VeriFone Systems Inc. PAY reported fourth-quarter fiscal 2015 adjusted earnings (including stock-based compensation) of 45 cents per share, which easily beat the Zacks Consensus Estimate of 40 cents. However, the company’s 2016 guidance was weaker than expected and resulted in nearly 3% drop in share price in the aftermarket session.
The company reported non-GAAP earnings of 49 cents a share, up from 44 cents reported in the prior-year quarter.
Quarterly Details
Revenues of $514 million increased 4.8% year over year and also surpassed the Zacks Consensus Estimate of $513 million. Revenues were also better than management’s guided range of $510–$513 million. The year-over-year growth was primarily driven by strong performance of the System Solutions segment.
System Solutions revenues (65.9% of total revenue) increased 9% year over year to $338.9 million. Services revenues (34.1% of total revenue), however, fell 2.4% to $175.2 million.
Non GAAP revenues from North America increased 54.3% year over year to $229.9 million. Sales of mobile products and security solutions remained strong in the reported quarter.
Revenues from Latin America declined 23.5% year over year to $62.8 million. Unfavorable economic environment in Brazil was the primary reason.
Revenues from EMEA (Europe, Middle East and Africa) declined 13.3% from the year-ago quarter to $164.2 million. However, the company’s business in Western Europe exhibited growth.
Asia Pacific revenues plummeted 18.4% year over year to $57.3 million.
Margins
The company’s non-GAAP gross margin improved 110 basis points (bps) year over year to 43.4%.
Operating expenses as a percentage of revenues increased 230 bps to 35.5% from 33.2% reported in the prior-year quarter. The year-over-year increase in operating expenses was due to higher general and administrative expenses in the quarter.
Operating margin for the quarter came in at 14.8%.
Liquidity
At the end of the quarter, VeriFone had approximately $208.9 million in cash compared with $250.2 million as of Oct 31, 2014. Long term debt was $760.2 million, down from $836.6 million as of Oct 31, 2014.
Cash flow from operations for the year ended Oct 31, 2015, was $249.3 million compared with $199.1 million in the prior-year period. Free cash flow for the year improved 25.2% on a year- over-year basis to $142.9 million. VeriFone repurchased $100 million worth of stock in fiscal 2015.
Outlook
VeriFone expects non-GAAP revenues of approximately $500 million for the first quarter of fiscal 2016. Management expects non-GAAP earnings per share to be 45 cents in the quarter.
For fiscal 2016, the company expects non-GAAP revenues to be between $2,090 million and $2,110 million. Earnings are expected within the $2.15 to $2.17 per share range. As per regions, VeriFone expects North America to see a revenue growth of 5% as against 3% projected earlier driven by sizable EMV upgrade, SMB and greenfield opportunities. EMEA and Asia pacific will witness mid single digit revenue growth whereas revenues will either remain flat or decline for the Latin American region.
Capex is expected to be $110 million for the fiscal while free cash flow is expected to be $175 million.
Our Take
VeriFone seems well positioned to gain from the ongoing demand shift towards EMV and NFC capable terminals. In fact, about a 30% increase in the EMV terminals market is expected after the EMV chip card fraud liability shift that came into effect this October. Thereafter, it has become mandatory for merchants to install EMV-capable terminals to enhance payment security. Furthermore, the company is benefiting from the presence of tech giants like Apple Inc. AAPL, Alphabet, Inc GOOGL and Samsung in the mobile payments industry.
Additionally, the company is also focused on increasing its operational efficiency by taking a number of cost-cutting and streamlining measures. This has increased margins over the past few quarters.
Nonetheless, VeriFone faces significant competition from a number of local providers in the domestic, international as well as emerging markets such as China and India. At the same time, we believe VeriFone’s highly leveraged balance sheet can limit its developmental activities.
Currently, VeriFone carries a Zacks Rank #4 (Sell). A better ranked stock worth consideration in the same space is Fiserv, Inc. FISV with a Zacks Rank #2 (Buy).
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