Executive Summary / Key Takeaways

• CompoSecure is undergoing a significant strategic transformation, marked by the spin-off of Resolute Holdings and the adoption of an equity method accounting structure for its operating subsidiary, aimed at simplifying its corporate structure and enhancing free cash flow.
• The core business, metal payment cards, continues to demonstrate strength with consistent demand, new program launches, and expanding adoption across mass affluent and younger demographics, supported by long-term customer relationships.
• The Arculus platform, offering secure authentication and digital asset storage, is gaining traction, achieving its first quarter of positive net contribution in Q4 2024 and record results in Q1 2025, with opportunities seen in traditional finance, fintech, and emerging verticals like gaming.
• Under new Executive Chairman Dave Cote, the company is implementing the CompoSecure Operating System (COS) to drive operational efficiencies and is actively pursuing accretive M&A opportunities, leveraging increased annual free cash flow (expected ~$20M increase) from the simplified structure.
• While facing macro headwinds, competition (including from digital wallets), and integration risks, the company reaffirmed its full year 2025 guidance for mid-single-digit growth in consolidated net sales and pro forma adjusted EBITDA, anticipating sales momentum to build throughout the year.

Setting the Stage: A Niche Leader's Evolution

CompoSecure, Inc. (CMPO) has carved out a unique position in the financial technology landscape, primarily known as a leading designer and manufacturer of premium metal payment cards. Founded in 2000, the company built its foundation on providing complex, high-quality card products to global financial institutions, establishing deep, long-term relationships with major players in the industry. This history of innovation and manufacturing expertise in a specialized niche has been central to its identity.

The company's journey took a significant turn with its public listing via a business combination in late 2021, initially operating under an Up-C structure. While providing access to public markets, this structure carried complexities, including tax distributions to non-controlling interests. A pivotal moment arrived in September 2024 with a strategic transaction involving affiliates of David Cote's Resolute Partners, which led to the elimination of the dual-class share structure and Resolute becoming the majority owner. This was followed by the spin-off of Resolute Holdings Management, Inc. (RHLD) in February 2025, separating the investment management function into a distinct public entity (RHLD) and fundamentally altering CMPO's financial reporting by moving its operating subsidiary (Holdings) to an equity method of accounting.

This transformation, spearheaded by new Executive Chairman Dave Cote, signals a renewed focus on operational excellence, accelerated growth, and strategic diversification through M&A, leveraging the expertise brought by the new leadership and the anticipated increase in annual free cash flow.

The Technological Edge: Crafting Premium Experiences and Digital Security

At the heart of CompoSecure's offering lies its proprietary technology in designing and manufacturing metal and composite financial cards. This isn't merely about aesthetics; the company's material science and manufacturing processes enable the creation of highly durable, secure, and aesthetically differentiated cards that serve as a tangible representation of a premium brand for card issuers. While specific quantitative metrics on manufacturing cost advantages or material performance relative to competitors are not detailed, management emphasizes that this expertise, built over two decades and protected by over 60 issued patents (with 35 pending), allows them to produce high-quality products at scale (over 31 million metal cards produced last year), a capability they believe is unique in the market. This technological foundation underpins their ability to command premium pricing and maintain strong gross margins relative to competitors focused solely on traditional plastic cards.

Beyond the physical card, CompoSecure has expanded its technological footprint with the Arculus platform. Arculus is positioned as a next-generation solution for security and authentication, bridging the physical and digital worlds. The platform includes:

• Arculus Authenticate: This solution provides seamless multifactor authentication, leveraging the FIDO standard (which is gaining traction among major tech companies like Microsoft (MSFT), Apple (AAPL), and Google (GOOGL)) to enhance security for logins and step-up authentication for medium to high-risk transactions. Management believes CompoSecure is the first and only company to incorporate a FIDO authentication token directly into a payment card. This offers a tangible benefit over software-only authentication methods or separate hardware dongles, potentially reducing fraud costs for issuers. While direct quantitative comparisons on fraud reduction or authentication speed versus all competitors are not provided, management highlights its effectiveness for step-up authentication.
• Arculus Cold Storage: This is a secure hardware wallet designed to safeguard digital asset keys with advanced encryption. Management views this as an exceptional competitor in the cold storage space, emphasizing its ease of use and security.
• Digital Asset Payments: An emerging capability leverages the Arculus secure hardware wallet to enable payment at point-of-sale terminals using digital assets, including stablecoins. This is seen as an important development at the intersection of digital assets and traditional payment rails, with promising applicability for Web3 payments.

The "so what" for investors is that this technological differentiation provides CompoSecure with a competitive moat. The expertise in metal card manufacturing supports premium positioning and profitability in its core market, while the Arculus platform opens new avenues for growth and diversification in the expanding digital security and authentication space. The ability to bundle Arculus Authenticate with metal cards allows issuers to future-proof their offerings and provides CMPO with opportunities for higher average selling prices and potentially recurring software revenue over time. R&D efforts continue to focus on enhancing these capabilities and exploring new applications, although specific target metrics or timelines for future technological advancements are not detailed.

Strategic Transformation and Operational Excellence

The partnership with Resolute and the subsequent spin-off represent a fundamental shift in CompoSecure's strategic direction and operational focus. The elimination of the dual-class share structure and tax distributions is expected to increase annual free cash flow by approximately $20 million, providing significant capital for reinvestment and strategic initiatives.

Under Dave Cote's leadership, a major focus is the implementation of the CompoSecure Operating System (COS). This comprehensive program aims to drive operational excellence and efficiency across the entire business value chain, from order intake through manufacturing to cash collection. While the full impact will take time, management is already seeing early benefits, particularly at the factory and production level, and anticipates positive net impact on results in 2025. This initiative, rooted in the principles of lean manufacturing and process improvement, is expected to enhance margins and free up capacity, strengthening the core business.

The strategic transformation also positions CompoSecure for accelerated growth through accretive mergers and acquisitions. Leveraging the M&A expertise brought by the Resolute team and the increased free cash flow, the company is actively evaluating opportunities. The M&A pipeline is described as healthy, with a focus on targets in and around the current business, up and down the value chain, and those aligning with the new leadership's experience. The key criteria for M&A are accretiveness and delivering value for investors, indicating a disciplined approach.

Financial Performance and Liquidity

CompoSecure's recent financial performance reflects both the underlying strength of its operating businesses and the impact of its strategic transformation.

For the full year 2024, the company demonstrated solid growth, with net sales increasing 8% to $420.6 million. This growth was broad-based, with domestic sales up 7% and international sales growing 11%, highlighting successful expansion in global markets. Gross margin for the year was 52.1%, a slight decline from 53.5% in 2023, attributed primarily to the production of new card constructions and inflationary pressures on wages and materials. Adjusted EBITDA increased 4% to $151.4 million.

The first quarter of 2025 saw consolidated net sales essentially flat year-over-year at $103.9 million, aligning with management's expectations for the start of the year. Pro forma adjusted EBITDA decreased slightly, reflecting planned investments in growth initiatives and COS implementation. The GAAP financial statements for Q1 2025 show a significant change due to the adoption of the equity method of accounting for Holdings effective February 28, 2025. Under this new structure, Holdings' operating results are no longer consolidated. Instead, CompoSecure, Inc. reports its share of Holdings' net income as "earnings in equity method investment," which amounted to $14.844 million for the one-month period post-deconsolidation (Feb 28 - Mar 31, 2025). The GAAP income tax expense in Q1 2025 was significantly higher ($27.004 million) compared to Q1 2024 ($0.836 million benefit), primarily due to a taxable gain on appreciated property resulting from the Spin-Off. Non-GAAP adjusted net income, which excludes non-cash fair value adjustments and stock compensation, increased 21% in Q1 2025.

Liquidity remains a point of strength. As of March 31, 2025, on a non-GAAP basis, the company had $71.7 million of cash and cash equivalents and $195 million in total debt. The decrease in cash and debt compared to year-end 2024 reflects the deconsolidation of Holdings' balance sheet. Holdings' primary sources of liquidity are its cash flows from operations and its credit facility.

The company recently amended and extended its credit facility, increasing capacity to $330 million ($200 million term loan, $130 million revolver) and extending maturity to August 2029. This provides ample capacity for ongoing operations, growth investments, and the ability to retire exchangeable notes maturing in 2026. The bank agreement senior secured debt leverage ratio stood at a healthy 1.05x at March 31, 2025.

A significant financial obligation is the Tax Receivable Agreement (TRA), under which the company is obligated to make substantial future payments based on realized tax benefits from increases in the tax basis of Holdings' assets. These payments are expected to reduce overall cash flows, although the company anticipates funding them from realized cash tax savings. The TRA liability and future payments could increase with future exchanges of Holdings interests.

Competitive Landscape and Market Dynamics

CompoSecure operates in a competitive environment within the broader payments and security industry. Its primary direct competitors in the secure payment card space include larger players who also offer card manufacturing services, though CompoSecure emphasizes its unique specialization and scale in metal cards. Broader competitors in financial technology and security include entities like NCR Voyix (VYX), Everi Holdings (EVRI), and ACI Worldwide (ACIW), who offer a range of payment processing, digital banking, and security solutions.

Compared to these larger, more diversified competitors, CompoSecure holds a niche leadership position, particularly in the premium metal card segment. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, CompoSecure's production volume and customer base suggest a significant presence in this specific market. Its technological advantage in metal card manufacturing provides a differentiator, enabling premium products and potentially better gross margins compared to competitors with less specialized capabilities.

In the emerging digital security and authentication space, the Arculus platform competes with various software-based authentication providers and hardware wallet manufacturers. Management differentiates Arculus Authenticate by its integration into a payment card and its use of the FIDO standard, positioning it as a unique hardware-based solution for enhanced security, particularly for step-up authentication. While digital wallets (like Apple Pay) and blockchain platforms (like those from Block Inc. (SQ)) represent indirect competition by offering alternative payment and digital asset solutions, management believes physical cards will remain relevant, supported by features like tap-to-pay, and sees opportunities at the intersection of traditional payments and digital assets.

CompoSecure's strategic response to this competitive landscape involves leveraging its core strengths: deep customer relationships with major financial institutions, its unique technological expertise in metal cards and integrated security, and its ability to scale production. The implementation of COS aims to improve cost structure and efficiency, making the company more competitive on price and delivery. The focus on Arculus expands the addressable market and provides diversification beyond physical cards, positioning the company in higher-growth areas like digital authentication and Web3 payments. The M&A strategy is intended to further diversify revenue streams and enhance competitive positioning by adding new capabilities or market access.

Customer dynamics remain favorable, with major financial institutions continuing to report strong purchase volumes and customer acquisition, particularly in premium card programs. This positive sentiment from customers supports the demand for CompoSecure's core products. Supplier dependencies, particularly for key components like metals and chips, are a potential vulnerability, though the company has established routines to manage supply chain risks.

Outlook and Growth Drivers

CompoSecure has reaffirmed its full year 2025 guidance, anticipating mid-single-digit growth in both consolidated net sales and pro forma adjusted EBITDA. This outlook is based on the expectation that sales momentum, which began building in Q2 2025, will continue throughout the remainder of the year, supported by the company's pipeline, orders, and backlog.

Key drivers for this anticipated growth include:

• Accelerated Organic Growth: Continued demand for premium metal cards, expanding adoption across customer segments (including mass affluent and younger demographics), and new program launches with existing and new customers are expected to fuel growth in the core business.
• Arculus Traction: The Arculus platform is expected to contribute positively to results, building on its recent achievement of net positive contribution. Growth is anticipated from increased adoption of Arculus Authenticate by financial institutions and fintechs, new vertical wins (like gaming), and progress in the digital asset payment capabilities.
• CompoSecure Operating System (COS): While primarily focused on efficiency, the COS implementation is expected to contribute positively to the bottom line in 2025 by driving operational improvements and potentially freeing up resources for growth initiatives.
• Strategic Investments: Investments in sales and engineering talent are aimed at strengthening the company's ability to capture organic growth opportunities and drive innovation.

Management remains mindful of potential headwinds, including broader macroeconomic uncertainty, rising labor costs, potential tariff impacts on raw material costs, and the competitive threat from digital wallets. However, they express confidence in their ability to navigate these challenges through disciplined execution, proactive risk management (like supply chain routines), and leveraging their differentiated offerings. The increased free cash flow from the simplified structure provides additional financial flexibility to pursue growth initiatives and manage potential downturns.

Conclusion

CompoSecure is a specialized player in the financial technology sector, leveraging its unique expertise in metal payment cards and its evolving Arculus platform to serve a demanding customer base. The recent strategic transformation, marked by the spin-off of Resolute Holdings and a simplified corporate structure, is a pivotal moment, intended to unlock value, enhance free cash flow, and position the company for accelerated growth.

The investment thesis for CMPO rests on several pillars: the continued strength and expanding market for its core premium metal card products, the growing traction and potential of the Arculus platform in digital security and payments, the expected benefits from operational efficiencies driven by the CompoSecure Operating System, and the potential for value creation through accretive M&A, supported by increased financial flexibility and new leadership expertise. While macroeconomic uncertainty, intense competition, and execution risks associated with integrating new systems and pursuing acquisitions are factors to monitor, the company's reaffirmed guidance for mid-single-digit growth in 2025 suggests confidence in its ability to execute on its strategy and build momentum throughout the year. For investors, CMPO represents an opportunity to invest in a niche leader undergoing a strategic evolution, aiming to translate its technological differentiation and operational improvements into sustained growth and enhanced shareholder value.