CPI Card Group Inc. (PMTS)·Q1 2025 Earnings Summary

Executive Summary

• Q1 2025 net sales rose 10% to $122.8M, while diluted EPS fell to $0.40 and Adjusted EBITDA declined 8% to $21.2M, driven by unfavorable mix and higher production costs; management affirmed its FY 2025 outlook for mid‑to‑high single‑digit organic growth in net sales and Adjusted EBITDA .
• Versus S&P Global consensus: Q1 revenue was a modest beat ($122.8M vs $120.9M*), but EPS ($0.40 vs $0.54*) and Adjusted EBITDA ($21.2M vs $23.6M*) missed; management flagged Q2 margin pressure with improvement in H2, citing mix normalization and efficiency gains as Indiana facility ramps .
• Strategic catalyst: announced acquisition of Arroweye Solutions for $45.55M, adding on‑demand, zero‑inventory card capabilities; the FY25 outlook excludes Arroweye and CFO expects near‑term EPS dilution in 2025–2026 before turning accretive in 2027 .
• Risk/watch items: known tariff impacts (~$2M incremental costs embedded in outlook), higher interest expense from 10% senior notes due 2029, and temporary dual‑facility costs in Indiana; cost actions and sourcing changes are underway to mitigate margin headwinds .

What Went Well and What Went Wrong

What Went Well

• Strong top‑line: net sales +10% YoY to $122.8M, with both segments up ~10%; Debit & Credit $96.5M (+9.7%) on contactless and eco‑focused cards; Prepaid $26.7M (+10.4%) on higher‑value packages and healthcare solutions .
• Management conviction: “We are pleased with our first quarter sales performance… Our outlook remains intact” (CEO John Lowe); outlook affirmed for mid‑to‑high single‑digit organic growth in net sales and Adjusted EBITDA .
• Strategic expansion: Arroweye acquisition adds digitally‑driven on‑demand capability, minimal customer overlap, and expected synergy opportunities; revenue mid‑$50M annualized (excluded from FY25 guidance) .

What Went Wrong

• Margin compression: gross margin fell to 33.2% (from 37.1% LY) on negative mix and increased production costs; Adjusted EBITDA margin declined to 17.2% (from 20.5% LY) .
• Earnings pressure: diluted EPS decreased to $0.40 (from $0.46 LY) and net income fell 12% YoY to $4.8M, reflecting lower gross profit and higher interest expense .
• Cash generation: operating cash flow fell to $5.6M (from $8.9M LY) and FCF to $0.3M (from $7.4M LY), driven by higher capex (Indiana facility), lower net income excluding non‑cash items, and slightly higher working capital usage .

Financial Results

Values retrieved from S&P Global.*

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• CEO (John Lowe): “We are pleased with our first quarter sales performance… Our outlook remains intact, and we plan to continue to execute our strategies to gain share and diversify our business, as evidenced by our acquisition of Arroweye Solutions” .
• CEO on Arroweye: “Arroweye’s zero‑inventory, rapid turnaround payment card solutions… brings us additional capabilities, advanced technology, and increased capacity” .
• CFO (Jeff Hochstadt): “We have implemented cost savings and supply‑chain actions to mitigate current known tariff risk and aid margins as the year progresses” .
• CFO outlook detail: Q2 margins similar to Q1; improvement in H2 as mix normalizes and efficiencies ramp; ~$2M tariffs embedded; semiconductor chips currently exempt .
• Financing for Arroweye: drew ~$35M from revolver; maintained cash on hand .

Q&A Highlights

• Arroweye scope and customers: low overlap with CPI; strong fit for fintechs and small nimble programs; hyper‑personalization capability complements CPI’s scaled offerings .
• Arroweye margin trajectory: currently low double‑digit Adjusted EBITDA margins; expect cost‑of‑goods synergies over time to move towards CPI levels (no specific timeline) .
• Pricing environment: competitive but rational; Q1 gross margin impacted by mix and higher production costs; cost actions (headcount reductions, discretionary spend controls) to offset gross margin declines .
• Indiana facility ramp: dual‑facility operations through year‑end to avoid customer disruption; additional quantitative costs not disclosed; expected long‑term accretion post‑transition .

Estimates Context

• Q1 2025 vs S&P Global consensus: revenue beat (+$1.9M), but EPS and Adjusted EBITDA missed; 4 estimates for EPS and revenue coverage. Near‑term estimate revisions may reflect margin commentary (Q2 similar to Q1, H2 improvement) and tariff headwinds .
• Immediate next quarter (Q2 2025) saw continued pressure versus consensus (post‑Q1 commentary aligned with softer margins), underscoring focus on H2 recovery .

Values retrieved from S&P Global.*

Key Takeaways for Investors

• Top‑line resilience with broad‑based growth, but near‑term margin headwinds from mix, production costs, tariffs, and Indiana transition warrant caution until H2; watch for gross margin inflection in Q3/Q4 on efficiency gains and mix normalization .
• The Arroweye acquisition is strategically additive (on‑demand, zero‑inventory capabilities) with minimal customer overlap and synergy potential; expect near‑term EPS dilution in 2025–2026, turning accretive in 2027—monitor integration milestones and synergy capture .
• Balance sheet: cash $31.5M, net leverage 3.1x; temporary leverage step‑up from Arroweye financing followed by deleveraging in 2026—focus on FCF generation as Indiana facility moves past start‑up costs .
• Segment mix matters: strength in contactless eco‑cards and prepaid healthcare packaging persists; watch personalization services recovery and eco‑focused product mix impact on margins .
• Trading setup: near‑term catalysts include Q2 margin confirmation, Q3/H2 margin improvement, Arroweye integration updates, and any tariff policy changes; re‑rating potential tied to sustained margin recovery and synergy execution .
• Longer‑term thesis: secular tailwinds from rising U.S. cards in circulation (9% CAGR last three years), eco‑cards adoption, and instant issuance penetration support mid‑single‑digit growth; diversification via digital and on‑demand capabilities enhances durability .