CPI Card Group, Inc. Stock

Welcome to CPI's Third Quarter 2026 Earnings Call. My name is Erica, and I will be your operator today. [Operator Instructions]. Now I would like to turn the call over to Davis Parker, Head of Investor Relations.

Thank you, operator. Welcome to CPI's Third Quarter 2026 Earnings Call. Joining me on the call today are John Lowe, President and Chief Executive Officer; and Terra Grantham, Chief Financial Officer. Before we begin, on Slide 2, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI's most recent filings with the SEC.

All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that occur after this call. During today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio and free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning.

Today's press release as well as the presentation that accompanies this conference call and the Form 10-Q are accessible on CPI's Investor Relations website at investor.cpicardgroup.com. We will open the call for Q&A after our remarks. I would now like to turn the call over to John.

Thanks, Davis, and good morning, everyone. Turning to Slide 3. The CPI team delivered a stronger-than-expected third quarter, including the highest quarterly revenue in company history, double-digit adjusted EBITDA growth and record year-to-date free cash flow. Revenue increased 15% to $158 million, supported by double-digit year-over-year growth across all three business segments. Our performance reflected continued momentum in Secure Card Solutions, ongoing expansion across our high-margin integrated PayTech business and healthy seasonal holiday volumes and prepaid solutions.

Gross profit increased 23% and adjusted EBITDA grew 17% with gross margin expanding 200 basis points adjusted EBITDA margin increasing 30 basis points. These results demonstrate our ability to translate strong revenue growth into even stronger profitability while continuing to invest to accelerate our strategy. We generated a company record $46 million of free cash flow through the first 9 months and ended the quarter with net leverage of 2.6x. This strong cash generation allows us to continue investing in our strategic growth opportunities, while reducing debt and creating long-term shareholder value.

Based on our strong performance through the first 9 months and our current outlook, we are increasing our full year guidance for revenue growth and free cash flow for the second consecutive quarter. while reaffirming our adjusted EBITDA growth guidance. While our strong revenue performance has translated into greater adjusted EBITDA, we continue to make investments for the long term, leveraging our financial performance to drive growth and diversification. Given our strong cash flow, we also expect year-end net leverage towards the low end of our 2.5x to 3x range.

Terra will discuss our outlook in more detail shortly. Beyond the financial results, we continue to see tangible benefits from the disciplined investments we have made to grow and diversify CPI. Arroweye continues to perform ahead of our original investment case and expand our customer relationships. Arroweye has delivered more than 30 new customer wins, the most recent one being the world's largest credit union and a top 15 issuer, Navy Federal Credit Union. This is a great win for CPI and further validate the differentiation and flexibility of the iris solution. We are building momentum with Carta as we bring its chip embedded payment technology to the U.S. market.

Our second stage of a pilot with one of the largest U.S. national retailers is progressing well, and we are seeing new opportunities to extend CPI's secure payment credential capabilities delivering value-added solutions beyond the initial issuance of the card. Our most recent acquisition, Trim, is broadening our instant issuance capabilities and strengthening our overall offering as the leader in the U.S. instant issuance market. Since acquiring the business in late June, this has been tracking to our expectations with strong customer retention, early commercial wins and reinforcing our original investment thesis. [indiscernible] once also continues to perform well. And together, our cloud-based card once and on-premise [ trism ] solutions give CPI a broader instant issuance platform to serve financial institutions of all sizes.

Looking ahead, we see meaningful opportunities to expand the pipeline, deepen existing customer relationships and continue our integrated PayTech growth by bringing Trism the benefit of CPI's broad go-to-market capabilities. In addition to our investment results, we continue to see strong momentum across our operating segments. In integrated Paytech, we announced a new partnership with Bank joy, a digital banking provider that will enable its 85-plus community bank and credit union clients to offer CPI's push provisioning, building on the momentum we discussed last quarter and further extending the reach of our digital solutions. Our IPT segment delivered 20% growth in the quarter with strong gross margins above 55%, driven by contributions from Trism and continued momentum in our cloud-based Card@Once solution. We expect that momentum to accelerate in Q4 with more than double the growth we delivered this quarter.

We are seeing increased demand for our broader suite of digital solutions. Including capabilities that enable digital credentials with push provisioning, while our partnership wins, such as Bank Joy and others we announced last quarter are expanding our reach into our addressable market. We're excited about the momentum in etiquette PayTech and look forward to finishing 2026 strong. In Secure Card Solutions, we delivered strong growth of 13% in the quarter. driven by continued strength in contactless while continuing to expand and deepen our customer relationships. Just over a year after beginning our production at our new Indiana facility, the investment is increasingly strengthening our operating platform providing greater capacity and production flexibility.

We're seeing a lot of excitement from our customers who increasingly value the flexibility and efficiency of our production network and the ability to support their growing and evolving needs at scale. On the prepaid side, we remain excited about our long-term opportunities across both open and closed loop markets with closed loop representing a market we estimate is approximately 5x the size of open loop by volume. Healthy seasonal open loop ordering ahead of the holiday season and strong closed-loop sales contributed to Q3 performance, validating our market position and the resiliency of the prepaid market. We are also proud of a milestone achievement that occurred in the third quarter.

The successful secondary offering of parallel49 remaining shares. As a reminder, Parallel49 has been a long-standing equity investor since 2007 and well before our 2015 IPO. The offering generated strong investor interest, broadened our shareholder base and increased our public float, which would support greater investor access and trading liquidity over time. Additionally, we are proud to say that our Chairman, other Board members and Tricor Pacific Capital increased their investments in CPI. I want to thank the parallel 49 team for their long-standing partnership and support of CPI and thank our Board and Tricor for their continued support as well. We also want to welcome our new group of investors as we continue executing on our strategy and creating long-term shareholder value.

Turning to Slide 4. We are proud of our team as they continue to strengthen and diversify CPI through our three growth pillars: expanding our proprietary technology platform, growing our marketable customer base and delivering evolving payment solutions. The double-digit growth across our businesses, new customer and go-to-market wins and momentum in digital and instant issuance demonstrate our execution against these pillars. We believe this positions us to deliver sustainable, profitable growth and long-term shareholder value.

With that, I'll turn the call over to Terra. Terra?

Thanks, John. I'll begin with our consolidated revenue and profitability results on Slide 6. We are pleased with our third quarter financial performance. As John noted, revenue reached the highest quarterly level in company history, supported by strong growth across all our business segments. Revenue increased 15% in the third quarter to $158 million compared with $138 million in the prior year period, driven by increased volume in contactless cards higher revenue in our Prepaid Solutions segment, led by closed loop volumes and strong seasonal open loop volumes as well as strong growth from our integrated PayTech segment, including contributions from the acquisition of Trism.

Third quarter gross profit increased 23% to $50 million, resulting in a gross profit margin of 31.7% compared with 29.7% in the prior year period, an increase of approximately 200 basis points. Adjusted EBITDA increased 17% to $27 million with adjusted EBITDA margin expanding approximately 30 basis points to 17.3%. Net income increased 117% to $5 million, primarily driven by higher operating income as well as lower interest expense and a lower effective tax rate compared with the prior year period. The strong growth in profitability across all our segments reflected operating leverage on higher volumes in secure card and prepaid continued growth in our higher-margin integrated PayTech business and favorable segment mix. SG&A expenses were $34 million in the third quarter compared with $28 million in the prior year period. This increase was driven by sustained investments in digital and technology to fuel our efforts to grow and diversify in our higher margin, more recurring businesses like Card@Once and digital.

The increase also reflected higher incentive and other compensation expenses, higher personnel costs to support our growth and recent acquisitions as well as integration and transaction-related costs. We expect the year-over-year increase in SG&A to continue in the fourth quarter as we continue to invest in our strategic growth initiatives. Integration and transaction-related costs were significantly lower than recent quarters at approximately $1 million in the third quarter, primarily related to the integration of Trism and Arroweye to a lesser extent. Arroweye integration efforts continue to progress well with the vast majority of work complete.

As a reminder, these costs are not included in adjusted EBITDA but do impact net income. We continue to expect integration investments to support revenue synergies, operating efficiencies and long-term growth. We also advanced several initiatives designed to improve margins over time, including supplier negotiations, incremental acquisition synergies and production optimization and automation across our network. Combined with continued growth in higher-margin offerings such as metal cards and integrated PayTech solutions. These initiatives provide multiple opportunities to improve productivity and profitability.

And as John mentioned earlier, the Indiana facility is beginning to yield contributions to our growth and long-term margin improvement strategy through a combination of increased capacity network optimization, automation and process standardization. Higher volumes are allowing us to better leverage the facility scale and flexibility, run a broader mix of customer programs more efficiently and improve unit economics across our operations. We continue to see additional opportunities ahead from greater automation, improved asset utilization and production efficiencies as we further optimize operations across our network.

Turning to our segment results on Slide 7. In Secure Card Solutions, third quarter revenue increased 13% to $112 million, driven by strong growth in contactless volumes. We also saw strong momentum in premium metal card offerings benefiting from a favorable mix of higher value solutions that our customers continue to adopt as they look to differentiate their card program and deliver more premium cardholder experiences. In prepaid Solutions, third quarter revenue grew 15% to $27 million, driven by increased sales of closed loop prepaid solutions and healthy volumes of higher-value open-loop packages.

This quarter, we benefited from strong seasonal volumes as customers prepared for the holiday season which is consistent with the quarterly variability we typically see in this business and reinforces our view that customer sell-through remains healthy and that CPI is well positioned to capture growth opportunities across both open and closed loop markets. As we look to the fourth quarter, we expect the normal seasonal moderation we've often seen historically in this business, with revenue closer to $20 million as customer ordering patterns normalize following the strong seasonal volumes in Q3.

Within Integrated PayTech, third quarter revenue increased 20% to $23 million, driven by contributions from TRIM and continued momentum in Card@Once. We continue to advance the Trism integration and expand our pipeline across instant issuance and digital solutions. We expect continued solid execution across the business through year-end including an integrated PayTech, where we expect fourth quarter revenue growth to be more than double the rate we delivered in Q3. We have confidence in this expectation based upon continued momentum in Card@Once in digital solutions, contributions from Trism and the benefits of favorable comps versus the prior year.

Moving to our cash flow and balance sheet on Slide 8. Cash flow from operating activities was $15 million in the third quarter and $57 million year-to-date compared with $10 million and $20 million in the prior year period, respectively. Free cash flow was $10 million in the third quarter and $46 million on a year-to-date basis compared with $5 million and $6 million in the prior year period, respectively, representing 7x year-over-year growth in year-to-date free cash flow. Our record year-to-date free cash flow performance reflected strong operating results, improvements in working capital, driven by strong performance in our Secure Card Solutions business, including lower inventory purchases and lower capital expenditures compared with the prior year period.

Capital expenditures totaled $11 million year-to-date compared with $14 million in the prior year period. As a reminder, our current year investments have primarily been focused on technology, automation and optimization across our network and growing our digital solutions. At quarter end, we had $15 million in cash, $15 million drawn on our ABL revolver with $74 million of remaining borrowing capacity and $238.5 million of senior notes outstanding. Net leverage ended the quarter at 2.6x compared with 3.6x at the same point last year. We remain committed to balancing debt reduction with disciplined investments that support long-term growth and shareholder value creation.

Wrapping up with our 2026 financial outlook on Slide 9. Based on our strong third quarter performance and current outlook, we are increasing our 2026 guidance for revenue growth and free cash flow for the second consecutive quarter while reaffirming our adjusted EBITDA growth and year-end net leverage guidance. For the full year, we now expect revenue growth of low double digits increased from high single to low double digits. Adjusted EBITDA growth of low to mid-single digits, which we are affirming as we continue to invest to grow and diversify the business. Free cash flow of $50 million to $55 million increased from our prior range of $45 million to $50 million. and year-end net leverage towards the low end of our 2.5x to 3.0x range. Our strong performance through the first 9 months positions us well to achieve our increased full year outlook. We remain focused on executing our strategy, serving customers, improving margins, generating strong cash flow and maintaining disciplined capital allocation.

I'll now turn the call back to John for some closing remarks.

Thanks, Terra. We delivered a strong third quarter while continuing to execute our strategy to grow and diversify CPI. We advanced our digital and cloud capabilities. progressed our integration of Trism, had great customer wins, including a top 15 issuer that was not previously a customer and strengthened our position across the payments ecosystem. We executed a successful secondary offering which represented an important milestone in CPI's evolution as a public company by broadening our shareholder base, investor engagement and increasing our public float. Our focus remains on expanding our proprietary technology platform, growing our marketable base and evolving our payment solutions to help our customers win.

Operator, we will now open the call up for questions.

[Operator Instructions]. Your first question comes from the line of Hal Goetsch with B. Riley.

Congratulations on a great quarter and getting that transaction done. My question is [indiscernible] the Navy Federal Credit Union, that's a pretty big bank. Could you maybe share a little bit more about how long it took to work that transaction? And if this sets you up for maybe other transactions with big customers you don't have at this time that are of that scale.

Yes, Navy Federal Credit Union is a great win. Largest credit union in the world, top 15 issuer in the U.S. And I think just stepping back, we acquired Airline in May of last year. At that point, one of our investment thesis was they had a great solution in market. They had a great team out there, great operations, we just believe that them combined with CPI and our scale would help us win more customers. And since acquiring them in May, they've done exactly that. We've won over 30 customers. Maybe Federal Credit Union is a great example of a great win a customer, we did not have as a broader company before. And so it's a way for us to win new customers and ultimately, you're exactly right. Our goal is to leverage that win and hopefully be able to provide support and help Navy Federal win with their customers by providing our other solutions across the broader suite of solutions that CPI has. So we're excited about it.

Terrific. And the follow-up is on innovative PayTech, the revenue growth in the quarter was good and then it's expected to be almost double that for Q4. And I'm wondering, is this a combination of some easier comparisons from Q4 a year ago? Or is there -- maybe program wins in that segment that really carried that outlook as well, let us know.

Yes, it is a combination of things. I mean Card@One continues to have momentum. Trism the acquisition there. And just as a reminder, for some of our new investors, our Trism acquisition is really focused on the on-premise market of instant issuance where we've been focused on the cloud side. So it allows us to go upstream into larger financial institutions and puts us in a leadership position in the instant issuance market. But Trism continues to perform at expectations. We've only owned it since late June, but they're doing great. And then you also have our digital solutions that continue to perform well fairly small but still a contributor. And to your point, how if you look at coming up versus Q4 last year, there are easier comps. We expect the growth rate in IPT to more than double the growth that was really strong growth in Q3 and look forward to finishing the year strong.

Your next question comes from the line of Peter Heckmann with D.A. Davidson.

Thank you. Good morning, everyone. Nice job on the really nice job on the year-to-date the cash flow and corresponding reduction in net leverage. How are you thinking about kind of the target range for net leverage? And how are you thinking about positioning for an eventual refinancing of your senior notes.

Yes. Thank you very much for the question. So yes, we're really excited. A great free cash flow year-to-date, a record free cash flow. And bringing our net leverage down to the 2.6x at the end of the quarter. So we had guided for 2.5x to 3x for the year, and we are evaluating kind of what is the optimal leverage for us. But our capital allocation priorities remain the same. We're going to continue to invest in the business and at this point, continue to bring down our debt. You talked about the refinancing next year. So in July of next year, our call premium drops to 102.5.

So we expect to be at that point, unless something happens outside of our control in the market or something else happens, we'll be looking to refinance pretty quickly because we think with our strengths now, we should be able to come down off our 10% that we're paying on their nodes and get better terms.

Yes, Pete, I think we'll give more guidance on how we think about leverage in March. I just don't think we'll give updated guidance today. But to Terra's point, a great free cash flow record year-to-date for the year. So we expect to be in a good position coming mid next year.

Great. Okay. That's good to hear. And then obviously a little early to start thinking to too much about next year, but you did have a few different drags on margins in 2026. I guess how do you think about some of those in terms of like the integration of Arroweye more incremental expenses in integrated PayTech. Do you see some of those allowing for some more margin expansion next year?

Yes. I mean just broadly, Terra can talk about the initiatives we have on margins. But if you think about just our grow our goal of, if you will, our strategy of growth and diversification, One of the things that we're focused on is investing in more profitable sections of the market. Now you see that with what we're doing in integrated PayTech and the growth rate there. Gross margins within that segment are greater than 5% prepaid, we continue to expand our closed-loop solutions that's kind of incremental to what we're doing in open loop, although open loops have been somewhat choppy this year. And then in Secure Card Solutions, our focus is getting Arroweye back to the EBITDA margins of what we have. And the example of Navy Federal Credit Union is a win this quarter is just another good example of their performance and market and our ability to kind of win good work there.

And ultimately, we still see metal sales being decent quarter to quarter to quarter. So we'll continue to drive kind of our growth and diversification strategy to ultimately improve margins but also just improve our profitability overall and drive more free cash flow. But Terra, anything you would add?

I guess, two things really. So first is there are a number of margin initiatives we have underway right now related to production optimization, continued automation as well in our production facilities. So we'll continue to do that and also seek synergies related to our acquisitions. Also because you specifically asked about integration expenses, our integration expenses were much lower this quarter at about $1 million. So we are nearly through that Arroweye integration. And although we have some trim integration expenses, they're going to be at a much lower rate than we had with ROI.

Your next question comes from the line of Jacob Stephan with Lake Street Capital Markets.

Congrats on a nice quarter. I guess first just for me. I want to start out on the IPT segment. Obviously, I got your guidance there. But looking at kind of Q4 of 2025, that was down sequentially and you're kind of guiding for that to be up sequentially in Q4 this year. So just overall, looking at where the strength is between Card@One and Trism would be helpful.

Yes, Jacob, so just looking at our Integrated PayTech segment, the majority of that is our instant issuance solution with Card@One. If you look at last year, we rolled out a new solution -- and I believe early '25, if not late 24, that led to a good amount of growth. I mean I think we grew 20% in 2025 for the year overall within that segment. But ultimately, at the end of the year, I think we had a little bit of softness in Q4 of 2025. But if you compare that to where we are this year, we continue to advance our solutions that we're pushing to market this year, which you could go on a website and look at all the things we're talking about, if you will.

But we're seeing really good momentum in Card@One, even sitting here today, Trim continues to perform. And so that, combined with our digital solutions and yes, in comparison to Q4 in we have pretty good confidence that we're going to have a good growth quarter even stronger than where we were last year and stronger than where we were in Q3 in Q4. So a little bit of a different time for the business and excited about to see where it lands at the end of the year.

Okay. Got it. And maybe if I could just touch on kind of the Q4 implied EBITDA guide kind of back into the number. But just looking at kind of the revenue weighting between segments given the growth implied in IPT, but maybe some softness in your other two segments I guess what -- from an operating expense standpoint, what -- where are the investments being made? What are you doing there? And maybe as a follow-up to that, do you see any kind of potential cost synergies between some of the acquisitions you made?

So Jacob, you've got a lot of questions in there, but let me start with the first one. I mean if I think about where we'll be for the end of the year in relation to adjusted EBITDA and the guidance we put out there. Just keep in mind, we've seen revenue continue to rise. We've seen cash flow continue to rise. And so the team is executing well. But what we're also doing. And I've been here more than 8 years, we've had years where we've had really great years, and we probably haven't invested as much as we should have for certain growth in certain areas.

And so this year, we're making strong investments in the technology side, especially in our digital side. When you hear us talk about wins such as Bank Joy as an example, those are things that take time and execution from a engineering and software development perspective. So those types of things are hitting OpEx. We're also investing across the business. I mean Terra can talk to automation and all of those different things. But at the same time, we're pretty confident in our EBITDA guide. But at the same time, we're continuing to make good investments in Q4 to set us up for long-term growth and diversification. But Terra, anything you'd add?

So I mean one thing also just -- and you alluded to this impacting our Q4 is the segment mix again. So we did have a great Q3, where we grew 15% double digits across all quarters in -- so we don't expect that exact repeat there in Q4. So that is impacting our Q4 EBITDA as well. So -- and we did also add prepaid at $20 million in Q4. So that's a little bit more specific for you.

I think you asked about synergies, too, from some of our acquisitions. And I think the synergies Arroweye is a great example of the revenue synergies that we're getting. If you think about Trism, most of those customers that were not customers before are only buying instant issuance. There's a number of other solutions that we can go to market with within that book of business, if you will. So on the revenue side, we're seeing really strong synergies and excited about that. On the operating synergy side, I mean it's continuing to plug along, and we're seeing better and better margins, especially in the airline side. But I think we have a little bit of ways to go. But Terra, I don't know if anything...

So well, I would just add that we are getting synergies now. So as John said, trying to get more, but I'll speak specifically of Arroweye. Arroweye's growth in the quarter was very strong. It really supported -- help support the secure card, 13% revenue growth and EBITDA growth in Array was very strong and continued to surpass our investment case. So really great performance there.

[Operator Instructions]. As there are no further questions in the queue, I would like to turn the call back to over -- I would like to turn the call back over to John Lowe for closing remarks.

Well, thanks, everyone, for joining us. I'd like to thank our employees for their continued dedication, our customers for their trust and partnership and our shareholders for their ongoing support in the third quarter. We look forward to continue to execute our strategy to create long-term value and delivering a strong Q4 to close out 2026. Thank you, and have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Thank you. Welcome to CPI's second quarter 2026 earnings call. My name is Alexandra, and I will be your operator today. [Operator Instructions] I would now like to turn the call over to [ Davis Barker ], Head of Investor Relations.

Thank you, Operator. Welcome to CPI's second quarter and first half 2026 earnings call. As a brief introduction, I recently joined the CPI team, and I'm incredibly excited to partner with CPI's leadership to share our compelling story with the investment community. Joining me on the call today are John Lowe, President and Chief Executive Officer, and Sarah Grantham, Chief Financial Officer. Before we begin on slide 2, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995.

These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI's most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. During today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA margin, net leverage ratio, and free cash flow.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Today's press release, as well as the presentation that accompanies this conference call and the Form 10-Q, are accessible on CPI's Investor Relations website at investors.cpicardgroup.com. We will open the call for Q&A after our remarks. I would now like to turn the call over to John.

Thanks, [ Davis ]. 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 Sarah on her appointment as Chief Financial Officer. Since joining CPI in 2017, Sarah 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 3, 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.

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 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 2.7x 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, delever 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. Sarah will share more about her 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've continued to win share and are now serving all of the top prepaid program managers in the U.S., further strengthening our position at the center of the prepaid market and creating new opportunities to deliver our secure packaging solutions.

We are making good progress with Target on our joint pilot to launch prepaid packages with safe-to-buy 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 5x 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 takes actions to reduce fraud. All together, 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 4, 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 5, 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. It 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 Sarah 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 7. 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. And 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 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 8. 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 packages and changing 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.

While the recovery has been slower than originally anticipated, we continue to be well positioned to capture new revenue opportunities in this market, including in closed-loop, where we are continuing to see strong customer interest, and in our strategic partnership with Target. Within Integrated PayTech, second quarter revenue increased 4%, driven by increased Card@Once revenue and a very small contribution from the TRISM instant issuance acquisition, which closed in late June. We continue to expect Integrated PayTech to deliver approximately 20% growth for the full year, an increase from 15% expected at the start of the year.

While this implies a significant increase in growth in the second half of the year, we have confidence in this expectation based upon continued adoption of our Card@Once and digital solutions, contributions from TRISM, and the benefits of favorable comps versus the prior year. We generated exceptional cash flow in the first half of the year. Cash flow from operating activities was a record $42 million in the first half compared with $10 million in the prior year period. Free cash flow was $36 million compared with $1 million in the prior year period, driven by lower working capital usage, including reductions in chip inventory, strong Secure Card Solutions performance, and accelerated inventory optimization initiatives.

Our free cash flow through the first six months of the year is a record for the company. Capital expenditures totaled $6 million in the first half, down from $9 million in the prior year period, as capital spending last year included investments for our new Indiana production facility. We now expect full year CapEx to be slightly below our 2025 levels, driven by a reduction in certain equipment investments and lower software capitalization plans. We are focusing CapEx on growing our digital solutions, enhancing our technology, driving automation, and other key growth investments.

On the balance sheet, at quarter end we had $21 million of cash, $92 million of available borrowing capacity under our ABL Revolver, and $265 million of Senior Notes outstanding prior to our $26.5 million Senior Note redemption in mid-July. Net leverage ended the quarter at 2.7x, down from 3.6x at this point last year. The progress on our balance sheet reflects our commitment to deleveraging and reducing our interest expense while continuing to grow adjusted EBITDA. Wrapping up with our 2026 financial outlook on slide 10. As John shared at the beginning of the call, we are pleased to be increasing our 2026 financial guidance on revenue growth and free cash flow while holding our guidance on adjusted EBITDA and year-end net leverage.

Our adjusted EBITDA outlook remains unchanged as the benefits from stronger Secure Card Solutions performance and tariff refunds are expected to largely be offset by continued investment in Integrated PayTech and ongoing choppiness in our higher-margin Prepaid Solutions segment. We now expect revenue growth of high single digits to low double digits. Adjusted EBITDA growth of low to mid-single digits. Free cash flow ranging from $45 million to $50 million, an increase from our prior guidance of a conversion rate in line with 2025. 2025 free cash flow was $41 million. Year-end net leverage from 2.5x to 3.0x.

As we already shared, we are raising our Integrated PayTech segment revenue growth from 15% to approximately 20%, helped by our acquisition of TRISM. Overall, our first half results keep us on track to achieve our updated full year objectives. We currently expect third quarter revenue and adjusted EBITDA to be slightly better than the second quarter as we progress toward our updated guidance. The actions we are taking to grow the business, expand our market opportunity, improve margins, and generate strong cash flow position us well for the remainder of 2026 and beyond. I'll now turn the call back to John for some closing remarks.

Thanks, Sarah. We delivered a strong first half of 2026, achieving double-digit revenue growth and record free cash flow, while continuing to execute on our strategy to grow and diversify the business. We expanded our digital and cloud capabilities, secured exciting customer wins, completed another strategic acquisition, and continued building momentum across our portfolio. At the same time, we strengthened our balance sheet, reduced debt, and maintained the flexibility to invest in future growth while creating value for shareholders.

As I wrap up today's remarks, I want to recognize the CPI team for delivering a strong first half and positioning us for an even stronger second half of 2026. We have a robust sales pipeline, an increasingly high-quality recurring revenue customer base, and a clear focus on generating profitable growth. Operator, we will now open the call up for questions.

[Operator Instructions] Your first question comes from the line of Peter Heckmann with D.A. Davidson.

I had a question on the TRISM acquisition. I inferred that this is a relatively small deal. I think in the original press release, you said that you didn't expect it to change your net leverage ratio at all. I did hop on a little bit late, so I apologize if you already covered it. But I guess in terms of thinking about like incremental revenue perhaps that you could pick up for 2027, should we be thinking about maybe something like for the full year, like $5 million to $10 million in revenue? And then just in terms of the rationale for that deal, I don't think there are very many players in the instant card issuance market. And so absorbing this one should really help your competitive position, and I can see you can talk a little bit about what attributes the deal brings to CPI.

Yes, Pete, good morning. Good question. No problem jumping on late. We can cover that. So just to start, you know, TRISM is a great strategic acquisition for us. You think about our position in the instant issuance market broadly. We historically have been the market leader by far in software as a service, kind of cloud-based solution where you're servicing those small to medium banks that don't have the ability to manage their own technology. We would also compete against a couple other players that would have on-premise solutions where they're typically servicing the larger banks with a greater number of locations that, you know, have large technology operations.

They can manage things on their own, and they want that somewhat. They want to buy the software, but they want to manage it on-site on their own. And so, TRISM fits into that latter mold. So it really grows our addressable market, essentially doubles from where we were. And a great investment for us. That said, going to your other question, size-wise, you know, we talked about TRISM increasing our Integrated PayTech segment guidance this year from 15% to 20%. If you just ran that math, that's roughly, you know, $3.5 million, $4 million is what we expect for the latter part of this year.

That's a great investment for us. That said, that's because we're getting them kind of up and running under the CPI umbrella. We would expect that run rate to be double and probably a little bit larger in 2027, so I don't want to necessarily give guidance yet, but I wouldn't expect just to be able to double that, and that's the guidance for 2027, put it that way. Does that answer your question?

Your next question comes from the line of Jacob Stephan with Lake Street Capital Markets.

First, maybe just kind of building off of that last one on TRISM. When I look at IPT, it grew kind of low single digits in the first half, but your fiscal year guide is 20%. I think TRISM is probably in the $3 million to $4 million range. What's the other $10 million that you're expecting to ramp in the second half?

Yes, hey morning Jacob. So really three things. You know, one, our Card@Once business, we do have strong confidence in kind of the second half of the year. We see the line of sight to greater growth there, and that's good for us. You add in TRISM, that's, as I mentioned, a small percentage of the growth. And then if you just look at comparables, for '26 compared to '25, Q3 was a pretty good quarter in '26, Q4 in '26, and '26 or '25 was a little bit slower per quarter. So we would expect a fairly strong growth in Q3 for the Integrated PayTech segment and a very strong growth in Q4 '26 for Integrated PayTech. So we're confident in the business and our line of sight to hit the 20% guidance for the year.

Okay, great. Maybe just on Secure Card, you know, that was up 25% in the first half. I guess how much of the incremental was, you know, ArrowEye versus kind of your organic contactless personalization? And can that kind of maintain against, you know, as we look at the second half of the year?

Yes, so I think if you look, Jacob, at our organic growth, it was also very strong in the first half of the year and in Q2. So overall for CPI, our organic growth for Q2 was 12% and for the first half was 14%. And the majority of that was driven by strong organic growth in Secure Card Solutions.

Okay. Last one for me, you know, just on the free cash flow. Obviously, $36 million is outstanding in the first half. I guess, you know, with your guide, you know, being your commentary being $45 million to $50 million, what kind of reverses in the second half and how much inventory kind of releases is left in the model?

Well, Jacob, first I'd say I just want to thank the team. I mean, we had a tremendous amount of cash flow in the second quarter. That's a really, first half is a record for us. The performance in the business is really driving what I would say significant volume growth, which ultimately drives inventory optimization, which we've been pushing to do for a period of time post-COVID. And so we knew we'd get to this point, but, you know, now we look forward and we're excited about the cash flow prospectively, but I'll let Sarah come in.

Yes, so again, I'll echo what John said. Very happy with our free cash flow performance in the first half. And a lot of that was driven by inventory. I would say acceleration of our inventory optimization. And I do want to say we actually, you know, continue to focus on that and we expect our inventory to continue to improve in the second half. But we do have some other items in the second half that will not be as positive as the first half, primarily kind of around our, you know, our AR and AP, which we did have some timing things there.

So really good performance in the first half. And some of that was, you know, team efforts and strong working capital management, but we also had a little bit of timing. And then we do expect a higher CapEx in the second half as well. But overall, we're very focused on, you know, continuing to drive cash flow, super excited about that strong performance and strong working capital management as we continue to go forward.

Okay, great. I appreciate all the color. I'll turn it over.

Your next question comes from the line of Peter Heckmann with D.A. Davidson.

Hey, John, sorry about that. I was on mute and I did have a follow-up question, but your answer to the prior question on TRISM was very helpful. Thinking about, and again I apologize if I missed it, but could you just go into a little bit of detail in terms of progress on anti-fraud packaging on closed-loop prepaid cards. If you've had any progress there and whether or not you have had any change in terms of your thoughts about the relative opportunity there over the next 18 months.

Yes, Pete, no problem. And good question. The prepaid market broadly is a, we said this in the last couple of quarters. I think we're extremely well positioned for what may occur on a go-forward basis. You know, just like any other market, things change on a kind of a slow basis, if you know what I mean. So it's hard to put a specific date on changes, but if you think about the two big markets, right? Open-loop, where we've been a leader for a long time. Closed-loop, where we're just entering into closed-loop is about 5x the size of open-loop from a volume perspective.

And the value of closed-loop continues to rise as there's regulation changing in the states and retailers, merchandisers, essentially demanding greater packaging around closed-loop cards. And that's where we fit in because we're the largest prepaid packager in the United States by far. And on the open-loop side, when you add in our ability to take our chip expertise, if you will, that we have on the Secure Card Solutions side, the IPT side. That is something that we're already in pilot with one of the largest national retailers in the United States. We're kind of in the second stages of that pilot. Seems to be going well.

So just like anything else, you know, things take time. But we're excited about the opportunity and, again, wouldn't put a number on what that means for '27 or '28. But I will say we're happy about our position in the market and we're excited about what's to come in prepaid broadly.

Okay, that's helpful. And then just last question on metal cards. I know it's a very small portion of your overall business, but I do think it's getting bigger. If I remember correctly, you had a pretty good year last year, and I think I've seen a couple of advertisements here and there. Can you talk a little bit about how your metal cards differ from maybe the other major metal card provider and where you see some opportunities there?

Yes, good question. Well, you know, we didn't really cover it this morning, but we did have decent metal sales in Q2. We had pretty strong metal sales in Q1. Just a much smaller part of the business. That said, where we compete is at a more value price point than some of our competitors, but also while providing a high-value kind of marketable product, if you will. The latest one that our teams have been working on is almost like an on-demand metal product.

And that we've been slightly advertising, I'd say it's kind of in early days, but metal is a market we will continue to participate in, continue to innovate in. And we feel like our value proposition within the market, especially for those thousands of small to medium banks we serve, we feel like we're well positioned to capitalize on metal as that continues to grow from a market perspective.

Great. Okay. I appreciate it. Have a good day.

Yep. Thanks, Pete.

Your next question comes from the line of Andrew Scutt with Roth Capital Partners.

First, going to piggyback off the previous just question on prepaid. Just outside the packaging, you guys kind of mentioned a little bit of lumpiness in demand in the quarter. Can you guys just kind of talk about what pockets you're kind of seeing that are working and maybe some of the areas where demand might be lagging a little bit behind expectations?

Yes, I mean, I think we said this. We knew the first half of the year would be a little bit weak. I'd say the second half we just expect things to continue further as the market tries to figure out how to protect against fraud, and the demand side is going to be, the most of that is in the open-loop side of the market, because that's the majority of what we service, as well as our leading position is in open-loop. But that said, Andrew, closed-loop, just as a reminder, we really started entering the closed-loop market in the latter part of 2025.

A small amount of closed-loop in the latter part of '25, but had really decent growth in closed-loop. I mean, it's still small in relation to the whole business, but closed-loop is very positive for us. And we see a ton of customer interest from where we're positioned and what our capabilities are, especially on the packaging side for closed-loop. So again, I think the prepaid market will remain choppy through late '26. That's our expectation. But that said, I mean, we're well positioned to grow with the prepaid market and somewhat are supporting that growth through the innovation that we have from a packaging and chip expertise perspective.

Great, appreciate the call. And then second for me, it's wonderful to hear that continued organic growth in Secure Card Solutions. Now, kind of as we think of the transition to the Fort Wayne facility, how has that kind of helped you absorb these additional volumes and kind of keep that going? Can you help us quantify how much more capacity you have for continued growth?

Yes, I mean, I'll start and ask Sarah to jump in. I mean, we're excited about Fort Wayne. I mean, the Fort Wayne team is doing a great job. We're now able to move work pretty much between Fort Wayne and our other site in Colorado pretty easily. The team's innovated quite a bit to make those two sites streamlined. That helps us to manage kind of where to put the best work for the best margin, if you will. But that said, capacity-wise, I think we do have a ways to go before we're at full capacity. And we essentially built the site, you know, looking, you know, 10-plus years out, not necessarily for next year. But Sarah, any color you would give?

Yes, I mean, I would just add that, I mean, we were definitely at a point where we were kind of, you know, running out of capacity. So it was a really important investment for us to continue to be able to grow the business. And you know, as John said, not at full capacity yet, but as you can see in our results, you know, we are continuing to grow in our Secure Card Solutions business. You know, gaining share there and certainly that's a very important component. We've invested in that Indiana site to be able to facilitate that growth as well as future growth.

Understood. Well, thanks for taking my questions and congrats on the strong first half.

Yep. Thanks, Andrew.

Your next question and final question will come from Harold Goetsch with B. Riley Securities.

You mentioned prepaid remaining choppy through late 2026. Are you facing basically tough comparisons or you know what is the cause maybe of what you would think maybe is a very consistent business, it's very choppy this year even in, you know, Q1 or Q2 growth is much better than Q1. What are some explanations for that and if you have any extra color. Thank you.

Yes, morning, Hal. Well, there are kind of two things. One, we did have some strong quarters last year. I would say prepaid had a significant increase in the, especially a really good Q4 of 2025, if you go back and look at it. So there are kind of high comparables in comparison. And we've seen that in the prepaid business and where we sit in the market, just given our position in the market. As the market ebbs and flows, right, we experience that. But just going back broadly, I mean, if you think about our position and the market trying to protect against fraud, I think the point we would make is we still believe it's a growing market.

We've heard that from our customers. Our position in the closed-loop side, there's a lot of opportunity there. And whether you're in the open-loop or closed-loop side, it all comes back to how do you protect against fraud? Do you implement greater packaging or do you implement some sort of chip solution? And we by far are the largest packager of prepaid cards in the U.S. and have extremely deep chip expertise, which is a unique combination that no one else has in the market. I wish I had better information on the prepaid go-forward this year, but I think it's going to be a little bit choppy this year. But we're confident in the longer-term growth and opportunity set in the prepaid business.

Yes, two quick follow-ups. One's on the balance sheet, so terrific work there, but a lot of the free cash flow stems from like a, really getting inventories in line, accounts receivable lower, where there's some big invoices outstanding in receivables. So it's a big working capital benefit. Probably won't get too much more of that, but it's still great to see, bringing that, be able to pay down on that term loan. Any other comments on like, you know, the free cash flow situation? We probably should expect this kind of performance every first half of the year, should we?

Yes, I mean, there were definitely some specific drivers, Hal, of our strong H1 performance. And, you know, as we've talked about, the inventory optimization was accelerated by our strong growth in our Secure Card Solutions, but you know some of that is due to timing. However, just kind of wanted to remind we did take up our free cash flow guidance though for the full year. So to $45 million to $50 million. So definitely really strong performance and expect a really great performance for the full year as well.

Okay. And last one for me, after in Fort Wayne, new plant, kind of running, maybe getting optimized, is it... Any color on the benefits that new plant has done, any lessons learned or any color of the learning curve of the new plant, is it producing for you what you thought, above expectations, in line, any color would be great.

Yes, I mean, Hal, I mean, we've talked about the, you know, automation we've been investing in. Really just kind of a more advanced site. If you will, I'd say the other side of it is we've been bringing customers through regularly and you know, we're investing where many in our industry are not putting those dollars to work to really modernize their locations, right? They're trying to squeeze as much out of a site as they can. And that investment is something that really shows to our customers, shows them that we're willing to help them win in what they're doing. And so, you know, margin-wise things will continue to improve and efficiency will continue to improve.

But I think people underestimate the value of investing for customers, and that's a strategy that we'll continue to employ. But Sarah, anything else you would add?

Yes, I mean, I think one of the initiatives, too, that is exciting that we've done as we've built out that facility is something John mentioned earlier, which is being able to really move things across sites. So that really helps us as well in terms of getting to a, I'll call it that, optimized production mix and making sure that we're able to put jobs in the most profitable place within that network.

Thank you very much.

Thanks, Hal.

As there are no further questions in the queue, I would now like to turn the call back over to John Lowe for closing remarks.

Well, thanks everyone for joining us. Before we sign off, I'd like to thank our employees for their continued dedication, our customers for their trust and partnership, and our shareholders for their ongoing support. We look forward to delivering a strong second half of 2026. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Welcome to CPI Card Group's First Quarter 2026 Earnings Call. My name is Carrie, and I will be your conference operator today. [Operator Instructions]

Now I would like to turn the call over to Mike Salop. Please go ahead.

Thanks, operator. Welcome to CPI's First Quarter 2026 Earnings Webcast and Conference Call. Today's date is May 5, 2026, and on the call today from CPI Card Group are John Lowe, President and Chief Executive Officer; and Terra Grantham, Interim Chief Financial Officer.

Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI Card Group's most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that occur after this call.

Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio and free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning.

Copies of today's press release as well as the presentation that accompanies this conference call and the Form 10-Q are accessible on CPI's Investor Relations website, investor.cpicardgroup.com. On today's call, all growth rates refer to comparisons with the prior year period unless otherwise noted.

The agenda for today's call can be found on Slide 3, and we will open the call for questions after our remarks.

I'll now turn the call over to John.

Thanks, Mike, and good morning, everyone. Overall, we are off to a solid start in 2026 and are on track to achieve our full year outlook. We are executing on our initiatives to deliver on our strategy of growing and diversifying the business by helping our customers win as we expand our proprietary technology platform, grow our marketable base of relationships and evolve our payment solutions to meet market needs.

We exceeded our expectations in the first quarter, delivering 20% revenue growth, which reflected another strong contribution from Arroweye as well as good growth across our other Secure Card solutions businesses. This included strong performance from our contactless solutions, led by continued strength of contactless metal as we emphasize our offerings of value-driven metal solutions and increased sales of personalization services. As expected, our Prepaid solutions segment had a slow start to the years, but we continue to anticipate growth for the full year.

Integrated Paytech grew only slightly due to comparisons with a strong prior year quarter, and we continue to expect the segment to grow more than 15% for the full year. Adjusted EBITDA increased 9% in the quarter, and we generated strong cash flow with more than $10 million of free cash flow in the quarter. We also improved our financial position, ending the quarter with a net leverage ratio just below 3x. Based on first quarter results and our current forecast, we are affirming the full year financial outlook we provided in March.

Terra will give you more details on first quarter results in a few minutes, but first I would like to provide a brief strategic update on Slide 5. As I said before, we are executing on our strategy as we start 2026 and are fortunate to operate in multiple growing markets. In addition to ongoing increases in cards in circulation in the U.S. payments market, our business is supported by increasing demand for digital solutions by financial institutions and an increased focus on security for prepaid cards and packages.

As we discussed last quarter, our strategy is to continue providing payment technology solutions that help our customers win, driven by 3 primary growth pillars that underpin our value proposition. First, our proprietary technology platform with a vast reach into the U.S. payments ecosystem; second, our marketable base of thousands of deep and broad relationships across the U.S. payments market; and third, our proven track record of delivering evolving payment solutions that reflect changing market needs. We continue to make progress on driving our strategy forward, laying more pipes to further expand our platform, expanding our marketable base of relationships and introducing new solutions for the market.

We mentioned at year-end that we have locked in a new referral agreement, giving us the opportunity to significantly advance our marketable base for our Integrated Paytech segment. We are excited to share that we are actively marketing our solutions with the help of Fiserv and are seeing positive customer interest. And we continue to expand our pipes on our technology platform, creating further integrations and customer connections for our digital solutions. We've also expanded our solution set by delivering for the closed-loop prepaid market, seeing strong closed-loop revenue growth from Q4 2025 in the first quarter. And we continue to explore the viability of chip-embedded cards in the U.S. prepaid market, advancing our extensive pilot with a large national retailer testing Karta's Safe to Buy technology.

We believe our strategic efforts and investments will continue to drive long-term growth, expanding our addressable markets and providing the solutions needed by the market as it continues to evolve, creating value for our company and our shareholders. We'll continue to update you on progress throughout the year. But now I'd like to turn the call over to Terra to take you through the first quarter results in more detail. Terra?

Thanks, John. I'll begin with the segment results on Slide 7. Overall, as John said, we are pleased with our first quarter performance. First quarter revenue increased 20% to $147 million, led by our Secure Card Solutions segment. Secure Card Solutions revenue increased 35%, which included a $16 million contribution from Arroweye. As John mentioned, we experienced strength across the segment in the first quarter with good growth from our contactless solutions and personalization services.

Our Prepaid Solutions segment declined 17% in the first quarter, reflecting timing of orders from key customers with the first quarter decline partially offset by better-than-expected incremental sales of closed-loop cards. Integrated Paytech increased 1% in the quarter due to comparisons with a strong prior year, while we maintained strong gross margins at over 55%. As John said, we still expect to grow revenue in this segment by more than 15% in 2026.

Turning to profitability on Slide 8. First quarter net income declined by 57% to $2.1 million, primarily affected by $3 million of pretax integration costs, while adjusted EBITDA increased 9%, driven by sales growth, including the addition of Arroweye. Integration costs were high in Q1, and we expect them to remain at similar levels in Q2, but drop significantly in the second half of the year. Our 2026 integration costs are meant to drive revenue synergies and lower operating costs and primarily result from go-to-market spending, technology investments and certain vendor termination fees as we drive operating synergies. As a reminder, integration costs are not included in adjusted EBITDA, but do impact net income.

Gross profit margin declined from 33.2% to 30.0%, affected by lower sales and margins in our Prepaid segment and increased production costs, including tariffs and depreciation, partially offset by benefits from increased sales from Secure Card Solutions.

Production costs in the quarter compared to prior year included $2 million of increased depreciation primarily related to Arroweye and the new Secure Card production facility and $1.2 million of tariff expenses. We expect Prepaid margins to improve in the second quarter with higher revenue levels, and we also expect overall company gross margins to be much stronger in the second half of the year. Margin comparisons with prior year should also improve going forward as Arroweye depreciation and tariffs primarily began impacting results in the second quarter of 2025. Overall, we anticipate full year gross margins to be relatively consistent with prior year levels.

We have multiple initiatives in place to drive margin improvement over time, including targeted supplier negotiations, automation investments, production optimization across our sites, driving more favorable product mix and achievement of Arroweye synergies.

We are also managing discretionary spending and driving operational efficiencies as volume increases, including in our new Indiana production facility, where we expect volumes this year to be 30% higher than 2024 levels in our old production facility.

First quarter SG&A expenses increased $6.5 million from the prior year, primarily due to Arroweye integration costs, the inclusion of Arroweye operating expenses, increased employee performance-based incentive compensation, increased severance and higher technology spending. Investment spending was less than anticipated in the first quarter, and we expect that to ramp over the remainder of the year beginning in the second quarter.

Turning to Slide 9. We had strong cash flow generation in the first quarter. Our cash flow generated from operating activities for the quarter increased from $5.6 million last year to $13.6 million, driven by strong working capital management. Free cash flow increased from $0.3 million in prior year to $10.1 million in the first quarter of 2026. We spent $3.5 million on CapEx in the quarter compared to $5.3 million in prior year, although we still anticipate full year capital spending to be similar to 2025 levels with increased focus on technology spending.

On the balance sheet, at quarter end, we had $19 million of cash, $15 million of borrowings on our ABL revolver and $265 million of senior notes outstanding.

Turning to our 2026 financial outlook on Slide 10, we are affirming the full year outlook provided in March. This includes high single-digit revenue growth, low to mid-single-digit adjusted EBITDA growth, free cash flow conversion at similar levels to 2025 and a year-end net leverage ratio between 2.5x and 3x. We expect Q2 revenue to be similar to Q1 levels with adjusted EBITDA expected to be slightly lower than prior year due to timing of investment spending, including some spending that was delayed from the first quarter.

I'll now turn the call back to John for some closing remarks.

Thanks, Terra. Turning to Slide 11 to summarize before we open the call for Q&A. We are executing on our strategy with a better-than-expected start of the year, with segment trends largely as we anticipated, and we are on track to achieve our full year outlook. We also generated strong cash flow and brought net leverage back down to just below 3x after the temporary increases following last year's Arroweye acquisition.

We intend to continue growing and diversifying our business, leveraging our expanding proprietary technology platform, our extensive marketable base and our evolving portfolio of payment solutions to meet the market needs, drive growth and enable our customers to win.

Operator, we will now open the call for any questions.

[Operator Instructions] Your first question will come from Pete Heckmann with D.A. Davidson.

In terms of thinking about instant issuance Card@Once solutions, didn't mention it in the prepared remarks, but I guess what are you thinking for this year in terms of kind of that base business as well as some of the tangential areas that you've expanded into over the last 15 months?

We're excited about instant issuance. It's a great platform for us. Just as a reminder, it's a Software-as-a-Service platform. We built it from the ground up. It took us 10-plus years to build it, especially all the integrations into what we refer to as the payments ecosystem that we service. So we have thousands of customers across the U.S. And we expect that to be a large chunk of the growth out of our Integrated Paytech segment for 2026, growing that segment from an outlook perspective greater than 15%.

I think the Fiserv deal we announced, that helps us grow. And just on the breakout between instant issuance and everything digital, I'll say digital, we're essentially building the business there. And it's relatively small in relation to the rest of the business, but we're seeing strong customer demand, a good pipeline, and we continue to build out the pipes and integrations, if you will, to continue to service multiple areas of the market. So we're excited about what we're doing in instant issuance, but broadly in digital, too.

Okay. Great. And then just in terms of contactless, I guess, where do you think we are in terms of contactless cards? I haven't seen recently any information that would suggest what percentage of cards out today have a have a contactless chip embedded.

Yes. Good question. I mean what we produce today is 90% plus contactless. So we used to use the baseball analogy. I would say we're in the very late innings of the transition. But that's on the debit and credit side. I would say on the prepaid side of our business, there's a lot of opportunity. The volumes within prepaid broadly when including open loop and closed loop are somewhat greater on an annual basis than even the debit and credit side in terms of what's produced. So to the extent that, that market starts to move more towards chip and starts to move specifically towards contactless which is what we're doing with Karta and what we're doing with a large national retailer, which we have a pilot underway, which we're having positive kind of movement on, if you will.

If that market continues to move towards chip and grows, we'll see a long transition there, which is what we would expect. And we would be in a unique position to capitalize on that transition. So on the debit and credit side to your question, I think we're late innings. We're pretty much fully penetrated, but I think there's a lot of opportunity on the prepaid side.

Your next question Jacob Stephan with Lake Street Capital Markets.

Nice quarter. I just wanted to ask on the Fiserv relationship. It seems like that was expanded a little bit. Maybe you could touch on some of the things that -- it was -- in ways that it was different from the past contract with them or agreement.

Yes. Jacob, I think the main difference is we called out their name. We had entered into this agreement around year-end. So we mentioned an agreement at year-end, but we just didn't call out Fiserv's name. I would say getting marketing teams together to finalize documents takes a long time. But the agreement is in place. We're excited about it. We're seeing positive customer interest in Q1 kind of ramping up, if you will. And Fiserv is a great partner. We love working with them. They have thousands of customers across the United States that we have worked with them to build good relationships with and make sure we're helping our customers win and helping their customers win at the same time.

Got it. And maybe just touching on the supply chain a little bit. I know that last year, about this time, we were talking a lot about tariffs. I guess from a supply chain perspective and chip tightness, what are you seeing out there in the market today?

I mean supply chain, broadly, I would say, has normalized. And I think that's a credit to not only the teams that we put in place to manage it, that continue to focus on how to manage things well, especially today in light of the Iran war, that's another kind of thing to tackle from a cost perspective, although that's not significant, I would say. But tariffs is something we had to work through from a supply chain perspective. I would say tariffs have somewhat normalized as well. But we are -- just to get ahead of your probably next question, we are expecting refunds on tariffs, but we don't necessarily have a timing aspect to that. We hope to see them at one point. But as I tell my team, I'll believe it when I see it that way.

Okay. And then just last one for me. You're kind of expecting a bigger ramp in the second half from the Integrated Paytech segment. I'm just wondering what are going to be the main drivers of that growth in Paytech?

Yes. It's -- a lot of it is in relation to the deal that we signed with Fiserv. That's a chunk of it. Another chunk of it is just the growth in the business as it stands. Last year, it grew roughly at 20% rate. If we look back over time, it's been growing at a faster pace generally than the rest of the business. And that's because we have a unique value proposition in the market. The other side of -- and I'm talking about our instant issuance solutions specifically.

On the digital side of the house, that's an area that's growing even faster. Now you're talking about smaller dollars. So it's smaller dollars growing to kind of law of small numbers, if you will. But at the same time, that's an area we continue to see a large amount of interest in, and we're trying to build out that business as quickly as we can to kind of support that large customer interest. So it's our instant issuance solution growth, which we've seen historically be pretty strong. We're confident in that, especially in light of the new deal and digital growing just given what we're seeing in the market and the customer demand.

Your final question will come from Craig Irwin with ROTH Capital Partners.

Craig, we can't hear you.

Can you hear me now?

Yes.

Okay. Perfect. So can you help us unpack the comments around Indiana, the 30% increase in volume? Is this something novel in the last quarter? Did something materially change there? And then with 30% higher volumes, this clearly isn't translating to the top line. Is there a mix issue or price erosion or something like that, that's impacting the contribution to revenue growth and, obviously, profit growth if the revenue is not falling? So any color there would be helpful.

Yes, Craig, good question. So the reason that we shared that number specifically is it's an indicator as we've kind of come to the end of building out Indiana. Just to step back, it took about a year plus to build. The team in Indiana has done a great job. We've essentially had nearly 0 customer complaints as we were transitioning. And the reason for the growth in volume disclosure is really the fact that we could not have done what we were doing in our own facility. We were at capacity if you go back 2, 3 years in 2022, as an example, when the market was insatiable in a sense, we were busting the team. So there are multiple reasons to move, but I think moving has been a large success for us.

And I think the -- your question about margins, I mean, there's depreciation on Arroweye, there's tariffs that have come up. Those types of things have affected our margins. There's always a competitive pricing market. But I wouldn't say that pricing is irrational. I would say that overall, from a margin perspective, we definitely had some impacts, but nothing that's created an irrational pricing market. I don't know, Terra, if you would provide any other comments.

Yes. So I would just say that we did grow pretty strongly in our overall Secure Card Solutions space, grew 35% overall. And then from an organic basis, we did grow 15%. So we did get a strong top line growth in that solution, and that was in part driven by contactless growth across our Secure Card Solutions. So related to that, as John said, we did get operating leverage based on that growth. It was offset by things like tariffs as well as the higher depreciation across the business related to our new Indiana facility as well as related to the acquisition of Arroweye.

And Craig, one thing I would add, though, we do expect our overall gross margins, they're somewhat stabilized, right? So we would expect them to be somewhat stable over the course of the year, if not increasing. Terra and team are doing a good job driving a lot of margin improvement goals. So between that and the growth of the business and the leverage we expect to get, I know we've had a lot of impacts over the last 1.5 years, 2 years, but we do expect margins to not only on a gross margin basis but on an EBITDA basis to improve over the course of the year.

We expect this year -- similar to last year, fourth quarter, we expect to be our biggest quarter. And so think of Q1 as kind of a starting point for the year, if you will.

Understood. That makes sense. So then Arroweye, I will admit I was a little surprised to see the increased integration expenses this quarter. I thought that you were a long way down the path of already integrating that. Can you maybe give us some detail around the actions that are being completed right now? What did you complete over the last couple of months? Strategically, I thought that you might be actually adding a little bit more CapEx for Arroweye and focusing on the growth of that platform given that personalization really is such an exciting opportunity.

Yes. I mean I'd say the integration costs we're spending now are really in 2 big areas. One is technology and one is go-to-market. And when we look at Arroweye and its position in the market specifically, and we look at our broader solutions that we provide outside of Arroweye, we see a lot of revenue synergies. Arroweye signed even in their first deal, I mean 10-plus deals and we haven't owned them, I mean, since essentially 1 year ago from now. So we've seen really strong progress in terms of Arroweye's performance on a revenue basis. And the other side that we're spending on is operating synergies, right, trying to make sure that the way that we operate on the floor is -- I wouldn't call it fully integrated, but essentially aligned with everything we're doing on a broader basis, which ultimately means we get purchasing power, things of that nature.

So there were some termination fees from a vendor perspective as we transition vendors, things of that nature pop up. And unfortunately, they're not small. But we do expect integration to kind of drop off in the second half of the year. We expect a little bit in Q2 to continue. But in the second half of the year, you should see that drop off dramatically.

Your next question will come from Hal Goetsch with B. Riley Securities.

On the prepaid segment, it was -- you said it was down 17% in the quarter. Can you give us some of the friction points again? And there some maybe significant nonrecurring customer revenue that came in 2025 and before that that are leading to these declines. Or is there -- is the channel rather full right now and we're working through channel inventories because organic growth through the channel is slower than expected?

Yes, Hal, on the prepaid side, just as a reminder, the whole business and the market, in general, because think of on the open loop side, we have leading market share. We're positioned really well, especially if that market starts moving towards chip. And so if you think about the broader market and our customers, they're trying to determine based upon not only regulatory demands but just customer demands, how do you increase the security around the package itself.

You can do that in 2 ways. You can do that by increasing the actual security around the package itself or you can put a chip in the prepaid card itself. And that's why we're working with Karta. That's the pilot we're working with a large national retailer on. And because of that kind of testing and transition that we ultimately do expect to occur over a long period of time, we're seeing what I would call normal course open loop market be weaker. And we knew coming into the year, this would be a slow start to the year. We're hearing that from our customers on the prepaid side. But that's because we believe from a longer-term transition perspective, the value of the market is going to grow, and we're well positioned to capitalize on that.

The other side on closed loop or -- sorry, of prepaid is the closed loop side of the business. And that actually has performed very well for us. It's fairly small today, but we had pretty strong growth over Q4 of last year in Q1. And so excited about where the prepaid business is going, but it's definitely a weaker quarter for us. And you could see this in the prepaid financials. That business gains a significant amount of operating leverage as it grows. And you saw the opposite in Q1, and that brought down broader margins broadly. I don't know, Terra, anything you add?

Yes. Just a reminder that we do expect good growth across our segments this year, including in prepaid. So even though it was down in Q1, we do expect better growth throughout the year. And just looking back, still very confident in that business. If you look back to 2024, we did grow that business 26%. And even though we were down last year, we were only down 3% once you adjusted for the accounting change that we made in Q2. So I do expect that return to growth as well as the increase in gross margins throughout the year.

And there are no questions in the queue. I would like to turn the call back over to John Lowe for any closing remarks.

Thanks, operator. Before signing off, I would again recognize and thank all of our CPI employees for their dedication and for continuing to deliver for CPI and our customers. Thank you all for joining our call this morning, and we hope you have a great day.

Thank you for your participation. This does conclude today's conference. You may now disconnect.

Welcome to CPI Card Group's Fourth Quarter 2025 Earnings Call. My name is Kate, and I will be your operator today. [Operator Instructions] Now I would like to turn the call over to Mike Silop.

Thanks, operator. Welcome to CPI's Fourth Quarter 2025 Earnings Webcast and Conference Call. Today's date is March 5, 2026, and on the call today from CPI Card Group are John Lowe, President and Chief Executive Officer; and Terra Grantham, Interim Chief Financial Officer.

Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI Card Group's most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call.

Also, during the course of today's call, the company will be discussing 1 or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio, free cash flow and net sales growth, excluding the impact of the accounting change implemented in the second quarter. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning.

Copies of today's press release as well as the presentation that accompanies this conference call are accessible on CPI's Investor Relations website, investor.cpicardgroup.com. In addition, CPI's 2025 Form 10-K will be available on CPI's Investor Relations website.

On today's call, all growth rates refer to comparisons with the prior year period, unless otherwise noted. The agenda for today's call can be found on Slide 3, and we will open the call for questions after our remarks.

I'll now turn the call over to John Lowe.

Thanks, Mike, and good morning, everyone. We are very pleased to report strong fourth quarter performance and solid results for 2025, a year which featured significant strategic, operational and technological advancements. As we discussed throughout the year, we anticipated our business to accelerate in the fourth quarter, and we successfully executed to deliver that growth with a record quarter, growing revenue 22%.

In addition to the contribution from Arroweye, this performance exceeded our expectations. We delivered strong growth across our debit and credit portfolio in the fourth quarter, driven by sales of contactless cards and ongoing double-digit growth from our Software as a Service-based instant issuance solution.

Revenue growth in the resulting operating leverage contributed to a 34% increase in adjusted EBITDA in the quarter and a 170 basis point increase in margins, and we generated exceptional cash flow.

For the full year, we delivered 13% revenue growth and 5% adjusted EBITDA growth despite more than $4 million of tariff expenses. We generated $60 million of cash from operating activities and $41 million of free cash flow, both large increases over 2024, allowing us to maintain net leverage around 3x at year-end.

Overall, I'm proud of our team's execution, which resulted in a solid end of 2025 and significant advances with our strategic initiatives.

Now before I cover some of our significant accomplishments in 2025, I'd like to take you to Slide 5, covering how CPI is continuing to evolve with the market and the successes we are having executing on that strategic evolution.

After being CEO for 2 years, and after nearly 8 years here at CPI, I've recognized we are a company that is constantly adapting with our markets, evolving with technology and finding new solutions for our customers in whatever forms they need. Historically, the company has been and remains a leading producer of debit and credit cards for the U.S. market and chances are, we're in your wallet. However, while debit and credit card production and personalization are solutions we focus on advancing every day, they do not define CPI for the key roles that we play in the U.S. payments market. We are broader than that with deep value in what we have built over many years and continue to build. We are a connector, an innovator, a company that educates our customers on the next big thing and how their customers can pay, and more importantly, how they can stay top of wallet, both physically and digitally.

At our core, our solutions help our customers win, allowing them to enable their customers to pay, whether in the form of a physical debit, credit or prepaid card, a digital mobile wallet, a digital card, a service that provides cloud-based instant issuance or other revolving digital alternatives.

To summarize, CPI has evolved into a payment technology company that provides a comprehensive range of physical and digital payment solutions for thousands of U.S. financial institutions, processors, fintechs, prepaid program managers and more. Our proprietary platform and expertise uniquely position us to deliver today and into the future as the market expands and payment methods evolve.

Our strategy is to continue providing payment technology solutions that help our customers win, driven by 3 primary growth pillars that underpin our value proposition. These include: first, a proprietary technology platform with a vast reach into the U.S. payments ecosystem; second, our marketable base of thousands of deep and broad relationships across the U.S. payments market; and third, our proven track record of delivering evolving payment solutions that reflect changing market needs.

Let me spend a few minutes discussing each of these pillars, starting with our proprietary technology platform and vast reach into the U.S. payments ecosystem. Our capabilities make it simple for any customer to offer flexible payment solutions to their customers. Over more than 15 years, CPI has built a vast network of technology integrations and connections. In simple terms, we call these connections into the payments ecosystem pipes. So when issuers payment programs can be agnostic to any service provider, maintaining their sticky, long-term relationship with CPI, while offering their customers, U.S. consumers and businesses, the payment options they want.

Our connections are broad and include thousands of financial institutions, fintechs, credit union service organizations, program managers, processors, core banking systems, payment brands, mobile providers and mobile app development companies, among others. We proved this every day when we see our customers change their processor or banking core where we simply move the pipes to maintain our relationships.

CPI enables payments that informs the market wants. Today, it's debit, credit and prepaid accounts accessed via cards, mobile wallets and apps. And while probably many years away, we may see other forms for consumers to pay again broader market acceptance such as crypto, biometrics and more. CPI's platform expands with our customers' growth and their ambitions to meet market needs.

Our second pillar is our marketable base. As CPI has evolved, our long-standing, deep and broad relationships continue to grow. Through a robust network of thousands of customers, partners and service providers, CPI solutions reach deep into the U.S. consumer base.

As the market shifts to add new payment methods, the fundamental need to securely deliver payment credentials does not change. That's where CPI shines with our reach. As consumer needs evolve beyond the physical and complementary digital issuance and usage grows, issuers count on CPI to enable innovative solutions to meet those needs, and we've kept their trust by always delivering. That trust, built over decades, is why our customers count on CPI for their ongoing payments innovation. They know we'll execute. And if you're developing an innovative service that adds value for issuers, CPI can connect you to our broad marketable base, further solidifying our value.

Our final pillar is our evolving payment solutions by leveraging our proprietary technology platform and our marketable base. CPI has a proven track record of delivering evolving payment solutions that reflect changing market needs. Through significant investments in digital solutions, we're increasing CPI's value to customers, driving new and incremental recurring revenue streams and expanding access to CPI's platform to enable future digital capabilities.

So why are we doing this? According to a prominent study, digital issuance was the #1 new capability debit issuers planned to introduce in 2024 and remain the most cited priority for 2025, and we hear the same directly for many of our customers. Additionally, we expect digital issuance to not only be incremental, but to out number of physical cards as penetration grows. That will be positive for CPI as we would expect digital to have greater economics in physical.

Let me give you 1 example to demonstrate what all this means, and that's our Software as a Service based into the issuance business. The value of instant issuance is not rooted in delivering a payment card, it is about enabling issuers to instantly provide account access to their customers through a cloud-based service that is plug and play for a financial institution. We spent over a decade building the pipes to deliver this service to virtually any financial institution in the U.S. We integrated with and connected to all the major players in the financial ecosystem, resulting in CPI being able to offer the service to nearly any issuer regardless of the processor, banking core system or other relationships they operate through. With instant issuance, we leveraged our proprietary technology platform, provided a service to our marketable base and evolved our solutions to provide a plug-and-play cloud-based service, meeting the needs of the market.

In this case, the solutions enable account access leveraging a payment card, but we have been evolving to use these pillars to provide access to mobile wallets and other forms as well, which indicates where we see our solutions going in the future.

To summarize our evolving strategy, our decades long in the making connections, people and solutions enable payments both physically and digitally for a broad and expanding customer base, and these customers count on us to deliver what's next. CPI will continue to evolve with the market, delivering market evolution to our customers while creating more value for our shareholders along the way.

Let me take you to Slide 6 for how we will execute and share our progress. To advance our strategy and drive long-term growth, we recently announced a new organizational structure, promoting several leaders to new roles, tightening the focus on our customers, our operations and our digital capabilities. Along with the structure change, we are also reorganizing our reporting segments, driven by the success of our Software-as-a-Service base instant issuance and other digital solutions and to better reflect how we manage CPI today. This change will provide more visibility on our technology-driven solutions as well as highlight the growth and diversification of our business.

Our new reporting structure includes 3 segments: Secure Card Solutions, Prepaid Solutions and Integrated PayTech. Secure Card Solutions represents our business as a leading debit and credit payment card and personalization provider in the U.S. market. And we estimate we produce about 1 out of every 4 cards in the U.S. We believe we have gained significant market share over the years, and we will continue to push to gain more share in growing markets through innovation, quality and customer service. Prepaid Solutions consists of our market-leading open loop prepaid card and secure packaging solutions as well as our growing prepaid health care payment solutions. We intend to grow our value in the prepaid market by creating innovative packaging for our open-loop market, expanding into the larger closed-loop market and providing fraud preventing chip-based solutions to the broader prepaid market, which we believe should further expand its value.

Integrated PayTech, our newest segment, which was formerly a part of our Debit and Credit segment, has reached the success level where it now represents more than 20% of CPI's profitability. We named it Integrated Paytech to reflect its value proposition of integration CPI has built over the last decade into the U.S. payments ecosystem, enabling it to provide ever-evolving payment technology to our customers. This segment represents an incremental addressable market opportunity, additive to physical payment cards. When we help our customers stay top of wallet digitally, we're not only creating greater value for our customers, we're adding incremental growth per customer for CPI. And we expect those who adopt digital usage to do so in greater numbers than they do with physical cards, using that same credential across multiple mediums such as a mobile phone, watch, tablet or laptop.

As we continue to grow our pipes into the U.S. payment ecosystem, our addressable market for these solutions continues to grow.

For a bit more context on Integrated PayCheck's profile, it has roughly 55% gross margins, approximately 40% EBITDA margins, a 95%-plus customer retention rate and an expected growth rate of over 15% in the coming years as we intend to invest to accelerate our digital solutions growth faster than we did with our instant issuance solutions.

Now let's turn back to the 2025 results, and I would like to highlight some key accomplishments on Slide 7. In Secure Card Solutions, we acquired Arroweye and made significant integration progress, paving the way for future revenue and cost synergies while driving strong results during the process. Arroweye contributed $43 million of revenue and more than $6 million of adjusted EBITDA in less than 8 months in 2025, implying approximately $9 million of adjusted EBITDA on an annualized basis even before most of our expected synergies have been realized.

Post acquisition, Arroweye has signed more than a dozen new customers, showing the value proposition they have in the market when combined with CPI's packing.

We also completed the build-out and transition to our new state-of-the-art secure card production facility in Indiana, which will provide operational efficiencies, increase capacity and additional capabilities. And we invested in automation in our Colorado facility, which we believe will drive even more efficiencies. We believe these investments have already helped us gain share in 2025, including being a key driver to winning another 4 years with Valero. Valero is one of our larger, long-standing secure payment card customers and the premier payments credit union service organization in the U.S. servicing 4,000 financial institutions.

We made significant improvements to our personalization operations, which allow us to continue to increase capacity and maintain high quality, all while driving greater efficiency as we grow. We believe these advancements were a key contributor to winning one of the largest credit unions in Texas in 2025.

And we expanded our metal card offerings, providing market competitive options to our marketable base. This expansion, while still small relative to the overall market position, contributed to our strong contactless card growth during the year with nearly $15 million in metal sales in 2025.

In prepaid solutions, we developed production and operational capabilities to enter the closed-loop prepaid market, which we believe has volumes greater than 5x the open-loop market and will increase in value as fraud prevention features are further adapted. We had a successful start in the fourth quarter and have already signed multiple deals since launch, including with the leading provider, TDS Gift Cards, who services many blue-chip customers in the U.S. such as Uber, DoorDash and others. Our reputation for quality, innovation and execution in the open-loop market is proven, and we are leveraging these attributes to drive our closed-loop expansion. While our prepaid business was down in 2025, we see strong signs of the transition starting to occur in the prepaid market. Fraud continues to drive either higher-value packaging or greater use of chip embedded gift cards, both of which would result in a unique market position for CPI as we are the only U.S. company that is a leader in both categories.

And in our new Integrated PayTech segment, we grew revenue nearly 20% as we continue to increase our instant issuance penetration and further built out integrations and customer pipelines for our evolving proprietary technology platform, including to expand the addressable market for push provisioning for mobile wallets. We expect to continue to see great things out of this segment, including strong growth and high margins, leveraging our market-leading value proposition.

One driver of our expected growth is our recently signed deal with a large U.S. processor and global leader in payments and financial technology where we have gained preferential access to more than 450 financial institutions and 3,500 banking locations, representing an opportunity to grow our Software-as-a-Service-based instant issuance solution footprint by 25% over the coming years.

We also invested in an Australian fintech and program manager, [indiscernible], to introduce into the U.S. chip embedded prepaid cards, which enhanced security and provide user-friendly physical to digital experience. Our ownership in Carta after our investment is 20%, with the option to purchase an additional 31%. As we have worked with the Carta team, we continue to be impressed by their growth as a program manager in Australia, a large opportunity to grow their digital card validation solution branded as safe to buy in the U.S. prepaid market and their potential value as a program manager in the U.S. Our agreement with Carta also makes us their exclusive U.S. supplier of their safe to buy solution, providing contactless prepaid cards with chip technology embedding Carta's Safe to Buy access. Carta solution eliminates the need for data to be printed on cards, significantly reducing the risk of prepaid fraud. And as a reminder, prepaid gift cards in the U.S. rarely are embedded with chip technology. So between Carta's technology to reduce fraud and CPI's prepaid and chip solutions, we were a perfect fit to drive meaningful and positive change in the prepaid market. We are currently in the second stage of a pilot for this solution with a large national retailer across hundreds of locations in the U.S., and we are seeing encouraging results.

Overall, we are proud of what our teams delivered in 2025, and we look forward to continuing to advance these initiatives and their benefits over the next several years. In 2026, we expect to deliver good growth again, and Terra Grantham, our new interim CFO, will give you more color on our outlook in a few minutes. Terra brings a wealth for CPI and industry knowledge and experience to this role, including most recently leading CPI's enterprise growth and strategy area and previous leadership of our Financial Planning and Analysis and Treasury teams, among others. She has been with the company for nearly 10 years and I want to congratulate Terra for being promoted into this new role, and I'm happy to have her join us for the call today. Terra will now take us through the fourth quarter results and 2026 outlook in more detail. Terra?

Thanks, John. I'm pleased to be here and look forward to meeting many of you in the coming months. I'll begin the detailed review on Slide 9 with the fourth quarter results.

Fourth quarter revenue increased 22% to a record $153 million, which reflects a strong $18 million contribution from Arroweye as well as double-digit organic growth from our debit and credit portfolio. Debit and credit segment revenue increased 40%, including the impact of Arroweye.

Organic growth for this segment was 20%, driven by strong sales of contactless cards and continued excellent performance from our instant issuance solution. Our personalization services also delivered a solid sales increase in the quarter. Prepaid revenue declined 27% compared to the exceptionally high prior year fourth quarter, and sales increased 59% to $33 million, but revenue increased 4% compared to the third quarter. As we said at the beginning of the year, we expected prepaid growth to be constrained due to comparisons with the very strong year in 2024, and we ended the year down 3% when adjusting for the impact of the revenue recognition accounting change in the second quarter.

And as John said, the prepaid market is transitioning, but we expect that to be a positive for CPI.

We began closed-loop prepaid shipments in the fourth quarter of 2025, and we expect this business to ramp significantly in 2026.

Turning to profitability. Fourth quarter gross profit margin declined from 34.1% to 31.5%, although it increased from 29.7% in the third quarter. Compared to prior year, the margin decline was driven by increased production costs, including increased depreciation and tariffs and unfavorable sales mix, partially offset by benefits from operating leverage on sales growth. Mix trends stabilized, though, and were comparable to the third quarter.

Production costs in the quarter compared to prior year included $2 million of increased depreciation, primarily related to Arroweye and a new secure card production facility and $1.6 million of tariff expenses.

Fourth quarter SG&A expenses increased $3.3 million from the prior year, primarily due to Arroweye integration costs of $1.8 million and the inclusion of Arroweye operating expenses, partially offset by reduced medical benefit expenses compared to a high level in prior year.

Our tax rate for the quarter was 27%, which brought our full year rate to 31% higher than anticipated coming into the year due primarily to nondeductible expenses related to the Arroweye acquisition.

Net income increased 9% in the quarter to $7.4 million as the benefit of sales growth were offset by integration costs related to Arroweye and a higher tax rate.

Fourth quarter adjusted EBITDA increased 34% to $29.4 million, and margins increased by 170 basis points from 17.5% to 19.2% and driven by sales growth and the resulting operating leverage.

Full year results and various explanations can be found on Slide 10.

Highlights for the year include revenue increasing 13%, led by double-digit growth from contactless cards and instant issuance solutions and a $43 million contribution from Arroweye following the May 6 acquisition. We believe Arroweye is already benefiting from being part of CPI, driving strong execution and increasing its ability to sell into the market.

Net income decreased 23% to $15 million, reflecting $6 million of acquisition and integration costs and a higher tax rate, partially offset by lower debt retirement costs compared to prior year.

Adjusted EBITDA increased 5% to $96.5 million as profitability from increased revenue was partially offset by the impact of unfavorable sales mix and $4.4 million of tariff expenses.

Turning to Slide 11. We had very strong cash flow generation in the fourth quarter and for the full year. Our cash flow generated from operating activities for the year increased from $43.3 million last year to $59.5 million in 2025, with $40 million generated in the fourth quarter. The increase in operating cash flow was driven by lower working capital usage, including better receivables and inventory management and cash tax benefits from the U.S. budget reconciliation bill.

Full year free cash flow increased from $34 million in prior year to $41 million in 2025, driven by lower working capital usage, partially offset by increased capital spending.

We spent $18 million on CapEx in 2025, double the prior year level as we invested heavily in our new Indiana production facility and other advanced machinery to support operating efficiency, capacity expansion and new capabilities such as closed-loop prepaid.

On the balance sheet, at quarter end, we had $22 million of cash, $25 million of borrowings on our ABL revolver and $265 million of senior notes outstanding. Our net leverage ratio at year-end was 3.1x as cash flow generation mostly offset the funding of the Arroweye acquisition in May.

During the course of 2025, significant capital allocation included the acquisition of Arroweye for $46 million, an investment in Australian prepaid fintech, Carta, and completion of the new production facility in Indiana as well as retirement of $20 million principal of our 10% senior notes in July.

Before turning to our 2026 outlook, I would like to share the new business segment reporting John mentioned we are implementing this year on Slide 12. Beginning with the first quarter reporting, our business segments will include Secure Card Solutions, Prepaid Solutions and Integrated PayTech. Secure Card Solutions includes our debit and credit card production and personalization businesses, including our Arroweye on-demand solutions. This business should provide steady growth over time, driven by ongoing cards in circulation growth and share gains from our leading innovation, quality and service.

As noted in our appendix slide, cards in circulation in the U.S. continued to increase with the latest U.S. cards in circulation trends from Visa and MasterCard showing a 7.5% compounded annual growth rate for the 3 years ended September 30.

Prepaid solutions, which has now changed from our prior prepaid segment includes our open loop gift cards and secure packaging, health care payment solutions and closed loop. We expect open loop growth to be driven by continued innovation in fraud prevention packaging and the introduction of chip cards into the prepaid market, and overall segment growth to benefit from expansion of health care and development of our closed loop solutions.

Our third business unit is Integrated PayTech. As John said, as our success has grown, we are now breaking this out as our fastest growing, highest margin unit consisting of strong recurring revenue businesses that rely on our vast and expanding technology connections into the U.S. payment ecosystem to provide various payment solutions to our customers. The majority of our revenue in this segment today is driven by our Software-as-a-Service-based instant issuance solution, but we expect to ramp digital push provisioning for mobile wallets and other digital solutions in the coming years.

On a pro forma basis, this segment would have represented 14% of our 2025 revenue and more than 20% of our EBITDA at an 18% growth rate with EBITDA margins of approximately 40%.

Over the next few years, we expect more than 15% annual top line growth from the Integrated PayTech business segment, while the EBITDA growth will be impacted by investments to accelerate our top line growth.

Turning to our 2026 financial outlook on Slide 13. We expect another good growth year while continuing to invest heavily to support our strategic initiatives. We are currently projecting high single-digit revenue growth with growth across our portfolio, led by expected double-digit growth from our Integrated PayTech segment. Our adjusted EBITDA outlook for the year is low to mid-single-digit growth, which reflects benefits from sales growth and cost savings activities, partially offset primarily by approximately $4 million in incremental spending to drive Integrated PayTech growth and penetration and other technology investments.

Our outlook reflects $6 million of tariff expenses.

Similar to our instant issuance trajectory, which took years of investment before scaling and turning into a high-margin recurring revenue business, we are still in the investment phase with many of our digital solutions, which is impacting our overall near-term profitability. While some level of PayTech investments will continue into future years, we expect our digital solutions profitability to expand greatly once revenue begins to ramp and scale in the next 2 to 3 years.

Regarding tariffs, there is still uncertainty on how the newly announced tariffs will be applied and what permanent tariffs may be enacted later in the year. At this point, our outlook reflects estimates based on a full year of the tariffs we paid in 2025.

We are working hard and pursuing various avenues to seek refunds for tariffs paid in 2025 based on the recent Supreme Court ruling. We expect a tax rate between 30% and 35% in 2026 and strong cash flow conversion, with capital spending likely similar to 2025 levels as reductions in spending on physical capital is replaced by increased technology capital spending.

We would also expect free cash flow conversion at similar levels to 2025 and continued improvement in our net leverage ratio ending the year between 2.5 and 3x.

As we complete integration of Arroweye in the first half of 2026, we are projecting approximately $5 million to $7 million of final integration costs.

Similar to 2025, we expect revenue and EBITDA levels to ramp during the year with the fourth quarter again being the largest, although revenue growth rates will benefit early in the year from the addition of Arroweye. However, we expect adjusted EBITDA in the first half of the year to be flat to down slightly with prior year due to digital and technology investments and a slow start of the year in prepaid.

Overall, we believe the environment is healthy and our momentum is strong, and we look forward to delivering a good year in 2026 while continuing to invest and advance various key strategic initiatives for long-term growth.

I'll now turn the call back to John for some closing remarks.

Thanks, Terra. Turning to Slide 14 to summarize before we open the call for Q&A. We had an exceptional fourth quarter, with revenue growth acceleration, strong adjusted EBITDA growth in margins and excellent cash flow generation. For the full year, we achieved solid revenue and adjusted EBITDA growth and generated over $40 million of free cash flow. We accomplished many strategic and operational objectives, including the Arroweye acquisition and investment in Carta, the completion of our new secured card production facility, entry into the closed loop prepaid market and the ongoing build-out for our other digital solutions. We are excited about our new organizational structure to drive our strategy and the long-term opportunities to enhance incremental growth.

We intend to continue leveraging our expanding proprietary technology platform, our extensive marketable base and our evolving portfolio of payment solutions to meet the market needs, drive growth and enable our customers to win. We are confident in our strategies and teams, and we expect to deliver another good year in 2026. Operator, we will now open the call up for any questions.

[Operator Instructions] Your first question comes from the line of Jacob Stephan with Lake Street Capital Markets.

Congrats on the results. Welcome, Terra. Maybe just to touch on something you kind of talked on the closed-loop market being 5x larger. So pretty significant opportunity for you guys. How are these sales cycles any different from potentially other prepaid deals? And do you have to change anything internally for -- to kind of capture this market?

Yes, jacob, good morning. So it's interesting. The closed loop market, you're right, 5x larger in volume, probably slightly higher than that. The value of closed loop, we expect to continue to grow and become even greater as we expect packaging to become more pervasive, if you will, across the United States, mainly due to regulatory changes in fraud. But from a sales cycle perspective, we actually have a slightly accelerated sales cycle versus our normal -- just our broader portfolio in general. And that's because in the open loop side, we've been working for most all the program managers that are out there with the addition of Arroweye now we work for all of the major program managers. So we have relationships with, I'd say, more than half the market that is already selling into the closed loop space. So as we build out our capabilities, we have the proven ability to execute and deliver. And so that's given us the right, if you will, to move into the closed-loop market fairly quickly, winning some deals, locking down contracts and really building out the whole operation in late last year. And ultimately, we believe we're going to have a decent growth out of that in 2026.

Okay. Got it. Helpful. Maybe just to kind of put a cap on that. So can you kind of help us think through the recent announcement with TDS, and how the closed-loop opportunity kind of plays into the high single-digit growth guidance for 2026? I know you guys kind of talked about that being an important driver this year.

Yes. Yes, and Jacob, good question. There's a lot of moving parts in our business. We've diversified quite a bit over the years. The prepaid market in general is, it's kind of odd because it's actually a little bit choppy right now, but that is positive for us. And the reason I say that is because, if you look at the broader prepaid market, fraud has been prevalent for a number of years. It's been a bit of a cat and mouse game. That has caused -- on the open loop side, where we are the market leader by far, that has caused significant kind of improvement in fraud preventive packaging, if you will, that we're constantly trying to innovate with our customers to stay ahead of the -- I would say, the criminal activity from a fraud perspective. But because of that, you're also starting to see, on the closed loop side, the same thing happened, right? You're starting to see states lead regulations that say, the closed loop gift card has to be a package or has to have a chip in it. And you're starting to see, as an example, on the open loop side, just like our investment in Carta where we own 20%, have a call option to grow to 51%, we're using their unique technology with one of our larger customers on the prepaid side and ultimately one of the larger national retailers in the United States to go through a second stage of pilot where we're putting chips in prepaid cards to reduce fraud.

And that -- those results have been very strong. That said, it creates kind of this environment in the prepaid market where the program managers, the distributors, others, the merchandisers are trying to understand, okay, do we move towards greater packaging, do we move towards putting chips and prepaid cards more broadly, which is more expensive. But ultimately, if you think about CPI and what we do, right, we are by far the leader in open loop packaging. We have the scale that no one else in the market has. We are also one of the leaders in the United States from a chip embedding perspective in the debit and credit market. So we are the only player in the U.S. market that has strong capabilities in both sides.

And so while the prepaid market is choppy this year, and actually, they're starting the year slow, and we would expect that to ramp up over the course of the year, but still have a fairly flat year to slow growth year, ultimately, over the long term, it's going to be really positive for us given how we're positioned in the market. So I know a lot to take in there, but hopefully, that helps.

Yes. And you kind of touched on my last question. Obviously, fraud has been a pretty important theme over the last year, 1.5 years. As we kind of look out to 2026 and maybe even beyond, is there potentially another sort of like recurring revenue type business that you would be interested in potentially acquiring with AI kind of boosting fraud rates? And I'm wondering if there's any sort of additional software solution that can help on the fraud prevention side that you guys might be interested in?

Well, we do already resell one major fraud solution that uses AI in their modeling, if you will, in their machine learning to prevent fraud on the debiting credit side. That's something that they're a fairly large player in the debit and credit market connected into a lot of the processors to kind of builds off our [indiscernible] technology platform and our ability to provide those types of services to our financial institution base broadly. But fraud is a market that is constantly changing. And so from an acquisition perspective, it would have to be a software that's proven and has an ability to constantly pivot on the fly. So right now, our strategy on fraud is really to help from kind of the production perspective as well as producing technology from what Carta produces to be able to prevent fraud on the prepaid side, where we believe there's probably a lot more value. And ultimately, in the debit and credit side, provide solutions from a more commercial perspective.

But if you think about on the prepaid side of our business, what Carta does, they're taking data off the prepaid card and ultimately using their solution to not only reduce fraud just by the fact that you can't steal the data off the card, but their solution also loads the prepaid gift card onto your mobile wallet and is a digital issuance platform as well. So there's kind of multiple value propositions on the Carta side. But from the fraud side, it's constantly changing. So it has to be someone who has really unique technology to look at them from an M&A perspective.

Your next question comes from the line of Craig Irwin with ROTH Capital Partners.

So John, when I look at my wallet, I'm seeing new cards from Chase, Wells Fargo and Fidelity provided by CPI. These are large issuers. I'm not asking you to comment about any of these specific large issuers, but I'm sure there's probably others. Can you maybe just give us a high-level commentary on these customers that I don't think you did a lot of business with over the last several years? Are you seeing an increased capture rate with large issuers? What was the contribution, if you could give us color on the 40% growth there in debit and credit from large issuers?

Yes. Greg, thanks for the call out. We'll happy to have you on our marketing team any time you want to join. And in all seriousness, we -- the large issuer base, I mean, we said this over time, we work with about half of them. You mentioned a couple of different names there. One of those we're actually doing metal with was part of our metal growth. I won't name names. But -- so very positive in terms of our relationships we have with large issuers. We have been growing share over the last, I'd say, 5 years with the larger issuers. But I wouldn't comment specifically on their growth rates in Q4 or 2025. What I would say is just broadly the larger players in general. So go beyond the large issuers that are the names you're thinking of. Think of the the credit union service organizations. We mentioned Valero this morning that we signed another 4-year deal with. I think of the large processors out there. There's a number of partners that we have that are fairly large that we also have been growing share with.

And so we're excited about our position in the debit and credit market, our secured card solution side between our card production, our personalization business, the acquisition of Arroweye really gives us a unique value proposition and allows us to continue to execute on our strategy and win share, not only in the large issuer market, but in the broader FI, fintech and other markets.

So my second question is about headcount, right? When I looked at your K, I saw you now have about 1,700 employees beginning 2026, it's up about 13% or a little over 13%, consistent with your revenue growth last year. Now that doesn't kind of point to leverage in the model. And I know there are a bunch of initiatives you were staffing up particularly on the technology side and some of these things with incredible long-term potential. Can you maybe flesh out for us where you would likely be hiring in 2026? And would you expect mid- to high single-digit growth consistent with revenue? Or do we potentially see a more tempered rate of hiring?

So a lot of our hiring last year when you just look at a headcount perspective, was through the acquisition of Arroweye, right? I mean they have, I don't know the exact number. I think it's 250 people roughly in Las Vegas. So a fairly decent sized business there. So you have to kind of take that into account, Craig. But if you went out and looked at who we're hiring and who we have hired over time, it has been predominantly in the go-to-market side to try to push our solutions further into the market, expand our go-to-market efforts as well as on the technology side within our Integrated PayTech segment.

So those are probably the 2 areas where we'll continue to invest in, and we continue to invest broadly in the business as we grow. But I think if you stripped out Arroweye, you'd realize we're definitely growing in the number of people that we have. But I wouldn't say we're not getting leverage out of the model. And you saw that in Q4 from our growth in Q4 and what we push to the bottom line.

Your next question comes from the line of Hal Goetsch with B. Riley Securities.

Questions on CapEx. CapEx was up from $8 million in the high teens, and you said it's going to be similar to that in 2026. Is this a number we should expect going forward? Or is this a number that might come back down after a 2-year investment period?

Yes, that's a good question, Hal. I'd say it probably will come down in the outer years. It has grown quite a bit in '25 as we built out closed loop, we built out Indiana. But I'd say it's more on the physical side in '25 than more on the digital side in '26 and what we might expect in coming years. But Terra, do you want to add to that?

Yes. Just to add to that, we did spend about $5 million in CapEx in 2025 on our factory -- new factory in Indiana. So that is going away, but we are replacing that with higher investments in our technology spend. So that is on the CapEx side to support the growth of our Integrated PayTech business and also to upgrade some of our other technology as well.

I will say that even with that CapEx spend, we are expecting similar cash flow conversion in 2026 as we had in 2025. So we're happy to be investing in the business and continuing to convert on the cash flow side as well.

Yes. The goal is to drive leverage down even while investing.

Could you show me on the tax side, it seems like your tax rate is higher than most of the companies that follow out that are mostly domestic. And I think you said over 30%, is that correct? And what was the cash flow impact -- free cash flow impact this year from the Big Beautiful Bill or tax change that might have lifted free cash flow this year?

And maybe what will be the impact next year from tax law changes to your free cash flow?

Yes. Hal, we did get a slight benefit. I don't think it's a huge number. I think it's in the few million range. Just on the tax rate in general, I think the big impact this year was due to the Arroweye acquisition and integration costs that are not necessarily tax deductible. But Terra, I don't know if you have any comments?

Yes. So we are expecting a benefit from between '25 and '26 million from the U.S. budget bill of $3 million to $5 million from across '25 and '26. Just a reminder, though, that, that is a cash impact, and it doesn't impact our ETR.

Yes. And a follow-up, last question for me on kind of modeling. Are you going to provide pro forma for the new 3 segments going back maybe at least quarters for 2025 that we can project trends and margins off of?

Yes. Hal, I think we did. I think there's a filing this morning, if I'm not mistaken, it has 2025 quarters as well as the full year.

As there are no further questions in the queue, I would now like to turn the call back over to John Lowe for closing remarks.

Thanks, operator. Well, first, I'd like to thank all of our CPI employees for what they accomplished in 2025 and their ongoing commitment to serving the company, our customers and executing on our strategy to win in the market. I hope everyone enjoys learning more about CPI's evolution this morning. We're proud of our 2025 and year-end performance, and we look forward to sharing more on the progress in future calls. And thank you all for joining, and we hope you have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to CPI Card Group's Third Quarter 2025 Earnings Call. My name is Janine, and I will be your operator for today. [Operator Instructions] And now I would like to turn the call over to Michael Salop, CPI's Head of Investor Relations. Sir, please go ahead.

Thanks, operator, and welcome to the CPI Card Group Third Quarter 2025 Earnings Webcast and Conference Call. Today's date is November 4, 2025. And on the call today from CPI Card Group are John Lowe, President and Chief Executive Officer; and Jeff Hochstadt, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

For a discussion of such risks and uncertainties, please see CPI Card Group's most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio, free cash flow and net sales growth, excluding the impact of the accounting change implemented in the second quarter. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning.

Copies of today's press release as well as the presentation that accompanies this conference call are accessible on CPI's Investor Relations website, investor.cpicardgroup.com. In addition, CPI's Form 10-Q for the third quarter will be available on CPI's Investor Relations website. For today's call, all growth rates refer to comparisons with the prior year period unless otherwise noted. The agenda for today's call can be found on Slide 3. After our remarks, we will open the call for questions. We can start on Slide 4, and I'll turn the call over to John.

Thanks, Mike, and good morning, everyone. As we come closer to wrapping up the year, I'm going to spend some time updating you on our strategic initiatives, where we are making great progress growing our core businesses and diversified, including in our digital solutions. But first, let me touch on the highlights of our third quarter performance. Overall, the third quarter results were largely in line with our expectations. Our Software-as-a-Service instant issuance business once again delivered strong growth and Arroweye continued to perform well.

In our Debit and Credit segment, we believe we gained market share as contactless card volumes increased nicely. Card revenue, though, was impacted by a mix shift to higher volume orders and lower average selling prices. This mix, combined with tariff impacts and other in-year investments has continued to impact margins. Overall, sales increased 11% for the quarter due to the addition of Arroweye compared to a very strong level in the prior year, which benefited from strong growth across our portfolio. Adjusted EBITDA decreased 7% in the quarter, primarily due to the unfavorable sales mix and tariff expenses. We continue to work on various initiatives to counter these margin pressures in 2026 and beyond, including key supplier negotiations, driving automation and operational efficiencies in production, achieving Arroweye synergies and general overhead cost management.

We have already obtained future savings on key components in our supply chain and our new Indiana facility is now fully operational with all work moved over from the previous facility, which should aid efficiencies in 2026. For 2025, we have updated our full year outlook to low double-digit to low teens net sales growth and flat to low single-digit adjusted EBITDA growth as we expect margin impacts in debit and credit to continue in the fourth quarter, and we anticipate certain prepaid orders may move into 2026. Our prepaid business remains a clear market leader. And as the pace of package innovation rises to combat fraud, order timing has been a bit uneven. That said, more prepaid complexity, including the potential for the use of chip technology is a positive over the long term as this increases values and demand for our solutions.

We still expect strong year-on-year growth in the fourth quarter for both net sales and adjusted EBITDA with levels significantly higher than the third quarter. Jeff will give you more details on the quarter and our outlook in a few minutes. But first, I want to update you on our strategy execution. Our vision and strategy can be seen on Slide 5. With everything we do, our organization is focused on the customer, quality and efficiency, innovation and diversification and our people and culture as we strive to be the most trusted partner for innovative payment technology solutions. We have made great progress on multiple strategy initiatives in 2025, including our efforts to expand our addressable markets to enhance growth for the future, and I'll highlight some of the most recent developments on Slide 6.

We are starting to provide tours to customers in our new Indiana production facility, and we believe we should be able to leverage our innovation and automation investments across our debit and credit portfolio to drive share gains and do so even more efficiently. We are continuing to expand and cross-sell our Arroweye solutions and are very excited about the initial progress and interest from new and existing customers. We believe our Software-as-a-Service instant issuance business is headed to a record year with growth in new verticals and from additional financial institution penetration. The value proposition of our integrations into the U.S. payments ecosystem continues to drive our share growth and is starting to show realization in our other digital solutions, too.

Although revenue in our other digital solutions is small today and will still take time to build, we continue to sign more issuers and build out even more integrations to broaden our addressable market. When we provide our full year 2025 results, we look forward to sharing more on our higher-margin digital solutions performance. Health care payment card expansion is also progressing with share gains of additional programs with existing customers and advances into new areas. Our value-based metal card offerings are also generating good interest with incremental sales again in the third quarter. In closed-loop prepaid, we are now in production and expect shipments in the fourth quarter. We've also invested in go-to-market for the space to expand beyond existing program managers we work with for open loop and are in discussions with several potential new customers.

As I mentioned before, complexity continues to rise for open loop packages, which not only further solidifies our position as a market leader, but also benefits our go-to-market plans for closed loop. And our most recent expansion initiative builds on this growth in prepaid complexity as we have entered into a strategic relationship with Karta, an Australia-based prepaid program manager and digital technology provider. We will be Karta's exclusive U.S. supplier of its digital card validation solution, producing contactless prepaid cards with chip technology embedding Karta's SafeToBuy [ applet ]. Karta's solution eliminates the need for data to be printed on cards, significantly reducing the risk of prepaid fraud.

As a reminder, prevention of prepaid gift card fraud can be accomplished through more complexity in packaging or through the adoption of chip technology and prepaid gift cards. CPI is uniquely positioned in our markets with deep expertise in both areas, we believe this can be a great complement to our secure prepaid solutions and will provide more choice for prepaid customers in the market. We are already piloting the solution with a large national retailer in the U.S. and look forward to further developing our relationship with Karta.

Many of these growth initiatives are starting to yield tangible results, and we look forward to continuing to update you on the progress as we move forward. I will now turn the call over to Jeff to cover the third quarter results and 2025 outlook in more detail. Jeff?

Thanks, John, and good morning, everyone. Let's start on Slide 8 with the third quarter results. Third quarter net sales increased 11%, which was primarily driven by the addition of Arroweye and growth in our instant issuance business, partially offset by a decline in prepaid sales. Debit and Credit segment sales increased 16% as Arroweye contributed $15 million of sales and our Card@Once instant issuance business delivered strong growth, led by solution sales. Contactless card sales were flat in the quarter compared to a very strong prior year sales level, which includes some large eco-focused card orders. Contactless volumes increased, but average selling prices were down due to sales mix.

Personalization services were also flat in the quarter, an improvement from the first half trend. Prepaid sales declined 7%, largely due to timing and comparisons to large sales in the prior year period. Similar to the second quarter, gross profit margin in the third quarter decreased from 35.8% in the prior year to 29.7%, driven by unfavorable sales mix resulting in lower average selling prices and increased production costs. Production costs in the quarter included $1.6 million of tariff expenses and $1.7 million of increased depreciation, which was primarily related to the Arroweye acquisition as well as the new Indiana production facility. SG&A expenses in the third quarter, including depreciation and amortization, increased approximately $1 million from the prior year, primarily due to acquisition and integration costs of $1.8 million and the inclusion of Arroweye operating expenses, partially offset by reduced employee performance-based incentive compensation and lower severance costs.

Our tax rate for the quarter was 38%, which brought our year-to-date rate to 34%, higher than anticipated coming into the year due primarily to nondeductible expenses related to the Arroweye acquisition. For the full year, we expect an effective rate between 30% and 35%. Net income increased 78% in the quarter as the prior year quarter included debt retirement costs related to the full redemption of our previous senior notes and replacement of our previous ABL revolving credit facility. Third quarter adjusted EBITDA decreased 7% to $23.4 million and margins declined from 20.1% to 17.0% as the impact of higher sales was offset by unfavorable sales mix and tariffs. Year-to-date results and variance explanations can be found on Slide 9. Year-to-date variances generally reflect the same factors that impacted the third quarter with year-to-date reported sales also negatively impacted by the revenue recognition change implemented in the second quarter, which primarily affected the prepaid segment.

Prepaid sales decreased 5% through the first 9 months on a reported basis, but increased 8%, excluding the accounting change. A reconciliation of the accounting change impact on sales can be found in the exhibits of our earnings press release. Turning to segment results on Slide 10. Income from operations for the Debit and Credit segment decreased for the quarter and year-to-date as sales growth, including the addition of Arroweye, was offset by lower gross margins and increased SG&A expenses, including the impact of additional headcount from the Arroweye acquisition. Debit and credit gross margins were impacted by sales mix and higher production costs, including tariffs, which primarily impact the debit and credit segment and increased depreciation related to Arroweye, the new Indiana production facility and other capital equipment purchases.

Prepaid debit segment income from operations decreased in the quarter and year-to-date due to decreased net sales. On a year-to-date basis, the decline was a direct result of the revenue recognition accounting change. Turning to the balance sheet, liquidity and cash flow on Slide 11. Our cash flow generated from operating activities for the first 9 months increased from $16.7 million last year to $19.9 million in the current year, driven by lower working capital usage. As we have discussed previously, 2025 has been a major investment year, including spending for our new Indiana production facility and other advanced machinery to support operating efficiency, capacity expansion and new capabilities such as closed-loop prepaid. Year-to-date, our capital spending has increased almost $10 million compared to prior year, resulting in free cash flow of $6.1 million in the first 9 months of this year, down from $12.5 million in the prior year.

Following the third quarter, as John mentioned, we finalized a strategic relationship with the Australian prepaid technology firm, Karta. This relationship also included an equity investment of $10 million to acquire 20% of the company, which is also backed by the Commonwealth Bank of Australia. For the investment, we paid $2.5 million in upfront cash with the remaining $7.5 million expected to be settled through performance of commercial arrangements as we work together to bring new digital technology to prepaid cards in the U.S. market. Turning to the balance sheet. At quarter end, we had $16 million of cash, $47 million of borrowings on our ABL revolver and $265 million of senior notes outstanding. As we mentioned last quarter, in July, we exercised an optional redemption feature on our 10% coupon senior notes and retired $20 million of notes at a redemption price of 103% of par value.

We have utilized our $100 million ABL facility to help fund the Arroweye acquisition and the senior notes redemption and plan to pay down borrowings over time as we generate cash flow. Our net leverage ratio at quarter end was 3.6x, which we also plan to work down as cash flow is generated. Before we move on to our 2025 outlook, we have provided the latest U.S. cards and circulation trends from Visa and Mastercard on Slide 12. For the 3 years ended June 30, cards in circulation in the U.S. increased at a 7% CAGR. Large issuers have continued to report card and account growth in their latest earnings reports, which indicate card issuance remains healthy.

I will now turn to our 2025 outlook on Slide 13. We have updated our 2025 outlook to reflect sales mix in our debit and credit segment and timing of orders in our prepaid segment. Our net sales outlook is now low double-digit to low teens growth, which compares to low double-digit to mid-teens growth in our prior outlook. Adjusted EBITDA outlook is now flat to low single-digit growth, down from our previous range of mid- to high single digits due to the margin impact of sales mix trends. Our current outlook reflects existing tariff rates and does not reflect potential impacts from the proposed semiconductor chip tariffs, which have not been enacted and details on implementation timing and exemption criteria remain unclear. I'll now turn the call back to John for some closing remarks.

Thanks, Jeff. Turning to Slide 14 to summarize before we open the call for Q&A. The third quarter was largely what we expected with good sales contribution from Arroweye and good demand from our core solutions, while we still face margin pressures, which we are working to counter. We have updated our outlook, and we expect strong sales and adjusted EBITDA growth in the fourth quarter. We continue to execute our strategy and are pleased to have transitioned our new Indiana production facility and advanced multiple long-term growth initiatives, including entry into closed-loop prepaid and our agreement to bring new prepaid chip-enabled technology solutions to the U.S. prepaid market with Karta.

We have faced many challenges this year, but we are confident in our core business growth moving forward and are excited to see many of our growth initiatives begin to yield results. Operator, we will now open the call up for any questions.

[Operator Instructions] Our question comes from the line of Andrew Scutt from ROTH Capital Partners.

First one for me is just if you could provide some more details around the impact of tariffs. I know this is kind of tough for you guys to parse out. But following your previous call, you guys said you expected around $5 million in charges on the year. I believe it was a $1 million headwind to EBITDA in the second quarter. So any further details around that in the third quarter would be great.

Andrew, I'll let Jeff cover that.

Andrew, yes, we said $1 million, you're right in Q2 -- in Q3, we mentioned about $1.6 million of tariffs. So -- and we did think in Q2, it's going to be closer to $5 million. China -- we did get a reduction in the China rate to 45% recently. And just -- we're still trying to push back every single day on our suppliers to some of that tariff impact. So we're actually thinking more in the range of $4 million to $5 million now. We're hoping it's closer to $4 million. But every day, we're trying to push back on our suppliers to try to reduce the impact to us. And then I would just say that started in April. I'm not -- we're not giving color for next year, but obviously, that would probably grow a little bit into 2026 just because you got a full year impact next year.

Yes. Understood. And I appreciate the color. Second one for me, and then I'll hop back in the queue. Your prepaid segment, you guys have added a bunch of additional programs now, health care, some payroll cards and whatnot. So previously, kind of analyzing the segment, it was just gift cards. So can you kind of give us the puts and takes in prepaid among your kind of different sales verticals?

Yes. Let me cover the kind of overview of what we're doing in prepaid because it has changed a little bit, and Jeff can give any color on the numbers for Q3 and the rest of the year. Our prepaid business, just as a reminder, we're the market leader in prepaid packaging solutions in the United States. And so as fraud rises within the prepaid market, the complexity of what our customers are asking for, what we're innovating with our customers continues to rise. That's actually created lumpiness in orders, I would say, for this year within our open loop packages. But that's a good thing. It creates kind of greater value over the longer term of what we're producing. And then we're also investing in closed loop, which is operational. We expect to have orders shipping in Q4. And that's again because fraud impacts are bleeding into the closed loop side of the prepaid market.

But additionally, I think you saw the announcement a couple of days ago, we issued a press release. We talked about it this morning on the call. We invested in a kind of innovative technology company based in Australia. They're a program manager. They're backed by the largest bank in Australia as well. That's another one of their big investors. And they've got unique technology that we're working with our program managers to actually chip-enabled payment cards in the prepaid space. We're already piloting that with a large national retailer in the U.S. So you look at the prepaid space, you look at our unique position to both lead in the packaging side, lead in our unique chip capabilities. And we believe our strategic initiatives entering into closed loop as well as expanding our capabilities in the open loop side are going to benefit us over the longer term. So we're happy about the prepaid performance, but definitely this year, a little bit lumpy on the revenue side.

Yes. And Andrew, I'll just add a little bit color on the revenue side. Last year, there was a lot of -- our clients were looking to increase the security of the packaging. So we did a lot of innovation. We actually rolled out some new security measures, fraud prevention packaging last year, and you saw a pretty really strong growth here last year, especially in the second half. So as John said, it can be a little bit lumpy, but we do have pretty strong comps to grow over this year. I mean we still feel really good with the prepaid business that does, especially in the second half, have some strong comps year-over-year.

[Operator Instructions] We have a question from Jacob Stephan from Lake Street Capital Markets.

First, I just wanted to ask on the Visa and Mastercard data. Obviously, the graph in your chart or in your presentation shows prepaid actually decreasing but credit being up. And most recent guidance here talks about timing of prepaid shipments. I guess maybe kind of help us think through what the timing in prepaid, what that portion of guidance was? And maybe do you expect that in 2026? Or are these pushed out indefinitely?

Jacob, let me comment on that first, and then I'll let Jeff add color. The credit side actually went up quarter-to-quarter. The debit side, not prepaid actually reduced a little bit. That said, it's 1 quarter. You look back over the last 3 years, your CAGR is still 7%. What we're seeing within our markets, what we're hearing from banks opening new accounts, we continue to see growth. So we're pretty confident on card growth and what we hear from our customers, we're still seeing growth in new programs coming on board. This year, our card volumes are actually up, so we're winning share. So winning share in a growing market, we're happy about it.

Yes. And I would just say I don't think that is correlated necessarily to delay in orders. Just as John mentioned, the prepaid ordering can be lumpy at times. And if something does get pushed off to early 2026, it would be more delayed to early 2026, not necessarily going away. So it's really -- we're just talking about the timing. Is it going to hit really in December? Is it going to hit in January, February? That's kind of more of what we're talking about.

Okay. That's helpful. And then also wanted to touch on Karta a little bit. I guess my perception of them is that they're kind of a credit card provider. I know they have kind of a travel -- a premium travel card launch, but help us kind of think through the safe to buy technology. What -- overall, I know fraud preventative packaging has been a big growth driver for you. But what is adding the chip capability to -- for you in prepaid along with the fraud preventative packaging?

Well, let me cover the first part. I think you're mixing them up with another company that has a similar name based in Southern Florida. That's a different company than we're investing in. This company is based in Australia. They're a prepaid program manager there. But just to touch on why the capability is unique and why it will benefit our markets as well as our company over the long term. They have the ability to essentially enable chips in a payment card and create a payment card where [ the PAN ], the 16-digit number is constantly changing. So your fraud and ability to kind of pull that 16-digit number off of the card, deal it, if you will, significantly reduced through putting their technology onto a chip into a payment card.

Why that's good for a market is because the fraud volumes, the amount of fraud has significantly increased in the prepaid market, it hurts the reputation of our customers, hurts the reputation of those retailers out there, the 100,000-plus points of distribution that have to deal with it every day. But additionally, if you think about our debit and credit market and you think about the transition in our debit and credit market from mag stripe to chip-enabled cards and now fully to contactless, the value grows. And that's exactly what we're starting to see hints of in the prepaid market, and we want to be on the front end of it. So that's why we made this investment. We have a right to buy a majority share of the company if we choose to. They're great partners of ours. And like I said, we're already piloting this with a large national retailer. So to the extent that this is successful and to the extent that the market moves more towards chips and prepaid payment cards, not only does it help our customers, help our market, but it also rises the value of what we're selling into that prepaid market and benefits our prepaid business.

Very helpful. Maybe just kind of a quick last one. Adding the chip to prepaid, how significantly does that change kind of the ASP?

Yes, I wouldn't comment on the exact ASPs, but just for context, if you're on the debit and credit side, mag stripe card versus a chip-enabled card, I mean, the chip-enabled card is generally more than 2x the cost. It's a little bit different on the prepaid side, but the price is higher. We'll try to put more pen to paper and give more color as we give more color on how the pilot is going when we released in March.

Our last question comes from the line of Peter Heckmann from D.A. Davidson.

I had some follow-ups. In terms of thinking about the potential for tariffs on semiconductors and thinking about your suppliers and whether or not they have manufacturing facilities in the U.S. I guess any additional thoughts and then how you're positioned, how you might be positioning inventories ahead of this? And potentially, depending upon the timing and whether it's retroactive or a date in the future, do you think there's the potential to pull forward some larger projects ahead of a tariff implementation?

Yes. Fair question. Everything we hear today in the market about semiconductor, we thought we would hear something late summer. It hasn't happened. The administration really hasn't come out with anything new in the last several months that we've been aware of. Our providers are pretty confident that if there was a tariff that they would be exempt just because of their -- like you said, their production facilities in the U.S. and their investment in the U.S. No one can be certain at this point. We also know if semiconductor tariffs do go into effect, it's going to affect the entire industry equally. So we're aware of that. We're really hoping either they're exempt or it doesn't impact the industry. But we'll just see. We're just waiting like everyone else. So we don't really have any more color than we did 3 months ago.

But with that said, if you look at our balance sheet, we did we did have a high inventory balance. So we've been buying chips at a little bit higher rate than we normally would have, just knowing what could potentially happen. I mean that could help us for a little bit of time if we had a higher balance of inventory. It's not completely sustainable, but it would help us in the short term. So we have been purchasing chips at a higher rate so far this year. We do expect just the timing of chips, that inventory balance may come down a little bit in Q4. But we do have a higher-than-average amount of chips on hand right now. So we've been taking a little bit aggressive approach on keeping that balance relatively high.

Sorry, yes, I was on mute. I was going to say just as regards to the instant issuance business, in terms of thinking about other use cases there outside of the financial institution channel, you talked about a public sector customer last quarter. Any additional thoughts there in terms of opportunities to roll that out? And remind us, that subset of revenue for 2025, would you expect Card@Once grows faster than the overall company?

Yes. Card@Once, our instant issuance business is growing faster. Just as a reminder, Pete, it's a higher-margin business than the rest of our business. It goes hand-in-hand with our other digital solutions. And the value proposition there is really the solution, the technology and the fact that we're integrated to most all processors and cores that support banks across the payments ecosystem. That's the exact same value proposition that we're using to win with our other digital solutions where we've been signing a number of issuers and growing, again, with higher-margin products, but our other digital solutions are fairly small right now.

That said, our instant issuance business, we're on track to have a record year. You're exactly right, there's a value proposition not only in the [ FI space ], but in any location where you'd want to issue a payment card on spot. And so we are continuing to kind of push to expand that market and diversify. And we're happy with our instant issuance business performance. They've done a great job this year, and we expect them to have a record year and then look forward to what they're going to do in coming years.

And just as a reminder, we said this in the call, our instant issuance business historically has been roughly 10% of the business. That's a little bit more now. Our digital solutions that we're adding continue to add to kind of our broader digital solution suite, if you will. And so we plan more on the performance, more metrics, if you will, when we release in March going into next year. So I look forward to sharing more on those businesses and especially given the value they create for CPIs [indiscernible].

As there are no further questions in the queue, I would now like to turn the call over back to John Lowe for closing remarks.

Thanks, operator. As we head into the holiday season, I want to thank all of our CPI employees for their contributions and dedication to the company and our customers and wish everyone a safe and happy holiday. Thank you all for joining our call this morning, and we hope you have a great day.

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