VeriFone Systems Inc.
) reported impressive fiscal second-quarter 2014 results. Earnings
of 27 cents per share (including stock-based compensation) beat the
Zacks Consensus Estimate by 6 cents.
Revenues (excluding amortization of step-down in deferred services
net revenue at acquisition) increased 8.6% year over year to $466.8
million, much better than the Zacks Consensus Estimate. Revenues
were also better than management's guided range of $440.0-$445.0
VeriFone's strong revenue growth was primarily driven by higher
number of client sign-ups for the payment-as-a-service solution,
growth in the U.S. taxi market and incremental revenues from the
acquisitions in New Zealand and France.
System Solutions revenues (62.3% of revenues) increased 5.1% year
over year to $290.7 million. Services revenues (37.6% of revenues)
surged 17.4% from the year-ago quarter to $175.7 million in the
Revenues in North America (which comprises operations in the U.S.
and Canada) increased 2.7% year over year to $125.3 million. Demand
for the company's EMV-capable MX 900 series product remained strong
during the quarter, as 15 existing clients selected the product.
VeriFone began to rollout in CVS and
), won orders from 6 clients earlier using a competitor's product
and three new customers. In the second quarter, six retailers,
including Nike, Godiva,
Abercrombie & Fitch
) and PetSmart agreed to implement EMV capable mobile solutions
that integrate with
) latest iPhone.
Revenues from the taxi business were almost flat sequentially.
Small and medium business was up from the previous quarter, while
the U.S. petrol business revenues were down sequentially as clients
deferred purchases as the company shifts its products to EMV
Revenues in LAC (which comprises operations in South America,
Central America, including Mexico and the Caribbean) decreased 2.3%
year over year to $83.3 million. Brazil increased on a sequential
basis due to competitive wins.
Revenues in EMEA (Europe, Middle East and Africa) increased 10.3%
from the year-ago quarter to $190.6 million. The company's revenues
continue to improve in this market and achieved strong sales in
Spain due to growing relationship with Redsys, the country's
largest processor. Strong demand from Nigerian banks also drove
ASPAC revenues (including operations in Asia Pacific, including
China, India, Japan, Australia, New Zealand and other countries in
the region) surged 36.0% year over year to $67.6 million. The
strong growth was driven by robust sales performance in Australia.
During the quarter, VeriFone launched portable VX 690, the first of
several new EMV capable devices that will allow merchants to use
NFC, low-energy Bluetooth, and many more additional mobile
point-of-sale bandwidths. This new terminal will first be available
Gross margin (including stock-based compensation) contracted 70
basis points (bps) from the year-ago quarter to 41.4%. The
year-over-year decline was due to 190 bps contraction in services
gross margin, which fully a 90 bps expansion in System solutions
Operating expenses as percentage of revenues surged 250 bps on a
year-over-year basis to 33.2%. The year-over-year rise in operating
expenses was due to higher research & development (R&D),
sales and marketing (S&M) and general & administrative
(G&A) expenses, which increased 100 bps, 130 bps and 20 bps,
Operating income (including stock-based compensation) contracted
280 bps from the year-ago quarter to 10.3%, primarily due to lower
gross margin base and higher operating expenses.
Net income (including stock-based compensation) was $31.0 million
or 27 cents per share compared with $38.9 million or 35 cents per
share in the year-ago quarter.
At quarter-end, VeriFone had approximately $229.8 million in cash
compared with $249.3 million in the previous quarter. Total debt
was $940.2 million compared with $1.00 billion in the previous
quarter. Cash flow from operations was $57.0 million compared with
$31.9 million in the previous quarter. Free cash flow increased to
$36.0 million from $11.0 million in the previous quarter.
During the quarter, VeriFone approved a restructuring program under
which it will reduce headcount by 500 (150 in the second quarter).
The company plans to close 10 facilities, liquidate 19 legal
entities and consolidate 20.0% of data centers.
VeriFone has identified approximately 100 cost saving projects that
it will execute eventually. The company has also selected 10
R&D sites where it will relocate staff from its 75 individual
sites. This consolidation will further improve efficiency.
VeriFone also plans to reduce legacy products to 500 (from 1000) by
the end of 2014. These programs are expected to save at least $35.0
VeriFone expects non-GAAP revenues to be in the range of
$455.0-$460.0 million for the third quarter of fiscal 2014.
Operating expense is forecasted to be $134.0 million. Management
expects second-quarter non-GAAP earnings to be in the range of 33
to 34 cents. The mid-point of the guided range is up from 15 cents
reported in the year-ago quarter. The Zacks Consensus Estimate is
currently pegged at 25 cents per share.
Free cash outflow is expected to be in the range of $20.0 to $25.0
million for the upcoming quarter.
For fiscal 2014, non-GAAP revenues are expected to be in the range
of $1.825 to $1.835 billion (up from $1.78-$1.81 billion expected
Operating expenses are expected to increase approximately 11.0% to
$535.0 million. Earnings are expected to be in the range of $1.42
to $1.44 per share (earlier guidance $1.40). Currently, the Zacks
Consensus Estimate is pegged at 97 cents per share, lower than the
Free cash flow is expected to be 95% of non-GAAP net income for
fiscal 2014. The company reported free cash flow of $159.0 million
in fiscal 2013, which was approximately 100% of the net income.
VeriFone provided positive outlook for the third quarter and full
year. We believe that initiatives such as reduction in overlapping
solutions, shifting R&D to new innovations, streamlining of
data centers, legal entities and facilities will improve VeriFone's
operating fundamentals in the long run.
We believe the company has significant growth opportunity in EMV
products, particularly in the domestic market, over the next 6-12
months. VeriFone's innovative product pipeline and customer wins
such as Abercrombie & Fitch and Costco are significant
positives. The partnership with American Express will also boost
VeriFone's customer base, going forward.
Moreover, the company has strong growth opportunities in overseas
market, particularly in emerging economies such as Brazil, China,
Russia and India.
However, execution remains a key headwind as the benefits of
restructuring will take some time to positively affect results.
Moreover, intensifying competition and investments on new product
development will keep margins under pressure in the near term.
Currently, VeriFone has a Zacks Rank #3 (Hold).
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