VeriFone (PAY) Q3 Earnings In Line, Revenues Beat Estimates

VeriFone Systems Inc. (NYSE:PAY) reported third-quarter fiscal 2017 non-GAAP earnings of 36 cents, in line with the Zacks Consensus Estimate but down 13.2% from the year-ago quarter. The figure was also in line with the high end of management’s guidance range of 35-36 cents.

The year-over-year decline was primarily due to lower non-GAAP revenues, which decreased 4.3% to $466.9 million, slightly better than the Zacks Consensus Estimate. The decline can be attributed to anticipated sluggishness in the Asia Pacific, particularly India, and weakness in North America. This was partially offset by strong revenue growth in Latin America and the Europe, Middle East and Africa (EMEA).

VeriFone is now in the process of divesting the taxi business. In June, the company completed the restructuring of operations in China. The company now has a minority stake in the newly created local company. As noted earlier, VeriFone formed a 50/50 joint venture by combining its Petro Media advertising business with Gas Station TV during the second quarter.

These divestitures will help in improving services gross margin by at least 200 basis points (bps). Management believes that improving margin profile of services business coupled with success of Engage (fourth quarter launch in 15 countries) and Carbon 8 (fiscal 2018 launch) platforms will drive overall results, going forward.

Moreover, the company’s mPOS device has also gained good traction within a short span of time. Management believes that it is on track to deliver more than 20% organic growth across mobile product portfolio in fiscal 2017.

Further, the company expects modest growth in North America going into fiscal 2018 driven by strong growth traction in retail and SMB verticals. This was offset by headwinds in the petroleum vertical.

Shares of the company declined 5.3% during after hour trading session. VeriFone’s stock has gained 9.6% year to date, substantially underperforming the 24.8% rally of the industry it belongs to.

Top-Line Details

System revenues (57% of total revenue) decreased 8.9% year over year to $266 million. The significant decline reflects tough comparisons, as the year-ago quarter benefited from strong EMV demand, particularly in the petroleum vertical. However, services (43% of total revenue) increased 2.5% year over year to $200.9 million.

Non-GAAP revenues from North America and Asia Pacific fell 22% and 4.3% from the year-ago quarter to $152.8 million and $49.3 million, respectively. However, EMEA and Latin America revenues surged 29.4% and 1.8% to $193.5 million and $71.3 million, respectively.

Management stated North America SMB vertical grew year over year for the first time in five quarters. The retail vertical benefited from several large QSR deployments, robust demand for E series mPOS devices as well as higher number of device refresh with Tier-1 retailers who were the earliest adopters of EMV.

Moreover, Latin America revenues benefited from strong year-on-year growth in Brazil, Argentina and Chile. Good momentum in France and Germany particularly due to robust demand for Engage platform drove top-line growth at EMEA.

Notably, in the first half of 2017 VeriFone sold Engage in four countries. In the reported quarter the platform was sold in seven countries. The company expects to launch the platform in 15 countries during the current quarter and another 10 countries in the first quarter of fiscal 2018.

Services Margin Improves

Non-GAAP gross margin was 40.7%, which was in line with management’s expectation but contracted 190 bps from the year-ago quarter.

Systems margins of 37.9% contracted 80 bps sequentially due to unfavorable product mix. Services margins were 40.7%, up significantly on a year-over-year basis due to the divestiture of low margin Petro Media business.

Operating expense decreased 8.1% to $142.3 million. As percentage of revenues, operating expenses declined 130 bps to 30.5%. The company incurred operating expenses of approximately $66 million primarily attributable to the announced divestitures of non-core businesses.

Non-GAAP operating margin contracted 80 bps on a year-over-year basis to 12.5%.

Balance Sheet

As of Jul 31 2017, VeriFone had approximately $159 million in cash & cash equivalents compared with $134.5 million as of Apr 31 2017. Long-term debt totaled $803.4 million as compared with $836.6 million at the end of the previous quarter.

Cash flow from operations in the quarter was $13 million as compared with $36 million in the previous quarter. Meanwhile, free cash outflow was $11 million in the quarter.

Guidance

For fourth-quarter fiscal 2017, VeriFone projects non-GAAP revenues to be in the range of $470-$473 million. The company expects earnings of 43 cents per share for the current quarter.

For fiscal 2017, the company now estimates non-GAAP revenues within a range of $1.864-$1.867 billion. Management projects earnings of $1.30 per share for the fiscal year down from previous range of $1.32-$1.34.

For fiscal 2017, free cash flow from operations is expected to be greater than $100 million.

Zacks Rank & Key Picks

VeriFone carries a Zacks Rank #4 (Sell). Total System Services Inc (NYSE:TSS) , Vantiv Inc. (NYSE:VNTV) and The Western Union Company (NYSE:WU) , all carrying a Zacks Rank #2 (Buy), are a few better-ranked stocks in the same sector. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rates for Total System Services, Vantiv and The Western Union is currently pegged at 12.5%, 14.3% and 8%, respectively.

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