CompoSecure, Inc.

Q1 2024 Earnings Conference Call

5/6/2024

spk01: Good day and thank you for standing by. Welcome to Compose Secure's first quarter 2024 earnings call. At this time, all participants are in a 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Steve Fetter, General Counsel and Corporate Secretary. Please go ahead.
spk14: Good afternoon, and thank you for joining us to review Composecure's first quarter 2024 financial results. With me on the call is John Wilk, Composecure's Chief Executive Officer, and Tim Fitzsimmons, Chief Financial Officer. They will begin with prepared remarks, and then we will open the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy and our ability to maintain existing and acquire new customers, as well as other statements regarding our plans and prospects. Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risk and other important factors that could affect our actual results, Please refer to the information in our annual report on Form 10-K and other reports filed with the SEC, which are available in the investor relations section of our website at compasssecure.com and on the SEC's website at sec.gov. Please note that the discussion on today's call includes certain non-GAAP financial measures, including 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 gap to non-gap measures is available in our press release and earnings presentation available in the investor relations section of our website. Thank you. And with that said, let me turn the call over to John to discuss our first quarter results.
spk05: Thank you, Steve. Good afternoon, and thank you for joining us for our first quarter conference call. Our momentum from the end of last year has carried into the first quarter as we generated our third consecutive quarterly net sales record. driven by sustained growth in our domestic business, which was up 26% compared to the year-ago period. During the quarter, our customers launched several new high-profile card programs that garnered significant attention in the marketplace. This includes the introduction of the Robinhood Gold Card and a new limited-edition Delta Reserve Card in white made from an airplane. I'll discuss these new programs in greater detail later in the call, but I'm proud to see the effort and execution from our team to introduce innovative new technology and card constructs that continue to drive demand for metal payment cards. Now, to summarize our financial results on slide three, net sales in the first quarter increased 9% to a record 104 million. driven primarily by continued growth in our domestic business, offset by lower international net sales. Looking at our bottom line, Q1 adjusted EBITDA grew 6% to $37.8 million, reflecting our team's continued focus on profitability while simultaneously driving investments to capture long-term opportunity and value. Our card issuers continue to express a positive outlook for the consumer and have expressed intentions to maintain or increase their payment card marketing spend compared to prior year. For Arculus, we continue to see positive momentum and remain on track for our total net investment to be lower than 2023, with the expectation of turning positive for fiscal year 2025 as mentioned in our last quarter's call. I would also like to take a moment to comment on the announcement we made today regarding our capital allocation framework. We have continued to generate meaningful free cash flow and closed out the quarter with a cash balance of $55 million, which has more than doubled from one year ago. Given our cash position, Our board has declared a special cash dividend of 30 cents per share for our Class A shareholders, along with a corresponding distribution to Class B unit holders. This reflects our confidence in the sustainability of our cash flow generation, as well as our commitment to rewarding shareholders. We are pleased to incorporate another means to enhance Composecure shareholder value, into our capital allocation framework, which includes investment in organic growth, debt paydowns, securities repurchases, and consideration of future special and recurring dividends. Finally, as mentioned in our press release earlier today, we are reiterating our full-year guidance, which calls for net sales to range between $408 and $428 million, and adjusted EBITDA ranging between 147 and 157 million. These targets reflect our expectation for continued strength in our business as we execute on our growth and profitability objectives. Moving on to slide four, we wanted to share several new metal card programs that we have launched since our last call. Robinhood launched a very exciting card program last month with the Robin Hood Gold Card, which is a gold colored metal veneer card weighing 17 grams. As part of the program, we also created a limited edition card made from 10 karat gold weighing 36 grams. AMEX and Delta announced a new limited edition Delta Reserve Card made from a recycled airplane. You may remember AMEX launched a limited edition version in black to great success in 2022. The new version, which was launched last week, is white and already generating buzz in the market. You can see several additional customer launches on this slide, including Lloyds Bank in the UK, Rogers Bank in Canada, and Bradesco in Brazil. Turning to slide five, I mentioned card issuer trends earlier, and I'd like to provide further insight. The information is based on quarterly reported public information. Our largest customers are continuing to drive strong purchase volume in 2024. Additionally, we've seen continued strong card acquisition trends, as well as sustained business development and marketing investment. Looking at the overall payment card market, we've highlighted several customer and partner quotes on slide six. Across the board, issuer sentiment remains constructive on the state of the consumer and the long-term opportunity in the payment space. Our issuers report intentions to sustain or increase program spend compared to 2023, with several citing the intention to lean into solutions to capture high-quality customer accounts. I always like to take the opportunity to outline our Arculus platform on every call. to provide clarity around our product capabilities. As mentioned earlier, we continue to see positive momentum and remain on track to achieve our net investment target. From a capabilities perspective, we recently added multi-card support for Arculus cold storage, which allows our customers to split their assets across multiple Arculus cards operating on the same device. and expanded support for different blockchains, including XTC, Providence, and Seller, in addition to adding support for Ondo tokens and Polygon NFTs. I'll now hand it over to Tim to review our financials before returning for closing remarks.
spk07: Thanks, John, and good afternoon, everyone. I'll provide a more detailed overview of our Q1 2024 financial performance and then turn it back to John. before we open the call for questions. Unless stated otherwise, all comparisons and variance commentary are on a year-over-year basis. In Q1, net sales increased 9% to a record level of $104 million compared to $95.3 million. The increase was primarily driven by continued domestic growth in our metal payment card business. Gross margin for the quarter was 53% compared to 56% in the prior year. The decrease in gross margin was primarily due to inflationary pressure on wages as well as product mix. Net income for the quarter increased 59% to $17.1 million, compared to $10.7 million in the prior year. The increase was driven by higher net sales and a $4.3 million net differential in non-cash items from the revaluation of warrants, earn-out consideration, and derivative liability driven by change in our stock price. Adjusted EBITDA in Q1 increased 6% to $37.8 million compared to $35.5 million in the prior year. And our adjusted EBITDA margin was 36% compared to 37% the first quarter of 2023. The adjusted EBITDA was driven by greater net sales, partially offset by $1.8 million of net investment in Oculus. Looking closer at the split between our domestic and international business, you can see that our first quarter domestic net sales remained strong at 93 million, up 26% year over year, and surpassing our record domestic quarter in Q4 of 2023. John highlighted earlier that our domestic business was offset by lower international net sales. International net sales for the first quarter of 2024 were 11 million, which was down from 22 million in the comparable period last year. As we have stated previously, our international business can be more variable due to the customer mix and a smaller sales base. We continue to expect our international business to account for roughly 20% of our annual total net sales mix. For perspective, international net sales were 18% of our total net sales mix in 2023, and we're 22% of our mix in 2022. Moving on to the balance sheet. At March 31st, 2024, we had cash and cash equivalents of 55.1 million and total debt of 335.6 million, which includes 205.6 million of term loan and 130 million of exchangeable notes. This resulted in total net debt of 280.5 million. Looking at our leverage ratios, we provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio as our bank agreement is calculated with slight differences. At March 31st, 2024, our overall leverage ratio was 2.28 times based on total debt of $335.6 million and trailing 12-month adjusted EBITDA of $147.3 million. This compares to 2.35 times at December 31st, 2023, with the improvement driven by paying down debt and increased TTM adjusted EBITDA. At March 31st, 2024, we had a bank agreement secured debt leverage ratio of 1.34 times based on a total secured debt of $205.6 million and trailing 12-month bank adjusted EBITDA of $153 million. This compares to 1.39 times at December 31st, 2023. As John mentioned earlier, we have accumulated a robust cash position supported by sustainable strong cash flow generation. Given this, our board has decided to allocate a portion of our capital towards a special cash dividend of 30 cents to our class A shareholders and an equivalent distribution to our class B unit holders. Both the dividend and the distribution will be payable on June 11th to Class A shareholders and Class B unit holders of record as of May 20 and will be funded by our cash and our balance sheet. The total amount of cash to be dispersed is expected to be approximately $24.2 million. Turning to our cash flow statement on slide 12, net cash provided by operating activities increased 36% to $33.8 million compared to $24.9 million in the prior year quarter. I want to turn now to earnings per share. As a reminder, our method under GAAP for calculating basic and diluted EPS allows us to allocate changes in adjustments of mark-to-market instruments among the public company and the operating subsidiaries to better reflect the actual economic impact of the conversion of such instruments on our net income and on a per share basis. GAAP EPS for the three months ended March 31, 2024 was $0.20 per basic and $0.17 per diluted share. This compares to $0.13 per basic and $0.11 per diluted share in the year-ago period. The increase was driven by greater net sales as well as changes to the fair value of the warrants, earn-out consideration, and derivative liabilities primarily due to the change in our stock price. On slide 13, you can read through the footnotes on the slide that take you through the complexities of the allocation of the net income due to the up-sea structure and the shares that are included in the basic and diluted calculations. On slide 14, we're also providing non-GAAP adjusted net income and adjusted EPS, which excludes the impact of non-cash fair value adjustments to the warrants, the earn-out revaluations, and stock compensation. We believe that this provides a clearer picture of the economics of the company's operating results. With that background, our non-GAAP EPS for the first quarter 2024 was 29 cents per basic share and 25 cents per diluted share. This compares to 27 cents per basic share and 23 cents per diluted share in the year-ago period. In the appendix, you will find a reconciliation between the GAAP and non-GAAP net income used in these calculations. I'll now turn it back to John to discuss our guidance and give closing remarks.
spk05: Thanks, Tim. As I mentioned earlier, we are reiterating our 2024 guidance and continue to expect net sales to range between $408 and $428 million and adjusted EBITDA to come in between $147 and $157 million. In closing, on slide 16, I'd like to highlight a few points we covered on our call this evening. 2024 is off to a strong start as we achieved another quarter of record net sales driven by the sustained momentum in our domestic operations. We're excited to see the launch of several high-profile customer programs that have received significant attention in the marketplace. Global issuers are reporting intentions to sustain or grow their marketing program spend in 2024 and continue to see a resilient consumer despite inflationary headwinds. For Arculus, we see positive momentum and remain on track for our total net investment to be lower than 2023 with the expectation of turning positive for fiscal 2025. We continue to generate strong and sustainable free cash flow, which has enabled us to accumulate a robust cash position on our balance sheet. As a result, today we announced that our board has declared a special cash dividend to reward our shareholders and to equip us with another tool to deliver shareholder value as we continue to execute on our growth and profitability objectives in the year ahead. With that, I'd like to open up the call to Q&A.
spk01: As a reminder, to ask a question, please press star 1-1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Todaro with Needham.
spk03: Hey, thanks for taking my question and congrats on the quarter. Great numbers here. I guess two questions for me. One, did domestic growth kind of surprise you? Was there any, you know, when we think about this quarter versus the rest of the year, I guess trying to understand, can we expect kind of more growth there again? And to almost frame it differently, if international bounces back, do you beat the guide that you're issuing? First question, and then just second one. I didn't really hear a call out on the multi-factor authentication outside of the Arculus wallet or crypto. Just, you know, hopeful to get some color and thoughts on that part of the business as well.
spk05: Thanks, John, for both questions. So let me try and take those in order. In terms of the domestic business, the domestic growth, yes, it was strong. We felt confident. really good about it, again, delivering a record quarter of domestic growth and performance. International definitely came in light, consistent with what we've talked about in the past, and Tim highlighted in his prepared remarks in terms of the customer base, some of the macros affecting the international business. As we look at the full year, We do expect international to account for roughly 20% of sales over time. So you've just got some timing there, where I think we'll see some of that more in the second half. And then overall, John, we feel comfortable with the ranges that we've given and aren't making updates to it at this time. But off to a strong start in our view overall. With respect to the second question on Arculus Authenticate, it is one of the things clearly that is giving us the confidence in the net investment continuing to improve. versus last year and positioning us for a positive sort of net investment for the full year of 25. So I'd say seeing momentum both with the authentication solution as well as the cold storage solution and continuing to manage investments on that side as well.
spk10: Great. Thanks. Thanks, Sean.
spk01: Our next question comes from the line of Mark Palmer with Benchmark.
spk13: Yes, good afternoon. Thanks for taking my questions. A couple of questions. First of all, just to follow up on the international front, is it the case that some of your customers there, seeing what's going on in the macro environment, are simply deferring or delaying the launch of different programs such that they could be coming online in the second half, hence your confidence in approaching the 20% of total sales from international?
spk05: Thanks for the question, Mark. Yes, somewhat. So we've got, we think, pretty good visibility, uh, with opportunities that, that we see and know, um, that help give us the, the view on kind of what the rest of the year looks like that, you know, approximately 20%. And some years it's been 22. I think last year was 18 in those ranges. Um, but we do believe it normalizes, uh, over time. And, and yes, we've seen some of that with, uh, orders coming in on the international side for later in the year.
spk13: Very good. And just to follow a question with regard to the announced special cash dividend, it is by definition special, but it's also based on the company's increased confidence in the sustainability of its free cash flow. Should we be thinking that if the free cash flow trends continue as they have, that a more permanent or common dividend may be in the works?
spk05: Mark, we've said in the release, and I'd point you to that, which is we will consider future dividends, which include special or recurring. The board looked overall at the capital allocation framework and how we wanted to try to reward shareholders and felt like the special dividend was the appropriate tool to be able to deliver value to shareholders at this time. And our overall message is from a capital allocation framework, it's continue to invest in growing the business organically, paying down debt, repurchasing securities and returning capital to shareholders in these ways. And we'll use any and all of these tools as the company and the board deem appropriate. So certainly consideration in the future.
spk12: Very good. Thanks very much.
spk05: Thank you.
spk01: Our next question comes from the line of Joe Flynn with CompassPoint.
spk08: Hi, guys. Thanks for the question. First on the Robinhood card program, I was hoping if you could provide any color on the details there. And ultimately, if you see this as an opportunity to maybe leverage Arculus products as well on the cold storage front.
spk05: So look, on the broader program, they've made a big splash in the market with the gold card launch that they announced. And the core of that program has a strong value proposition and our metal veneer, a gold metal veneer card that we make for them. In addition, they announced a limited edition solid gold 10-carat card. And I think they're very excited about the program. We're very excited to partner with them as well. So excited to see what that holds. And with regard to the second, Joe, I'm not going to comment specifically on Robinhood. I'm going to tell you that you can presume that we are talking to all of our customers and prospects about both our card capabilities and authentication solutions and or cold storage where appropriate. It's not always appropriate, but you can presume if it is, you know, we are having those discussions. So beyond that, I'm not going to comment more specifically.
spk08: Great. Thanks. That's helpful. And on the capital allocation front, is there any more, has there been any more internal discussion in regard to, you know, potentially unlocking value from moving from the upseat to regular C Corp? or think going forward it was primarily going to be through dividends and buyback?
spk05: Look, Joe, we've talked about over time, we anticipate seeing that structure change as B units are sold into the market, but there's nothing about that structure that changes with this announcement. You know, we understand perspective out there in the market on it. And I'd say, you know, we've taken this step with providing a special dividend to deliver value to all shareholders. And, you know, we think it's a great demonstration of the capability and power of this company to be able to do that. I go back to my comment earlier, Joe. We will use any of the tools in our tool set to be able to deliver value to shareholders over time.
spk09: Great. Thanks. That's all for me.
spk01: As a reminder, to ask a question, that is star 1-1. Our next question comes from the line of Reggie Smith with J.P. Morgan.
spk11: Hey, good evening. Thanks for taking the question. Congrats on the quarter. I had a question, kind of housekeeping, but I was curious, you know, for a deal like Robinhood, I would imagine it was inked a while ago. Thinking about the revenues, I'm curious if there was anything, I guess, is it episodic, like the launch of programs like that, and were revenues recognized, you know, both in the fourth quarter of last year and maybe the first quarter of this year? Maybe talk a little bit about how those REVs, I guess for the initial shipment, you know, kind of flow through. And then secondarily to that, I know you guys mentioned a couple of pretty exotic card forms. I think you mentioned like the gold that's actually in the Robin Hood card and then the Delta card that was made from recycled airplanes. And I also noticed that the gross margins were a little lower this quarter. Is there any relationship between those two factors or appreciable difference in like how the margins on some of the more exotic cards compared to your, I guess I'd say classic metal card.
spk05: Yeah, so let me take, no, it's okay. I think I got it. I'm going to try and take those in reverse order and I'm going to start with the gross margin in general, Reggie, if I could. So on the gross margin, What we've said is we believe gross margins in our business should be north of 50 percent. And, you know, coming in at 53, certainly in line with our expectations about where gross margins should be in our business. And we think those are strong, especially combined with EBITDA margins, you know, in the high 30s. So, you know, that just is a baseline for the story of our business. Second, with respect to why it's down year over year, there are two factors that Tim talked about and I'd reemphasize. One is, we have seen some impacts from inflationary pressures due to things like wages that have had some impact on the gross margin. And the second does relate to, as we launch new card constructs, It just typically takes a little bit of time to get those up and running at a level of efficiency that we expect to see over time. So yes, we will see kind of lower margins as those products ramp up that stabilize, we think, in the levels that we expect overall in the business. So yes, when we're launching a bunch of new things, you see some of that impact. And we talked a little bit about it last quarter, and Tim highlighted it a little bit this quarter as well. And we think over time those sort of normalize out to more stable levels for us. With respect to Robinhood generally, I'm going to comment just broadly how this works. Someone like that is ramping up a program. Reggie, there are a couple different ways they can do it. One is with a large upfront order and then steady volume to follow or just steady volume as they build. And it's just really a preference of the buyer and the company themselves. So I'm not going to comment specifically on how they're doing it and how their revenue will grow, but presume that generally anytime you see a program like that, it's certainly a good thing. And we like to see that build over time. And as you and I have talked about, when those programs build, Reggie, over time, you'll see kind of three or four different levers. New acquisition, you know, over time, you'll see loss stolen. You'll see natural reissue a few years later. You know, and all of those build to, you know, we think the kind of sticky relationship that we want to see with customers over time. So excited about the launch and the opportunity.
spk11: Got it. And if I can ask one more. I've known you long enough. I know you're not the type to raise guidance after the first quarter, so I'm not going to ask you about that. But I guess thinking about, you know, where results came in, first quarter versus your expectations, maybe the pipeline. Maybe if you could talk a little bit about how both of those are today relative to what you were thinking when we spoke two months ago. Any color there would be helpful. Thank you.
spk05: Yeah, so, Reggie, I appreciate the question, and, yes, we're getting to know each other better as we move through these. You know, look, if you look at the guidance range that we issued, you know, we're spot on out of the gates to kind of be right in those ranges. we will always look to do better. But we're right where we wanted to be, right where we expected to be with the business. And I think from looking at it, if a company starts and they need a huge hockey stick to be able to achieve their results, someone sitting in your chair always looks at it skeptically. We're right on where we need to be performing in this business and just very pleased with the start that we're off to.
spk11: When I do the math on just the seasonality, looking at your first quarters in the previous like three years, using that kind of range, I kind of get toward the high end of your guidance already just based on what you did in the first quarter. So that was the impetus for the question. It just seems like you guys are off to a good start. which you said, but I wanted to, I guess, hear it again. That's all I have. Thank you.
spk04: Appreciate it. Thank you, Reggie.
spk01: That concludes today's question and answer session. This will conclude today's conference call. Thank you for participating. You may now disconnect. you Thank you. Thank you.
spk00: Thank you. Thank you. you
spk01: Good day and thank you for standing by. Welcome to Compose Secure's first quarter 2024 earnings call. At this time, all participants are in a 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Steve Fetter, General Counsel and Corporate Secretary. Please go ahead.
spk14: Good afternoon, and thank you for joining us to review Composecure's first quarter 2024 financial results. With me on the call is John Wilk, Composecure's Chief Executive Officer, and Tim Fitzsimmons, Chief Financial Officer. They will begin with prepared remarks, and then we will open the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy and our ability to maintain existing and acquire new customers, as well as other statements regarding our plans and prospects. Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risk and other important factors that could affect our actual results, Please refer to the information in our annual report on Form 10-K and other reports filed with the SEC, which are available in the investor relations section of our website at compasssecure.com and on the SEC's website at sec.gov. Please note that the discussion on today's call includes certain non-GAAP financial measures, including 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 gap to non-gap measures is available in our press release and earnings presentation available in the investor relations section of our website. Thank you. And with that said, let me turn the call over to John to discuss our first quarter results.
spk05: Thank you, Steve. Good afternoon and thank you for joining us for our first quarter conference call. Our momentum from the end of last year has carried into the first quarter as we generated our third consecutive quarterly net sales record. driven by sustained growth in our domestic business, which was up 26% compared to the year-ago period. During the quarter, our customers launched several new high-profile card programs that garnered significant attention in the marketplace. This includes the introduction of the Robinhood Gold Card and a new limited-edition Delta Reserve Card in white made from an airplane. I'll discuss these new programs in greater detail later in the call, but I'm proud to see the effort and execution from our team to introduce innovative new technology and card constructs that continue to drive demand for metal payment cards. Now, to summarize our financial results on slide three, net sales in the first quarter increased 9% to a record 104 million. driven primarily by continued growth in our domestic business, offset by lower international net sales. Looking at our bottom line, Q1 adjusted EBITDA grew 6% to $37.8 million, reflecting our team's continued focus on profitability while simultaneously driving investments to capture long-term opportunity and value. Our card issuers continue to express a positive outlook for the consumer and have expressed intentions to maintain or increase their payment card marketing spend compared to prior year. For Arculus, we continue to see positive momentum and remain on track for our total net investment to be lower than 2023 with the expectation of turning positive for fiscal year 2025 as mentioned in our last quarter's call. I would also like to take a moment to comment on the announcement we made today regarding our capital allocation framework. We have continued to generate meaningful free cash flow and closed out the quarter with a cash balance of $55 million, which has more than doubled from one year ago. Given our cash position, Our board has declared a special cash dividend of 30 cents per share for our Class A shareholders, along with a corresponding distribution to Class B unit holders. This reflects our confidence in the sustainability of our cash flow generation, as well as our commitment to rewarding shareholders. We are pleased to incorporate another means to enhance Composecure shareholder value, into our capital allocation framework, which includes investment in organic growth, debt paydowns, securities repurchases, and consideration of future special and recurring dividends. Finally, as mentioned in our press release earlier today, we are reiterating our full-year guidance, which calls for net sales to range between $408 and $428 million, and adjusted EBITDA ranging between 147 and 157 million. These targets reflect our expectation for continued strength in our business as we execute on our growth and profitability objectives. Moving on to slide four, we wanted to share several new metal card programs that we have launched since our last call. Robinhood launched a very exciting card program last month with the Robin Hood Gold Card, which is a gold colored metal veneer card weighing 17 grams. As part of the program, we also created a limited edition card made from 10 karat gold weighing 36 grams. AMEX and Delta announced a new limited edition Delta Reserve Card made from a recycled airplane. You may remember AMEX launched a limited edition version in black to great success in 2022. The new version, which was launched last week, is white and already generating buzz in the market. You can see several additional customer launches on this slide, including Lloyds Bank in the UK, Rogers Bank in Canada, and Bradesco in Brazil. Turning to slide five, I mentioned card issuer trends earlier, and I'd like to provide further insight. The information is based on quarterly reported public information. Our largest customers are continuing to drive strong purchase volume in 2024. Additionally, we've seen continued strong card acquisition trends, as well as sustained business development and marketing investment. Looking at the overall payment card market, we've highlighted several customer and partner quotes on slide six. Across the board, issuer sentiment remains constructive on the state of the consumer and the long-term opportunity in the payment space. Our issuers report intentions to sustain or increase program spend compared to 2023, with several citing the intention to lean into solutions to capture high-quality customer accounts. I always like to take the opportunity to outline our Arculus platform on every call. to provide clarity around our product capabilities. As mentioned earlier, we continue to see positive momentum and remain on track to achieve our net investment target. From a capabilities perspective, we recently added multi-card support for Arculus cold storage, which allows our customers to split their assets across multiple Arculus cards operating on the same device. and expanded support for different blockchains, including XTC, Providence, and Seller, in addition to adding support for Ondo tokens and Polygon NFTs. I'll now hand it over to Tim to review our financials before returning for closing remarks.
spk07: Thanks, John, and good afternoon, everyone. I'll provide a more detailed overview of our Q1 2024 financial performance and then turn it back to John. before we open the call for questions. Unless stated otherwise, all comparisons and variance commentary are on a year-over-year basis. In Q1, net sales increased 9% to a record level of 104 million compared to 95.3 million. The increase was primarily driven by continued domestic growth in our metal payment card business. Gross margin for the quarter was 53% compared to 56% in the prior year. The decrease in gross margin was primarily due to inflationary pressure on wages as well as product mix. Net income for the quarter increased 59% to $17.1 million, compared to $10.7 million in the prior year. The increase was driven by higher net sales and a $4.3 million net differential in non-cash items from the revaluation of warrants, earn-out consideration, and derivative liability driven by change in our stock price. Adjusted EBITDA in Q1 increased 6% to $37.8 million compared to $35.5 million in the prior year. And our adjusted EBITDA margin was 36% compared to 37% the first quarter of 2023. The adjusted EBITDA was driven by greater net sales, partially offset by $1.8 million of net investment in Oculus. Looking closer at the split between our domestic and international business, you can see that our first quarter domestic net sales remained strong at 93 million, up 26% year over year, and surpassing our record domestic quarter in Q4 of 2023. John highlighted earlier that our domestic business was offset by lower international net sales. International net sales for the first quarter of 2024 were 11 million, which was down from 22 million in the comparable period last year. As we have stated previously, our international business can be more variable due to the customer mix and a smaller sales base. We continue to expect our international business to account for roughly 20% of our annual total net sales mix. For perspective, international net sales were 18% of our total net sales mix in 2023, and we're 22% of our mix in 2022. Moving on to the balance sheet, at March 31st, 2024, we had cash and cash equivalents of 55.1 million and total debt of 335.6 million, which includes 205.6 million of term loan and 130 million of exchangeable notes. This resulted in total net debt of 280.5 million. Looking at our leverage ratios, we provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio as our bank agreement is calculated with slight differences. At March 31st, 2024, our overall leverage ratio was 2.28 times based on total debt of $335.6 million and trailing 12-month adjusted EBITDA of $147.3 million. This compares to 2.35 times at December 31st, 2023, with the improvement driven by paying down debt and increased TTM adjusted EBITDA. At March 31st, 2024, we had a bank agreement secured debt leverage ratio of 1.34 times based on a total secured debt of $205.6 million and trailing 12-month bank adjusted EBITDA of $153 million. This compares to 1.39 times at December 31st, 2023. As John mentioned earlier, we have accumulated a robust cash position supported by sustainable, strong cash flow generation. Given this, our board has decided to allocate a portion of our capital towards a special cash dividend of 30 cents to our Class A shareholders and an equivalent distribution to our Class B unit holders. Both the dividend and the distribution will be payable on June 11th to Class A shareholders and Class B unit holders of record as of May 20 and will be funded by our cash and our balance sheet. The total amount of cash to be dispersed is expected to be approximately $24.2 million. Turning to our cash flow statement on slide 12, net cash provided by operating activities increased 36% to $33.8 million compared to $24.9 million in the prior year quarter. I want to turn now to earnings per share. As a reminder, our method under GAAP for calculating basic and diluted EPS allows us to allocate changes in adjustments of mark-to-market instruments among the public company and the operating subsidiaries to better reflect the actual economic impact of the conversion of such instruments on our net income and on a per share basis. GAAP EPS for the three months ended March 31, 2024, was $0.20 per basic and $0.17 per diluted share. This compares to $0.13 per basic and $0.11 per diluted share in the year-ago period. The increase was driven by greater net sales, as well as changes to the fair value of the warrants, earn-out consideration, and derivative liabilities, primarily due to the change in our stock price. On slide 13, you can read through the footnotes on the slide that take you through the complexities of the allocation of the net income due to the up-sea structure and the shares that are included in the basic and diluted calculations. On slide 14, we're also providing non-GAAP adjusted net income and adjusted EPS, which excludes the impact of non-cash fair value adjustments to the warrants, the earn-out revaluations, and stock compensation. We believe that this provides a clearer picture of the economics of the company's operating results. With that background, our non-GAAP EPS for the first quarter 2024 was 29 cents per basic share and 25 cents per diluted share. This compares to 27 cents per basic share and 23 cents per diluted share in the year-ago period. In the appendix, you will find a reconciliation between the GAAP and non-GAAP net income used in these calculations. I'll now turn it back to John to discuss our guidance and give closing remarks.
spk05: Thanks, Tim. As I mentioned earlier, we are reiterating our 2024 guidance and continue to expect net sales to range between $408 and $428 million and adjusted EBITDA to come in between $147 and $157 million. In closing, on slide 16, I'd like to highlight a few points we covered on our call this evening. 2024 is off to a strong start as we achieved another quarter of record net sales driven by the sustained momentum in our domestic operations. We're excited to see the launch of several high-profile customer programs that have received significant attention in the marketplace. Global issuers are reporting intentions to sustain or grow their marketing program spend in 2024 and continue to see a resilient consumer despite inflationary headwinds. For Arculus, we see positive momentum and remain on track for our total net investment to be lower than 2023 with the expectation of turning positive for fiscal 2025. We continue to generate strong and sustainable free cash flow, which has enabled us to accumulate a robust cash position on our balance sheet. As a result, today we announced that our board has declared a special cash dividend to reward our shareholders and to equip us with another tool to deliver shareholder value as we continue to execute on our growth and profitability objectives in the year ahead. With that, I'd like to open up the call to Q&A.
spk01: As a reminder, to ask a question, please press star 1-1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Todaro with Needham.
spk03: Hey, thanks for taking my question and congrats on the quarter. Great numbers here. I guess two questions for me. One, did domestic growth kind of surprise you? Was there any, you know, when we think about this quarter versus the rest of the year, I guess trying to understand, can we expect kind of more growth there again? And to almost frame it differently, if international bounces back, do you beat the guide that you're issuing? First question, and then just second one. I didn't really hear a call out on the multi-factor authentication outside of the Arculus wallet or crypto. Just hopeful to get some color and thoughts on that part of the business as well.
spk05: Thanks, John, for both questions. So let me try and take those in order. In terms of the domestic business, the domestic growth, yes, it was strong. We felt really good about it, again, delivering a record quarter of domestic growth and performance. International definitely came in light, consistent with what we've talked about in the past, and Tim highlighted in his prepared remarks in terms of the customer base, some of the macros affecting the international business. As we look at the full year, We do expect international to account for roughly 20% of sales over time. So you've just got some timing there, where I think we'll see some of that more in the second half. And then overall, John, we feel comfortable with the ranges that we've given and aren't making updates to it at this time. But off to a strong start in our view overall. With respect to the second question on Arculus Authenticate, it is one of the things clearly that is giving us the confidence in the net investment continuing to improve. versus last year and positioning us for a positive sort of net investment for the full year of 25. So I'd say seeing momentum both with the authentication solution as well as the cold storage solution and continuing to manage investments on that side as well.
spk10: Great. Thanks. Thanks, Sean.
spk01: Our next question comes from the line of Mark Palmer with Benchmark.
spk13: Yes, good afternoon. Thanks for taking my questions. A couple of questions. First of all, just to follow up on the international front, is it the case that some of your customers there, seeing what's going on in the macro environment, are simply deferring or delaying the launch of different programs such that they could be coming online in the second half, you know, hence your confidence in approaching the 20% of total sales from international?
spk05: Thanks for the question, Mark. Yes, somewhat. So, you know, we've got, we think, good visibility with opportunities that we see and know that help give us the view on kind of what the rest of the year looks like, that approximately 20%. And some years it's been 22%. I think last year it was 18% in those ranges. But we do believe it normalizes over time. And yes, we've seen some of that with orders coming in on the international side for later in the year.
spk13: Very good. And just to follow a question with regard to the announced special cash dividend, it is by definition special, but it's also based on the company's increased confidence in the sustainability of its free cash flow. Should we be thinking that if the free cash flow trends continue as they have, that a more permanent or common dividend may be in the works?
spk05: Mark, we've said in the release, and I'd point you to that, which is we will consider future dividends, which include special or recurring. The board looked overall at the capital allocation framework and how we wanted to try to reward shareholders and felt like the special dividend was the appropriate tool to be able to deliver value to shareholders at this time. And our overall message is from a capital allocation framework, it's continue to invest in growing the business organically, paying down debt, repurchasing securities and returning capital to shareholders in these ways. And we'll use any and all of these tools as the company and the board deem appropriate. So certainly consideration in the future.
spk12: Very good. Thanks very much.
spk05: Thank you.
spk01: Our next question comes from the line of Joe Flynn with CompassPoint.
spk08: Hi, guys. Thanks for the question. First on the Robinhood card program, I was hoping if you could provide any color on the details there. And ultimately, if you see this as an opportunity to maybe leverage Arculus products as well on the cold storage front.
spk05: So look, on the broader program, they've made a big splash in the market with the gold card launch that they announced. And the core of that program has a strong value proposition and our metal veneer, a gold metal veneer card that we make for them. In addition, they announced a limited edition solid gold 10-carat card. And I think they're very excited about the program. We're very excited to partner with them as well. So excited to see what that holds. And with regard to the second, Joe, I'm not going to comment specifically on Robinhood. I'm going to tell you that you can presume that we are talking to all of our customers and prospects about both our card capabilities and authentication solutions and or cold storage where appropriate. It's not always appropriate, but you can presume if it is, you know, we are having those discussions. So beyond that, I'm not going to comment more specifically.
spk08: Great. Thanks. That's helpful. And on the capital allocation front, is there any more, has there been any more internal discussion in regard to, you know, potentially unlocking value from moving from the upseat to regular C-Corp? or think going forward it was primarily going to be through dividends and buyback?
spk05: Look, Joe, we've talked about over time. We anticipate seeing that structure change as B units are sold into the market, but there's nothing about that structure that changes with this announcement. We understand perspective out there in the market on it. And I'd say we've taken this step with providing a special dividend to deliver value to all shareholders. And we think it's a great demonstration of the capability and power of this company to be able to do that. And I'd go back to my comment earlier, Joe. We will use any of the tools in our tool set to be able to deliver value to shareholders over time.
spk09: Great. Thanks. That's all for me.
spk01: As a reminder, to ask a question, that is star 1-1. Our next question comes from the line of Reggie Smith with J.P. Morgan.
spk11: Hey, good evening. Thanks for taking the question. Congrats on the quarter. I had a question. It's kind of housekeeping, but I was curious, you know, for a deal like Robinhood, I would imagine it was inked a while ago. Thinking about the revenues, I'm curious if there was anything, I guess, is it episodic, like the launch of programs like that, and were revenues recognized, you know, both in the fourth quarter of last year and maybe the first quarter of this year? Maybe talk a little bit about how those REVs, I guess, for the initial shipment, you know, kind of flow through. And then secondarily to that, I know you guys mentioned a couple of pretty exotic card forms. I think you mentioned like the gold that's actually in the Robin Hood card and then the Delta card that was made from recycled airplanes. And I also noticed that the gross margins were a little lower this quarter. Is there any relationship between those two factors or appreciable difference in like how the margins on some of the more exotic cards compared to your, I guess I'd say classic metal card.
spk05: Yeah. So let me take, no, it's okay. I think I got it. I'm going to try and take those in reverse order and I'm going to start with the gross margin in general, Reggie, if I could. So, On the gross margin, what we've said is we believe gross margins in our business should be north of 50%. And coming in at 53, certainly in line with our expectations about where gross margins should be in our business. And we think those are strong, especially combined with EBITDA margins in the high 30s. you know, that just as a baseline for the story of our business. Second, with respect to why it's down year over year, you know, there are two factors that Tim talked about and I'd reemphasize. One is, you know, we have seen some impacts from inflationary pressures due to things like wages that, you know, have had some impact on the gross margin. And the second does relate to as we launch new card constructs, it just typically takes a little bit of time to get those up and running at a level of efficiency that we expect to see over time. So yes, we will see kind of lower margins as those products ramp up that stabilize, we think, you know, in the levels that we expect overall in the business. So yes, when we're launching a bunch of new things, you see some of that impact. And we talked a little bit about it last quarter, and Tim highlighted it a little bit this quarter as well. And we think over time, those sort of normalize out to more stable levels for us. With respect to Robinhood generally, I'm going to comment just briefly broadly how this works. When someone like that is ramping up a program, Reggie, there are a couple different ways they can do it. One is with a large upfront order and then steady volume to follow or just steady volume as they build. And it's just really a preference of the buyer and the company themselves. So I'm not going to comment specifically on how they're doing it and how their revenue will grow, but presume that generally anytime you see a program like that, it's certainly a good thing. And we like to see that build over time. And as you and I have talked about, when those programs build, Reggie, over time, you'll see kind of three or four different levers. New acquisition, you know, over time, you'll see loss stolen. You'll see natural reissue a few years later. You know, and all of those build to, you know, we think the kind of sticky relationship that we want to see with customers over time. So excited about the launch and the opportunity.
spk11: Got it. And if I could ask one more. I've known you long enough. I know you're not the type to raise guidance after the first quarter, so I'm not going to ask you about that. But I guess thinking about, you know, where results came in, first quarter versus your expectations, maybe the pipeline. Maybe if you could talk a little bit about how both of those are today relative to what you were thinking when we spoke two months ago. Any color there would be helpful. Thank you.
spk05: Yeah, so Reggie, I appreciate the question, and yes, you are getting, we're getting to know each other better as we move through these. You know, look, if you look at the guidance range that we issued, you know, we're spot on out of the gates to kind of be right in those ranges. we will always look to do better. But we're right where we wanted to be, right where we expected to be with the business. And I think from, you know, from looking at it, you know, if a company starts and they need a huge hockey stick to be able to achieve their results, someone sitting in your chair always looks at it skeptically. You know, we're right on where we need to be performing better. in this business and just very pleased with the start that we're off to.
spk11: When I do the math on just the seasonality, looking at your first quarters in the previous like three years, using that kind of range, I kind of get toward the high end of your guidance already just based on what you did in the first quarter. So that was the impetus for the question. It just seems like you guys are off to a good start. which you said, but I wanted to, I guess, hear it again. That's all I have. Thank you.
spk04: Appreciate it. Thank you, Reggie.
spk01: That concludes today's question and answer session. This will conclude today's conference call. Thank you for participating.
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