First Quarter Earnings Conference Call

Transcription

1 First Quarter Earnings Conference Call May 3, 2017

2 Safe Harbor Forward-Looking Statements Statements in this presentation that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of These forward looking statements may be identified by terms such as statements about our plans, objectives, expectations, assumptions or future events. Words such as may, will, should, could, expect, anticipate, believe, estimate, intend, continue, project, plan, foresee, and other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks and uncertainties include, but are not limited to: material breaches in the security of our systems; market acceptance of developing technologies that make Financial Payment Cards less relevant; a slower or less widespread adoption of EMV and dual-interface EMV technology than we anticipate; difficulties in production quality and process; defects in our software; our failure to operate our business in accordance with the PCI security standards or other industry standards such as Payment Card Brand certification standards; failure to accurately predict demand for our products and services; extension of card expiration cycles; a decline in U.S. and global market and economic conditions; failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers; potential imposition of tariffs and/or trade restrictions on goods imported into the United States; our substantial indebtedness; infringement on our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; failure to meet our customers demands in a timely manner; competition and/or price erosion in the payment card industry; our dependence on licensing arrangements; inability to renew leases for our facilities; interruptions in our IT systems or production capabilities; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; non-compliance with, and changes in, laws in foreign jurisdictions in which we operate and sell our products; challenges related to our acquisition strategy; our dependence on specialized equipment from third party suppliers; and other risks and other risk factors or uncertainties identified from time to time in our filings with the SEC. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Reference is made to a more complete discussion of forward-looking statements and applicable risks contained under the captions Cautionary Statement Regarding Forward-Looking Information and Risk Factors in the Company s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 2, CPI Card Group Inc. undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise. 2

3 Business Summary Steve Montross President and CEO

4 First Quarter Financial Summary Total net sales of $56.0 million, 35.2% decrease year-over-year Net loss was $4.5 million, or $(0.08) per diluted share Adjusted net loss* of $3.0 million; Adjusted diluted EPS* of $(0.05) cents per share Adjusted EBITDA* of $3.9 million, 6.9% of net sales Cash used in operating activities of $(5.0) million, and Free cash flow** of $(8.3) million Returned $2.5 million to stockholders through dividends * See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. ** See slides 10 and 12 to this presentation for a reconciliation of Cash (used in) provided by operating activities to Free cash flow. 4

5 First Quarter Business Highlights First quarter results were in line with expectations 18.3 million EMV cards sold at an average selling price (ASP) of $0.84. Decline in ASP reflects customer mix Services net sales decline of 16.5% year-over-year Impacted by delayed rollout of a product refresh by a larger Prepaid customer Strong Card@Once growth to 6,050 installations from 5,600 at year-end 2016 Expense savings and efficiency initiatives are on-track 5

6 Market Conditions Expect EMV card production in the U.S. in 2017 to be similar to 2016 levels Demand outlook for value-added services remains solid Strong growth in the B2B and B2C prepaid markets Expect overall growth in U.S. retail prepaid market Market Outlook Consistent with Prior Quarter Expectations 6

7 Innovation Highlights Print on Demand Strong initial demand Pipeline continues to ramp Metal Cards Received certification from Visa, MasterCard and Discover for a metal EMV card Card@Once Beta testing next generation printer with customers 7

8 CPI Strategic Focus Capitalize on secular growth of the Financial Payments Card market Expand within our broad and attractive customer base by focusing on our entire suite of end-to-end products and solutions Boost revenue growth through offering new and innovative products and services Focus on profitable growth through productivity, cost efficiency, and process excellence initiatives Continued Focus on Quality and Superior Execution 8

9 Financial Summary Lillian Etzkorn Chief Financial Officer

10 Financial Results ($ in millions, except EPS) First Quarter Change Net sales: Products $ 29.8 $ 55.0 $ (25.2) Services (5.2) Total net sales $ 56.0 $ 86.4 $ (30.4) Gross Profit $ 16.1 $ 29.7 $ (13.6) gross margin 28.7% 34.4% (Loss) Income from operations $ (1.8) $ 13.7 $ (15.5) Net (Loss) Income $ (4.5) $ 5.7 $ (10.2) GAAP Diluted EPS $ (0.08) $ 0.10 $ (0.18) Adjusted EBITDA* $ 3.9 $ 18.8 $ (14.9) adj. ebitda margin 6.9% 21.7% Adjusted Net (Loss) Income* $ (3.0) $ 7.1 $ (10.1) Adjusted diluted EPS* $ (0.05) $ 0.13 $ (0.18) Cash provided by operating activities $ (5.0) $ 16.8 $ (21.8) Capital Expenditures $ (3.3) $ (3.8) $ 0.5 Free Cash Flow $ (8.3) $ 13.0 $ (21.3) * See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. 10

11 Segment Results ($ in millions) U.S. Debit and Credit Net Sales $65.1 $39.5 $7.6 EBITDA* $18.9 Q Q Q Q Margin 19.3% 29.1% Net Sales EBITDA* U.S. Prepaid Debit U.K. Limited $9.8 $12.3 $1.8 $3.3 Q Q Q Q Margin 18.2% 26.5% Net Sales EBITDA* $5.6 $6.2 $0.3 $0.2 Q Q Q Q Margin 5.8% 3.5% * See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. 11

12 Free Cash Flow ($ in millions) First Quarter Change Net income $ (4.5) $ 5.7 $ (10.2) Depreciation and amortization Stock-based compensation expense (0.2) Amortization of debt issuance costs and debt discount Excess tax benefits from stock-based compensation - (0.2) 0.2 Deferred income taxes (0.4) (0.1) (0.3) Working capital / other, net (5.7) 6.0 (11.7) Cash (used in) provided by operating activities $ (5.0) $ 16.8 $ (21.8) Capital Expenditures (3.3) (3.8) 0.5 Free Cash Flow $ (8.3) $ 13.0 $ (21.3) 12

13 2017 Guidance Reaffirmed ($ in millions, except EPS) Low High Revenue $315.0 $340.0 Adjusted EBITDA* $64.0 $73.0 GAAP EPS $0.22 $0.32 Non-GAAP EPS* $0.35 $0.46 * See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. 13

14 Appendix 14

15 Non-GAAP Measures Non-GAAP Financial Information In addition to financial results reported in accordance with U.S. generally accepted accounting principles (GAAP), we have provided the following non-gaap financial measures in this presentation: Adjusted Net (Loss) Income, Adjusted Diluted (Loss) Earnings per Share, EBITDA, Adjusted EBITDA, and Free Cash Flow. Adjusted Net (Loss) Income and Adjusted Diluted (Loss) Earnings per Share exclude the impact of amortization of intangible assets, stock-based compensation expense, litigation and related charges incurred in connection with certain patent and shareholder litigation, performance bonuses in connection with the EFT Source acquisition, and other non-operational, non-cash or non-recurring items, net of their income tax impact. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA, adjusted for stock-based compensation expense, litigation and related charges incurred in connection with certain patent and shareholder litigation, performance bonuses in connection with the EFT Source acquisition, foreign currency gain or loss, and other items that are unusual in nature, infrequently occurring or not considered part of our core operations, as set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted Net Income should not be considered an alternative to net (loss) income, (loss) income before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with GAAP as those items are used to measure operating performance, liquidity or the ability to service debt obligations. The Company believes that EBITDA, Adjusted EBITDA and Adjusted Net Income present a transparent view of our recurring operating performance and allow management to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. Management also believes that these measures are useful to investors in their analysis of our results of operations and provide improved comparability between fiscal periods. EBITDA, Adjusted EBITDA and Adjusted Net Income, as CPI defines them, may not be comparable to EBITDA, Adjusted EBITDA and Adjusted Net Income or similarly titled measures used by other entities. We define Free Cash Flow as cash flow from operations less capital expenditures. We use this metric in analyzing our ability to service and repay our debt and to forecast future periods. However, this measure does not represent funds available for investment or other discretionary uses since it does not deduct cash used to service our debt. Investors are encouraged to review the reconciliation of these historical non-gaap measures to their most directly comparable GAAP financial measures, and a reconciliation of non-gaap measures contained in our 2017 guidance included below. Additional information relating to certain of our financial measures, including our Non-GAAP financial measures, is available in our most recent earnings release and on our website at 15

16 Non-GAAP Reconciliation Three Months Ended March 31, (in millions) EBITDA and Adjusted EBITDA: Net (loss) income $ (4.5) $ 5.7 Interest expense, net Income tax (benefit) expense (2.3) 2.8 Depreciation and amortization EBITDA $ 2.8 $ 17.7 Adjustments to EBITDA Stock-based compensation expense Litigation and related charges 0.6 EFT Source acquisition performance bonuses 0.3 Foreign currency (gain) loss (0.1) 0.1 Subtotal of adjustments to EBITDA Adjusted EBITDA $ 3.9 $ 18.8 Adjusted net (loss) income and (loss) earnings per share: Net (loss) income $ (4.5) $ 5.7 Amortization of intangible assets Stock-based compensation expense Litigation and related charges 0.6 EFT Source acquisition performance bonuses 0.3 Tax effect of above items (0.8) (0.7) Adjusted net (loss) income $ (3.0) $

17 Non-GAAP Reconciliation Three Months Ended March 31, (in millions) Weighted-average number of shares outstanding: Basic Effect of dilutive equity awards 0.3 Weighted-average diluted shares outstanding Three Months Ended March 31, Reconciliation of diluted (loss) earnings per share (GAAP) to adjusted diluted (loss) earnings per share: Diluted (loss) earnings per share (GAAP) $ (0.08) $ 0.10 Impact of net income adjustments Adjusted diluted (loss) earnings per share $ (0.05) $

18 2017 Guidance: Non-GAAP Reconciliation (in millions, except per share amounts) Low Range High Net income (GAAP) (1)(2) $ 12.3 $ 18.1 Amortization Stock-based compensation (2) Litigation and related charges (3) Tax effect (4.0) (4.0) Adjusted net income $ 19.7 $ 25.5 (1) Does not include adjustments to interest expense for potential debt repayments, including the impact of accelerated amortization of debt issuance cost and discount. (2) Does not give effect to the impact to stock-based compensation expense for any future grants, forfeitures or modifications of stock-based awards. (3) Represents legal costs incurred in connection with certain patent and shareholder litigation. (4) Does not give effect to the impact of any 2017 share repurchases under the repurchase program announced on May 11, Weighted-average diluted shares outstanding (4) Diluted earnings per share (GAAP) $ 0.22 $ 0.32 Adjusted diluted earnings per share $ 0.35 $ 0.46 Net income (GAAP) (1)(2) $ 12.3 $ 18.1 Depreciation Amortization Interest expense (1) Taxes EBITDA $ 57.1 $ 66.1 Stock-based compensation (2) Litigation and related charges (3) Adjusted EBITDA $ 64.0 $