CompoSecure: Heavy Metal - [Business Breakdowns, EP.232]

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2:27This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. This is Matt Russell, and today we are breaking down Composecure. If you have a premium metal credit card in your pocket, Composecure likely manufactured it. And my guest for this episode is Parsa Kiai, founder and CIO of Steamboat Capital. Now, in the spirit of integrity and full disclosure, this is my first time breaking down a company where I actually own the stock. And while we get into the risks in this discussion, and you'll hear the disclaimers, to be very clear, this is not investment advice.

3:11I was first introduced to Parsa by Andrew Peters of Revalere Partners. I saw Andrew posting some notes from an investor about Compo, and I was curious to hear more. And what really made him the ideal guest is that he has history in Compo Secure before the Dave Cody era, which started sometime in 2024. We get into all of this, the niche market of premium metal credit cards, how Compo has such a dominant position in that industry, whether there's an opportunity in digital storage, and then perhaps most importantly, what Dave Cody's involvement, his M &A track record that he brings, and the unique corporate structure that they've created all mean for Compo.

3:58Please enjoy my conversation with Parsa on Compo Secure. Parsa, I am excited to have you here to talk Compo Secure. You were a very specific guest that I had interest in in talking about this name, and we'll get to that. But I don't think it's in any way a well-known name, and it's been coming on the radar. But I think just starting us off with a simple introduction to the underlying company and what they do will be the perfect place to start, and then we can get rolling from there. Composecure is interesting in the sense that it's certainly not a household name, but I would say probably almost all of your listeners have it in their wallet.

4:41It is a fascinating little company that manufactures the premium heavy metal credit cards that most of us have in our wallets. So if you look at the back of your American Express or Chase Sapphire card, and you look in the bottom right corner underneath the little NFC beam logo, you'll see a serial number and in between it with the letters CS for Composecure. So a very niche business, but in a very interesting industry and market where they manufacture, design and distribute these cards for most of the large premium credit card companies that we think about. American Express Black, Platinum, Gold, Chase Sapphire, Capital One Venture, and a lot of these new fintech cards like the Coinbase card or the Robinhood gold card or even crypto cards.

5:39Very fascinating and really interesting history that goes beyond just the breakdown of the business and the journey along the way from humble family origin to a SPAC becoming a broken IPO, and then all the way along with its evolution. I still have one of those old plastic credit cards, a Capital One that sits in my wallet and has to come out every now and then. It drives me nuts. The rest of my cards, which I prefer to use, are those premium metal cards. They happen to be Compost Secure cards. It is this interesting niche business. The reason I wanted to have you on was because it came on my radar after Dave Cote He was involved in the business sometime in 2024, sometime last year.

6:22And that added a unique dynamic. You have some experience with this business well before that. Maybe we could just start with Cody and what he represents to the story and how it's changed. And we'll get into the backstory to the business after that. But I do think it's important to bring him into the conversation quite early. He's probably the main figure in the story right now. You're right. It was August 2024 that he came in. It was a watershed moment for the company. He became the controlling shareholder by buying out the private equity sponsors and the co-founder, a lady named Michelle Logan.

6:57And for many of your listeners, Dave Cody needs no introduction. He, along with another industrial CEO who's been talked about on your podcast a lot, Brad Jacobs, are probably the two best known industrial CEO entrepreneurs that we have in our market right now. And their track records are both incredible. Dave Cody was the star CEO of Honeywell for many years and then became the chairman of Vertiv and has led the growth in that company. he's written two books on the operating system. It was the Honeywell operating system at first. It is a focus on operational excellence. It is a focus on capital allocation.

7:38And a large part of that is exceptionally astute M &A, which comes from deal origination, integration, and paying the right price for the right business. His involvement is critical. And we honestly look at our investment in the company in kind of two parts. There's Composecure 1.0, which was before Mr. Cody's involvement when it was a broken IPO with a hidden gem of a business that was trading at a fraction of its core value. And then Composecure 2.0, which is a more respected business with really attractive near-term tailwinds and a much longer-term potential under the Composecure operating system.

8:22Let's get back in time to some of that Compo 1.0 era. It's not quite the 100 plus year old business like we just covered with an Amphenol. It has a little bit of a shorter history though. It's still decades old. Bring us back in time in terms of the origin story and how they got to this position in the marketplace where they are so prominent. Very fascinating story. Does not have the length of history of some other companies, but it was a family started business. And there was a gentleman named John Herzlo and his daughter, Michelle Logan. They worked for their family's plastic business that the grandparents had started in the fifties.

9:01And through that business, they eventually founded Composecure in 2000. By happenstance, they worked with American Express in 2003 in introducing the first ever metal credit card. And up until then, credit cards were always plastic. And they worked with American Express to make the first metal credit card. And I think there's a real rich history of innovation and growth that we'll get through. And it's important that American Express today, 22 years later, is still a key partner and customer. And I think it just shows you a lot about the innovation and organic growth that the company has. Throughout the years, they really pioneered a lot of what we see in a physical premium credit card today.

9:49After working with Amex, they helped Chase launch their first metal card, which was the predecessor to the Chase Sapphire card. It was called Chase Palladium in 2009. And again, Chase today, many, many years later, is still a premier customer. And you've seen that that relationship has grown. And throughout the years, so much of the innovation that we see in a card today was really helped and pioneered by them. They were the first ones to put a ENV chip in a credit card. And your listeners will know, the guys that listen to the Visa and MasterCard podcast will know EMV is Europay, MasterCard, and Visa, which is the security protocol for payment cards that puts a microprocessor embedded into a chip so that it works with an EMV enabled payment terminal to authenticate transactions with much higher security.

10:42So they were the first ones to do that. They were also the first ones to put large scale NFC or near field communications integrated dual interface metal cards. This is really a protocol in a card that allows for radio frequency identification between the payment card and the terminal. So a lot of this innovation was done by then. And even up until now, including biometric security, dynamic CVV codes, and a lot of other things. Really rich history. And then along the way, a private equity company called LLR invested in the company. They paid $100 million for a 60 % stake in the business. And one key aspect was they brought on board a senior payments executive named John Wilk.

11:28John Wilk has a deep history in the business at Bank of America first and then at Chase. And John was in the room when they were making that first Chase Sapphire card. And he had the vision and the experience being on the issuer side, saying, what does an issuer need? What do our premium clients want, our cardholders? And John has been instrumental in growing the business, strengthening and growing the American Express and Chase relationships and expanding to all these new customers like Capital One and the Delta co-branded card, Amazon co-branded cards, and now with all these neobanks and fintechs.

12:11That business was growing. When COVID comes around, everything payments related went crazy. And it believed they were trying to shop the company in 2020. I think that sale didn't materialize. the company came public via a SPAC. They merged with a special purpose acquisition company called Roman DBDR, and it debuted in the market in 2021 at a$1 billion enterprise value. SPACs didn't have a great reputation at the time. We hit a little bit of a bear market, and it provided an opportunity for our involvement in Compo 1.0. But it's a really rich history of innovation and growth for an interesting niche little company.

12:54It's easy for me to look at the metal card and think about the vanity play of the noise it makes when it drops on the table. But there's obviously a lot of actual innovation going into the chip and what would attract them to the banks on the other side of this. I want to get into that SPAC era now because they have this premium metal card business, but I know they introduced another growth engine, very much a sign of the times. And we'll see where it goes. But can you talk a little bit about beyond just being baby thrown out with the bathwater in terms of SPAC up and SPAC down, what was fueling some of the excitement over Compo that was another piece of the business that we can introduce now?

13:38The SPAC era was interesting because there was just some real unrealistic expectations about everything, digital asset, and a lot of other things. But they actually do have a business called Arculus, which focuses on two things. One is a digital cold wallet for storing, transacting, and trading digital assets. But its larger use case, in my view, is really on the security and authentication side. And it's here where I think there's potentially a lot of value and it really shows the next step in the innovation and growth of the company. When they came public via the SPAC, you had this very good core payments business and it was almost overlooked as an afterthought because they're like, all right, we have this business, it's profitable and it's growing, but really look at this Arculus business.

14:34And the expectations there initially were too high. If you think about what Arculus does from security and authentication, it has a lot of incredible use cases that we have not yet seen monetized. So their services can be combined between the payments and the authentication. It makes your premium metal card into a security token, into an authentication token, and it can be combined to have a lot of different use cases for different banks, fintechs, and a whole sorts of payment transactions. For example, you can use this for passwordless login on a variety of different financial apps or banking apps.

15:16So you can combine it with your biometric fingerprint or face recognition. You can tap your Arculus-enabled metal card on your phone, and this reduces the need for passwords, reduces fraud risk, and it simplifies your access while maintaining a lot of high security. I think it also can be used in certain high value false declines in online purchases. So if you make a potential transaction that needs verification from your bank without having to call in or text to confirm, you can tap your Arculus card and it minimizes friction, It boosts the approval rate, cuts down on fraud. So it's really a win for the cardholder and the issuer.

15:59There are a lot of other use cases, including high value transactions in gaming, in-store approvals in more unusual locations, call center efficiency, customer verification. Beyond just saying it's a crypto cold wallet, it has a lot of applications. And it was a big portion of the excitement of the company. A couple of years after the SPAC, it almost became a bit of a liability because its revenues had not materialized. It was generating about a$20 million operating loss, and it went from being the shiny toy to a liability. And that was our involvement in the company saying, we've got this incredible niche core payments business that is growing organically, has a long runway for growth, is valued at a fraction of what it's worth.

16:50And we have this incredible nascent technology that is not yet generating a lot of revenues, but it has incredible use cases, an incredible team, and is the next leg of innovation and growth for this company. As a consumer, I've heard of your credit card with a Bloomberg B unit, for those that use Bloomberg, attached in and being a one-stop shop to reduce a lot of the frictions. But then you can obviously understand from the opposite side of the equations, whether it's banks or whoever, who have to deal with all of the costs associated with the challenges of security, and it's only getting more and more intense.

17:25So that's an interesting one where the expectations were so high. And at times you could see these dislocations, but it will be interesting to see how that evolves. I wanted to tap into a little bit about those relationships they have. They seem so core. Can you just talk about what drives that beyond some of what you just mentioned and what the competitive set looks like in terms of others that might be trying to do the same thing and where Compo really ranks against the rest of the peer group. When you think about the relationships that they have with their issuers, the two biggest customers are American Express and Chase.

18:03And if you're in the premium metal car business, it's only natural that those are going to be your two biggest clients given their size and scale in the industry. If you focus on those two first, you see how long and valuable that partnership has been. And even though it's a contractual business, one, two, three-year contracts, the number of times that those contracts have been renewed and have been increased in 10-year really speaks to how important that relationship is. Initially, when we looked at the business, we had some concerns about customer concentration, but the more we learned about how symbiotic this relationship is, we became a lot more comfortable with that.

18:45So if you think about what they provide, this is really all about the pursuit of the high-end credit card customer. Research shows that 10 % of cardholders are responsible for nearly 50 % of all consumer spending. So if you are a Chase, American Express, now Citibank, Capital One, you really want to go after that high-end customer because they spend, on average, customers, cardholders with credit cards that have an annual fee greater than $500, they spend something like$3 ,000 per month on their credit cards. Those with cards with below that as an annual fee spend only$1 ,000. The difference between that$2 ,000 a month is$24 ,000 in annual spend.

19:31And that is a huge prize for credit card issuers, not only because of the interchange revenue that it brings, but all the ancillary service fees and cross-selling opportunities to this high-end cohort. These are also a much more loyal customer base with lower churn. And given their higher income stature, they generally don't carry balances. So you have lower credit loss provisions. And you're seeing this now with the increase in annual fees and the increase in rewards for the new American Express Platinum cards, the new Chase Sapphire cards. It really is a battle to win the top of wallet status.

20:12When you open your wallet, you want to be that heavy metal card that you fill on the dinner table at a restaurant and it clanks. It really is trying to find those. What Composecure does is it really helps facilitate that because when you think about the unit economics of this business, you can think about it on a per card basis and then you could think about it in aggregate. If we take an American Express cardholder or a Chase Sapphire cardholder, these cardholders will spend anywhere between$30 ,000 to$60 ,000 per year. On some of that spend, that interchange is as high as 2.5%. So the card issuer can get$750 or$1 ,500 annually in interchange revenue.

21:00On top of that, they provide these rewards to the customers. So they have to give something about half of the interchange back to these customers. And they're happy to do that because it makes and retains and grows these customer relationships. So you spend about$375 or$750 on your rewards costs. These cards typically have very, very low credit losses. And then you add on top your annual fee for this. And you're looking at something like a$1 ,200 or$1 ,600 annual profit. And the cost to the issuers for this Composecure card is$12 per card. So you're looking at something like 100 times return on your investment.

21:47This is really the only physical cogs that an American Express or Chase has. There's a lot of other things are variable costs. And if that metal card, that premium feel is that important, we think it's very important to have that quality card so that you're not going to switch to go to a new upstart competitor to save a dollar per card when you're making something like$1 ,000 or$1 ,500 in annual profit. And now you compare that to your generic plastic card, even that one that has no fee, it costs less than a tenth of a premium metal card. It costs$1.25 per card. But given how much less a customer spends and generally the higher cost for credit provisions and churn, we estimate that the return on investment on a generic plastic card is less than a fifth of what it is on a premium metal card.

22:40That is why we think that this symbiotic relationship exists. And that is why even as the company has become public and its high gross margins, its high EBITDA margins, and its average selling price has become public disclosure, you have not seen customer attrition. You've not seen market share losses because it is such an incredibly valuable tool for their issuers to go after those high-end credit cards. If you look at a business like American Express, American Express does something like$75 billion of annual revenues. And the largest component of that, about$40 billion, is interchange fees. Another$18 billion is net interest income, about$10 billion is your card fees, and$8 billion is service fees.

23:37So on this$75 billion, American Express makes about$20 billion of pre-tax and pre-provision profits. The biggest cost structure is about$18,$19 billion in card member rewards. This $20 billion of pre-tax, pre-provision profit is really facilitated by providing that valuable customer experience and a$10 card. That cost of goods sold is 0.2 % of their cost space. And we think this is a really interesting business that you provide such an experience to such a big company facilitating such a large scale, and you are such a small part of that cost. And that's really why we think these relationships exist, grow, and why other people want to get into the game.

24:29You mentioned they have this market share. Do you have any sense in terms of numbers of what that market share looks like in this segment? There's about 18 billion payment cards in circulation. And that number, despite all the movements towards mobile wallets and Apple Pay and everything, that number is still growing at about 4 % per year. The fascinating thing about cards is it's actually a rather stable recurring revenue business because the number of new cards issued, most of them actually come because of card expiration or lost and stolen cards. And these happen with regular frequency. About 4 billion new cards are issued annually.

25:12If you look at net new accounts, it's actually a fraction of the cards issued. So there's a solid core of recurring card issuance per year, and then an interesting nice little amount of new accounts. When you look at the premium metal card business that Compose Secure operates, it's a very, very small share, but a very fast growing share. Of the 4 billion cards issued annually, less than 1 % of that are premium metal credit cards. But those premium metal cards are growing three or four times faster than the aggregate cards in circulation. One thing that we think is really fascinating is Composture has something like an 80 % market share in these premium metal cards.

25:59So that market share, that penetration of premium metal cards goes from 1 % to 2 % or 3%. Even if you lose a little bit of market share, you're still getting so much growth in terms of units and dollars that there's a long runway for organic growth. Even as your market share goes from basically being virtually the only player in a 90 % market share to 80 and 75 or something. So we think that if you look to where the puck is going on the issuer side and the focus on premium metal cards, Compost Secura is in the pole position to maintain a very large market share and to have outsized organic growth.

26:38I can speak to having a card expire recently and then getting my new card and it was upgraded to of metal. That's just a perfect example of a mixed shift moving in their direction and how that can continue to happen over time. But you did mention Apple Pay. There's this natural question of once that was released, will we ever need wallets ever again? Will we ever need to carry credit cards? How do you frame that risk of Apple Pay? This is probably the most important question in breaking down this business and thinking about it long-term. And it really was the biggest concern we had when we first invested in Composecure before David Cody's involvement, as I mentioned.

27:22It is a real important and interesting topic, and it's worth thinking about the disintermediation risk by mobile wallets and Apple Pay, but I'll address it in two ways. The first is back when we first invested in the company, the company was valued as if no one was going to use a credit card in three or four years. The company was trading at five times normalized free cash flow. When we did our work then, we came away with the conclusion that cards were going to be around for at least five years and we were going to make good money on this investment because it was priced as if you were disintermediated in the near term.

28:01While cards were still growing, double digits and all of these new fintechs and neobanks were all looking to get into the premium card business. That was a different story then. Fast forward a few years to now, it's still an important question, but the data shows that the premium metal card has become increasingly important, not the other way around, even as Apple Pay, mobile wallets, and other things have taken off. You're seeing that that customer response is getting stronger, not weaker. Take a look at American Express. When they did one of their first big product refreshes back in 2016, and they introduced the brand new shiny American Express card with a higher annual fee, net new accounts acquired went up by 50 % over the pre-refresh period.

28:55When American Express just introduced the new product refresh earlier this year, you saw that net new account acquisition went up by 2x. So the customer response was double in 2025 what it was in 2016, even though mobile wallets, Apple Pay and everything is more prevalent today. So customers are still showing that they want a top of wallet physical card and the status and prestige that that brings among your friends. The second point is when you look at even digitally native companies that have some aversion to physical assets like Coinbase, Robinhood, Gemini, all of them are coming out with brand new premium cards that are physical metal cards as a customer acquisition tool.