CompoSecure, Inc.

Good day, and thank you for standing by. Welcome to the Compose Secure Q3 2022 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sean Manchuri. Sir, please go ahead.

Thank you, Justin. On our call today, we have the CEO of Composecure, John Wilk, as well as the company's CFO, Tim Fitzsimmons. Please note that the discussion on today's call includes certain non-GAAP financial measures as defined by the SEC, including EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting the company's financial condition and results of 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 titled non-GAAP measures used by other companies. A reconciliation of GAAP to non-GAAP measures is available in our press release and earnings presentation available on the investor relations section of our website. Due to the forward-looking nature of the adjusted EBITDA guidance we will provide on this call, specific quantifications of the charges excluded from forward-looking adjusted EBITDA, including with respect to depreciation, amortization, interest and taxes that would be required to reconcile the non-GAAP financial measures included in such guidance to GAAP measures are not available. So it is not feasible to provide accurate forecasted non-GAAP reconciliations without unreasonable effort. As a result, No disclosure of estimated comparable gap measures is provided, and no reconciliation of the forward-looking non-gap financial measures is provided. Thank you. And with that, let me turn the call over to John to discuss our third quarter results. John?

Thanks, Sean. Good evening, everyone, and thank you for joining us for our third quarter 2022 earnings call. We're excited to announce that we have achieved another record quarter. and continue to build upon our momentum from the first half of the year. Before we share some of our highlights, I want to recognize our more than 800 team members who delivered an outstanding quarter for our shareholders. Now onto our results on slide two. For the third quarter, we achieved net sales of 103 million, which was up 56% versus last year. as we continue to see strong demand for premium metal card products, both domestically and internationally. And we capitalized on this through strong sales execution, deep customer relationships, and partner channels. We also reported net income of $22 million, up 17% year over year. And adjusted EBITDA was higher than expected at $33 million for the quarter, up 33% year over year due to a combination of our ability to drive significant economies of scale, our focus on operational excellence and efficiency, and managing investments based on the Arculus ramp up expectations and timing. Our growth trajectory is supported by positive card issuer trends, including high consumer and business demand for premium cards, and spending in such areas as travel, entertainment, and services, and growth in new customer card acquisitions for card issuers. I'll provide some additional detail on this in a few slides. It's important to note that as of today, we have not seen any major impact from larger economic issues. However, we're closely monitoring our customers, the market, and macroeconomic factors. If economic indicators evolve, we believe we are well equipped to respond similar to how we executed throughout the pandemic when we grew both top and bottom line despite a challenged economy overall and in particular challenges in the credit card market. Moving on to Arculus progress. We are announcing a number of new partnerships and continued progress with names previously mentioned. And we believe the Archulis platform is well positioned to support today's growing security, payment, and authentication needs across a variety of industries. That said, the overall ramp up remains slower than expected with the continued uncertainty in the digital asset market. And we are managing our spend accordingly and have increased our focus on executing our B2B sales and marketing efforts, which we believe can deliver greater scale at a lower cost. To be more specific, going into 2022, we shared that our projected full year net impact from Arculus was forecasted to be around 33 million negative. which encompassed total anticipated net sales minus expected operating and marketing expenses. Based on our strategic business decisions and spending discipline, driven by uncertainty in the market, we now anticipate the net impact for the full year to be more in the range of 20 to 22 million negative, which has a positive impact on our adjusted EBITDA for the year. Coming back to our overall outlook for the year and based on the outperformance in the metal payment card business, we are updating the 2022 net sales range to the high end of our previously announced guidance and now expect net sales for the year between 370 and 380 million. We are also raising our 2022 adjusted EBITDA guidance and now expect it to be in the range of 130 to 137 million, given our continued margin expansion, profitability, and spending discipline. The adjusted EBITDA guidance is up nearly 20 million from the midpoint of last quarter's guidance. and up nearly 30 million from the midpoint of our guidance issued last December. Now moving to slide three. We have seen strong growth in the payment card business, including new clients across banking, gaming, entertainment, fintech, and exchanges. For example, we've seen cards launched this year from Venmo and PayPal, while owned by the same company that launched distinct metal card programs. We've also launched programs with additional FinTechs, including Vital, Mercury, and BHC, which target different aspects of the FinTech landscape. On the gaming side, we have MANA, which is a neobanking platform designed for video gamers and is offering a metal debit card so gamers can earn rewards for purchases and gameplay. We've got continued expansion with eToro, a social investment and multi-asset brokerage company that offers a debit card tied directly to an eToro money cash account. Last, we have a unique innovation we're bringing to market with U.S. Bank, where we're piloting an LED metal payment card. The card is truly distinct with the bank logo on the face, and that card lights up when a contactless transaction is initiated. Once again, highlighting Compose Secure's card form factor innovations. I also want to highlight some of the progress we're seeing on the Arculus side. CoinZoom, which announced a partnership with Visa in June, is a US-based crypto exchange that can leverage their Visa partnership to deliver crypto to eligible customers in 194 countries. They plan to combine their current metal payment card, which we provide, with FIDO2 authentication capabilities starting early next year. Legacy Vault app is a cloud-based platform that delivers security for managing and preserving valuable information related to legal and financial family planning. With an Arculus FIDO2-enabled metal card, they expect to deliver enhanced device-level security. We mentioned in BESCO last quarter we're excited about our progress, which includes a premium metal card plus Arculus digital authentication. And separately, white labeling our Arculus cold storage wallet. We are tracking well and anticipate a launch in the first half of 2023. Change, also mentioned last quarter, is a DeFi app with half a million users that empower people to become their own digital bank, and they are working to offer the Arculus cold storage solution for their mobile wallet. Finally, as I mentioned earlier, we're increasing our focus on executing B2B sales and marketing. We had a strong showing at Money 2020, and we're encouraged by the conversations we had with potential and current customers. As I mentioned earlier, we're increasing our focus on executing our B2B sales and marketing. Strong showing at Money 2020, encouraged by the conversations. with customers across a variety of industries, such as gaming, gambling, entertainment, et cetera. We also expanded our B2C distribution in the third quarter, and the Arculus cold storage wallet is now available for sale on Walmart's new egg. Turning to slide four, I'm excited by our customer progress, and we are encouraged by the positive card issuer market trends that we're seeing. On the left hand of slide four, we are showing our largest customers purchase volume growth based on publicly available data, which remains well above pandemic levels. Despite general mixed signals within the broader economy, we continue to hear positive messages from our clients. Card issuers are experiencing record spending levels by their customers, supported by travel, entertainment, and goods and services. For example, Amex stated that millennials and Gen Z spending was up 39% year over year in the quarter, and that US SME spending grew 17% in the quarter. They also noted that offline spending was back above pre-pandemic levels, highlighting that consumers are out shopping and spending. Which takes me to the right side of the chart. As you can see, tap to pay with cards is the fastest growing method of in-store transactions for consumers and remains well above digital wallets and growing at a much faster trajectory. A positive indicator for our market that reinforces the demand and usage of card products as well as the ability to enable premium brand experiences for our clients. On slide five, you can see that American Express reported strong card acquisition numbers for the quarter. They added 3.3 million new proprietary cards during the quarter, an all-time high for quarterly card acquisitions. At the same time, they are tracking well for their planned investment for marketing and business development growth. American Express recently referenced the marketing portion of the spend for the third quarter, which was 1.5 billion, on track with their expectation to spend over 5 billion in 2022. They also stated that investments to drive customer engagement, acquisitions, and retention continue. to generate results with card member spending at near record levels in the quarter and highlighted the fact that the strength of the rebound in travel spending has exceeded expectations throughout the year and total T&E spending was up 57% in the third quarter from a year earlier. This is all publicly available information and we update this chart every quarter to try and give some additional insight and understanding based on our customer's guidance. Regarding the Arculus platform, I'd like to take an opportunity to dive deeper into Arculus and share the diversity and strength of the platform. Each time we've talked about Arculus, I've highlighted that it is a security and authentication platform with opportunities across a variety of verticals, and we'll continue to frame that for you. On the right side, we have our direct-to-consumer Arculus cold storage product, which was the first vertical application for our platform. On the left side, we're showing our B2B solutions that deliver security authentication, identity verification, and or cold storage across a variety of verticals, including financial institutions, FinTech, gaming, gambling, telecom, crypto exchanges, et cetera. When we talk about secure authentication, this helps better protect the login process, whether it's for banking and investment accounts, gaming or gambling, this is our direct response to the password problem. And Arculus allows for the use of two or three factor authentication to support enhanced security. As we move to slide seven, I want to provide a little more context for the massive scale of the password problem. You can see that over 90% of internet users worry about getting their passwords hacked, and that 57% of people who have been scammed don't change their passwords. This is a burgeoning security crisis and many organizations are trying to move beyond passwords. And we believe that Arculus is the ideal solution. On slide eight, you can see how the Arculus portfolio can turn a metal credit or debit card into a physical security token, which reduces reliance on passwords and combats fraud. It is also something that you carry with you everywhere and are used to using multiple times a day already. With Arculus, we can also add step-up authentication for such actions as high-value transactions, customer service, or authenticating a device. Moving to slide nine. I spoke to the uncertainty in the digital asset market in general and how we're better timing our Arculus investment. As you can see, hacks and thefts in the crypto market persist. Year to date, the industry has seen more than 3 billion worth of cryptocurrency stolen and hacks from various services. In addition, we are seeing exchanges still freeze customers' digital assets due to liquidity challenges for some of these platforms. While this uncertainty persists, these challenges continue to drive greater consumer awareness and exchanges are encouraging offering solutions to protect customer assets such as cold storage and authentication. We see strong interest in Arculus cold storage and we are encouraged by the positive conversations we're having with many platforms and exchanges across the world. This climate actually drives an increased need for consumers to control the private keys to their digital assets. This is what the Arculus cold storage wallet and our offering was made for and we believe we'll benefit from this market turbulence and the medium and long-term. You can see a few screenshots of the Arculus cold storage wallet, which shows our advanced three-factor authentication, how we leverage NFC to better security as opposed to Bluetooth or plugging a dongle into your computer, and we provided added layer of authentication when sending or receiving digital assets. In addition, businesses can white label our cold storage offering and provide it to their customers as a better way for them to secure their digital assets. As I mentioned, we're already working with several exchanges and platforms. We are still on track to deliver all-in-one capability of payment card plus authentication and cold storage early next year. With that, let me hand it over to Tim for a deeper discussion on our financials.