May 11, 2016
Executives
William Mania - ICR Steve Montross - President and CEO David Brush - CFO
Analysts
James Schneider - Goldman Sachs Bob Napoli - William Blair & Company William Johnson - Raymond James & Associates, Inc. Paulo Ribeiro - BMO Capital Markets Eric Ciura - Robert W.
Baird & Company, Inc.
Operator
Good day, ladies and gentlemen and welcome to the CPI Card Group Inc. Quarter One 2016 Earnings Conference Call.
At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference is being recorded.
I would now like to introduce your host for today, Mr. William Maina, Investor Relations.
Please go ahead.
William Mania
Thank you, Andrew, and good afternoon, ladies and gentlemen. Welcome to the CPI Card Group First Quarter 2016 Earnings Conference Call.
Participating on today's call from CPI Card Group are Steve Montross, President and Chief Executive Officer; and David Brush, 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.
Please refer to disclosures at the end of the Company's Earnings Press Release for information about forward-looking statements that they may be made or discussed on this call. Please review the information along with our filings with the SEC and SEDAR for a disclosure of the factors that may impact subjects discussed on this call.
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 on or more non-GAAP financial measures including EBITDA, adjusted EBITDA, adjust EBITDA on margin, adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations, free cash flow and constant currency.
Please see the earnings release on the CPI's web site for all the disclosures required by the SEC including reconciliations to the most comparable GAAP numbers. And now I'd like to turn the call over to Mr.
Steve Montross, President and Chief Executive Officer.
Steve Montross
Thanks Will. Good afternoon, everyone.
And thank you for joining us today for our first quarter 2016 Earnings Conference Call. I’ll start with some operating and financial highlights from the quarter.
Our US shipments of EMV chip cards increased approximately 6.6% from the fourth quarter of 2015 and increased 66.1% over the prior year period. Our net sales were $86.4 million up 11.7% over the prior year period.
Adjusted EBITDA was $18.8 million, a 13.1% increase over the prior year period. Adjusted net income from continuing operations with $7.1 million or $0.13 per share and free cash flow was $13 million, up $7 million in the prior year period.
On a segment basis, while our EMV card sales grew on a sequential basis from the fourth quarter of 2015 and were up strongly year-over-year. Our U.S.
debit and credit results were slightly below expectations due to lower than projected EMV card purchases by our large issuer customers, which is something we’ll discuss further during the call. Our value-added services business lines in our U.K.
limited segment or essentially in line with our expectations on the first quarter as was our U.S. prepaid debit segment as we recognize that significant product redesigns by major customer in the first quarter of 2015 would not be replicated in 2016.
Dave will discuss our segment results in more detail later. I’m going to focus my comments on key trends in the U.S.
EMV market and what they mean for our revised 2016 outlook. Through recent discussions with our customers and other important market participants, there are three adverse market trends that have become evident.
Two of which concern the timing of EMV card sales in which we’ll have a significant impact on the EMV card production market in 2016 and third impacts market pricing. First, the overstocking of EMV cards by the large issuers and processors in 2015, which we discussed in the previous earnings call as the reason for our outlook of relatively soft first half of 2016 for EMV sales is now known to be much greater than previously understood.
The carryover of unissued EMV card inventories into 2016 by the large issuers and processors which is now estimated to event an additional 50 to 100 million units or about 8% to 16% of total EMV card production demand in 2016 has left many large issuers and processors with at least three months’ supply of excess inventory and in some cases more. The issuers and processors are now working through their excess card inventory positions and have been curtailing their purchases of additional EMV cards.
We expect this trend to continue until the large issuers and processors right size their EMV card inventories. We estimate that the negative revenue impact of CPI in 2016 from this reduction in current card demand will be approximately $35 million to $40 million compared to our original guidance for 2016.
We believe that the impact will be highest in the second quarter with less impact in the third quarter and then sequentially less impact in the fourth quarter. I think it’s important to note a couple of things.
One, this issue is affecting the entire card production industry, not just CPI. And two, this issue impacts card producers and not the issuers or processors.
Many of you cover the processors so you probably appreciate that the processor’s business similar to our own personalization and fulfillment business is driven by card issuance and is not impacted by the excess inventory of unissued cards. And as their EMV card issuance to consumers continues to grow the processors are nodding in their earnings calls the current tailwind from increased EMV issuance which we are also experiencing in our own personalization business.
Second, the small to mid-sized issuer segment of the market which represents over 35% of the financial payment card market and where we have our highest market share is experiencing delays and the conversion to EMV. As the first step in EMV issuance, the processor for the issuers must set up the issuer’s accounts to process EMV transactions and must to extensive testing of the processors.
Also the process to configure and test the EMV cards to be issued by the banks is an additional technical and time consuming process. It is slower than anticipated test of EMV conversions for the small to mid-sized issuers is expected to delay to 2017, a significant portion of EMV card demand from this market segment.
We currently estimate that the impact to CPI from this deferral of EMV demand to future periods by the small to mid-sized issuers will be to reduce our 2016 revenues by approximately $35 million to $40 million compared to our original guidance. Along with this temporary softness in the market for EMV cards, we are seeing increased competitive intensity for the EMV card orders which is leading the greater than expected pressure on EMV card prices in the large issuer market.
Importantly, despite the pricing pressure we have been able to maintain stable margins through reductions in our chip costs although, the reduction in product prices does have the effect of lowering our revenues. When we combine the impacts of the anticipated reduction in 2016 EMV card volumes and the revenue impact from the pricing dynamics that I just discussed, we will not achieve our prior growth targets for 2016 and we have reduced our 2016 guidance to match this expectation.
Dave will provide more detail with respect to our guidance for the second quarter and revised outlook for the full year later in the call. Overall, I want to emphasize that we believe that this temporary slowdown of EMV chip card orders which we would characterize as a result of timing overstocking in one period resulting in a reduction in demand in a subsequent period and a delay in EMV issuance by a portion of the small and mid-size issuer market does not reflect reduced long term market demand for EMV card as the current estimate of market conversion to EMV is only approximately 50%.
Estimates from independent industry analyst as well as our own estimates, conversations with our customers and information from the card brands indicate that the size of the market in terms of the number of cards and circulation continues to grow and the progress or the conversion from magnetic strip cards to EMV cards continues to progress. However, with the excess inventory sitting with the large banks and core processors, card procurements will be weaker than expected this year as issuers work through these inventories.
And we currently believe return to more normal EMV buying activity will not occur until late 2016 or early 2017. On a positive note, we do expect to delay conversions by the mid and small size banks will begin to update in late 2016.
And we expect orders from this market segment to accelerate in 2017 to meet the demands of those institutions. This market segment is heavily waited to debit issuance and with debit estimated to be approximately 28% converted to EMV by the end of the first quarter of 2016, we believe that there is significant EMV conversion, card demand and issuance ahead for this market segment.
Before moving on, I would like to reiterate that our longer term growth opportunity driven by the ongoing conversion of magnetic strip cards to EMV chip cards is unchanged. Based on our analysis and recent market data including announcements by the major card brands on the percentage of their branded cards and circulation that are EMV, we estimate that only about 28% of debit cards and 58% of credit cards in the U.S.
were converted to EMV at the end of the first quarter of 2016, which was up from an estimate of approximately 20% and 50% respectively at year end 2015. Given this level of penetration, there is clearly significant future growth for meaning as a market continues its conversion to EMV, which other leading market participants including core processors are nodding when they are remarking that we are still in the early stages of the EMV migration.
With our leading market position and long standing trusted relationships with over 4000 customers, we expect to continue to benefit on the ongoing migration to EMV. Now I will like to provide you with an update of some of the other important growth areas of our business.
As we discussed with you on our last call, we are experiencing increasing activity with respect to dual interface or contactless EMV cards. And although, we are supplying dual interface cards to just the couple U.S.
issuers the overall market customer demand remains relatively low at this time. As we previously discussed, we recently won a pilot with the major issuer to manufacture and personalize dual interface or tap and go cards and we are now in the process to delivering on that project.
We are also discussing dual interface EMV pilots with other issuers and are working with the number of additional issuers to get dual interface products into their product roadmaps. At this time, many large issuers are including a new request for proposal dual interface products.
We continue to expect to see increasing dual interface card issuance over the next few years starting from a low level this year and growing to a more meaningful portion of the market over the next few years particularly as the portfolios for priority bank customers which were first converted to EMV in 2014-2015 come up for reissuance beginning next year and proceeding over the next couple of years. This is the particularly exciting growth opportunity for us given our significant preparation deliver this product to the market and revenue impact with this higher priced product.
The prepaid debit segment remains a growth area for us. Our retail prepaid debit business continues to enjoy a strong market position due to our long standing trusted relationships, expertise, product innovation and design in our quality processors and data management capabilities.
The hiding concerns by the prepaid program managers about fraud in a retail channels and the greater need for product security placed particular demand on our product innovation and design capabilities. As we’ve discussed previously, we also see strong growth opportunity in the B2B and B2C segments of the prepaid debit market.
As a result, we are investing in a highly customizable product offering which enables prepaid program managers to go to market quickly with unique personalized offerings for each individual in a program. This product offering is ideally suited to address the growing demand in the prepaid debit market to utilize data analytics and drive targeted offers for gift, rewards and incentives, payroll tax and healthcare programs all high growth areas of the prepaid debit markets.
Finally, with respect to our service business lines we continue to see strong demand from our customers for our industry leading solutions. Our personalization and fulfillment service continues to achieve with our revenues and earnings up significantly in a first quarter of 2016 from a prior year period.
And our services is benefitting from the EMV migration with approximately 52% of our work represented by EMV personalization fulfillment compared to less than 1% in the prior year period. We ended the first quarter of 2016 with over 4,230 instant issuances or card at once installations versus 4,000 at the end of 2015.
We continue to view our instant issuance products and services as a strong growth area. In summary, the current market dynamics have let us to significantly reduce our 2016 outlook and we are currently disappointed with that.
But our long term growth opportunity in this market is undiminished. I want to emphasize that the strength in the long-term fundamental growth drivers of our business remains sound and are unchanged from what we’ve discussed in prior quarters and during our IPO.
We are a leader in the large and growing addressable financial payment card market and enjoy strong relationships as the trusted provider with over 4,000 customers. We will continue to grow as our customers in our markets grow driven by powerful secular tailwinds including the ongoing conversion of the U.S.
financial card market to EMV as well as dual interface cards. \We will also benefit from increasing demand in the market or value added services and we will expand our share of our customer’s wallet by continuing to cross sell our products and services to our customer base.
And we will grow by broadening our market reach into new attractive market vertical particularly in prepaid and we will continue to pursue a highly selective acquisition strategy through which we’ve achieve success and generated significant growth. I’ll now turn the call over to Dave.
David Brush
Thank you, Steve, and good afternoon, everyone. I will begin by summarizing the results of our first quarter 2016.
I’ll then provide our current guidance for full year '16 before opening the call for questions. First quarter net sales were $86.4 million, up 11.7% from $77.3 million in the first quarter of 2015.
Our net sales this quarter continued the benefit from the ongoing conversion in the U.S. financial payment card market from magnetic strip cards to EMV chip cards as well as continued demand from our customers for value added services.
First quarter product net revenue grew 22.1% year-over-year to $55 million. Services net revenues decline 2.7% year-over-year to $31.4 million in the first quarter.
The decline in our service revenue primarily reflects the year-over-year impact of a significant prepaid debit card refresh program that occurred in Q1 of 2015 offsetting solid growth in other areas of the segment. When you remove the $4.4 million year-over-year impact of the program refresh as well as 1 million of revenue related to the close Peter’s field facility.
Services net revenue increased by 17% in Q1 2016. Now turning to the review of our segments.
U.S. debit and credit segment net sales were 65.1 million for the first quarter, a 30% increase over the prior year period and segment EBITDA was $18.9 million or a 50.4% increase.
The increase in revenue in EBITDA were predominantly driven by 66.1% year-over-year growth in EMV card shipments partially offset by declines in average selling prices. Our EMV card shipments for the first quarter increased 6.6% sequentially from the fourth quarter of 2015 to 41.4 million cards in the quarter.
This was modestly below our original forecast driven by the market factors Steve discussed earlier. U.S.
prepaid debit segment net sales were $12.3 million in Q1 down 29.2% year-over-year and segment EBITDA decreased 45.4% year-over-year to $3.3 million. The year-over-year decline in U.S.
prepaid debit segment revenues than EBITDA primarily reflect the timing of the large customer there refreshed its packaging designs in the first quarter of ‘15 which was not replicated this past quarter. Consistent with what we said on our last earnings call we expect the prepaid debit business to show increasing revenue growth in the second half of ‘16 driven by ongoing growth with our poor customer base and entering the vertical markets within a new investments Steve mentioned earlier.
Finally, U.K limited segment net sales were 6.2 million in the first quarter or 0.1% decline from the prior year period and EBITDA was $200,000, up 19.7% year-over-year. Our U.K.
Limited Segment results were impacted by unfavorable foreign currency exchange rate fluctuations and on a constant currency basis, sales and EBITDA for the quarter were up 5.8% and 40.3% respectively compared to the prior year. Moving down the income statement, gross profit for the first quarter grew 16.4% to $29.7 million representing a gross margin of 34.4% compared with gross profit of $25.5 million and gross margin of 33% in Q1 2015.
Further the first quarter 2016 gross margin improved sequentially from the fourth quarter 2015 gross margin percentage of 33.6%. Income from operations in the first quarter was $13.7 million, up 16.8% from $11.7 million in the prior year period, driven primarily by our revenue and gross profit growth, partially offset by incremental cost associated with operating as a public company.
We reported net income from continuing operations of $5.7 million or $0.10 per share in the first quarter of 2016 compared with net income from continuing operations $6 million and a loss of $0.16 per share in the first quarter of 2015. Our loss per share attributed common shareholders in Q1 2015 reflects $12.6 million of preferred dividends paid on our Series A Preferred Stock, all of which was reviewed [ph] with our IPO in October of 2015 and therefore had no impact for EPS in the first quarter of 2016.
The modest decline in our net income from continuing operations versus the first quarter of 2015 primarily reflects higher interest expense owing to our higher average debt balance partially offset by a lower tax rate. Our GAAP tax rate in Q1 was 33%, down from 39.9% in the year ago period.
The higher rate in the prior year period primarily relates to the impact of foreign and state income taxes. Turning to our non-GAAP financial measures, adjusted EBITDA for the first quarter of 2016 was $1.8 million, representing a 13.1% increase over the $16.6 million in the first quarter of 2015.
Adjusted EBITDA margin was 21.7 in the first quarter, an increase over the prior year first quarter adjusted EBITDA margins of 21.5%. The first quarter 2016 adjusted EBITDA margin was impacted by the timing of SG&A spending and the higher expenses associated with being a public company.
Adjusted net income from continuing operations was $7.1 million for the first quarter of 2016, representing a 1.6% decrease compared to $7.3 million in the prior year period, driven by the factors I previously mentioned. Adjusted, diluted earnings per share from continuing operations in the first quarter of 2016 were $0.13 a share, consistent with the prior year period after making a pro forma adjustment to our Q1 2015 shares outstanding for the issuance of 15 million in our IPO.
Our adjusted EPS fro, continuing operations using actual weighted average diluted shares outstanding was$0.13 and $0.18 for the first quarter of 2016 and 2015 respectively. Our Q1 2015 adjusted EPS from continuing operations excludes the impact of preferred stock dividends which I mentioned earlier.
Moving to some key cash flow and balance sheet items. Cash flow from operations for the first quarter was $16.8 million, up 32.2% from $12.7 million in the prior year.
Capital expenditures in the first quarter were $3.8 million yielding free cash flow of $13 million, up from $7 million in the prior year. We ended the quarter with a cash balance of $26.9 million, while total debt outstanding was $309.5 million net of deferred financing cost and discount.
At March 31, 2016, our net debt leverage ratio was 3.0 times compared with 3.2 times at the end of the fourth quarter of 2015. As of march 31, 2016, we had approximately $66.8 million of available liquidity comprised of $39.9 million undrawn revolver and $26.6 million of cash in the balance sheet.
We continue to be committed to maintaining strong liquidity. As you may have read in our press release issued this afternoon, we announced today a quarterly dividend of $0.045 per share payable on July 7, 2016 to stockholders of record at the close of business on June 16, 2016.
Finally, we announced today that our Board of Directors has approved a stock repurchase plan that authorizes a $20 million repurchase of our common stock with the maximum of 2.8 million shares over the next 12 months. The share repurchase program reflects our confidence in long-term growth prospects and our financial flexibility.
Now, turning to our guidance. As Steve discussed, we're seeing a reduction in EMV card purchase activity across all large issuer and processors as they work through the higher than expected excess in inventory.
In addition we're seeing the vast majority of small and mid-sized issuers delaying their EMV purchases due to slower than anticipated EMV conversions at the processor level. And finally, the current softness in demand for new EMV products is driving greater than expected pricing pressure for those EMV card programs that are now being executed.
It is important to note that we're seeing chip input cost to counter the pricing impacts, while this balance offsets the bottom-line impact effect on net sales as meaningful. We currently believe the negative impact of these factors will be highest in Q1 and Q2 and then sales improvement begins in Q4.
The second quarter will primarily be negatively influenced by the 2015 inventory carry-over issue and the third quarter will be principally influenced by the delay in timing of the small to mid-sized issuer conversions. The net sales for the fourth quarter will be influenced by the ramp-up of small issuer conversions and by declines in pricing for the large issuers.
Given our current visibility into the second quarter and the magnitude of our guidance reduction, we thought it would prudent to provide you with the guidance range for the second quarter. Please note that we don't intend to provide quarterly guidance going forward.
For the second quarter, we expect our EMV card shipments to be approximately 60% lower than our prior estimate, directly influenced by the impact of excess inventory in the market. When we combine the volume impact with some pricing pressure I just discussed, the negative impact on our second quarter net sales is estimated at approximately $38 million to $40 million.
As a result, we currently expect to generate revenue in the second quarter in the range of $68 million to $72 million. This translates into adjusted EBITDA in the range of $12 million to $14 million and EPS in the range of $0.04 to $0.07.
For the full year 2016, giving effects to the EMV card volume pricing impacts and based on our best estimate given visibility we have in the market today, we currently expect net sales to be between $335 million and $355 million. This revision of guidance principally relates to the U.S.
Debit and Credit Segment and specifically the card manufacturing parts of the segment. The remaining segments including the personalization and service component of U.S.
debit and credit are largely unchanged from our original guidance range. The Prepaid Debit Segment has some pricing pressures that we have contemplated within the new guidance range.
For full year 2016, we now expect to generate adjusted EBITDA between $75 million and $82 million. Our guidance range reflects expenses associated with being a public company in the range of $6 million.
Finally, we expect full year 2016 pro forma adjusted diluted earnings per share of $0.50 to $0.58. With that operator, please open the call for questions.
Operator
Certainly. [Operator Instructions] And our first question or comment comes from the line of Jim Schneider with Goldman Sachs.
Your line is now open.
James Schneider
Thank you for taking my question. Guys I was wondering if you could maybe start with the sequence of events that kind of happen since the last Q4 conference call and what are the factors that you started to hear from your issuing partners.
And what order they come in? And kind of give us a sense of how these factors came to play out in terms of your awareness of them?
And I have a follow-up please.
Steve Montross
Okay. Jim this is Steve.
So, just going through the timeline, we saw slowing of orders as we got into the late first quarter. We saw a slowdown in orders and started to having more frequent discussions with the issuers about the slowdown in orders.
And we had -- as you referenced, in our earnings call back in February, we had discussed this overstocking that took place in 2015. And so we were aware that through discussions with the customers and knew that was going to slow the first part of the year.
Then in late March, we started seeing a slowdown in orders and we knew that the overstocking had taken place and part of it was in an assumption that we're seeing the impact because the amount of shipments that we had thus far in the first quarter and orders was fairly strong and as you know by the numbers, we shipped about $41 million in EMV cards in the first quarter which was sequentially up from the fourth quarter. So, the activities level is still pretty good, but as things started to slowdown, we assume that part of it was this overstocking and we started to having more frequent discussions with the issuers.
And the issuers frankly were -- have been reluctant all along to really give the details in terms of what their own situation is. Part of it is competitive reasons, also part of it is that takes a while, knows organizations for the information to really funnel down.
But as started having more discussions all through April with those issuers, the picture started to emerge that the overstocking in 2015 was far more significant than what we had been led to believe and what we understood by all of the information that we gathered. And then over the last couple of weeks as we started to get much harder information with -- from the issuers directly as we had discussions then we started to get then much better sense of the inventory levels that they had, the pace of their issuance that they had and therefore what that excess inventory position was.
And -- so that's sort of a timeline as things progress. With the small to mid-sized issuer, we -- as you know, when we discussed in the earnings call the first quarter, we didn’t expect that we were going to see a pick-up in the small to mid-sized issuer market until the second half of the year.
And so were already looking at that being a second half event, not a first half event. But as we got into the first quarter and saw the pace of conversions and what we were hearing was that there was a bottleneck at the processor level for converting these small to mid-sized issuers over to EMV.
And then also as we started to look at the information from our own personalization and fulfilment operation where we're doing a lot of business with processors, we started to chart exactly how much -- how many of those financial institutions with those core group of processors that we were working with. How many of those issuers had been converted over.
And so we were looking at those percentages as well and looking at that progress. And so after looking at all of that information, we came to the conclusion that the conversions in that small to mid-sized issuer market were not happening as quickly as we expected and also we're not happening as quickly as what we were hearing from others as well including issuers that those conversions weren’t happening as quickly as expected.
And so we started to do more digging in terms of talking to other people and other market participants and we started hearing similar things that the -- there was a bottleneck of these conversions at the processors and that seem to be slowing things down, which led us to the conclusion that the business and the ramp-up that we expected we were going to see in the second half of the year is not going to be nearly as strong as what we had first expected and that there's going to be a portion of that business for the small and mid-sized issuer market that's going to be pushed into 2017 from 2016.
James Schneider
Okay. Then if in terms of pricing situation, can you maybe comment on what your revised guidance implies in terms of the pricing for EMV cards in both the small and larger issuer segments?
And maybe talk about what we should be thinking about in terms of the gross margin impact due to that pricing. Is there a small impact or -- which is what you've kind of alluded to, or there could be a bigger impact?
And how do we know that there's not a further downside on the pricing side as we head into the back half of the year?
David Brush
Yeah, Jim, this is Dave. What I would tell you is that it's sort of in the range of $10 million to $12 million of pricing and it's substantially waited in the third and the fourth quarters.
As we moved through the first quarter pricing, really right in line with what we expected and as we look at well on much smaller volumes, we look at the -- as a pricing for the second quarter. Again, it's right in line with what we expected as we began the year.
I think when you look at the -- then the third and fourth quarter expectations, we're predicting a little bit forward about where we see pricing just giving current market activity, the current market activity is obviously being driven by people searching for volume at much lower levels. But as we predicted forward, it's really all around the large issuer segment.
We haven't seen any real pricing pressure at all in that small and mid-size issuer segment. So, I guess, to specifically sort of address the magnitude of the pricing in and around the larger issuer segment when we put together our original guidance, we were sort of in the $0.87 range for that part of the market.
I think as we predict forward for the -- what we could see in the latter half of the year, it’s a $0.15 to $0.20 reduction off of that. I think at the same time, we have already had discussions with chip suppliers on the chips that go into those cards and at those levels already have commitments on lower chip pricing that would maintain our margins even at those levels.
So, I think what I can tell you as we said here today is our projection to the fourth quarter too conservative; one and two is a permanent decline in pricing or is it a more temporary situation just based on the current volume that's available into the marketplace.
James Schneider
So, then finally, just to be clear, are you saying that you don't anticipate gross margins to be down by the end of the year relative to where they are now?
David Brush
What I would say Jim is that the second and the third quarters, the gross margins are going to be down off of where we would historically predict them, but that's more driven by volume and absorption at the margin level. We’ve adjusted indirect labor and the things that are variable that we can control, but I think margins in the second and third quarter will be impacted by just the low volumes on the same overhead.
As we move into the fourth quarter based on our current projections of volumes and our current discussions on pricing and chip pricing, we would expect to see our gross margins back in that 36% to 37% range.
James Schneider
Okay. Thank you.
David Brush
Yeah.
Operator
And our next question or comment comes from the line of Bob Napoli with William Blair. Your line is now open.
Bob Napoli
Thank you. I guess what is your buyback you have out there?
What is the – how aggressively will you be with the buyback, share buyback?
Steve Montross
Hi, Bob, it’s Dave.
Bob Napoli
Hi, Dave.
David Brush
I think first of all as the share prices where they are at and below that it’s -- doing the share repurchase will be an accretive transaction for the company. We also believe that in the spirit of shareholder return, its good measure to have it out there.
What I would tell you though is as we look at the 20 million and 2.8 million shares, we’re going to be measured in terms of how we spend that. I think we will be measured partly in terms of not just being very aggressive on the front end and secondarily just measured from a liquidity perspective as we move through the year to make sure that we’re in line with our current expectations and that we don’t spend well ahead of it.
Bob Napoli
Okay. And then just on dual interface I guess we’ve heard some rumblings that’s larger banks are looking at launching dual interface in U.S.
I mean nothing definitive on that from what we’ve heard, but I men are you hearing, what are you hearing in the market with regard to dual interface, at this point?
Steve Montross
Bob, its Steve. I’d say there is a range of views.
There is one major issuer that as I mentioned that we’re in process of delivering on that pilot four right now. And then there is another major issuer that has taken the view that they are going to wait and see.
And then there is a lot of activity in between. I can say that almost without exceptions everybody is in dual interface products on the roadmap.
And they are going through the process of getting those products qualified, so they are ready. And while there is no one that has announced a major program that being said there are some issuers right now in the U.S.
market that are issuing dual interface and so we have that activity, but that number of issuers is limited. No other major issuers have announced a dual interface program.
We are coming out with one. But there are some issuers right now, including one major issuer that are issuing to dual interface cards.
And so, there is activity Bob and increasing interest, I would say based upon our work around the products and qualifying products, it seems to be much interest in dual interface and starting that whole process of been prepared for dual interface issuance sometime in the near future.
Bob Napoli
And do you have any dual interface in your guidance, how much do you have in your guidance?
David Brush
We have a little bit Bob, but I wouldn’t categories as meaningful think about it.
Steve Montross
It is very small it’s not – it’s not – as Dave said it’s not meaningful Bob.
Bob Napoli
And it's in line…
Steve Montross
I’d say –put it this way we are not counting on dual interface in 2016 at all. We’re doing all the missionary work so to speak around that and working with the customers, but we are not counting on dual interface to any meaningful extent.
Bob Napoli
Okay. And what is pricing on dual interface cards today?
Steve Montross
Pricing is in the – it’s around $2 a unit.
Bob Napoli
Okay. And then just – I mean how confident are you that you have not lost market share, this is challenges in a market share challenge?
Steve Montross
Yeah. We’re pretty confident we haven’t lost market share because we’ve been tracking very closely the sales that have taken place what issuers are preparing and through those discussions we’ve got a good sense of what the market is in the first quarter for instance and we believe that our market share was close to 40% in the first quarter.
Now we are not projecting that through the whole year at all, but we’re looking very, very closely at the procurement by the issuers and tracking that very closely. So we’re comfortable that this isn’t suddenly this revision is a big share loss by us at all.
Bob Napoli
Okay. Thank you.
Steve Montross
Thanks Bob.
Operator
And our next question or comment comes from the line of William Johnson with Raymond James. Your line is now open.
William Johnson
Yes. Good afternoon.
So if we could just summaries here again, so three challenges inventory, SMB pricing pressure, how would you weight that again, let's say that revenues are essentially coming down by 100 million in this year 2016, so if have to assign a dollar value to each one or percentage to each one could you just hit that one more time for me please?
David Brush
Yeah Wayne, this is Dave. I would – I think the number I quoted on pricing to Jim was in the 10 to 12 range.
And then the issue on the large issuer or the inventory carryover and the delay and the small issuers is about 50-50 equally divided from a dollar perspective. From a unit perspective, obviously the small issuer delay at higher pricing and the little bit larger on the volume on the inventory delay off a bit smaller pricing.
William Johnson
Could you talk at all about what else you are seeing in the prepaid market over and above general and purpose cards?
Steve Montross
Yeah. We’re – couple of things we are seeing in the prepaid market one is we’re seeing a lot of growth what we call the enterprise prepaid or I talked about it earlier as the B2B and B2C segments of prepaid.
So that’s rewards in incentives it’s also a healthcare for instance and if these are in payroll would be another area. So, we are seeing strong growth in those areas.
And it’s more specialized or customized offering that really demanded by the participants, but there is very strong growth there which is why we are investing to make sure that we have the capabilities to really serve those markets and so we are seeing excellent opportunity in those segments of prepaid. In terms of retail prepaid, we see still strength in GPR, gift is as you know seasonal, but we are seeing still good strength in GPR.
Also what we’ve seen is a real concern by the program managers around fraud in the retail channel. And so there is a lot more focus on the secure packaging itself and how that can help them to combat that in the retail channel.
But there is big concern and a big increase in prepaid or brought with prepaid cards. And so the program managers are concerned about that and taking steps to address that.
Also we’ve been having conversations or discussions with the prepaid program managers about chip cards for the reloadable cards and we’re continuing to work with them on that. I think you probably know we’re already doing chip cards for prepaid cards up in Canada.
And we are actually doing some dual interface cards prepaid cards up in Canada for one program manager. So we’ve already seen chip cards emerged in the prepaid space up in Canada.
And again, we are working with several program mangers around qualifying a chip product for their reloadable products.
William Johnson
Great. Thank you very much.
Steve Montross
Sure.
Operator
And our next question or comment comes from the line of Paulo Ribeiro with BMO Capital Market. Your line is now open.
Paulo Ribeiro
Hi, good afternoon. I have a couple of questions.
The first is very straight forward; in your EPS guidance for revised EPS guidance for the year, do you include any of the buyback?
David Brush
No.
Paulo Ribeiro
…for your EPS?
David Brush
No. Sorry, Paulo I know you have some terms get in the press release, but we laid out the guidance on schedule up and just noted at the bottom of it that the revised guidance does not reflect the accretion impact of a share repurchase.
Paulo Ribeiro
Perfect. That’s easy.
Second question is in terms of what Steve said in US dividend credit that you expect this impact from lower EMV volumes in products, but not in service, did I get it right? And if I did does it mean that you are personalizing higher share of the existing cards, yeah just trying to you are producing or shipping less cards, but your service are not impacted, so just trying to understand that better?
Steve Montross
Yeah. Paulo, this is Steve.
Yes, we are seeing the decline or decrease in card manufacturing, the purchases or the demand in card manufacturing and we are seeing the increase in our personalization fulfillment business. And like we were talking about earlier with the issuers oh, I am sorry the processors in earnings calls were talking about the EMV tailwind and they see increasing activity and while we are seeing that same kind of increasing activity with our personalization and fulfillment operation around EMV.
And that’s also a helping increase the results for our personalization fulfillment business. We had very strong results in the first quarter year-over-year, but just to give you a sense in the first quarter of 2015 we personalized, of all the cards we personalized in fulfillment first quarter less than 1% was EMV.
And in the first quarter of 2016 approximately 52% of the cards that we personalized were EMV. So we have seen a big increase in EMV activity around the issuance if you will, but personalization and fulfillment business so in services.
Paulo Ribeiro
I see. So just a quick try to follow-up that, so coming to 2017 and I know you are not giving guidance for that.
But you said in the stage for one, if the timing issue for especially for the small issuers they are pushing 2017 and then personalization it does keep sustainable that increase degree of personalization percentage of personalization. You set up 2017 be stronger than you initially expected in U.S.
dividend credit? Hello?
Steve Montross
Yes, we would. But we absolutely -- with that small to mid-sized issuer business pushing out, we would expect that would have a positive impact on 2017 for us.
Paulo Ribeiro
Okay perfect. I'll get back to the line.
Thank you.
Steve Montross
Okay. Thank you, Paul.
Operator
Our next question or comment comes from the line of Eric Ciura with Baird. Your line is now open.
Eric Ciura
Hey, guys. Thanks for taking my question.
Just on the personalization, you guys called a pricing pressure from the large issuers on the manufacturing side, have you seen any pricing pressure on personalization? And then do you expect to see any in the latter half of the year?
Steve Montross
No, in the personalization business, no, we haven’t seen any pricing pressure and we wouldn’t expect to see any. Personalization business that we have is heavily weighted to the small and mid-issuer and as Dave was mentioning, even on the manufacturing side, we haven’t seen pricing pressure in that small and mid-issuer segment.
It's been really in the large issuer segment as where we've seen the pricing pressure and where we expect to see it in the second half of the year. But we don't expect to see pricing pressure in the personalization business.
Eric Ciura
Okay. And then secondly on potentially M&A opportunities, you mentioned that during the call, I guess what types of things are you guys still looking for and how big could they potentially be given -- using free cash for potential buybacks and the dividend?
Steve Montross
Yeah. The things that we would looking for looking are -- we would really be looking to complement our services to build -- continue to build out our service offering.
And so that would be number one priority as something that will strengthen -- obviously strengthen our offering for our customers if we also get into a new niche for it; that would be very attractive. But the focus has been services.
We've got -- we believe we've got excellent manufacturing capacity and therefore really looking at service side of things and how we can continue to really build and strengthen the service side of the business. So, that would be the number one priority for us.
Eric Ciura
Okay. Thanks guys.
Steve Montross
Thank you, Eric.
Operator
And at this time, I'm showing no further questions or comments. So, with that said, I would now like to turn the conference back over to President and CEO, Mr.
Steve Montross for closing remarks.
Steve Montross
Okay. Well, I thank everyone for your participation in the earnings call today.
And we know that we're going to have follow-up discussions with a number of you over the next few days and we look forward to those discussions and we also look forward to communicating with you next quarter in our earnings call. Thanks for participating, have a good rest of the day.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect.
Everyone enjoy the rest of your day.