VeriFone Beats, Slashes Guidance (PAY)

VeriFone Systems Inc (PAY) posted a net income of $37.7 million or 34 cents per share in the third quarter of 2012 compared with $14.5 million or 3 cents per share in the second quarter of fiscal 2012 and $26.4 million or 28 cents per diluted share in the year-ago quarter.

Excluding one-time charges but including stock-based compensation expense, net income came in at 64 cents per share, beating the Zacks Consensus Estimate of 61 cents.

VeriFone reported revenues of $489 million, up 54.2% year over year and 3.6% sequentially.

Based in San Jose, California, VeriFone designs, markets and services a transaction automation system that facilitates electronic payments between consumers, merchants and financial institutions.

Excluding amortization of step-down in deferred revenue on acquisition, revenues came in at $493 million, up 56.0% annually and 2.9% quarter over quarter. Revenues, however, were below management’s guidance of $495 million – $500 million.

Organic revenues, which exclude net revenues from businesses acquired in the past 12 months, grew 16% from the year-ago quarter. North America grew 9% organically. International revenues grew 21% organically as core demand remained strong across all geographies except Brazil.

On a segment basis, System Solutions generated revenues of $350.2 million, up 38.1% year over year. Services revenues soared 119.3% year over year to $138.8 million.

In Europe, the Middle East and Africa (EMEA), revenues grew 109% year over year and 16% organically. Latin American sales were robust as the region recorded a 45% growth on a year-over-year basis.

VeriFone has integrated both Point and Hypercom acquisitions into its operations smoothly. On January 4, 2012, VeriFone completed the acquisition of Point, one of Northern Europe’s largest providers of payment and gateway services and solutions for retailers.

Based in Stockholm, Point provides payment and gateway services and solutions for retailers in Northern Europe. Founded in 1988, the company has operations in 11 Northern European countries and currently serves a captive network with over 475,000 merchants. Nordic Capital acquired Point in 2004.

The company continues to bundle encryption services, content and advertising, gateway services, e-commerce capabilities and cloud-based retail application processing, which provides it with an edge over other competitors. VeriFone has begun the process of rolling out Point’s payment as-a-service offering beyond Point's traditional markets.

Margins

Gross margin (excluding stock-based compensation and one-time items) came in at 45%, flat with the previous quarter, and up from 43% in the year-ago quarter. Including these items, gross margins came in at 42% compared with 41% in the previous quarter and 42% in the year-ago quarter.

Operating margin came in at 23.0%, up from 21.3% in the previous quarter and 19.1% in the year-ago quarter. VeriFone generated $82 million of cash from operating activities and exited the quarter with cash and equivalents of $409.8 million, down from $361.0 million at the end of the previous quarter.

Outlook

Management remains concerned about the potential impact of a declining euro and other currencies when converted into U.S. dollar.

For the fourth quarter, VeriFone expects to report net revenues between $495 million and $500 million. Excluding stock-based compensation, net income per diluted share is projected between 75 cents and 77 cents.

For fiscal 2012 (including 10 months of Point revenues), VeriFone expects to report net revenues between $1.893 billion and $1.898 billion, down from the previous guidance of $1.900 billion – $1.925 billion. Excluding stock-based compensation, net income per diluted share is projected between $2.73 and $2.75, up from the earlier projection of $2.60 – $2.66.

For fiscal 2013, revenues are estimated between $2.05 billion and $2.10 billion. Excluding stock-based compensation, net income per diluted share is projected between $3.25 and $3.30.

We continue to maintain a Neutral recommendation on VeriFone. In the short-run, we have a Zacks #4 Rank on the stock which translates into a short-term rating of Sell.

The weaker-than-expected sales and disappointing guidance led to an 11.02% decline in stock price to $31.48 in afterhours trading. In regular trading, the stock was down 1.90%.