Verifone Systems Inc. (PAY) is one of the most important electronic payment systems. VeriFone continues to grow fueled by two key drivers: strategic acquisitions and a growing high margin services mix. I am encouraged by the company´s new offerings and high margin service businesses. Some examples of PAY's compelling new offerings are the implementation of London Taxi payment systems, Secure PumpPay solutions and mobile payments growth. Verifone shares went down because its management reduced revenues projections due to reduced sales from Latin America and unfavourable exchange rate volatility.
PAY has been transforming its business to the coming mobile payments trend. The company has developed a complete platform that let retailers manage and accept all existing payment types, including the evolving alternative and mobile payment methods offered by Google (GOOG), PayPal (EBAY), Groupon (GRPN), Isis, Visa (V), MasterCard (MA) and American Express (AXP). I project a global trend towards electronic payment transactions. This trend has been accelerated by the use of credit and debit card-based payments, especially PIN-based debit. Verifone is one of the very few companies exploring the payments-as-a-service field as it continues to bundle encryption services, content and advertising, gateway services, e-commerce capabilities and cloud-based retail application processing, which provide it with an edge over its competitors.
The company has been also very active in creating partnerships. Recently, Verifone partnered with National Australia Bank, a leading bank in Australia, to let the bank´s clients make payments or transactions via mobile devices. It also signed a partnership deal with Indiana-based retailer The Finish Line, to provide multimedia-driven countertop payment solutions for a better shopping experience for its customers. The company signed a profitable five-year contract with the District of Columbia Taxicab Commission to provide payment devices to 6,500 taximeters. Verifone has also made a deal with Google to incorporate its payments technologies into the Google Wallet platform. Verifone has also acquired several interesting firms. Show Media in New York, LIFT Retail Marketing Technology Inc., Global Bay Mobile, Hypercom, and Linq3 are some of its early acquisitions and partners in the payment business. Its most recent acquisition of Point, a company that provides payment and gateway services to consumers in northern Europe, signals another stepping up of the company. Growth rates for electronic payment solution systems have been higher in international markets, primarily due to the relatively low penetration rate of electronic payment transactions in many regions, such as Eastern Europe, Latin America and Asia.
In the recent earnings report, PAY reported a strong revenue growth of 56% yet it fell short of Wall Street guidance. Revenues were below management guidance of $495/$500 million. This was primarily due to reduced revenues from Latin America as a result of a fire at its facility in Brazil. Record results included adjusted services revenue at 29% of total revenue, adjusted gross margin at 45.4%, and adjusted operating margin at 23%. This strong metrics show that the core business is going strong.
Verifone´s net margin is 21.6%, stronger than its past year margins of 9.87%. Its Return on Assets is 16% while its past year´s ROA is 9.8%. I like when companies show increased net margins. Its current ROE is 40%. I always look for companies that report return on equity ratios above 20%. The company has shown impressive revenue and EPS growth. PAY increased year over year revenues by 30% and EPS by 158%. The company also reports a strong Free Cash Flow/Sales of 12.4% while it had a FCF/S of 3.40% in 2007.
In conclusion, I think that PAY trading at just 13x P/E ratio does represent a value opportunity and is one of the mobile stories I find most compelling. With 4 quarters of consecutive revenue growth, 3 consecutive years of annual revenue growth in excess of 20%, strong balance sheet fundamentals (current ratio of 1.26) and growing institutional interest, the stock could be poised for a rebound.