 in the prior year to $10.1 million in 2026. We spent $3.5 million on CapEx in the quarter compared to $5.3 million in the prior year, although we still anticipate full-year capital spending to be similar to 2025 levels, with increased focus on technology spending. On the balance sheet, at quarter-end, we had $19 million of cash, $15 million of borrowings on our ABL revolver, and $265 million of senior notes outstanding. Turning to our 2026 financial outlook on slide 10, we are affirming the full-year outlook provided in March. This includes high single-digit revenue growth, low- to mid-single-digit adjusted EBITDA growth, free cash flow conversion at similar levels to 2025, and a year-end net leverage ratio between 2.5x and 3.0x. We expect Q2 revenue to be similar to Q1 levels, with adjusted EBITDA expected to be slightly lower than the prior year due to timing of investment spending, including some spending that was delayed from the first quarter. I will now turn the call back to John for some closing remarks.

John D. Lowe, President & Chief Executive Officer

Thanks, Tara. Turning to slide 11 to summarize before we open the call for Q&A. We are executing on our strategy with a better-than-expected start of the year. The segment trends are largely as we anticipated, and we are on track to achieve our full-year outlook. We also generated strong cash flow and brought net leverage back down to just below three times after the temporary increases following last year's ROI acquisition. We intend to continue growing and diversifying our business, leveraging our expanding proprietary technology platform, our extensive marketable base, and our evolving portfolio of payment solutions to meet market needs, drive growth, and enable our customers to win. Operator? We will now open the call for questions.

Operator, Operator

Thank you. We will now open the call for any questions. If you would like to ask a question, please press star then 1. If you would like to withdraw your question, press star 1 again. Your first question will come from Peter James Heckmann with D.A. Davidson.

Peter James Heckmann, Analyst (D.A. Davidson)

Hey, good morning. Thanks for taking my question. In terms of thinking about Instant Issuance, Card@Once solutions, you did not mention it in the prepared remarks, but what are you thinking for this year in terms of base business as well as some of the tangential areas that you have expanded into over the last fifteen months?

John D. Lowe, President & Chief Executive Officer

Pete, good morning. We are excited about Instant Issuance. It is a great platform for us. Just as a reminder, it is a software-as-a-service platform. We built it from the ground up. It took us ten-plus years to build it, especially all the integrations into what we refer to as the payments ecosystem that we service. So we have thousands of customers across the U.S., and we expect that to be a large chunk of the growth out of our Integrated Paytech segment for 2026, growing that segment from an outlook perspective greater than 15%. I think the Fiserv deal we announced helps us grow. And on the breakout between Instant Issuance and everything digital — broadly, we are building the business there. It is small in relation to the rest of the business, but we are seeing strong customer demand, a good pipeline, and we continue to build out the integrations to continue to service multiple areas of the market. We are excited about what we are doing in Instant Issuance, and broadly in digital as well.

Peter James Heckmann, Analyst (D.A. Davidson)

Okay. Great. And then just in terms of contactless, where do you think we are in terms of contactless cards? I have not seen recently any information that would suggest what percentage of cards out today have a contactless chip embedded.

John D. Lowe, President & Chief Executive Officer

What we produce today is 90% plus contactless. We used to use the baseball analogy. I would say we are in the very late innings of the transition on the debit and credit side. On the prepaid side of our business, there is a lot of opportunity. The volumes within prepaid broadly, when including open loop and closed loop, are somewhat greater on an annual basis than even the debit and credit side in terms of what is produced. To the extent that that market starts to move more towards chip, it will specifically move toward contactless — which is what we are doing with Carta and what we are doing with a large national retailer, where we have a pilot underway that is showing positive movement. If that market continues to move towards chip and grows, we will see a long transition there. We would be in a unique position to capitalize on that transition. So on the debit and credit side, I think we are in the late innings and pretty much fully penetrated, but there is significant opportunity on the prepaid side.

Peter James Heckmann, Analyst (D.A. Davidson)

Got it. I appreciate it. I will get back in the queue.

Operator, Operator

Your next question comes from Jacob Michael Stephan with Lake Street Capital Markets.

Jacob Michael Stephan, Analyst (Lake Street Capital Markets)

Hey, guys. Good morning. Nice quarter. I just wanted to ask on the Fiserv relationship. It seems like that was expanded a little bit. Maybe you could touch on some of the things and ways that it was different from the past contract with them, or agreement. And then maybe touching on the supply chain a little bit — last year about this time we were talking a lot about tariffs. From a supply chain perspective and chip tightness, what are you seeing out there in the market today? And lastly, you are kind of expecting a bigger ramp in the second half from the Integrated Paytech segment. What are going to be the main drivers of that growth in Paytech?

John D. Lowe, President & Chief Executive Officer

Jacob, the main difference is we now call out Fiserv by name. We entered into this agreement around year-end and have finalized the marketing and related documents. Getting marketing teams together to finalize documents takes time, but the agreement is in place. We are excited about it and are seeing positive customer interest in Q1. Fiserv is a great partner with thousands of customers across the United States, and we have worked with them to build good relationships to help our customers win. On supply chain, broadly I would say it has normalized. That is credit to the teams we put in place to manage it, who continue to focus on how to manage things well, especially in light of geopolitical issues. Tariffs are something we had to work through, and I would say tariffs have somewhat normalized as well. We are expecting refunds on tariffs, but we do not have a definitive timing on those refunds. On the second-half ramp in Integrated Paytech, a lot of it is related to the deal with Fiserv. That is a chunk of it. Another chunk is just organic growth in the business. Last year it grew roughly at a 20% rate. Historically, it has grown at a faster pace than the rest of the business because of our unique value proposition, particularly Instant Issuance. On the digital side, that area is growing even faster, although from smaller dollars. We continue to see strong customer interest and are building that business to support the demand. So the drivers are Instant Issuance growth, boosted by the Fiserv relationship, and continued growth in our digital solutions.

Jacob Michael Stephan, Analyst (Lake Street Capital Markets)

Got it. Very helpful. Appreciate it. Thank you.

John D. Lowe, President & Chief Executive Officer

Yep. Thank you.

Operator, Operator

Your final question will come from Craig Irwin with ROTH Capital Partners.

John D. Lowe, President & Chief Executive Officer

Hey, Craig. We cannot hear you.

Craig Irwin, Analyst (ROTH Capital Partners)

Thank you. Sorry about that. Can you hear me now? Good morning. So can you help us unpack the comments around Indiana, the 30% increase in volume? Is this something novel in the last quarter? Did something materially change there? And then with 30% higher volumes, this clearly is not translating to the top line. Is there a mix issue or price erosion or something like that impacting the contribution to revenue growth and, obviously, profit growth if the revenue is not following? Any color there would be helpful.

John D. Lowe, President & Chief Executive Officer

Craig, good question. The reason we shared that number specifically is it is an indicator as we have come to the end of building out Indiana. It took about a year-plus to build. The team in Indiana has done a great job. We essentially had nearly zero customer complaints as we were transitioning. The growth in volume disclosure reflects the fact that we could not have done what we were doing in our old facility because we were at capacity. If you go back two to three years, when the market was insatiable, we were stretching the team. There were multiple reasons to move, but moving has been a large success for us. On margins, there is depreciation related to ArrowEye and the new facility, and there are tariffs that have affected margins. There is always a competitive pricing market, but I would not characterize pricing as irrational. Overall, we have had some impacts on margin, but nothing that has created an irrational pricing market. We expect overall gross margins to be somewhat stabilized and to improve over the course of the year. Tara and the team are driving margin improvement goals, and we expect to get operating leverage as the business grows. Similar to last year, we expect the fourth quarter to be our biggest quarter, so think of Q1 as a starting point for the year.

Tara Grantham, Interim Chief Financial Officer

I would add that we did grow strongly in our overall Secure Card Solutions space, up 35% overall, and from an organic basis we grew 15%, so we did get strong top-line growth in that segment, driven in part by contactless growth across Secure Card Solutions. We did get operating leverage from that growth, which was partially offset by tariffs and higher depreciation related to our new Indiana facility as well as related to the acquisition of ArrowEye.

John D. Lowe, President & Chief Executive Officer

Craig, one thing I would add is we do expect our overall gross margins to be somewhat stabilized, and we expect them to improve over the course of the year. We expect integration-related costs to drop off in the second half and for operating leverage to benefit margins as volumes increase.

Craig Irwin, Analyst (ROTH Capital Partners)

Understood. That makes sense. So then, ROI — I will admit, I was a little surprised to see the increased integration expenses this quarter. I thought that you were a long way down the path of already integrating that. Can you maybe give us some detail around the actions that are being completed right now? What did you complete over the last couple of months? Strategically, I thought that you might be actually adding a little bit more CapEx for ROI and focusing on the growth of that platform, given that personalization really is such an exciting opportunity.

John D. Lowe, President & Chief Executive Officer

The integration costs we are spending now are really in two big areas: technology and go-to-market. When we look at ROI and its position in the market, we see a lot of revenue synergies outside of the airline vertical. Airlines signed deals early on — 10-plus deals — and we have not owned them for more than a year. We have seen strong progress in ROI's performance on a revenue basis. On the operating side, we are spending to align operations, which will give us purchasing power and other efficiencies. As we transition vendors, there are termination fees that pop up and are not small. We do expect integration costs to drop off in the second half of the year; there will be some in Q2, but the second half should show a dramatic reduction.

Craig Irwin, Analyst (ROTH Capital Partners)

Thank you for that. I will take the rest of my questions offline.

Operator, Operator

Your next question will come from Harold Lee Goetsch with B. Riley Securities.

Harold Lee Goetsch, Analyst (B. Riley Securities)

Hey. Thanks for taking my question. On the Prepaid statement, it was said it was down 17% in the quarter. Can you give us some of the friction points? And again, were there some maybe significant nonrecurring customer revenues that came in 2025 and before that that are at least driving these declines? Or is the channel rather full right now and we are working through channel inventories? And is organic growth through the channel slower than expected? Thanks.

John D. Lowe, President & Chief Executive Officer

Hal, on the Prepaid side, the open loop side of the market is where we have leading market share and are well positioned, especially if that market starts moving toward chip. Our customers are determining how to increase security around packages and cards. You can increase security around the package, or you can put a chip in the prepaid card itself. That is why we are working with Carta and why we have a pilot with a large national retailer. Because of that testing and the longer-term transition we expect, the normal-course open loop market has been weaker. We knew coming into the year this would be a slow start for Prepaid. The closed loop side of the business performed very well; it is fairly small today but had strong growth from Q4 into Q1. We are excited about where Prepaid is going, but Q1 was a weaker quarter and that had an impact on broader margins. The Prepaid business gains a significant amount of operating leverage as it grows, and you saw the opposite in Q1, which brought down broader margins.

Tara Grantham, Interim Chief Financial Officer

Just a reminder that we do expect good growth across our segments this year, including in Prepaid. So even though it was down in Q1, we do expect better growth throughout the year. Looking back, we remain confident in that business. In 2024, we grew that business 26%, and even though we were down last year, we were only down 3% once you adjusted for the accounting change we made in Q2. I do expect a return to growth as well as improvement in gross margins throughout the year.

John D. Lowe, President & Chief Executive Officer

Okay. Thank you very much. Thanks, Hal.

Operator, Operator

And there are no questions in the queue. I would like to turn the call back over to John D. Lowe for any closing remarks.

John D. Lowe, President & Chief Executive Officer

Thank you to all of our CPI Card Group Inc. employees for their dedication and for continuing to deliver for CPI Card Group Inc. and our customers.

Tara Grantham, Interim Chief Financial Officer

Thank you all for joining our call this morning, and we hope you have a great day.

Operator, Operator

Thank you for your participation. This does conclude today's conference. You may now disconnect.