CPI Card Group Inc. Common Stock 2026 Q2 Earnings Call

Thanks, Davis, and welcome aboard. We're excited to have you on the CPI team. Good morning, everyone, and welcome to the call. Before I begin, I'd like to officially congratulate Terra on her appointment as chief financial officer. Since joining CPI in 2017, Terra has been a key driver of CPI's evolution into a payments technology leader, and after an outstanding job as interim CFO, I couldn't be more excited to have her in the role permanently. Turning to slide three, the CPI team delivered a strong second quarter and first half of 2026. We achieved revenue growth of 15% in the second quarter and 17% in the first half, resulting in a record first half revenue for the company. Our performance reflected continued momentum in Secure Card Solutions, including another quarter of strong execution from Arroweye, which continues to exceed our original expectations.

We completed another strategic acquisition, buying an instant issuance solution known as TRISM, which further supports the expansion of our higher growth, higher margin Integrated Paytech segment. We also received tariff refunds in the second quarter, which benefited the P&L by more than $3 million. These successes were partially offset by some market choppiness in prepaid, as we continue to see softness within that segment, which we expect will continue into late 2026. We delivered good profitability growth, exceeding our expectations with second quarter adjusted EBITDA increasing 7% to $24 million, while generating a company record free cash flow of $36 million in the first half. Strong performance in our Secure Card Solutions is driving significant operating cash flow growth as higher volumes accelerate inventory optimization initiatives.

Just as importantly, we continue to strengthen our balance sheet, reducing net leverage to 2.7 times and redeeming $26.5 million of our Senior Notes shortly after quarter end. These results reinforce the strength of our business model and our ability to consistently generate strong operating cash flow, de-lever our balance sheet, and create additional value through disciplined capital allocation. With our strong first half performance and visibility into the second half of the year, we are pleased to raise our full-year revenue growth and free cash flow guidance while reaffirming all other guidance targets. Terra will share more about our updated outlook shortly. Beyond the financial results, what excites me most is the continued progress we're making executing our strategy and diversifying CPI.

We continue to see strong momentum across our cloud-based and digital solutions, which are helping us generate new recurring revenue streams, deepen customer relationships, and expand our role in the payments ecosystem. During the quarter, we continued to build go-to-market momentum across our businesses. In our Integrated Paytech segment, we're excited to expand the reach of our cloud-based Push Provisioning and Card@Once solutions with Blossom, a leading digital banking and payments platform serving 350-plus credit unions, and CU*Answers, a leading core processing and digital banking provider serving more than 400 credit unions across the U.S. We continue to be excited about the momentum we're building as we expand our reach into the payments ecosystem as a provider of digital solutions leveraging our tokenization capabilities.

In our Secure Card Solutions segment, we hit a new milestone with Arroweye, where we executed our 25th new customer win since closing the acquisition in May of last year. We are also excited to have extended our relationship with Vericast, a data-driven fintech that services roughly 60% of U.S. commercial banks and credit unions, and a customer relationship that spans more than two decades. On the prepaid side, while the current year remains choppy, we remain excited about our long-term opportunities in the open loop market and the much larger closed loop market. This quarter, we have continued to win share and are now serving all of the top prepaid program managers in the U.S., further strengthening our position as the center of the prepaid market and creating new opportunities to deliver our secure packaging solutions.

We are making good progress with Karta on our joint pilot to launch prepaid packages with SafeToBuy chip-embedded technology at one of the largest U.S. national retailers, and we are seeing encouraging signs in the adoption of closed loop, a market where we estimate is approximately five times the size of open loop. Given our leadership position in prepaid packaging, chip-enabled solutions, and customer relationships, we believe CPI is uniquely positioned to capitalize on the prepaid market as it actions to reduce fraud. Altogether, these wins across our business are a great example of how CPI is leveraging both physical and digital payment solutions to create value for customers and drive profitable growth. Turning to slide four, let me briefly remind everyone of the foundation of our strategy.

Everything we do is built around three core growth pillars: our proprietary technology platform, our marketable base of thousands of customer relationships across the payments ecosystem, and our ability to deliver innovative payment solutions that evolve alongside market needs. These pillars continue to drive growth and diversification across the company, and our acquisition of TRISM Instant Issuance is an excellent example of that strategy in action. Turning to slide five. TRISM expands our leadership position in the attractive U.S. instant issuance market and roughly doubles our instant issuance addressable market by enabling us to serve larger financial institutions that prefer an on-premise solution.

The acquisition increases our instant issuance presence to nearly 20,000 locations across over 3,000 financial institutions, adds recurring revenue and long-term customer relationships, and creates attractive cross-selling opportunities across CPI's broader portfolio. I met with the TRISM team last week, and on behalf of the leadership team and all of CPI, we are excited to have TRISM as part of our team. TRISM is expected to increase Integrated Paytech growth to approximately 20% in 2026 while maintaining a gross margin profile of over 50%, consistent with our existing Integrated Paytech business. Additionally, this acquisition had little impact on leverage, enabling us to complete the strategic acquisition while maintaining our disciplined approach to capital allocation. In summary, we delivered an excellent second quarter. We gained share, generated strong revenue growth and profitability expansion, delivered record first half free cash flow, and continued to improve our balance sheet.

We are executing our strategy to grow and diversify the business, positioning CPI well for the second half of the year and beyond. With that, I'll turn the call over to Terra to provide more detail on our financial results and outlook for the remainder of the year.

Thanks, John. Before I begin, I'd like to thank John, our board of directors, and the entire CPI team for their confidence and support as I take on the CFO role. I look forward to continuing to partner with our leadership team as we execute our strategy, drive profitable growth, and create long-term value for our shareholders. I'll begin with our consolidated revenue and profitability results on slide seven. We are pleased with our second quarter and first half financial performance. Our strong results for the second quarter were better than our expectations, although the mix of performance across the business evolved as the first half progressed. Strong performance in Secure Card Solutions helped offset a slower-than-expected start to the year in Prepaid Solutions.

Revenue increased 15% in the second quarter to $149 million compared to $130 million in the prior year period, driven by increased volumes of contactless cards and higher personalization solutions, as well as contributions from the acquisition of Arroweye. Excluding Arroweye, total organic revenue grew 12% in the second quarter, reflecting the underlying strength of our business. Second quarter gross profit increased 21%, resulting in a gross profit margin of 32.5% in the second quarter, an increase of approximately 160 basis points from 30.9% in the prior year period, primarily driven by a benefit of more than $3 million of tariff refunds. Second quarter adjusted EBITDA was $24 million, representing growth of 7%, driven by revenue growth and the benefits of tariff refunds.

Gross margin and adjusted EBITDA margins were impacted by unfavorable segment mix due to softness in higher margin prepaid revenue that was partially offset by continued growth in Secure Card Solutions, which, while profitable, carries lower margins than our prepaid business. SG&A expenses were $37 million in the second quarter compared to $31 million in the prior year period. The increase in SG&A was driven by Arroweye integration expenses and investments in digital and technology as we fuel our efforts to grow and diversify in our higher margin, more recurring revenue businesses like Card@Once and digital. Integration and transaction-related costs primarily related to Arroweye were nearly $3 million in the second quarter. We expect these to be significantly lower in the second half of the year. We will have TRISM integration expenses in the second half, but at significantly lower spend levels.

These investments have and will continue to support our long-term growth strategy through expanded capabilities and revenue and operating synergies. As a reminder, these costs are not included in adjusted EBITDA but do impact net income. We are driving initiatives designed to improve margins over time. During the second quarter, we progressed supplier negotiations, realized incremental acquisition synergies including freight, scale efficiencies, advanced worksite optimization across our Secure Card Solutions footprint, and moved our automation initiatives forward. We also continued our focus on expanding our growth in higher margin solutions, including metal cards in our Integrated Paytech segment. While some of these initiatives are already generating benefits, we expect a larger impact as we move through the year. Turning to our segment results on slide eight.

In Secure Card Solutions, second quarter revenue increased 17% to $111 million, driven by increased volumes of contactless cards, higher personalization, and $5 million of Arroweye contribution. Excluding Arroweye, second quarter organic revenue in the Secure Card segment increased 13% with strong underlying growth in our largest segment. In Prepaid Solutions, second quarter revenue increased 18% to $23 million, primarily due to a change in accounting that was implemented in the second quarter of 2025, partially offset by comparisons with strong sales of higher value packaging solutions in the prior year period. As I shared at the start of my remarks, we experienced a slower-than-expected start to the year in Prepaid as customer ordering patterns remained uneven.