Excess Chip Card Inventories and Small Issuers’ Delayed EMV Rollouts Hurt CPI Card Group

Despite a 66% increase in shipments of EMV chip cards to U.S. credit and debit card issuers in the first quarter, shares of CPI Card Group Inc. plunged as much as 43% Thursday morning after the big card manufacturer reported financial results below its expectations.

CPI said large issuers and payment processors had high inventories of EMV chip cards, which crimped sales to that group in the quarter, while small and mid-sized issuers have been taking their time in replacing their mag-stripe cards.

Littleton, Colo.-based CPI has been riding the EMV wave in recent quarters as U.S. payment card issuers replace magnetic-stripe cards with new chip cards. It’s still a white cap—CPI shipped 41.4 million EMV credit and debit cards to U.S. customers in the first quarter, up 66% from a year earlier. But sales were up not quite 7% over 2015’s fourth quarter.

Total net sales increased 12% to $86.4 million from $77.3 million a year earlier, while net income from continuing operations slipped 4% to $5.71 million from $5.96 million. Sales to U.S. credit and debit card issuers increased 30% to $65.1 million from $50.1 million.

“Our first quarter results were slightly below expectations, with the primary impact resulting from lower than expected EMV card shipments,” Steve Montross, CPI Card Group’s president and chief executive, said in the company’s earnings report issued late Wednesday.

Citing discussions with customers, chip suppliers, and other industry sources, Montross said “two separate adverse trends have developed in the U.S. EMV card market” that will push some of this year’s anticipated sales growth into 2017.

“First, the carryover into 2016 of unissued EMV card inventories at the large issuers and processors is much greater than anticipated, and accordingly, their EMV card purchases are being curtailed until inventories return to normal levels,” he said.

This excess inventory is about a three-month supply, in the neighborhood of 50 million to 100 million cards, according to a report from Chicago-based investment firm William Blair & Co. In addition, competition among card producers for large issuers’ business has driven prices down 20% to a range of 67 cents to 72 cents per card from CPI’s estimate of about 87 cents, the report says.

The second factor is “evidence of slower than anticipated EMV conversions for the small to mid-sized issuers,” Montross said. He attributed the slowness mostly to issues involving processors serving smaller issuers, but the effect is that EMV demand CPI expected this year instead will come next year.

As a result, CPI lowered its financial guidance for 2016 by about $93 million in revenues. But the company said it still sees “a significant growth opportunity” since only about 50% of U.S. payment cards have been converted to EMV, issuers have high replacement rates, and demand is high for related services such as card personalization.

While at least one stock analyst downgraded CPI Card Group, William Blair said it is maintaining its “outperform” rating despite the first quarter’s “severe disappointment.

“We are confident this is a timing issue; EMV cards are being issued, there is not a question about this and it is clear there is still a lot of runway to go,” analyst Robert Napoli said in the report.

Napoli also said he doesn’t believe that CPI has lost market share, and that U.S. issuers are beginning to show interest in higher-margin dual-interface chip cards. Such cards can be inserted, or dipped, into an EMV card reader just like most EMV cards today. But they also facilitate contactless transactions and have become popular outside the U.S., he said.