Tell us about the company and its history.
CompoSecure has been around for more than 20 years. Our heritage is in security and technology and payments. We started with the metal payment card business and have evolved more recently into security and authentication with a three-factor authentication solution called Arculus. It can be used in crypto cold storage as well as other applications for strong customer authentication.
What is the Arculus card all about?
If you think about all of the advances and the exciting things happening, particularly in the crypto space, the number of users is exploding every month. At the same time, the number of hacks or thefts of crypto is also going up significantly. Based on reports we’ve seen, there’s been almost $8 billion in crypto lost this year from hacking and thefts. For us, that necessitates increased security — meaning consumers controlling the private keys to their crypto.
Today most consumers store their crypto in what we would refer to as a hot wallet, which means that the exchange holds your private keys to your crypto. If the exchange is hacked or if your device is compromised, or if your username and password are compromised, your crypto can vanish.
Arculus is a card-based solution. So similar to other things that we’ve developed. And this card stores your private keys to your crypto in a way that it is essentially for all intents and purposes, air-gapped, not connected to the online world. You use three factors of authentication – your biometric, a pin, and your Arculus card to essentially enable and sign a crypto transaction. And without those three factors, no one can get access to your crypto.
How do you see your product mix in the future? Do you expect the crypto unit to be a larger player a couple of years down the line?
We think it can be a bigger business over time than our existing business. The total addressable market for both sides of our business is massive. On the card side, there are more than 13 billion payment cards in circulation. There are four to five billion payment cards issued any given year. Last year, we issued 20 million metal cards. So if you do the math, it’s perhaps half a percent of cards that may have been issued in that year. And for investors, it also offers the upside opportunity of the three-factor authentication in the crypto solution that we think is pretty unique.
The payments industry is a very fast-evolving market. And we see a lot of digital wallets and online payment services like Google Pay, Amazon Pay, etc, available. How do you see the impact of these on card payment solutions, as they do away with the need for carrying a physical card?
These solutions are not new. Apple Pay is seven years old at this point and the adoption curve, from my perspective, has been actually very un-Apple-like, in terms of penetration, or, retail sales. The reason behind that, from my point of view, is that it’s not really solving a true consumer pain. Cards work extremely well for consumers. The place where the phone makes the greatest impact is where the underlying consumer experience is broken. Music is an example, where storing songs on my phone is a lot more convenient than storing 20 CDs of music in my car.
With cards, they work extremely well. And we’ve added tap-to-pay capabilities with the card. And that convenience makes tap-to-pay with a card easier than using your phone to pay. Additionally, consumer research suggests that consumers don’t trust their phone as much as they trust their card. And they also don’t know who to go to if they have a problem. Mobile wallets will continue to grow but cards are going to be around 15 years from now.
What’s the nature and duration of your partnerships with your largest clients JPMorgan and American Express?
The relationship with American Express is an 18-year relationship. With Chase. It’s more than 12 years at this point. We’ve also seen growth outside of traditional banks with fintech clients around the globe. We see both fintech space as well as international growth as important levers as we look to the future of this business.
Recently you had announced your SPAC merger with Roman DBDR. Why choose the SPAC route?
So when we looked at the SPAC route, one of the things that were important is we wanted to be able to tell the story, not just about where we’ve been, but where we’re going. The SPAC process lets us talk a bit more about where we’re heading in the future and provide some guidance and forecast of where we think we can take this business over the next few years.
In addition to that, going the SPAC route lets us choose a partner, Roman DBDR team, and the co-CEOs are Don Basile and Dixon Doll, Jr, both of who have more than 20 years of experience growing and scaling technology-based businesses. And for us what we found was a high value-add partner in the Roman DBDR team. We expect the transaction to close in the fourth quarter.
What should investors expect from CompoSecure over the next two years?
If you look backward, our growth over the last few years has been north of 20% and we’ve projected a 15% growth rate, going forward, maintaining strong margins. We’ve got margins north of 40% in the business. To use a baseball analogy, we’re in the third inning of our domestic growth story, and the first inning of our international growth story and fintech growth story. And the core business is throwing off in excess of a hundred million in free cash flow.
And almost $120 million in EBITDA projected for this year in the core business. If you look at that from an evaluation perspective, a business growing at 15% a year with 4-plus percent EBITDA margins, companies like that would trade at 15-18 times EBITDA. Our valuation is 10 times EBITDA if you just looked at the core business. And what that would tell you is, you’re almost getting a free call option on an investment in the crypto and broader, digital asset ecosystem. Other SPAC transactions, other companies in the market, you’re paying 10 times revenue, not 10 times EBITDA for things like that.
So, we think this is a pretty unique opportunity with an existing business growing and throwing off a lot of cash where we can leverage that to fund the future growth in the business.
On the side of things, we talked about crypto. But it’s just one example for me. We can use the three-factor authentication capabilities of Arculus in core financial services to lock down, for example, your investment account, to lock down your bank account, we could use it in the gaming industry. Gambling sector, entertainment, I can go on with the different verticals that we think we can attack with this solution.
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