Hypercom Corporation Q4 2008 Earnings Call Transcript

Hypercom Corporation (HYC)

Q4 2008 Earnings Call Transcript

March 10, 2009 at 4:30 pm ET

Executives

Norman Stout - Chairman

Philippe Tartavull - Chief Executive Officer and President

Bob Vreeland - Interim Chief Financial Officer

Scott Tsujita - Senior Vice President of Finance, Treasury and Investor Relations

Analysts

Analyst for George Sutton - Craig-Hallum Capital

Robert Dodd - Morgan, Keegan & Company, Inc.

Gil Luria - Wedbush Morgan Securities, Inc.

Analyst for Gil Luria - Wedbush Morgan Securities, Inc.

Tim Brown - Roth Capital Partners, LLC

Presentation

Operator

Welcome to the Hypercom Corporation fourth quarter and yearend 2008 results call. All participants are in a listen-only mode. Today's conference is being recorded. (Operator Instructions) Now, I will turn the meeting over to Mr. Norman Stout, Chairman. Mr. Stout, you may begin.

Norman Stout

Thank you, Holly and welcome everyone to Hypercom's Q4 2008 earnings call. With me today are Philippe Tartavull, Hypercom's Chief Executive Officer and President; Bob Vreeland, our Interim CFO; Scott Tsujita, Senior Vice President, Treasury and Investor Relations. And now, I will it over to Scott to read our risk factors and forward-looking statements. Scott?

Scott Tsujita

Good afternoon and welcome to everyone on the call. The purpose of this call is to discuss this afternoon’s press release announcing Hypercom’s fourth quarter 2008 financial results. You should note that this conference call contains forward-looking statements regarding future events and Hypercom’s future financial performance. Hypercom's management believes that the expectations contained in these forward-looking statements are based on reasonable assumptions. However, it can give no assurance that its expectations will be attained.

Actual events or results may differ materially from those in the forward-looking statements. Please see the Company's annual reports to stockholders and its filings with the SEC including its recent filings on Forms 10-K and 10-Q as well as this afternoons press release for a discussion of important risk factors that could cause actual events or results to differ materially from those in the forward-looking statement.

All participants should be aware that the forward-looking statements, included in this conference call are made only as of the date of this conference call and Hypercom undertakes no obligation to update such statements to reflect subsequent events or circumstances. Please note that all prior quarter and prior year quarterly figures shown in the published financial statements and referred to in today's comments are restated to reflect the same continuing operations as reported in the fourth quarter of 2008.

In addition, today's call will cover certain non-GAAP financial measures. Our management uses these measures to evaluate our operating performance and you compare our results with those of prior periods as well as to peer companies. The non-GAAP measures are not substitutes for disclosures made in accordance with GAAP. Reconciliations of these measures to the most comparable measures are presented in our earnings release which is available at our website, www.Hypercom.com.

This conference call is the property of Hypercom Corporation and is being simultaneously recorded and webcast, any redistribution or retransmission or rebroadcast of this call in any form without the expressed written consent of Hypercom is strictly prohibited. I will now turn the call back over to Norman.

Norman Stout

Thanks, Scott. We will begin today with fully addressing our fourth quarter results then Bob will add some details with the financial performance including the non-cash impairment charge and then we will conclude with Philippe providing some data and visibility for 2009. Philippe?

Philippe Tartavull

Good afternoon and thank you, Norman. First I would address the fourth quarter in light of the economic environment, how we are dealing with current market conditions and accelerating our key objective to gain market share, improve gross margin, boost overall profitability and facilitate the overall transformation of the corporation.

Given our acquisition of TeT, the large fluctuation of the foreign exchange and the deteriorating global economy, we focus on the variation sequentially over the third and fourth quarter to clearly portray current market dynamic. Total revenue for the quarter was $121.6 million. On the constant exchange rate basis, revenue was up 10% over the prior quarter. This increase was primarily due to s in both northern and southern EMEA and it was offset by the slight decline in North America and Asia Pacific.

Sequentially, product revenue is up $4.8 million or 10.5% in volume due to strong increase in countertop and mobile sales. Also sequentially, service revenue declined $4.3 million due to decrease in South America and Asia Pacific, almost exclusively tied to decrease of local currency. Net mix, we generated with complements for our products and services through the fourth quarter.

Now let us look at each region. The America; our business in North America started to be affected by the economic condition. Despite good performance in North America business, countertop product revenue decreased by $600,000 or 4.9%. Also, we continue to seek additional market share in the distributor by little and bank channel with our Optimum T4210 and the rollout of our new entry-level T4205. Our countertop sales were higher in Q4 2008 and Q4 2007. That said Q1 is weak seasonally lower than Q4. Customer demands for product during the first two months of 2009 are certain considerably and are far lower than what is typically will be.

For other channel and processor customer, we experienced softer demand in January and February and as a result, focus on selling their existing inventory. On the multi-lane side, we experienced some sequential decline. We believe multi-lane is a good opportunity. Our customers are clearly looking for alternative and new approaches to security. Our HyperSafe Secure end-to-end encryption system based on industry standard triple DES offers distinct advantages over competitive products because data is decrypted without having to purchase custom equipment and become locked into proprietary solution.

Given the contraction of the traditional North American market, our overall goal is to increase our presence in new market segments where we can now bring to market certified products, example of those segments and with mobile and unattended. In summary, we increased our revenue in the US market by 24% over 2007.

Mexico; In Mexico, product revenue increased $1.6 million from $1.2 million to $2.8 million with mobile sales driving the increase. Going forward, we anticipate select opportunity in Mexico despite challenging price expectations on in-channel in country.

In Brazil, fourth quarter revenue sequentially was down $3.4 million to $10.3 million or 24.5% decrease over the prior quarter. On constant currency revenue basis, it was flat. You may recall our prior discussion regarding our plan to start production in Brazil. I can report to you that we have secured our first order and we start production in Brazil at the end of this month.

EMEA Region is divided into Northern and Southern Europe. Revenue for Northern Europe sequentially increased $2.8 million or 9.7%. Using a constant currency for comparative purpose, revenue will have increased $6.7 million or 31% when calculated using third quarter 2008 exchange rate. Key geographic market in Northern Europe includes Germany, Austria, Sweden, and Denmark. Demand was particularly strong in Germany. There we sequentially revenue by 31%. This gain was driven primarily by increased sales for our short-term payment product and the introduction of our new medCompact healthcare terminal into the German healthcare market. We also continue to see good traction in the region and most specifically in Austria, Denmark and Sweden.

Revenue for Southern Europe sequentially increased $4.5 million or 12.6%. Using the constant currency for comparative purposes, revenue will have increased $7.6 million or 21%. Key geographic market in Southern Europe includes the UK, France, Spain, Italy, Eastern Iraq, Russia and the Middle East. Sequentially, France increased 20% at constant exchange rate. This was mainly driven by our integrated payment solution and some key contact list technology deployments. Going forward, we see additional potential in France. Spain, Russia and to some extent, the UK remained challenging due to their local economy. Middle East remained constant.

Lastly, Asia Pacific; Asia Pacific fourth quarter revenue was sequentially down $2.2 million or 15.7% over Q3 or a decline of 7.6% at constant currency. Our primary focus remains Southern Asia, Australia and New Zealand. To strengthen our position, we now have in place a new regional managing director, Jacques-Herve Maupin. He is a key executive and he is moving forward to redefine our strategy and expand our engagement in the region.

Now, let me speak to the initiative that we established to accelerate the improvement of profitability. First, our gross margin. With regard to price and ASP and consistent with the commitment we initiate in Q4 of 2007, we continue to maintain a very strong price discipline globally. We have as a result of that discipline lost a few deals in Eastern Europe and Asia but nothing of significance.

To move towards improved gross margin, we have established three key indicators; industrial margin, service margin and period cost. This period cost principally comprised of supply chain labor cost, excess inventory, obsolescence, freight and warranty cost. Since the acquisition of TeT and we move to contract manufacturing, our industrial margin had risen from 39.9% in Q2 to 42.3% in Q4. We had a number of initiatives on these fronts that we continue to increase our industrial margin during 2009.

Our period cost rose significantly during the fourth quarter due to excess inventory charge of over $4 million. The increase in excess and obsolescence is primary due to some legacy issue along with the current economic environment. We have increased efforts to enhance our system and process so that we can decrease our risk over excess and obsolescence. We decreased our inventory by $15.5 million. We anticipate lower excess and obsolescence expenses in 2009.

Sequentially, gross service margin declined in Q4 due to decrease from repair and maintenance margin in the America and Pacific. Our software and solution margin remained flat above 38%. We are also operationally increasing our focus to ensure that we maintain and grow only those businesses that are profitable. In addition to product margin and period cost, we stepped up efforts to reduce inventory.

As mentioned earlier, we reduced inventory by $15.5 million, excluding the $4 million of excess inventory and our EMS provider also decreased raw materials. Going forward, we should be able to continue to reduce our inventory, albeit not at the same height level achieved last quarter. With regards to operating expenses, we continue to look very closely at our operating expenses and new scale of business to current market condition.

Year-over-year, excluding the increase from TeT, quarterly operating expenses are down $5.4 million, some of which are due to the benefit of lower foreign currency exchange rate. Sequentially and in addition to the benefit from foreign exchange movement, operating expense declined to lower R&D cost resulting from the integration synergy with TeT. We also, last year, reduced headcount including contractor by roughly 300. We anticipate further integration synergy going forward as well as further optimization of operating expenses. We have also reduced and/or eliminated discretionary spending.

Now, I would turn it over to Bob for some details on Q4.

Bob Vreeland

Thank you and good afternoon. First, as I have mentioned on previous calls, our results include the results of Thales e-Transactions beginning April 1, 2008. Our opening balance sheet of Thales remains as a preliminary valuation as of April 1, 2008 and as such, we could have further adjustments to the opening balance sheet up to 12 months from April 1 which is allowable under General Accepted Accounting Principles.

However, the valuation process relative to the opening balance sheet must also take into consideration the more recent impairment evaluation performed as of December 31, 2008 so any opening balance sheet adjustments may result in a reassessment of the impairment charge. Concerning the non-cash impairment charge recorded during the fourth quarter, which was triggered primarily by the decline in our share price during the fourth quarter. Under US GAAP, we are required to perform an impairment analysis when there is a significant triggering event such as the decline in the stock price below book value or at least annually relative to goodwill.

This non-cash charge amounted to $67.8 million, of which, $59 million related to goodwill and $8.8 million related to intangible asset. Total revenue for the quarter was $121.6 million. This included $48 million of revenues from Thales e-Transactions and $73.6 million as revenue from the legacy Hypercom business. On a constant exchange rate basis, revenues in the fourth quarter 2008 grew by 10% over revenues in the third quarter of 2008. This growth came principally from European both North and South EMEA, offset by slight decline in North America and Asia Pacific.

Product revenue was $91.8 million in the fourth quarter of 2008 compared to $62.2 million for the fourth quarter of 2007. The fourth quarter 2008 product revenue of $91.8 million included $36.2 million of former Thales e-Transactions and $55.6 million of legacy Hypercom. On a constant exchange rate basis, fourth quarter product revenue grew by 11.5% over the third quarter with increases in Europe and slight decline in North America and Asia Pacific.

Service revenue was $29.8 million in the fourth quarter of 2008 compared to $27.3 million in the fourth quarter of 2007. Thales contributed $11.8 million in service revenues for the fourth quarter of 2008. Also the prior year quarter included $4.6 million of one-off revenues related to the collection of monies from the Brazil Health Ministry. On a constant exchange rate basis exclusive of the Brazil Health Ministry revenue, legacy Hypercom service revenues were essentially flat as gains in Brazil were offset by declines in Mexico and Australia.

Moving on to gross margin. Our overall gross margin was 27% for the fourth quarter of 2008 compared to 32.1% for the third quarter of 2008 and compared to 27.5% in the fourth quarter of 2007. The 2008 gross margins include amortization of approximately $1 million per quarter which is essentially off from the purchase of Thales. Exclusive of the amortization, our overall margin was 27.7% for the fourth quarter of 2008 and 33% for the third quarter of 2008.

Now, let me discuss the margin at the product and service categories to help better explain the dynamics of what is going on there. In the product category, our gross margin was 28.9% for the fourth quarter 2008 compared to 35.1% for the third quarter of 2008. However, at the product industrial margin level, our industrial gross margin was 42.3% in the fourth quarter compared to 43.3% in the third quarter. This slight decline in our industrial margin was purely due to product mix.

Philippe mentioned industrial margin as the key indicator. Industrial margin represents the differential of our product revenue less the direct cost from our contract manufacturers before any consideration of internal supply chain cost. This measurement gives us better visibility of changes in average selling price as well as the cost being charge by our contract manufacturers. At the contract manufacturer cost level, we are continuing to see improvements such that sequential progress is being made in the core industrial margin area.

In addition to the direct cost from our contract manufacturers, we also have general supply chain overheads which include personnel cost, freight and warranty cost, excess and obsolescence or relative reserves to name some of the larger cost. We refer to this cost as manufacturing period cost. Since the product industrial margin was essentially flat, 43% versus 42% and actually only was impacted by sales mix from the third quarter, then the decline in our overall product margin from the third quarter was due to an increase in our manufacturing period cost.

The largest increase in the manufacturing period cost was in our excess and obsolescence and relative reserves which increased by $4.1 million over the third quarter, so 450 basis point impact. This was principally an excess quantity matter with the components that are on-track manufacturers versus obsolescence and is mostly a reflection of the global economic condition. That puts our ongoing to consume the excess on these components but due to the current economic environment, we cannot say with certainty that we will sell all of that excess.

In the services category, our gross margin was 24.1% for the fourth quarter compared to 27.6% for the third quarter. This was principally sales mix related. Operating expenses exclusive of the $67.8 million non-cash impairment charge where $34.8 million or 28.6% of revenue compared to prior year same quarter operating expenses of $25.7 million or 28.8% of revenue. A large dollar increase over the prior year reflects the addition of Thales e-Transactions including the effect of incremental acquired intangible asset amortization of $1.7 million. On a constant exchange rate basis compared to the third quarter of 2008, the fourth quarter operating expenses increased by approximately $1.7 million principally in the selling and marketing expense areas relative to our European operations.

Given the current economic situation, we are evaluating all operating expenses and streamlining and controlling spending throughout the Company. Exclusive of the impairment charge, we have a loss from operations of $2 million for the fourth quarter of 2008 compared to an operating loss of $1.2 million in the fourth quarter of 2007 and compared to income from operations of approximately $3.4 million in the third quarter of 2008.

Going forward, our focus remains on achieving gross margin improvement particularly in our industrial product margin as well as the manufacturing period cost and keeping operating expenses under control and right size for the business. We made progress in the fourth quarter in certain key areas but we are disappointed by the inventory reserves.

Below the line in non-operating income, we were essentially on-track with our net interest cost nearly all of which is driven by our borrowing to acquire Thales. Relative to foreign currency, we saw a significant increase in our translation loss due to the severe strengthening in the dollar against most all currencies but most notably for us the euro, Brazil real, the pound and Australian dollar. This change also included the identification of balance sheet currency exposures that have subsequently been hedged.

One point to keep in mind here is that the bulk of our foreign currency gains or losses are non-cash as it relates to the accounting treatment of translating our foreign balance sheet into US dollar. We also had a small division of our larger service operation in Australia that we declared as discontinued during the fourth quarter. We have recently sold the operation to a private operator in Australia.

All revenues and other P&L items for this division have been netted down in the discontinued operations line. This operation contributed about $5 million in annual revenues and low operating margins and was a non-core service active. Our adjusted EBITDAS defined as earnings before interest taxes, depreciation, amortization and stock-based compensation, and excluding the non-cash impairment charge was $4.1 million for the fourth quarter of 2008.

Cash increased $4.5 million in the fourth quarter to $36.5 million as operating cash flow for the fourth quarter was $8.7 million reflecting a positive impact of our working capital management in addition to our EBITDAS. One of the more notable contributing factors to the positive change in working capital during the fourth quarter was the decline in inventory of $15.5 million excluding the incremental excess inventory charge.

We have tightened our entire supply chain process including forecasting and build order process with our EMS providers. We are committed to decrease in inventory exposure and decreasing our inventory excess and obsolescence cost. On the receivable front, our average day’s sales outstanding increased as of the end of the year by six days to approximately 77 days outstanding due to the increased sales volume towards the end of the year and some slowdown in payments by customers. These two factors accounted for three days each of the increase in DSO.

Of course, we are continuing our same efforts at managing working capital as we move forward. I will now turn the call over to Norman.

Norman Stout

Thank you, Bob. That covers the fourth quarter. Now, let us look to the 2009. Philippe?

Philippe Tartavull

Thank you, Norman. The first part of this year would be extremely challenging with some positive momentum in the second quarter. It is at present difficult to gain visibility into the second half of the year. It is quite clear that our industry as a whole will contract this year as well. Typically, our revenue in the first quarter is at least 10% to 20% lower than Q4. We expect that this year least effect will be amplified by foreign exchange and the current economic environment. We remain vigilant in evaluating our customer credit risk which may trigger further contraction of softer revenues.

That said, an uptick of the current environment is we believe that this environment create opportunities to reinforce our position and become a much stronger franchise by vigorously going on the offense as well as on the defense. Going on offense, we focus on four key goals. First is geographic expansion especially in countries that we have identified and in which we expect success this year. We have one of the most globally diversified geographic portfolios in the industry with 21% of our business coming from North America, 21% coming from Northern Europe, 30% from Southern Europe, 12% from Asia Pacific, 11% from Brazil, 5% from Mexico, Caribbean Central America.

Second goal is to increase our presence in a number of verticals where more value can be driven out of our products through specific software application. Those verticals include transport, e-H, [35.13], etc. Third, we will continue to increase our integrated payment system business. Merchants are adopting centralized server-based systems to provide centralized view of transaction performance and enable secure end-to-end transaction processing environment.

Lastly overall, the industry security environment have been and remained secure. Nevertheless, the industry is currently seeing an increasing number in the diversity of product. In order to improve the current infrastructure, Hypercom has developed multilayer end-to-end high security technology that can address and neutralize the threat. We are also setting a leadership role for the industry to cooperatively adopt the two necessary to continue to increase security. Moving defensively, we are executing on all the different initiative that we have discussed in our review of the fourth quarter and those initiatives are; continue improvement of our industrial margin, inventory reduction, management of PR and customer credit, increase control of inventory excess and obsolescence, detail reviews and evaluation of our different services businesses to evaluate profitability and strategy value, optimization of operating expense.

We believe those actions should result in 10% reduction of our quarterly expenses very quickly. Our goal is to exit 2009 with a more profitable and streamline business. Assuming the economy begins to recover, we still feel we can exit 2009 with consolidated gross margin exceeding 35%.

Norman Stout

Thank you, Philippe and now, we will turn it back to Holly, the operator, to open it up for some Q&A. Holly?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of George Sutton - Craig-Hallum Capital.

Analyst for George Sutton - Craig-Hallum Capital

This is DJ calling for George Sutton. Could you give an update on your wireless program?

Norman Stout

Hi, DJ. We would be happy to, Philippe, on the wireless program.

Philippe Tartavull

Yes, so regarding mobile devices and mobile business, we have seen an increase of activity during the fourth quarter where volume of sales activity had increased. We have now some device, 35 in North America and new device, the M4230 are also now starting to enter the different channel in Europe which is clearly a focus on the Company for 2009.

Analyst for George Sutton - Craig-Hallum Capital

You started the manufacturing in the Brazil so how we should look at it, how it will affect margins going forward?

Philippe Tartavull

First of all, we start this business in Q2, a little bit in Q1 and Q2. The reason we have decided to do local manufacturing in Brazil is to avoid all the taxation. So, we entered Brazil with a pricing that not the best on the planet but very reasonable.

Norman Stout

And I would add, DJ, with our 4205 product that was our low cost product that we introduced earlier this year and are late 2008 some other countries.

Analyst for George Sutton - Craig-Hallum Capital

Could you provide an update on the e-Healthcare project in the Germany?

Philippe Tartavull

Yes, as you know the device has been certified. We start selling the device during the last quarter. It remains governmental project which mean we need to be careful in terms of volume but I was in Germany last week and all indication are that they are pushing for the program according to plan with maybe one or two months delayed but the movement is there. The total market expectation, and I repeat it is just an expectation is about 800,000 devices and we are just at the start of the program this year.

Norman Stout

Holly, next question?

Operator

Your next question comes from the line of Robert Dodd - Morgan, Keegan & Company, Inc.

Robert Dodd - Morgan, Keegan & Company, Inc.

A couple of financial kind of picky ones. If we look at your manufacturing period costs, you have done a decent job expanding the industrial gross margin but just excluding the $4 million in obsolescence in Q4, it still looks like manufacturing period cost went from about 7 in Q3 to little over 8 in Q4. So, they looked to be basically moving the long way for you to be getting towards a 35% consolidated gross margin. I mean, what can you do to control those costs as you go through 2009 especially when you are going to be adding another supply chain relationship with the Brazilian manufacturing facility?

Norman Stout

So a couple of things. As we, so first on the industrial piece of the margin, we have quantified more improvement there and how Bob and Philippe were discussing this trying to provide more transparency, how we are looking at it, so to the procurement side and also as we design the product or multiple components then we can go through and get better pricing on that. So, that first affects the industrial margin and again, we have been able to quantify improvement that will happen throughout this year. The actual improvement depends on the mix and the quantities quarter by quarter. So that is first.

Secondly, on the period costs that Bob talked about and Philippe talked about, the excess and obsolescence $4 million excess piece, we took a hard look in the inventory, both inventory on our books as well as the EMS providers and as we look at the volumes projected now and with some legacy pieces, we made a decision that that was the right thing to do. We would certainly anticipate that coming down and then third and fourth and then Bob, we will ask you to give a little more color as well, we will expect some improvements in freight. Obviously, freight rate would come down and just some natural efficiency as we are now moving on Oracle in a couple of countries with TeT.

We still have work to do, a lot of work to do but we are seeing some improvement. Bob, would you want to add?

Bob Vreeland

Okay, yes. I am in complete agreement with that. I would say that in the period costs that those are, we see those as very controllable type cost and as we move forward and complete even more of the convergence of the products and the synergies with the Thales, we have identified areas of cost savings throughout the period cost.

Robert Dodd - Morgan, Keegan & Company, Inc.

Okay, got it. Secondly, on the, I mean Philippe mentioned in his comments looking and reviewing credit risk. I mean, if we look at receivables, Q4 $97 million, Q3 $88 million with revenues flat, you had some discussion on your DSO obviously but I mean, how carefully are you going to be looking at your credit risk? Particularly I would imagine in North America with the ISO businesses, are you seeing any stress in your resellers and pulling back there and just could you give us some color on that?

Norman Stout

Okay, first off, we will be looking at it very carefully and have been and I think that that is probably common throughout many companies in this environment. I would not say that we are seeing stress but there has been some minor slowdown on some payments but nothing that we are categorizing as a significant issue.

Robert Dodd - Morgan, Keegan & Company, Inc.

Okay.

Philippe Tartavull

Okay, I just want to make sure that everybody understands clearly here. Just the same way that we have a strong point discipline, we will have and we have a strong credit risk discipline. So, we will maybe lose revenue but we will make sure that we minimize the risk on the credit side.

Robert Dodd - Morgan, Keegan & Company, Inc.

Got it and then finally if I can one more, on the multi-lane side, obviously that still looks ahead again to next year at least over the next 18 to 24 months. There should be a fair amount of good demand both in North America and obviously globally. I mean, are you seeing anything in terms of RFP delays, pullbacks, anything like that or is that just taking a long, perhaps a little weaker but generally in line with the trends you are expecting to see?

Philippe Tartavull

We believe there are the high end and the low end. On the high end and the large retailer, certainly some desire to improve security there and therefore we start to see a number of RFP on the market. On the low end side, they are a bit more complex. So, we continue to focus on the high end and we should and maybe we will have some success specifically with our new products for security.

Operator

(Operator's instruction) Your next question comes from the line of Gil Luria - Wedbush Morgan Securities, Inc.

Analyst for Gil Luria - Wedbush Morgan Securities, Inc.

This is actually Nick Sytan for Gil. I have a couple of questions. First, are you seeing any pricing pressure that may be of concern in any of your geographies?

Philippe Tartavull

Not really. As I mentioned during my script, we have seen some pricing pressure in certain spots. I am not sure with the trend. I think it is maybe some erratic behavior. So, overall the pricing has been I will say remain from where it used to be.

Analyst for Gil Luria - Wedbush Morgan Securities, Inc.

Okay, and then my second question is within North America, can you talk about your multi-lane vertical versus your [FI] acquired vertical? Are you seeing any prospects in the multi-lanes at all or have they pretty much shut their purses?

Philippe Tartavull

No, we continue to see a number of opportunity and RSP in the multi-lane. I believe personally that it would take a little bit longer than usual to transform those opportunities to be sales. But I think during the year 2009 even if the market, if the economic conditions are not the best, there is some need to change some security requirement. So, we would see some activity there.

Operator

Your next question comes from the line of Tim Brown - Roth Capital Partners, LLC.

Tim Brown - Roth Capital Partners, LLC

Just maybe if you could give us kind of your outlook for 2009, I think the last call you said we are looking at 5% to 10% volume growth. I assume now you are looking for something that is closer to 10% contraction worldwide.

Norman Stout

I will start and I will ask Philippe to give a lot more color. As we look at it, we are certainly, we started the year there is less transparency than 2008 on the revenue piece. On the gross margin piece, given what Philippe has talked about ASPs that we know that we have some improvements in the industrial margin principally through procurement and sourcing, things like that and also some improvement to period cost, we feel better on the gross margin piece that is what we talked about, some exit range there. The OpEx piece, certainly we have put measures in at the end of last year and early this year so that we could put the OpEx to the right size of the business and Philippe, maybe if you could talk a little bit more about, just talking about the whole year and what you see Q1 to Q2 and if you see if we can see further than that?

Philippe Tartavull

Well, maybe I can talk a little bit about Q1, give some visibility a little bit on Q2 and then we would talk about the rest of the year. Clearly, this year, it is very difficult to see if the industry if the industry is going to decrease by 33% or 32%. I do not think anybody can have good visibility on that. But coming back to Hypercom, what we can say is that all revenue in Q1 is affected by both external and internal element.

On the internal side, typically every quarter, we have some revenue overflow from one quarter to the other. In Q4, we did a very good job about closing all the revenue that was supposed to be in Q4. Therefore, there is a little overflow to Q1. So, that is an internal factor.

Regarding the external factor, we obviously have seen the deteriorating economies specifically in North America and we talked about that. We have a lot of volatility on the exchange rate. As we mentioned before, we are very careful with the credit and our credit limit. So, those factors will clearly affect Q1.

Now, Q2, we see some positive momentum coming up so when you look at the different return and the feedbacks from the management, we can see that we are going towards a positive momentum. Going further, Q2 is extremely difficult, yet if you listen to our customer, we shall see some positive momentum that is six months from now, it is a long way or four months from now, it is a long way to say that those commitments are going to be delivered. So, the only thing I can say is that very tough Q1, positive momentum in Q2.

Tim Brown - Roth Capital Partners, LLC

And Philippe, what is the driver of the momentum? Is that going to be the wireless and the new entry into Brazil? Does that affect…?

Philippe Tartavull

No, I think when I say good momentum; I mean that most of the regions are showing even in our traditional business some positive momentum. Now, in addition to that, which is different, we obviously are entering new geography like Brazil and some others that will add to the momentum.

Tim Brown - Roth Capital Partners, LLC

Okay. So, you are saying your current business is seeing some positive momentum?

Philippe Tartavull

Yes, exactly and in addition to what I just said, also I mentioned at the beginning that some of the eHealth business in Germany was delayed a little bit so they will overflow and then we will go to Q2 so we will see more momentum in Q2 but practically we see more demand coming up that needs to be confirmed by fields.

Norman Stout

Does that answer your question?

Tim Brown - Roth Capital Partners, LLC

Yes, thanks Norman and then I was just curious on the geographic expansion. Now, that you have the low-cost terminal that you are going to move into Brazil, is that something that you can push out into other countries like India, China? I mean are there thoughts on using that low cost terminal there?

Philippe Tartavull

No, not at this point. We have, well I say we have selected number of countries. We select a number of countries where we believe we have an opportunity and the opportunity is driven by two things. First, the ASP and the value we can create is still good and two, the competitive environment is such that it creates an opportunity.

Tim Brown - Roth Capital Partners, LLC

Okay, just one more question, just on the market share, did you gain market share on Q4, if you can give us an idea on that?

Philippe Tartavull

It is very difficult to, you see the growth that we have so I believe we need, I believe in North America with the growth probably of 24% in the US, we did gain market share. Now between the contractions, a little bit of Q4 difficult to see what level of market share we will gain.

Operator

I am showing no further questions.

Norman Stout

Great. Thanks, Holly and we want to thank our shareholders and investors and analysts for participating in today's call. We look forward to next quarter's call. Thank you. Have a good day.

Operator

Thank you. This does conclude today's conference call. You may disconnect at this time. Have a good day.

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