PMTS Q3 2025: Tariff Costs Hit $1.6M as Prepaid Innovation Drives Strategic Shift
Margin compression from tariffs and sales mix overshadowed top-line growth in Q3, as CPI Card Group leaned into digital innovation and prepaid complexity to offset near-term EBITDA pressure. Investors should watch the rollout of chip-enabled prepaid solutions and the impact of ongoing cost actions into 2026.
Summary
- Tariff Pressures Deepen: Margin headwinds intensified as tariff expenses and lower average selling prices weighed on profitability.
- Prepaid Complexity Rises: Innovation in fraud prevention and chip-enabled cards is reshaping the prepaid segment’s value proposition.
- 2026 Focus Shifts to Cost Actions: Supplier negotiations, automation, and facility consolidation are positioned to recover margins next year.
Performance Analysis
PMTS delivered 11% net sales growth in Q3 2025, primarily driven by the ROI, acquisition of Arrow Eye, and continued expansion in the instant issuance software-as-a-service (SaaS) business. However, adjusted EBITDA declined 7% as margin pressure from unfavorable sales mix and $1.6 million in tariff costs offset top-line gains. The Debit and Credit segment, which now includes ROI, saw a 16% sales increase, but gross margins contracted sharply due to a shift toward higher-volume, lower-priced orders and elevated production costs tied to tariffs and depreciation from new facilities.
The Prepaid segment, historically a market leader for CPI, declined 7% in sales year over year, reflecting timing variability and tough comps against last year’s surge in fraud-prevention packaging. Gross margin for the company fell to 29.7% from 35.8% a year ago, with tariff and depreciation costs compounding the impact of lower average selling prices. Operating cash flow improved modestly to $19.9 million year-to-date, but free cash flow dropped to $6.1 million as capital expenditures nearly doubled, reflecting heavy investment in the Indiana facility and new machinery.
- Sales Mix Drag: Higher contactless card volumes were offset by lower pricing, reducing overall profitability despite volume gains.
- Tariff and Cost Inflation: Tariff expenses rose to $1.6 million in Q3, with full-year costs now expected between $4 and $5 million.
- Prepaid Order Timing: Lumpy prepaid revenues and delayed shipments are likely to push some growth into early 2026.
The net leverage ratio stands at 3.6x, reflecting recent debt-funded investments and acquisitions. Management is prioritizing cash flow generation to deleverage over time.
Executive Commentary
"Our software as a service instant issuance business once again delivered strong growth, and ROI 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 mixed 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."
John Lowe, President and Chief Executive Officer
"Production costs in the quarter included $1.6 million of tariff expenses and $1.7 million of increased depreciation... Our net leverage ratio at quarter end was 3.6 times, which we also plan to work down as cash flow is generated."
Jeff Hochstadt, Chief Financial Officer
Strategic Positioning
1. Prepaid Segment Transformation
Prepaid is evolving from basic gift cards to a complex, fraud-resistant product suite. CPI’s leadership in packaging innovation and its new push into closed-loop and chip-enabled prepaid cards positions the company to capture higher-value, defensible market share as fraud risk escalates industry-wide. The recently announced CARTA partnership, an exclusive US supply relationship with an Australian technology firm, brings chip-enabled, dynamic PAN (primary account number) prepaid cards to market, aiming to materially reduce fraud and drive up average selling prices (ASPs) over time.
2. Digital and Instant Issuance Expansion
Instant issuance, CPI’s SaaS business for on-demand card production, is on track for a record year and is expanding into new verticals beyond traditional financial institutions. This higher-margin business now exceeds 10% of revenue, and its integrated position with core banking processors is enabling cross-sell into other digital solutions. Management sees this as a core pillar for future margin recovery and growth.
3. Cost Actions and Operational Efficiency
To combat margin erosion, CPI is aggressively pursuing supplier negotiations, automation, and facility consolidation. The new Indiana facility is now fully operational, and management expects efficiency gains to materialize in 2026. Early savings on key supply components have already been secured, and further cost discipline is expected as the company integrates Arrow Eye and optimizes overhead.
4. Capital Allocation and Leverage
Capital deployment has been focused on growth and innovation, with nearly $10 million invested in facilities and technology year-to-date, plus a $10 million equity stake in CARTA. While net leverage remains elevated, management is committed to deleveraging as cash flow improves, though near-term free cash flow is constrained by investment needs.
5. Navigating Tariff and Regulatory Uncertainty
Tariff headwinds are a persistent risk, with potential semiconductor tariffs looming for 2026. CPI has proactively increased chip inventory and is working with suppliers to mitigate exposure, but the impact of new tariffs could affect the entire industry and further pressure margins if exemptions are not secured.
Key Considerations
This quarter’s results underscore CPI’s transition from volume-driven growth to a more complex, innovation-led business model, with near-term margin pressure but expanding strategic optionality.
Key Considerations:
- Tariff Sensitivity: Ongoing tariff expenses and the risk of new semiconductor tariffs could further erode margins if not offset by pricing or cost actions.
- Prepaid Innovation Cycle: Complexity in prepaid packaging and chip-enabled solutions is raising ASPs, but also driving uneven order timing and lumpy revenue recognition.
- Digital Expansion: Instant issuance and digital integrations are gaining traction, with higher margins and cross-sell potential, but remain a minority of total revenue.
- Leverage and Cash Flow: Elevated leverage and increased capital spending constrain financial flexibility, with deleveraging dependent on successful execution of growth and cost initiatives.
- Order Timing Volatility: Delays in prepaid shipments could shift revenue into 2026, impacting near-term visibility and compounding margin pressures.
Risks
Tariff escalation, especially around semiconductors, remains a material risk to margin structure, with limited visibility on exemption status or timing. Prepaid order lumpiness and delayed shipments reduce earnings predictability, while elevated leverage heightens sensitivity to execution missteps. Competitive threats in digital issuance and potential regulatory changes could also impact growth assumptions.
Forward Outlook
For Q4 2025, CPI Card Group guided to:
- Strong year-over-year growth in both net sales and adjusted EBITDA, but at levels “significantly higher than the third quarter.”
- Continued margin pressure in Debit and Credit, with some prepaid orders deferred to early 2026.
For full-year 2025, management lowered guidance:
- Net sales: low double-digit to low teens growth (down from low double-digit to mid-teens).
- Adjusted EBITDA: flat to low single-digit growth (down from mid to high single-digit).
Management highlighted several factors that will shape results:
- Tariff rates and supplier negotiations remain fluid, with ongoing cost containment efforts.
- Prepaid order timing and digital solution ramp will influence Q4 and early 2026 performance.
Takeaways
CPI is in the midst of a strategic pivot, leveraging innovation in prepaid and digital issuance to offset persistent cost headwinds and margin compression.
- Margin Recovery Hinges on Execution: Cost actions, automation, and supplier negotiations must deliver in 2026 to restore profitability as tariff and mix pressures persist.
- Prepaid Innovation Is a Double-Edged Sword: While complexity and chip technology drive long-term value, they introduce near-term volatility and require disciplined execution to capture higher ASPs and defend share.
- Investors Should Monitor: Progress in digital and instant issuance, the pace of prepaid chip adoption, and CPI’s ability to deleverage and manage through tariff uncertainty.
Conclusion
Q3 2025 highlighted CPI’s resilience in driving top-line growth through innovation, but also exposed ongoing vulnerabilities in margin structure and cost management. Strategic bets in digital and prepaid technology offer long-term upside, but investors should expect continued volatility as the company works through operational and external headwinds.
Industry Read-Through
CPI’s experience this quarter is emblematic of broader payment card industry trends: as fraud risk rises, complexity and technology adoption (like chip-enabled prepaid cards) are becoming industry standards, raising barriers to entry and ASPs. Tariff and supply chain volatility remain sector-wide risks, with all major card manufacturers exposed to similar cost pressures. Digital issuance and SaaS integration are emerging as key differentiators, with firms able to scale these solutions likely to capture outsized share and margin over time. Investors in the payments and secure credentialing space should watch for similar margin dynamics and innovation cycles across peers.