Verifone Systems, Inc. (PAY)

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VeriFone Systems, Inc (PAY)

Q3 2011 Earnings Call

September 06, 2011 4:30 pm ET

Executives

Doug Reed - Vice President, Treasurer and Executive officer of Investor Relations

Robert Dykes - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Douglas Bergeron - Chief Executive Officer and Executive Director

Analysts

Robert Dodd - Morgan Keegan & Company, Inc.

Julio Quinteros - Goldman Sachs Group Inc.

Tal Simon

Tien-Tsin Huang - JP Morgan Chase & Co

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Darrin Peller - Barclays Capital

Keith Housum - Northcoast Research

Gil Luria - Wedbush Securities Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 VeriFone Systems Inc. Earnings Conference Call. My name is Amesia, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to Mr. Doug Reed, Treasurer and Vice President of Investor Relations. Please proceed.

Doug Reed

Thank you, Amesia, and welcome everyone to the VeriFone financial results conference call for the third quarter of fiscal year 2011. Today's call is being webcast with both audio and slides available via the link in the Investor Relations area of our website, and a recording will be available on our website verifone.com until September 13, 2011. With me today is our CEO, Doug Bergeron; and our CFO, Bob Dykes.

First, for the legalities. VeriFone desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements in this conference call, including management's view of future events and financial performance, are subject to various factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For a description of these factors, I refer you to our filings with the Securities and Exchange Commission. Any forward-looking statements speak only as of today, and VeriFone is under no obligation to update these statements to reflect future events or circumstances.

In addition, today's call will cover certain non-GAAP financial measures on both historical and forecast basis. Our management uses these measures to evaluate our operating performance and to compare our results to those of prior periods as well as to those of peer companies. These non-GAAP measures are not substitutes for disclosures made in accordance with GAAP. Reconciliations of these measures to the most comparable GAAP measures are presented in our earnings release, which is available on our website. [Operator Instructions] Now I'd like to turn the call over to Doug Bergeron, CEO of VeriFone.

Douglas Bergeron

Thanks, Doug, and good afternoon, everyone. We are delighted with the results of our third quarter of fiscal year 2011. For the seventh consecutive quarter, we posted all-time record results. Q3 non-GAAP revenues were $317 million, a 21% increase over the previous year. This is also the fifth straight quarter that growth rates have exceeded 20%.

Sequentially, we had a record quarter-to-quarter growth of $25 million or 8%. This includes a little over $1 million from our South African acquisition that we completed at the end of June.

We continue to see the benefits of our new business initiatives as non-GAAP services revenue grew 31% over the same period last year, significantly faster than our 19% growth in product revenues. Non-GAAP gross margins for the quarter were at 43%, consistent with our strong Q2 results and up 4 points over the same period last year.

Our cash balances grew to $584 million, an increase of $53 million from the previous quarter. Non-GAAP fully diluted earnings for the third quarter were $0.49 per share, 36% higher than the $0.36 per share results a year ago.

Today, I will review our performance by region and follow with comments on our strategic activities, including the mobile payment space. Finally, I will turn the call over to Bob who will provide a detailed review of the financials and update guidance.

VeriFone's third quarter revenues reflect strong results globally with double-digit growth year-over-year in each of our international regions and continued solid performance in North America. In North America, sales of $122 million were up 1% sequentially and down 1% compared to last year. By comparison, on a year-over-year basis, Ingenico recently reported a 25% revenue decline in their North American segment, and Hypercom reported a 13% decline in their Americas segment. Recall that in fiscal year 2010, we saw full year revenue growth of nearly 30% in North America due in big part to the widely publicized PCI deadline. So our 2011 comps are difficult.

We had an excellent quarter of advertising and taxi revenue as the summer tourist season kicked in and strong sales into our small business and ISO channels. Our Multi-lane Retail sales were robust, featuring key wins at several national retail chains, including Lord & Taylor, Eddie Bauer and OfficeMax. We are taking market share because of our leadership in encryption, mobile checkout and NFC.

We continue to see good demand for our Gemstone systems Ruby, Topaz and Sapphire in the petro station kiosks as our product innovations and solid performance differentiate our solutions in the marketplace. However, we are not achieving sales volumes at the levels of a year ago when many sites were upgrading for PCI compliance. The roll out of our software maintenance program for Gemstone systems continues to be very successful. Approximately 65% of our U.S. base has now signed up for the service, and we continue to -- we expect continued adoption of this program in Q4 and beyond.

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