Executive Summary / Key Takeaways

• Dual Growth Engines & Market Leadership: CompoSecure, the undisputed global leader in premium metal payment cards, is strategically expanding its moat by leveraging its physical security expertise into the rapidly growing digital authentication and asset protection market with its innovative Arculus platform.
• Operational Excellence Driving Margins: The implementation of the CompoSecure Operating System (COS) is yielding tangible results, significantly improving manufacturing efficiencies and contributing to robust gross margin expansion, which is expected to continue fueling reinvestment and future growth.
• Strong Financial Performance & Outlook: The company delivered impressive Q2 2025 non-GAAP net sales growth of 10% year-over-year to $119.6 million and pro forma adjusted EBITDA growth of 26% to $46.3 million, leading to a raised full-year 2025 guidance of approximately $455 million in non-GAAP net sales and $158 million in pro forma adjusted EBITDA.
• Arculus's Positive Momentum: The Arculus platform, offering FIDO-standard authentication and cold storage for digital assets, achieved its first quarter of positive net contribution in Q4 2024 and continues to build commercial traction with new vertical wins and strategic partnerships, positioning it for profitability in 2025.
• Disciplined Capital Strategy: Following a significant balance sheet improvement in 2024 and the spin-off of Resolute Holdings, CompoSecure boasts a strong liquidity position and is actively pursuing accretive M&A opportunities to diversify revenue and accelerate long-term value creation.

The Evolution of Trust: From Physical to Digital Security

CompoSecure, Inc. (NASDAQ:CMPO) began its journey in 2000, not just as a manufacturer, but as a pioneer, meticulously crafting the market for premium metal payment cards. Over two decades, it has established itself as the undisputed global leader, combining elegance, simplicity, and security to deliver unique, branded experiences for financial institutions worldwide. This foundational expertise in physical security and high-quality manufacturing, underscored by over 60 issued patents and another 35 pending, has enabled CompoSecure to produce over 31 million metal cards in 2024 alone, cementing its competitive moat.

The core investment thesis for CompoSecure today transcends its established leadership in metal cards. The company is strategically evolving, extending its security prowess into the burgeoning digital realm through its innovative Arculus platform. This dual-engine growth strategy, coupled with a relentless focus on operational excellence and disciplined M&A, positions CompoSecure to capitalize on vast, underserved markets in both physical and digital finance.

Unlocking Value: The CompoSecure Operating System and Arculus Technology

CompoSecure's strategic transformation is deeply rooted in operational and technological innovation. Under the guidance of Executive Chairman Dave Cote, the company has embarked on a comprehensive implementation of the CompoSecure Operating System (COS). This system, drawing on methodologies proven at Honeywell (HON) and Vertiv (VRT), is systematically enhancing efficiency and execution across all functions, from order intake to cash collection. The initial focus on manufacturing has already yielded significant improvements in output, yield, and overall cost management, directly contributing to the company's expanding gross margins. Management anticipates these operational efficiencies will continue to build throughout 2025 and into 2026, freeing up capacity and reducing costs.

Central to CompoSecure's future is its Arculus platform, a testament to the company's technological differentiation. Arculus is a secure multifunction platform for digital authentication and asset protection, seamlessly integrating hardware and software.

• Arculus Authenticate serves as a Passkey-based authenticator, providing seamless multifactor authentication for secure logins, account validation, and crucial step-up authentication for medium to high-risk transactions. This technology is designed to reduce fraud and enhance security, leveraging the FIDO standard, which major tech companies like Microsoft (MSFT), Apple (AAPL), and Google (GOOGL) are increasingly adopting. CompoSecure believes it is currently the first and only entity integrating a FIDO authentication token directly into a payment card.
• Arculus Cold Storage offers a robust digital asset hardware wallet, enabling users to securely store and use their digital asset keys. Its three-factor authentication technology significantly enhances the safety of users' assets compared to hot storage wallets, which are constantly connected to the internet.
• Secure Payment with Arculus Authenticate extends functionality to enable spending stablecoins directly from cold storage at the point of sale, either over traditional payment rails or via direct wallet-to-wallet transfers. This capability positions CompoSecure at the forefront of the convergence between digital assets and traditional payments.

The "so what" for investors is clear: Arculus extends CompoSecure's competitive moat from physical card security to digital security, creating opportunities for higher average selling prices (ASPs), potential recurring software revenue, and a powerful differentiator in the evolving Web3 and digital security landscape. This technological edge, combined with the proven benefits of metal cards in driving issuer branding and customer engagement, underpins CompoSecure's long-term growth strategy.

A Broadening Market and Robust Financial Performance

The market for premium metal cards continues to expand, moving beyond high-net-worth individuals to encompass mass affluent and even mass market segments, including younger demographics (25-35 year olds) who value the cards as a status symbol. With an estimated 4 billion payment cards shipped annually and metal cards representing less than 1% penetration, the growth runway remains substantial. This demand is fueled by issuers' desire to differentiate, attract new customers, and encourage top-of-wallet spend, all at a relatively low cost compared to other rewards programs.

CompoSecure's recent financial performance reflects the strength of this market and the early successes of its strategic initiatives. For the second quarter ended June 30, 2025, the company reported non-GAAP net sales of $119.6 million, a robust 10% increase year-over-year. This growth was primarily driven by strong domestic demand from both traditional banks and leading fintechs, with domestic net sales climbing 22% year-over-year to $104.3 million. International net sales, while experiencing a 35% decline to $15.3 million in Q2 2025, are typically lumpier and are expected to contribute to overall annual growth.

Profitability metrics also demonstrated significant improvement. Non-GAAP gross margin expanded to 57.5% in Q2 2025, up from 51.6% in the prior-year period, a direct result of improved manufacturing efficiencies from the CompoSecure Operating System and a favorable product mix. This operational leverage translated into a 26% year-over-year increase in pro forma adjusted EBITDA, reaching $46.3 million for the quarter.

Looking at the broader picture, 2024 was a foundational year, with net sales growing 8% to $420.6 million and adjusted EBITDA increasing 4% to $151.4 million. Crucially, the company materially improved its balance sheet, reducing net debt by 60% to $120 million.

Net cash provided by operating activities for 2024 was $129.6 million, and free cash flow surged 62% to $84.9 million.

As of June 30, 2025, CompoSecure maintained a strong liquidity position with $96.5 million in cash and cash equivalents and a net debt leverage ratio of a healthy 0.66x.

The spin-off of Resolute Holdings is anticipated to further enhance free cash flow by approximately $20 million annually due to reduced tax distributions.

The Arculus platform, a key growth driver, achieved its first quarter of positive net contribution in Q4 2024, generating $10.5 million in revenue for the full year. This momentum continued into Q1 and Q2 2025, with Arculus delivering record results and positive contributions, primarily driven by revenue growth in its authentication and cold storage offerings. Recent partnerships with Coinbase (COIN) and American Express (AXP) for the Coinbase One Card, and new vertical wins with MetaMask and MoneyGram (MGI), underscore its growing market traction.

Competitive Landscape and Strategic Positioning

CompoSecure operates in a competitive landscape, yet it maintains a specialized and leading position. Its core competitive advantages, or moats, are formidable:

• Proprietary Technology and IP: Over two decades of R&D have resulted in extensive intellectual property, including numerous patents, that protect its unique metal card manufacturing processes and the innovative Arculus platform.
• Specialized Manufacturing Expertise: The company developed the metal card market from scratch and possesses unparalleled experience and scale in producing complex, high-quality metal and composite cards.
• Brand and Customer Relationships: CompoSecure has deeply embedded, long-term relationships with leading global financial institutions, including JPMorgan Chase (JPM) and American Express, which collectively represented 63% of net sales in 2024. These relationships are built on trust and the proven ROI of CompoSecure's premium products.

When compared to direct competitors like CPI Card Group Inc. (PMTS), CompoSecure distinguishes itself through its higher-end, proprietary technology and integrated secure transaction solutions. While PMTS may have a broader plastic card portfolio and potentially lower operating costs due to scale, CompoSecure's focus on advanced security features and user experience, particularly with Arculus, provides a significant edge in premium segments.

Against Entrust Corporation (ENTG), which is more software-centric in digital security, CompoSecure's hardware-focused solutions (metal cards, Arculus Wallet) offer superior durability and ease of use in physical security applications. CompoSecure's strategy emphasizes tangible products that integrate hardware with mobile apps, potentially offering a more seamless user experience in financial transactions, leading to stronger pricing power in its niche.

Compared to Fidelity National Information Services, Inc. (FISV), a financial technology giant focused on digital payment platforms, CompoSecure's niche in proprietary metal cards and authentication hardware provides materially better performance in physical security and durability. While FISV boasts an extensive ecosystem and faster integration capabilities, CompoSecure's unique value proposition in specialized ID solutions allows it to carve out distinct market segments.

Indirect competitors include digital wallets (Apple, Google) and blockchain-based authentication providers. While digital wallets are a "watch item" for physical card demand, management believes physical cards, especially with "tap to pay" capabilities, will remain relevant for a long time. The company's strategic response to this broader digital shift is Arculus, which leverages the FIDO standard to enhance security, positioning CompoSecure to thrive at the intersection of physical and digital finance.

Forward Outlook and Strategic Initiatives

CompoSecure is poised for continued growth, as reflected in its raised full-year 2025 guidance. The company now expects non-GAAP net sales to be approximately $455 million and pro forma adjusted EBITDA to be approximately $158 million. This upward revision from prior mid-single-digit growth forecasts signals strong commercial and operational momentum building in the second half of the year. Management anticipates sales momentum to accelerate throughout 2025, driven by deep customer relationships, innovative product offerings, and the ongoing benefits of the CompoSecure Operating System.

Key strategic initiatives for 2025 include:

• Accelerating Payment Card Organic Growth: Continued focus on new program launches and expanding existing customer relationships, capitalizing on the broadening appeal of metal cards.
• Driving Efficiency through COS: Relentless pursuit of operational excellence across all functions to enhance margins and free up resources for reinvestment.
• Continuing Arculus Traction: Expanding market presence for both Arculus Authenticate and Cold Storage, with a clear target for Arculus to achieve net positive contribution for the full year 2025.
• Delivering Accretive M&A: Actively evaluating a robust pipeline of acquisition opportunities that align with CompoSecure's core business, extend its value chain, and meet disciplined criteria for delivering shareholder value. The spin-off of Resolute Holdings was a foundational step to facilitate this M&A strategy.

Despite acknowledging macro headwinds such as rising labor costs, global economic uncertainty, and potential tariffs on internationally sourced raw materials, management remains confident. They are proactively managing the supply chain and have not observed a material impact on client activity or orders. The guidance assumes greater supply chain stability and more consistent material costs for the year.

Risks to Consider

While CompoSecure's outlook is strong, investors should be mindful of several risks. The company's significant dependence on a few key customers, such as JPMorgan Chase and American Express, presents concentration risk. Regulatory uncertainty in the rapidly evolving digital assets industry could impact the Arculus platform, particularly regarding the classification of digital assets as securities or requirements for broker-dealer registration. Furthermore, the reliance on Resolute Holdings for management services, though strategically beneficial, introduces potential conflicts of interest and a dependency on external resources. Obligations under the Tax Receivable Agreement are substantial and could accelerate under certain conditions, potentially impacting liquidity. Competition, while managed through differentiation, could still exert pressure on pricing and market share, and the long-term impact of digital wallets on physical card demand remains a watch item.

Conclusion

CompoSecure is undergoing a profound transformation, evolving from a leading metal card manufacturer into a diversified secure authentication and payment solutions provider. Its strategic pivot, anchored by the CompoSecure Operating System and the innovative Arculus platform, is already yielding impressive financial results and expanding its competitive advantages. With robust organic growth in its core metal card business, the burgeoning potential of Arculus, a strong balance sheet, and a disciplined approach to M&A, CompoSecure is well-positioned to unlock significant long-term value. The company's technological leadership and operational excellence are not merely buzzwords but tangible drivers of its compelling investment narrative, promising a future where trust, whether physical or digital, is securely forged.