Executive Summary / Key Takeaways

• Strategic Diversification Fuels Growth: CPI Card Group is actively expanding its total addressable market through strategic acquisitions like Arroweye Solutions and organic initiatives in digital solutions, healthcare payments, and the closed-loop prepaid market, moving beyond its traditional physical card manufacturing.
• Technological Edge in Core and New Verticals: PMTS leverages its market-leading Card@Once instant issuance platform, eco-focused card production, and advanced chip technology, while integrating Arroweye's on-demand hyper-personalization capabilities to offer differentiated, high-value solutions.
• Near-Term Profitability Headwinds Amidst Investment: While net sales guidance has increased significantly due to the Arroweye acquisition, adjusted EBITDA growth remains stable, reflecting increased investments in new facilities and digital solutions, alongside anticipated tariff impacts and unfavorable sales mix in the near term.
• Robust Cash Flow and Deleveraging Path: Despite increased capital expenditures for strategic projects and acquisition funding, the company maintains healthy operating cash flow and aims to reduce its temporarily elevated net leverage ratio in 2026, underscoring financial discipline.
• Competitive Positioning Through Specialization: PMTS differentiates itself by focusing on operational efficiency, strong customer relationships, and specialized, value-driven offerings, particularly for small-to-medium financial institutions and niche prepaid markets, effectively carving out its space against larger, more diversified competitors.

The Evolving Landscape of Payment Solutions

CPI Card Group Inc. (PMTS) stands at the forefront of the U.S. payment card solutions market, a sector undergoing significant transformation. Incorporated in 2007, PMTS has built a foundational business in the design, production, data personalization, packaging, and fulfillment of secure debit, credit, and prepaid cards. Its vision is clear: to be the most trusted partner for innovative payment technology solutions, a goal it pursues through strategic pillars of customer focus, quality, efficiency, innovation, diversification, and a strong people-centric culture.

The broader industry trends underscore a robust and expanding market for payment cards. U.S. cards in circulation increased at an 8% CAGR for the three years ended March 31, 2025. Large issuers continue to report healthy account growth, with JPMorgan Chase (JPM) noting an 11% year-over-year increase in cards outstanding and Bank of America (BAC) adding 1 million credit card accounts. This growth extends to general purpose credit cards, which saw a 7% increase in 2024, and a 9% rise in total credit and debit cards, including prepaid. These figures highlight the enduring relevance of cards as the predominant form of payment for in-person transactions, providing a fertile ground for PMTS's core business.

PMTS has historically demonstrated its ability to navigate market dynamics, including channel inventory challenges, by leveraging strong chip supplier relationships and consistently winning market share. This resilience is a testament to its operational effectiveness and customer-centric approach. The company's strategic initiatives have already expanded its total addressable market from $1.5 billion to approximately $2 billion, with further opportunities on the horizon.

Technological Edge: Innovation Beyond the Card

PMTS's competitive advantage is deeply rooted in its technological differentiation and continuous innovation, which are critical to its market positioning and long-term growth. The company's core offerings include EMV-compliant and contactless cards, with eco-focused options gaining significant traction. Over 350 million eco-focused credit, debit, and prepaid card or packaging solutions have been sold since their launch, with prepaid products alone contributing over 200 million in certification in 2023. Contactless cards now represent approximately 90% of PMTS's chip card volume, up from just over 80% in 2023, reflecting a strong market shift.

A key differentiator is PMTS's market-leading Software-as-a-Service (SaaS) instant issuance solution, Card@Once. This platform allows customers to issue personalized debit or credit cards on-demand within their locations, generating strong recurring revenue. Card@Once grew over 20% in the first half of 2025, expanded to more than 17,000 locations, and achieved two consecutive record sales quarters. This technology provides tangible benefits by enabling rapid card replacement and new account activation, enhancing customer convenience and loyalty for financial institutions.

PMTS is also at the forefront of new chip technology, announcing its ability to produce cards with an advanced contactless chip that integrates the antenna directly within the chip itself. This innovation offers greater flexibility in card design and reduces the carbon footprint by eliminating the need for separate antenna layers. While still in early pilot stages, this positions PMTS as a potential early adopter of an important new technology, with the strategic intent to enhance product performance and market appeal. Furthermore, the company's investments in metal card capabilities have yielded sizable customer orders, contributing to recent growth by offering a good value proposition relative to other high-end metal offerings in the market.

Beyond physical card production, PMTS is advancing its digital solutions, including push provisioning for mobile wallets. While these solutions are still immaterial to overall sales, they are growing, with new client signings and a robust pipeline. To scale these higher-margin offerings, PMTS continues to invest in resources, technology, and go-to-market strategies. The company has also partnered with Rippleshot to offer fraud prevention tools to small- and medium-sized financial institutions, leveraging predictive analytics to identify fraud patterns and reduce losses.

Strategic Expansion and Competitive Dynamics

PMTS's strategic narrative is one of targeted expansion and diversification, designed to capitalize on evolving market needs and competitive gaps. The pivotal acquisition of Arroweye Solutions, Inc. on May 6, 2025, for an estimated adjusted purchase price of $46.0 million, is central to this strategy. Arroweye, a leader in digitally-driven on-demand payment card solutions, offers a fully integrated, end-to-end process that eliminates the need for customers to hold inventory and enables hyper-personalization with rapid turnaround times. This acquisition is highly complementary, providing PMTS access to diverse market segments like prepaid program managers, payroll, healthcare, fintechs, and government disbursements, with minimal customer overlap. Arroweye contributed nearly $10 million in revenue within less than two months post-acquisition, exceeding initial expectations for both sales and profitability.

In the competitive landscape, PMTS operates against a mix of larger, diversified players like Thales Group and ASSA ABLOY AB (ASA), and digital commerce specialists such as NCR Voyix Corporation . PMTS excels in operational execution and customer-focused services, particularly for its niche in financial institutions. Its specialized expertise in card personalization and strong customer relationships provide a significant competitive moat, fostering recurring revenue streams and potentially stronger pricing power. For instance, PMTS's focus on EMV and eco-focused cards, combined with its efficient production processes, allows it to differentiate itself in shared markets and build loyalty, especially with small-to-medium issuers.

While larger competitors like Thales (HO) may lead in broader cybersecurity and biometric integration, and NCR Voyix (VYX) in digital payment ecosystem integration, PMTS strategically positions itself as a dedicated partner for tangible card services. The Arroweye acquisition further strengthens this by enabling PMTS to serve nimble, smaller card programs and fintechs that require rapid, customized solutions, a niche not always effectively addressed by larger, more complex organizations. PMTS's metal card offerings, positioned for value, also allow it to capture market share from customers seeking premium options without the highest price tags.

PMTS is also making significant inroads into the U.S. closed-loop prepaid market, estimated to be four to five times larger than the open-loop market. This segment is experiencing a shift towards higher-value secure packaging due to regulatory changes and fraud prevention needs. With initial closed-loop deliveries on track for the fourth quarter of 2025, this represents a substantial long-term growth opportunity, leveraging PMTS's leadership in secure packaging. The company's expansion into healthcare payment solutions, such as FSA and HSA cards, is another growing and recurring market where its high-volume, high-accuracy capabilities are a strong fit.

Financial Performance and Outlook

PMTS's financial performance in the first half of 2025 reflects the initial impacts of its strategic investments and market dynamics. For the second quarter of 2025, reported net sales increased 9% to $129.8 million, or 15% excluding a one-time, non-cash accounting change related to revenue recognition timing for work-in-process orders. This growth was driven by organic strength in the Debit and Credit segment and the significant contribution from the Arroweye acquisition. Year-to-date net sales for the six months ended June 30, 2025, reached $252.5 million, an increase of 9.4% over the prior year.

However, profitability faced headwinds. Gross profit margin decreased to 30.9% in Q2 2025 from 35.7% in the prior year, primarily due to an unfavorable sales mix (weighted towards larger volume issuers and a decline in personalization services) and increased production costs. These costs include higher tariffs (over $1 million in Q2 2025), increased depreciation ($1.3 million higher due to Arroweye and the new Indiana facility), and incremental expenses associated with operating duplicate production sites during the Indiana facility transition. Adjusted EBITDA for Q2 2025 increased 3% to $22.5 million, but the margin declined from 18.4% to 17.3%, reflecting these pressures. Net income for Q2 2025 decreased 91% to $0.5 million, impacted by Arroweye acquisition costs, restructuring charges, the accounting change, and higher interest expense.

For the full year 2024, PMTS reported an 8% increase in net sales to $480.6 million, with the Prepaid segment delivering exceptional 26% growth to exceed $100 million. Adjusted EBITDA for 2024 increased 3% to $91.9 million, though the margin slightly declined to 19.1% due to increased employee performance-based incentive compensation. Free cash flow was robust at $34.1 million.

Looking ahead to 2025, PMTS has raised its net sales outlook to low double-digit to mid-teens growth, primarily due to the Arroweye acquisition. Despite this, the adjusted EBITDA outlook remains unchanged at mid- to high single-digit growth. This reflects management's expectation that Arroweye's contribution will be offset by approximately $5 million in increased tariffs for the year and an unfavorable sales mix. The company anticipates similar margin pressures in Q3 2025, with accelerated sales growth and margin improvement expected in Q4 as the new Indiana facility ramps up. This facility, a $20 million investment, is expected to be operational by the end of 2025, doubling PMTS's footprint in Indiana and bringing significant efficiencies and capacity through automation. However, the transition will incur approximately $3 million in incremental costs in 2025, declining by half in 2026.

Liquidity remains a focus. As of June 30, 2025, PMTS held $17.1 million in cash and had $42.9 million available on its ABL Revolver.

Post-quarter, the ABL Revolver capacity was increased to $100 million, and $20 million of Senior Notes were redeemed, demonstrating active capital management. While net leverage is expected to be temporarily higher in 2025 due to the Arroweye acquisition and increased capital spending ($9.1 million in H1 2025, primarily for Indiana), PMTS aims to reduce this ratio in 2026 through strong cash flow generation. The company also expects to utilize approximately $5 million of Arroweye's net operating loss tax benefits in the coming years and anticipates $3 million to $5 million in cash benefits from the U.S. Reconciliation Bill over the next 12 months.

Risks and Considerations

While PMTS's strategic direction is compelling, investors should consider several risks. Macroeconomic uncertainties, including the potential for additional tariffs, pose ongoing challenges. The U.S. administration's proposed tariffs on semiconductor chips, if implemented, could impact the industry broadly. However, PMTS has a history of managing supply chain disruptions, maintaining ample chip inventory, which provides near-term flexibility. The company's reliance on a few key suppliers for chips and other components could also present risks.

The integration of Arroweye Solutions, while promising, carries inherent execution risks and is expected to be dilutive to EPS in 2025 and slightly dilutive in 2026 before becoming accretive in 2027. The transition to the new Indiana production facility also involves one-time costs and operational inefficiencies, impacting profitability in 2025. Furthermore, while channel inventory levels are improving, a slower-than-expected normalization could affect demand for PMTS's core debit and credit card products.

Conclusion

CPI Card Group is undergoing a significant strategic evolution, transforming from a traditional card manufacturer into a diversified payment technology solutions provider. The Arroweye acquisition, coupled with organic investments in digital offerings, eco-focused products, and new market verticals like government disbursements and closed-loop prepaid, positions PMTS for sustained long-term growth. While near-term profitability will be impacted by integration costs, tariffs, and investments in its state-of-the-art Indiana facility, these are calculated moves designed to enhance its competitive moat and expand its addressable market.

PMTS's ability to leverage its specialized technology, strong customer relationships, and operational efficiencies allows it to carve out a unique and defensible position against larger, more generalized competitors. For discerning investors, PMTS represents an opportunity to invest in a company that is not merely adapting to the evolving payment landscape but actively shaping its future through strategic innovation and disciplined execution, with a clear path towards enhanced profitability and deleveraging in the years to come.