CPI Card Group Inc. Reports Third Quarter 2016 Results

CPI Card Group Inc. (Nasdaq: PMTS; TSX: PNT) ("CPI Card Group" or the "Company") today reported financial results for the third quarter ended September 30, 2016.

Third Quarter 2016 Summary
  • Net sales were $81.2 million, a decrease of 24.6% compared to the prior year period.
  • Net income from continuing operations was $4.0 million, or $0.07 per share, compared with net income from continuing operations of $14.8 million, or $0.19 per share, in the prior year period. Third quarter 2016 net income from continuing operations reflects the impact of $0.6 million, or $0.01 per share, of litigation and related charges associated with patent and shareholder litigation.
  • Adjusted net income from continuing operations was $6.0 million, or $0.11 per share on a diluted basis, compared with $17.3 million and $0.30 per share on a pro forma basis in the prior year period.
  • Adjusted EBITDA was $17.8 million, or 21.9% of net sales, compared with $32.5 million, or 30.2% of net sales, in the prior year period.
  • Returned $2.5 million to stockholders through dividends in the third quarter of 2016.

"Our third quarter results were below expectations, primarily due to continued softness in demand for EMV ® chip cards and unfavorable foreign currency exchange rates. Partially offsetting the lower EMV demand in the third quarter was a sequential improvement in our EMV card average selling prices resulting from customer mix," said Steve Montross, president and chief executive officer of CPI Card Group. "As we look to the fourth quarter, we do not see EMV card shipments materializing at the improved rates we assumed in our prior guidance and, as a result, we are reducing the 2016 full year guidance range, primarily to reflect this softness."

"The longer-term growth opportunity for CPI remains positive, driven by our broad product offering for the financial card markets, the ongoing conversions of magnetic stripe cards to EMV chip cards and increasing demand for our services offerings," Montross continued. "The business is well positioned in markets that we believe will continue to demonstrate a favorable long-term growth dynamic. We will add to the growth in the business through our new, innovative product offerings for the financial payment card market, including Print on Demand and Card@Once ® instant issuance. Lastly, we continue to transform the business through our ongoing efforts to make improvements to our quality and service levels, our ongoing cost saving programs and recent additions to our senior leadership team."

Financial Outlook

Based on the continuing softness in EMV card shipments in the fourth quarter at order rates that are below what was expected in our previous guidance, combined with a delayed operational start-up of our Print on Demand offering for the Prepaid Debit segment and unfavorable foreign currency exchange rates, the Company's 2016 financial outlook is as follows:
  • Net sales between $300 million and $305 million
  • Adjusted EBITDA between $53 million and $55 million
  • Adjusted diluted earnings per share of $0.24 to $0.26

For 2017, we expect the U.S. debit and credit card production market to stabilize, with a slower than previously anticipated overall rate of market conversion from magnetic stripe cards to EMV cards, and limited market adoption of dual interface cards. We expect our services business to grow at above market rates in 2017, benefiting from our personalization and fulfillment offering, the recently launched Print on Demand capabilities in the U.S. Prepaid Debit segment and continued adoption of our proprietary Card@Once ® instant issuance offering. We are in the process of preparing our 2017 annual operating plans, and the preliminary view results in an expected range of growth of 10-15% in net sales from 2016.

Third Quarter 2016 Segment Information

U.S. Debit and Credit:

Net sales decreased 32.5% to $49.2 million in the third quarter of 2016 from $72.8 million in the prior year period. Gross profit decreased to $17.1 million from $28.2 million in the prior year period, and gross profit margin was 34.8% compared with 38.7% in the prior year period. Income from operations decreased to $10.8 million from $21.6 million in the third quarter of 2015, and operating margins were 21.9% compared with 29.6% in the prior year period. EBITDA decreased 44.7% to $12.9 million, or 26.3% of net sales, from $23.4 million, or 32.1% of net sales, in the third quarter of 2015. The decline in net sales in the U.S. Debit and Credit segment was driven primarily by a reduction in the number of EMV ® chip cards sold in the third quarter, decreasing by 45.1% compared with the third quarter of 2015, partially offset by higher EMV ® card average selling prices due to customer mix, and strong year-over-year growth of card personalization and fulfillment services of $4.3 million in the quarter.

U.S. Prepaid Debit:

Net sales for the third quarter of 2016 decreased 2.4% to $23.1 million from $23.7 million in the third quarter of 2015. Gross profit was $9.2 million compared with $11.0 million in the prior year period, and gross profit margin was 39.7% compared with 46.4% in the prior year period. Income from operations in the third quarter of 2016 was $8.0 million compared with $9.5 million in the prior year period, while operating margins were 34.7% compared with 40.0% in the prior year period. EBITDA was $8.6 million, or 37.2% of net sales, compared with $10.0 million, or 42.2% of net sales, in the third quarter of 2015. The year-over-year decline of U.S. Prepaid Debit segment net sales primarily reflects lower prices, largely offset by increased volume from sales activity.

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