VeriFone Systems Inc. (
reported first-quarter 2013 earnings of 40 cents, which surpassed
the Zacks Consensus Estimate by 3 cents. However, VeriFone's
reported revenues missed the Zacks Consensus Estimate of $460.0
The miss was primarily due to soft macroeconomic conditions in
Europe, currency headwinds in Venezuela (usually a strong market
for VeriFone), postponement and delay of certain projects,
particularly in Asia; the cancellation of the Washington D.C.
taxi project and certain internal execution challenges.
Revenues (excluding amortization of step-down in deferred
revenues on acquisition and expenses related to acquisition &
divestiture) increased 1.0% from the year-ago quarter but
decreased 12.1% from the previous quarter to $429.7 million.
Organic revenues declined 7.0% year over year in the reported
Revenues were within the management's guided range of $425.0
million to $430.0 million as announced on Feb 20, 2013 (please
VeriFone Reports 1Q Prelim Results
). However, revenues were much lower than the initial guided
range of $495.0 million to $500.0 million.
System Solutions revenues (65.6% of revenues) decreased 10.4%
year over year and 16.2% quarter over quarter to $281.8 million
in the reported quarter. Services revenues (34.4% of revenues)
jumped 33.7% from the year-ago quarter but declined 3.0%
sequentially in the last quarter.
Revenues were negatively impacted by VeriFone's increased
focus on long-term service initiatives in multiple regions, which
hurt near-term hardware and software features. However, a number
of external challenges also reduced top-line growth.
VeriFone's result was negatively impacted by a soft European
market, much against the management's expectation of sequential
growth. Although VeriFone shipped new products in Germany, it did
not boost top-line growth in the quarter. Revenues in EMEA
(Europe, Middle East and Africa) declined 14.8% from the fourth
quarter of 2012. On a year-over-year basis, revenues increased
10.8% to $171.6 million.
VeriFone management blamed poor sales planning and execution
as one of the reasons behind the revenue decline in the quarter.
Increase in deferred revenues (by $23.0 million) due to higher
volume shipments to a new mix of customers in the Middle East and
Africa, which did not meet the first-quarter revenue recognition
criteria, hurt top-line growth.
Postponement and cancellation of certain projects in the Asia
region (particularly in India and China) negatively impacted
top-line growth. In India, sales were hurt by Reserve Bank of
India's directive to reduce and cap the merchant discount rate
for debit transactions. Moreover, one of VeriFone's large Indian
customers implemented a capital freeze during the quarter.
As a result, ASPAC (which comprises operations in
Asia-Pacific, including China, India, Japan, Australia, New
Zealand and other countries in the region) plunged 13.5%
sequentially but increased 13.8% from the year-ago quarter to
During the quarter, VeriFone won a managed services contract
from China PnR. The company acquired New Zealand-based ENZ and
Sektor Payments during the quarter. VeriFone expects these
acquisitions to be completed by the end of second or third
The success of payments-as-a-service ("PaaS") model in ASPAC,
particularly in Australia encourages company growth opportunities
in the region. Moreover, the recent acquisitions are expected to
help the company improve its penetration going forward.
Revenues in LAC (which comprises operations in South America,
Central America, including Mexico, and the Caribbean) decreased
27.2% year over year and 8.7% quarter over quarter to $73.0
million. Revenues suffered from a shortfall of approximately $5.0
million due to currency controls in Venezuela. Software
localization issues in other Latin American countries also hurt
The cancellation of a 5-year $35 million to $45 million taxi
in-payment project in Washington D.C. also negatively impacted
top-line growth in the reported quarter. Revenues in North
America (which comprises operations in the U.S. and Canada)
declined 8.3% sequentially. On a year-over-year basis, revenues
increased 11.4% to $133.2 million.
The strong year-over-year growth in North American revenues
was primarily due to a strong product portfolio. VeriFone's
multi-lane retail sales increased 11% from the year-ago quarter,
driven by strong demand for MX 900 systems.
Petroleum revenues were up 10% year over year, driven
primarily by strong sales of the Topaz platform, which is
currently used by approximately 60,000 to 100,000 gas stations in
the US. Revenues in the North American small business sector were
up 30% year over year, with strong growth in both U.S. and Canada
Gross margin (including stock-based compensation) improved 60
basis points ("bps") from the year-ago quarter but contracted 70
bps from the previous quarter to 43.4%. The year-over-year growth
was driven by 230 bps service gross margin expansion, which fully
offset a 30 bps decline in system solutions gross margin. The
year-over-year growth in service gross margin was due to the
inclusion of the full quarter sales of higher-margin point
The sequential decline was due to 240 bps contraction in
service gross margin, which primarily reflected the negative
impact of lower taxi advertising revenues and absence of certain
higher-margin sales in the first quarter, which positively
affected the fourth quarter gross margins.
Operating expenses as a percentage of sales jumped 320 bps
from the year-ago quarter and 450 bps on a sequential basis to
28.0%. This sharp rise in operating expenses was due to higher
research & development expense ("R&D"), which as a
percentage of revenues increased 110 bps from the year-ago
quarter and 120 bps from the previous quarter to 8.9%.
Sales and marketing ("S&M") as a percentage of revenues
jumped 130 bps year over year and 160 bps quarter over quarter to
10.5% in the last quarter. General & administrative
("G&A") was up 80 bps from the year-ago quarter and 170 bps
from the previous quarter to 8.6%.
Operating margin declined 260 bps year over year and 520 bps
sequentially to 15.4% in the last quarter. The significant
decline was primarily due to higher operating expenses and lower
gross margin base.
Net income margin declined 220 bps from the year-ago quarter
but increased 460 bps sequentially to 10.3% in the reported
Earnings per Share
Earnings per share ("EPS") including share-based compensation
decreased 18.0% year over year and 39.7% sequentially in the
reported quarter. Excluding stock-based compensation,
amortization charges, acquisition related charges and related tax
effect, VeriFone reported EPS of 51 cents. However, EPS was
slightly better than the management's preliminary result of 47
cents to 50 cents, but was well short of the previously guided
range of 70 cents to 73 cents.
On a GAAP basis, EPS was 11 cents, slightly better than the
company's preliminary result of 7 cents to 10 cents. EPS declined
from 24 cents reported in the previous quarter but improved
significantly from a loss of 3 cents in the year-ago quarter.
At quarter end, VeriFone had approximately $476.7 million in
cash compared with $454.1 million in the previous quarter. Total
debt was $1.29 billion compared with $1.31 billion in the
previous quarter. Cash flow from operations was $53.0 million and
free cash flow was $33.0 million in the quarter.
VeriFone expects non-GAAP revenues to be in the range of
$435.0 million to $450.0 million for the second quarter of 2013.
Management expects second quarter non-GAAP EPS to be in the range
of 45 cents to 50 cents.
For fiscal 2013, non-GAAP revenues are projected in the range
of $1.8 billion to $1.83 billion, EPS in the range of $1.90 to
$2.10 and free cash flow in the range of $170 million to $190
million. VeriFone expects non-GAAP net revenues and non-GAAP EPS
to grow sequentially in the third and fourth quarters of fiscal
While there are certain European countries that are performing
at or above plan for VeriFone, the company expects overall demand
in Europe to remain weak throughout the rest of fiscal 2013.
For the remainder of fiscal 2013, VeriFone expects operating
expenses to ramp up to approximately $120 million to $130 million
per quarter, reflecting increased investments on its
VeriFone expects to launch a mobile payment application in the
near term for both
Android based phones. Currently in beta, VeriFone's new mobile
wallet has been tested by New York City Cab passengers over the
last month. The application allows users to load payment cards,
tip preferences and receipt delivery preferences on their phone
and quickly prepay their fare with a single tap using advanced
VeriFone announced a number of steps to boost its operating
results going forward. The steps include a comprehensive review
of the strategic operating plan to boost near-term productivity
along with increasing service offerings over the long term.
Moreover, the company expects to take steps to improve cost
efficiencies of the acquisitions.
We believe that these initiatives will drive VeriFone's
results going forward. Additionally, VeriFone's accretive
acquisitions are expected to boost customer base going
However, competition continues to be stiff from the likes of
NCR Corp. (
, and is a major headwind. Organic growth also remains a matter
of concern amid volatile macroeconomic conditions. Moreover,
increasing investments will hurt profitability in the near
Currently, VeriFone has a Zacks Rank #5 (Strong Sell).
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