CPI Card Group Inc. (NASDAQ:PMTS) is a leading provider of comprehensive Financial Payment Card solutions in the United States. The company designs, produces, personalizes, and fulfills credit, debit, and prepaid debit cards for a diverse customer base that includes some of the largest issuers of debit and credit cards in the U.S., the largest prepaid debit card program managers, numerous financial technology companies, as well as independent community banks and credit unions.

Financials

In the fiscal year 2023, CPI Card Group reported annual net income of $23,985,000, annual revenue of $444,547,000, annual operating cash flow of $34,041,000, and annual free cash flow of $27,636,000. The company's financial performance has faced challenges, as evidenced by recent declines in key metrics.

During the first quarter of 2024, CPI Card Group reported a 7% decline in net sales to $111,936,000, compared to $120,852,000 in the prior-year period. This decrease was primarily driven by lower volumes in the company's Debit and Credit segment, which saw a 14% decline in net sales. However, this was partially offset by a 26% increase in net sales in the Prepaid Debit segment, as well as strong growth in the company's instant issuance and card personalization services businesses.

Gross profit in the first quarter of 2024 declined 4% to $41,518,000, but the gross profit margin improved from 35.7% to 37.1% due to lower production costs, primarily related to labor efficiencies and costs incurred in the prior-year period when the company transitioned its prepaid production facility workforce from temporary to permanent employees.

Operating expenses, including selling, general, and administrative expenses, increased by $4,877,000, or 21.7%, compared to the prior-year period. This increase was primarily due to higher compensation-related expenses, including a $2,000,000 accrual related to the previous CEO's retention award and other CEO transition-related items.

Net income for the first quarter of 2024 decreased 50% to $5,455,000, compared to $10,873,000 in the prior-year period. The decline in net income was impacted by the executive retention award accrual, other CEO transition-related costs, and a higher effective tax rate of 28.7% compared to 20.7% in the prior-year period.

Adjusted EBITDA, a non-GAAP financial measure, decreased 8% to $23,000,000 in the first quarter of 2024, with an adjusted EBITDA margin of 20.5% compared to 20.7% in the prior-year period. The company's net leverage ratio remained consistent with the end of 2023 at 3.1x.

Segment Performance

CPI Card Group's Debit and Credit segment reported a 24% decrease in income from operations to $22,754,000, driven by the sales decline and increased compensation expenses. In contrast, the Prepaid Debit segment saw a 138% increase in income from operations to $8,745,000, driven by sales growth and lower production costs.

Liquidity

During the quarter, the company generated $8,865,000 in cash flow from operating activities and invested $1,506,000 in net capital expenditures, resulting in free cash flow of $7,359,000. This compares to operating cash flow of $8,001,000 and free cash flow of $3,856,000 in the prior-year period.

CPI Card Group's balance sheet remains strong, with $17,144,000 in cash and cash equivalents and no outstanding borrowings on its $75,000,000 asset-based revolving credit facility as of March 31, 2024. The company's senior secured notes due 2026 had a principal balance of $267,897,000 at the end of the quarter.

Outlook

Looking ahead, CPI Card Group has affirmed its full-year 2024 financial outlook for net sales and adjusted EBITDA, projecting slight increases for both metrics compared to 2023. However, the company has adjusted its free cash flow outlook to be approximately half the 2023 level of $27,636,000, primarily due to increased capital spending and incentives related to a recently signed long-term contract with one of its large customers.

The company's strategic initiatives focus on gaining share in its traditional businesses, such as secure cards, card personalization services, instant issuance solutions, and prepaid solutions, by leveraging its leadership in customer service, quality, and innovation. Additionally, CPI Card Group is pursuing opportunities to expand into adjacent markets, including digital solutions, to supplement its core growth.

Conclusion

Despite the challenges faced in the first quarter, CPI Card Group remains well-positioned to navigate the evolving payments landscape. The company's diverse customer base, strong market positions, and focus on innovation and operational excellence position it to capitalize on the long-term growth trends in the U.S. debit and credit card market.