VeriFone Holdings, Inc. Wall Street Analyst Forum's 20th Annual Institutional Investor Conference Transcript

| About: VeriFone Systems, (PAY)

VeriFone Holdings, Inc. (NYSE:PAY)

Wall Street Analyst Forum's 20th Annual Institutional Investor Conference Transcript

March 26, 2009 12:30 pm ET

Executives

Gerald Scott – President and Founder, The Wall Street Analyst Forum

Bob Dykes – SVP and CFO

Gerald Scott

Good morning ladies and gentlemen. In our ongoing attempt to adhere to the published schedule, as much for the physical attendees as virtual attendees, I like to introduce the next company in this afternoon’s program, VeriFone is a global leader in secure electronic payment solutions. They provide expertise solutions and services that add value to the point of sale with merchant-operated, consumer-facing, and self-service payment systems for the financial, retail, hospitality, petroleum, government, transportation and healthcare vertical markets. They are one of the leading electronic payment solution brands, and are one of the largest providers of electronic payment systems worldwide.

They benefit from a number of competitive advantages gained through a 27-year history and success in the industry. These advantages include their globally trusted brand name, large installed base, significant involvement in the development of industry standards, global operating scale, customizable platforms, and investment in research and development. I believe that these advantages position them well to capitalize on the continuing global shift for electronic payment transaction. Without any further introduction, I would like to introduce Bob Dykes, Chief Financial Officer; and he is accompanied by William Nettles, Vice President of Investor Relations.

Bob Dykes

Thank you. Also here is Doug Bergeron [ph] our Treasurer, who happened to be in town on some other items, renewing (inaudible) insurance and the like. So anyway, first of all, I would like to add the normal safe harbor statement. Anything I say you should take with a grain of salt, and then I will just take you through our business. As it has already been described, we're one of the major providers of the equipment that you scrape your credit card through or in the case of (inaudible) communication tap your credit card on when you're paying for items, and over 40% of our businesses was outside of the US, outside of North America in fact, and so the growing use of electronic payments outside of North America is a major factor in the growth of this company.

And so we provide not only the hardware but also software that helps to control parts of the payment processing industry, and while migrating as I will describe more of the company towards concentrating on the software aspect of what we do. So the success is really driven by the fact that we are one of the leading providers in this space, globally diversified, and particular in some of the emerging markets and in Europe, being globally diversified used to be a great thing in sort of whole economy, worldwide economy, (inaudible).

But there are multiple avenues of growth. As I said, the emerging markets, the moment to IP-based communications from the dial-up. So you can go through the checkout line a lot faster that way if the device dialed up to process your credit card is a real factor of people upgrading, movement to wireless products at restaurants for example. They actually are able to save money by bringing the product to your table, having you swipe your credit card and use an ATM card instead of a credit card.

In fact, and they can get lot of payment fees and have a 4 to 6-month payback on buying one of our terminals. So it is real economical and safer for restaurants to do that. But for full disclosure, restaurants aren’t buying anything at the moment because of their own economic weakness.

And then the increasingly complex security standards that I will talk about later are also a significant driver for our product introductions to North America at the moment. And I will talk about the software as well, which is really part of that solution. So, we are one of the largest providers in a market that has been consolidated already in three major bidders in those markets right now with very significant barriers to entry that I will describe.

And we have the financial strength of the continuing very heavy R&D spend in our space, partly to fulfill customer needs, to improve the security of our products and to break through the barriers of entry. So I am going to take you through each of our markets in some detail, and because it is really a different story in terms of our growth, what our weaknesses and strengths are market by market.

So in North America, on the right hand column there, the multilane retail, those are the Safeway and Walgreens et cetera that -- that is an area of substantial growth for us at the moment because all those major stores, on one hand having to upgrade their equipment because of new standards in the industry. They say they should upgrade by the middle of next year. But wouldn't buy our stuff based on those standards being literally a hard date, because standards do move.

Rather look at the fact that most ways of these retail stores feel that they need to improve the security of the payment processing, because if they don't they badly get hit [ph]. TJ Maxx is an excellent example of the company, an enormous amount of credit card data got hacked, and now they are being sued and have significant financial consequences, and so it is really protecting the brand, the stores brand. Protecting the data and minimizing losses are the major reasons why they go through significant upgrades at this time.

And so for the major retailers when they decide to buy our equipment, it isn't one of those things you just do overnight and plug and play. (inaudible) and new equipments got, new capabilities, new abilities that change this into an IT project, and will do more software (inaudible) and it becomes a 12 month exercise. The good news is at the start of last year and so we're well into the process in the multilane retailers in the US today.

The government healthcare is an area where we also have some strength. Washington is driving more security in the healthcare space. You probably may have seen that in the stimulus film. So we're hoping for more upside there, but we can't count on that in the very near term. In the taxis, we have about half of the taxis in New York and (inaudible) Chicago, San Francisco, and Los Angeles, Miami, Los Vegas, Philadelphia. We have all of the Philadelphia fleet actually.

There we rate the equipment as one source of revenue. We get a proportion of the payments from the taxi, and then we get advertising revenue on the taxi. So I'm sure you've all seen that, particularly if you look at the taxis having the ABC content in New York, and that is the VeriFone devices. So that is a small piece of business for us, but further growth.

Now on the left, the financial services, which is our destination for really going through distributors, and getting to the small merchants. So it is Banc of America, Wells Fargo, (inaudible), and Phoenix working through many associates of small jobbers [ph] that may have 5 sales people or 50 salespeople. The myriad of people that are out there reaching the small merchants and introducing them to use our equipment, to use a particular payment processor, and there are feet on the street all the time.

That area has definitely dropped off, because also on the right hand side, I talked about the multilane retailers, how they are going about the upgrade on the small businesses even where they need to upgrade. They need to upgrade all the terminals. Even when they need to upgrade, I am sure most of all retailers say, well, the deadline is July of next year. I will wait till June before I do anything, and so they are minimizing their spending.

But nevertheless there is an ongoing level of spending in that space because the equipment has a finite life of 3 years to 5 years, and so there is an ongoing replacement cycle that is really driving the business today. But I will be very open with investors that in this quarter and next quarter, we may well see a contraction in distribution inventories in this space as well. So there may be a one-time notch down, and so when we provide the guidance for the current quarter, and said that last quarter was $240 million, next quarter or the current quarter maybe $205 million, to somewhere north of that hopefully.

I feel that was partly based on the possibility of a contraction in distributor entries in this space during this quarter or maybe next quarter, I can’t say precisely, but there is some risk in some of the other markets I will describe later on as well.

Petroleum is another area of opportunity for us, and actually was slightly weaker in the first quarter than we expected. But most of the equipment in the gas pumps today is not secure at all. And the payment industry has actually designated standards for to get pump operators to put equipment out of the gas pump. We are the major provider of equipment in the gas pump business.

The sheet metal changes, $2000 or $3000 per gas pump. So this is a nontrivial investment for the operators. Obviously, they have lease alternators as well, but it is a real critical go out, and put sheet metal of the pump and replace it. And all of that is required there has been a census by one brand, one major brand, for their franchisees to upgrade with the new equipment, and I hope the other brands will follow that. Certainly the one brand that has provided this interest will have a competitive advantage down the road of having secured equipment out of the pump. But I also -- we have to say that we are now on a trajectory, because the deadline in the middle of next year is fast approaching such that the gas pumps cannot possibly meet that deadline, and so this is going to really be any area where best there is not going to be in one-time jump in our revenues and the falloff.

Those are going to get compliant over some extent of period of time. So the revenue growth that you see here is going to be on one hand more modest, but on the other hand, longer lived. And so good upside there. So the macroeconomic issues are that the economy has slowed down, and we have seen that in some areas as I said base business is replacement businesses. And then we have on the right and some of these drivers that are going to help propel growth in the future just as the economy recovers.

That was North America. Then in Western Europe, in the UK, we have quite a good market share, in fact improving our market share there, mainly up against Ingenico, it is a company of similar size to ours, French-based company. We have low market share in France and Germany, but reasonable share in Spain and Italy. But in Spain and Italy the economy is definitely being hurt negatively by the economic slowdown, and so you know we're anticipating a lot of revenues there.

The revenue stayed reasonably strong in Scandinavia, but not mentioned here, but some of the other countries of note are Russia, where our business fell off about 80% in the first quarter, and we expected to stay at a low level for some period, while the economy sorts itself out. Some bank failures there, some bank consolidations. The good news is that the bigger banks that tend to sell our equipment have taken over some of the smaller banks that have been putting off brand equipment out of the marketplace, and they are certainly going to replace the equipment when they can afford to.

So I think we still see good numbers going forward in Eastern Europe, but not much this year. Turkey is another layer of good strength for us. Turkey is rapidly evolving to be part of the EU, and they are really upgrading the whole economy, and in our case the payment processing to be much more in line with what you see in Europe, and so we're getting good growth drivers there.

And also in Israel, a small country, but we have very high market share there. And as many have interpreted, it is very stable, moves up-and-down shekel, but we do very well there. So we have been improving our market share in the UK, and the results of the UK certainly are weakened by the economic slowdown, but some market share gains partly offset that.

In the emerging markets, in Asia Pacific, while I like to hit Latin America first, so we saw a significant drop in the value of the real, and other Latin American currencies as well. The real went down 50% or so. That would definitely reduce the purchasing power of our customers there. So we saw falloff in revenues. This has been an area where we have seen in the past growth of double-digit better than 20%, yet they had growth in the past, and so we expect that this is going to fall off now. The growth will resume in Latin America because the economy hasn't been -- although they certainly hurt their purchasing power because of the revaluation. They haven't been dramatically hurt because of the economic slowdown at this point, and I think that they are working through it, and because of the relatively low amount of electronic payment processing in those countries, and I will try to remediate that. In all of these countries, including Eastern Europe, the governments are pushing electronic payment processing because it helps them capture knowledge about the economy, but also sales tax. And so the government's other real centre for electronic payment processing.

As we move to Asia Pacific, China is our largest country there. We do business through the largest operator in China, who has got a 40% market share, and China has been a very strong country for us. It was up quite solidly in the fourth quarter and again in the first quarter. We are nervous about the Chinese economy despite the stories we read in the newspaper about the economy in China doing very well, we actually think that they are going to have difficulty with placing their export, lower export sales with domestic spending, and so we are being quite conservative in our expectations for the Chinese economy.

And so those are the major markets that we plan a small amount of business in Africa and the Middle East, but they haven't been too affected by the economic slowdown, but they are small numbers anyway.

So to summarize that, by looking at the numbers here on the slide, by business group you can see even on the bottom line on integrated systems, which we have multilane retail and our picture business, that I said were strong growth drivers, actually were down in the first quarter compared to the fourth quarter. So the economic slowdown has been offsetting a lot of the positives that I have been just spoke about, but there are some significant reasons why mainly because of the replacement cycle, these numbers are not likely to drop dramatically. This isn't so much a capital goods industry very much a replacement cycle industry and driven by these other upsides, but as I said there will be fluctuations from quarter to quarter because of the fluctuations in the exchange rates, and also because of the potential for inventory contraction in our distribution channel.

Just a data point, I mentioned how the petrol business needs to operate $2000 to $3000 a pump. There are 850,000 gas pumps in this country by the way. Obviously, not all of them have credit card processing out of the pump for one thing, and even that those who do, as I said they can't all meet the deadline by next year.

But nevertheless it is interesting to read an article like (inaudible) billion cost for the industry to go through this upgrade process, particularly when you consider that VeriFone is the major provider in that space, because back in the kiosk we have the bulk of the equipment in the kiosk that controls the pump. The way the gas pump work is that pump communicates to the kiosk and the kiosk communicates back to the credit card processing at the pump. You don't have a direct communication between the pump and the credit card equipment, but it is sitting right there. It all runs through the kiosk, and some times people (inaudible) dollars worth of gas for example. So the kiosk has to control the pump directly, and we are the major provider of that kiosk equipment, and therefore the logical provider of the new equipment that goes out to the gas pump.

Now another data point is growth in China. As you can see, here, obviously much larger economies or population than the US. In China, electronic transactions are substantially lower than the US on a much larger population. So we have a lot of opportunity to grow there. And as we said, we have the highest market share, and in India, obviously miniscule amount of electronic transactions per head of population with the high population. It is clear to us the Chinese economy is where we are seeing the major growth. It is clearly moving much more rapidly to an electronic-based economy than is India. So that is a major opportunity for growth in Asia is in China.

If we look at the competitive landscape in North America, we're up against Ingenico mainly at the multilane retail, and in the distribution space with the smaller retailers, we tend to be up against Hypercom [ph]. In Europe, as I mentioned, in the UK, Ingenico was our major competitor with Hypercom having a small share there. In France and Germany it is stuck mainly struck between Hypercom and Ingenico, and that we are in Spain, Italy and some of the other countries.

And then Asia, Hypercom and Ingenico tend to be in Australia, New Zealand, but that is a smaller market share. But we are the dominant player in the largest market there which is China.

So there are significant barriers to entry in this space, and I want to take you through them a little bit. How do we (inaudible) brand, partly because of all the securities issue in the electronics payment industry, in fact the people are really getting hacked through this organized crime targeting companies like ourselves, devices and other players in the electronics payment industry.

Everyone is nervous about that and in times of nervousness, they tend to go to the larger one-off brands, and so brand is a significant barrier to entry. The technology is also, and certifications are part of that. And scale is really (inaudible) but that brand of certifications. So this is intended to be an chart, but just to emphasize that to get a certification, lots and lots of steps to go through, and there are so many different certifications, and various countries the banks have their own certification, as well as there must be an industry certification.

And that is US and a lot of other countries. And so the certification process is one of those things that if we can get certified, you sort of have a real entree into that market, but it is often quite difficult and certainly expensive to get certification. And there are so many certifications to get that it is not easy for anyone to enter this market, and other companies like NCR et cetera and IBM have tried to enter in the past, and they have then pulled back. And this is part of the reason.

We have a strong R&D team of 800 employees and spend a lot of money in that space. What we offer with our products is really an operating system, and certainly the larger retailers, they write programs on our devices and then that gives us somewhat of a lock in those markets because they are written on our operating system, and they have their loyalty programs and other software written, higher software on these devices, and so we are getting into the retail already gives us a strong.

But going forward, I will talk about this a little bit on the next slide is the security around these products. So, we are evolving the company to more talk about that customs about security and the need to upgrade the operating system to upgrade the security on the products. And so the software that is used to control the operating system becomes more relevant piece, and so we call it real estate management, where we sit back and actually control an upgrade software on these devices. That gives us an ongoing revenue stream.

Contactless payment is another area of growth for us. We're spending money. If you look at the taxi, you actually don’t need to swipe your card. You can actually just tap at it, you have a contactless card, and so customers around the country are upgrading to contactless, and as you see long list of products are being rolled out every year.

So, to give you a little background on why security is an area where we think we can be a very significant player of real value at is that you have the point of sale and you swipe your card there or tap it there. The data then goes to the retail store, and often the retail stores keep that data for 12 hours to 24 hours because a lot of the (inaudible) transactions happens when you swipe your card. Actually they just verify the card has enough dollar balance on it. But the actual transaction happens on a batch process at night.

So, I expect to IBM mainframe days, and as a batch process happens there, and also the payment process of batch process happens. So during that period the data, the credit card debt is all being held in the big data system, and it is not encrypted, password protected. And so the PCI standard is basically says to put a fence around us to got to have two different passwords to access the data, number of security things, but nevertheless it is just a fence around unencrypted data, and that somebody can break into through that fence, then they can get all the data. And clearly that is what has happened in the case of TJ Maxx.

Heartland recently had a big break and they were supposedly PCI compliant. And so there really is a door into the data, and that is obviously bribe a couple of employees to get the password is one simple way is to get into so many dollars available in this space.

That would be the easiest way to get in, but our people have more sophisticated ways apparently to hack in as well. And so that is a real issue for the industry, the PCI standard doesn't really give particular retail stores that may not be the most sophisticated on security, a lot of assurance. And so what we're offering to them is the concept that we will provide encryption of the data, the time you swipe your card, we will encrypt it right on the machine, then provide the data encryption all the way through the payment process, so that at the point when the data moves off to the card issuer, we end up with the data being unencrypted. Obviously the card issuer, actually knows whose credit card it was. But the people in the middle, the retail store and the payment processor, make sure all they need is 10 digits flowing throwing through. And we just have 10 digits, but we encrypt them. So it is a different 10 digits. So you end up with the data flowing through just like a credit card, but it is all encrypted and provides a very secure solution for these folks.

Now, while I say that I think there is great potential. This is something that is being rapidly adopted right now because everyone was looking around and saying this has got to move first et cetera, but it is certainly driving sales of our equipment to the merchant retail stores, who will say, well this is really good potential. We should really be thinking about this. So this is driving market share for us today, and then we will continue to work with other industry players to make a formal presentation but this is good upside for us.

So financials, as I said, most consensus numbers are down in this fiscal year versus last fiscal year because of this economic issue. The last quarter Q1 of ’09, revenue growth was 15%. It sounds great, but it really cleared our point that the ’08 comparable was quite low because we went through some transitions with our distributors during that period. They were virtually a private company, because of the restatement that we are going through. So we took that opportunity to change out some of our distributors, but going forward we don't expect to have growth in the current quarters as the guidance we provided is still intact, but it is negative growth for a period.

And then the non-GAAP gross margin was 35%. We also pointed out in that there was about five points of reserves, inventory reserves that I took during the first quarter, and not to say that there want be more reserves in subsequent quarters, and so, I am not saying it is going to reverse up, but it does show there is a positive to go to a higher gross margin, and so I also pointed out in our last conference call that our engineers are working on cost savings that will add about 3 points of gross margins to our numbers. Again that could be offset by pricing reductions and things like that. So, I am not hoping for you had all those numbers up and write it down. But the point is, we are continuing to work on ways to drive up our gross margin and have costs down.

So our balance sheet, report show a lot of equity analysts these days (inaudible) debt because people have fear about the covenants et cetera. So, our convert was there at $316 million of converts. No covenants on that. About 1% coupon, just slightly more during June 2012. The senior debt is about 3.25% at the same during June 2013. And so we are generating cash between now and 2012, and so we think that we are in comfortable position with regard to this debt. The leverage ratio should be less than 3.5, we are down at 1.5. Fixed charge coverage should be greater than 2 and it was 4.2. And I would point out that the 1.5 and the 4.2 are based on EBITDA as a rolling average, last 4 quarters, and back in 2007, several of those quarters were negatively impacted by the restatement costs, the forensic accounting and other things we spent about $40 million on that.

So, while people will look forward and say, well your numbers may get weaker because of the economy et cetera, and actual fact some of the numbers rolling off were quite weak as well. So, we are not looking for a significant deterioration in those numbers going forward assuming the economy doesn't completely fall apart.

So good cash position and we are looking to further improve that. We reduced inventory by $29 million for example in the last quarter. And we look to reduce them inventory further going forward.

So long-term we think that the emerging markets growth will reinvigorate the company once the economy stabilizes. We think that the ongoing need for upgrades to meet industry standards, and PCI Council has said they are going to upgrade the channel about every three years. So it is going to be a rolling activity of continuing to drive growth in the future, while helping us with revenue growth, and I've already pointed out some of the things we are doing to achieve these gross margin objectives.

So, in conclusion, we are one of the strongest players in this space, a very well trusted brand, very good barriers to entry, migrate into more of a software, security ongoing revenue base, and the emerging markets are going to certainly be big drivers for our growth in the future.

So questions.

Question-and-Answer Session

Unidentified Participant

(inaudible).

Bob Dykes

The question is how much of our revenues is into distributors?

Unidentified Participant

(inaudible).

Bob Dykes

Well, okay, so the first question was how much of our inventory -- of our revenue goes to distributors. Just going back to the slide -- the slide here, slide nine, for people on the phone, the bulk of our revenue, virtually all of that above that bottom line. So, down the bottom where you have integrated systems, we sell directly to the retailers and to the petro business. While everything else goes through distribution in one form or other. Some direct in the UK, but the bulk of it is distribution. They take various forms. In the US for example, distributors like Phoenix, which pay distributors just like you would normally think of them. Internationally distribution is through banks. For example, so internationally the banks tend to hold pretty low inventories, and we refresh when they order another product, be kept another one in 3 to 5 days. So that continually turning over pretty low inventory. In North America, small traditional distributors where they may have 60 days of inventory on hand, and that figures out to the (inaudible) and other such people. So it is just in North America, where I indicated that distribution -- where still contraction of distribution inventory is a real possibility.

So then your second question was --

Unidentified Participant

(inaudible).

Bob Dykes

Yes, that is right. So, that is unrelated to this question, because it is really this one where you could face, it is really just about what is down in inventory. What is revenue? We took a reserve -- 5 points of gross margin. So, it is always around a bit of a $10 million.

Unidentified Participant

(inaudible).

Bob Dykes

The products weren’t -- the extra reserves that we talk -- that I am talking about the $10 million was of an material that was obsolete, such that you are going to crush it and throw it out. It was material, but because we have a pretty long process cycles, and so you can sell it, but some of it hadn’t, you know, they have been purchased many months ago and haven't been sold. Salespeople have kind of objectives to sell it and hadn't done that. If the economy weakens, I took a judgment and along with the other management, and said we should reserve some of this because it may not sell. We may decide that rather than forcing into the market at low margin, we may be better off just disposing of that inventory for example. While the economy might rebound and we might get to use it, but if the economy, particular we were reporting together our first quarter results, for those of you who have memories longer than a couple of weeks, you will remember the stock market was particularly crashing back then.

(inaudible) deepest recession and so thought it was more prudent to have more reserves on that inventory.

Unidentified Participant

(inaudible).

Bob Dykes

So in India we sell to all of the banks. We wouldn't refer to any one of those as being a strategic partner of ours. They have – they open up RFQs, and say and we want to buy 10,000 terminals next month and everyone goes in and bids and the market there doesn't pay a lot of value for brand or for security. So it is pretty low margin. So I wouldn't look for India as being a major driver of our growth.

Unidentified Participant

(inaudible).

Bob Dykes

I beg your pardon.

Unidentified Participant

(inaudible).

Bob Dykes

In India, I think the gas pumps in India. So, we do sell directly to a number of smaller players in India, some retail stores, some distributors, gas pumps et cetera, there is an ongoing small business in India with that type of activity. Again India is a small piece of our business

Unidentified Participant

(inaudible).

Bob Dykes

We do have salespeople there that is mainly selling to -- it is a very small sales force and it is selling mainly to those banks.

Unidentified Participant

(inaudible).

Bob Dykes

So how do we handle currency risk. So we hedged the balance sheet at the end of each quarter. So actually the bulk of our hedging strategy is minimizing what you measure on the income statement as the FX gain or loss. So Doug Bergeron who is here, his objective is to make that zero. He drove it down. He just joined a few months ago in the fourth quarter. It was $2.5 million loss; he drove down to $400,000. So sort of paid a salary back in the first quarter, and he achieved the same thing every quarter now. But we are not trying to hedge the revenue or expenses per se because we think that is a foolish game. You can do it for a quarter, but pretty soon you are going to run out. So, the revenue moves up-and-down. Now in a place like the UK, where obviously when the sterling goes down, we just increase prices domestically, and so we have done some of those.

In fact, I noticed that the folks in the UK were having to explain to the economists -- having to explain that they didn’t make enough of an allowance in their inflation forecast for the first quarter. So in fact for companies like us, we are going to be increasing prices while their exchange rate dropped. So that is one of the factors. And we do that in other countries. And somewhere in Russia and places like that, and also Western America we actually negotiate in dollars.

Unidentified Participant

(inaudible).

Bob Dykes

Well the question is how much of it is recurring? Well, you can argue that almost none of it is recurring in the strictest sense of the word. We have rental contracts in Israel and a few other places, and we have maintenance contracts in some locations, and on some software. But even when I talk about an ongoing replacement cycle because all of our products they die in 3 to 5 years, and so somebody buys a replacement. In theory, the replacement they could buy could be a competitor product, but you know they get multilane retail, they have already written the software for -- we are the incumbent. So if one of those products break, they tend to buy another of the incumbent.

So it is a little bit of a mixed bag. But to the largest extent you can say that it is not a recurring business today. But we certainly want to drive it towards a recurring business.

Unidentified Participant

(inaudible).

Bob Dykes

Most of them are on the same basis as us. There is some rental, but most of it is selling the product outright. In places like Brazil, our customers turn around and rent it. (inaudible) rent their products themselves, and we do see some opportunity to further increase our rental business, and so we are looking at that -- well not looking at it, we are pursuing it.

Unidentified Participant

(inaudible).

Bob Dykes

Well we don't really do our forecast based on unit numbers. You are asking for the unit numbers of pricing, and it is certainly going to be a negative number, but we're clearly guiding down for the year. But we haven't done that on that basis. There clearly is some price erosion. Obviously, we are driving costs out of the product. So, hopefully faster than the price erosion so we can improve margins. All three companies in this space are public companies, and if you listen to the earnings calls, all are talking about how they want improve margins. So we have not seen a lot of pricing pressure in the market these days. And so we're not looking for that as being a major dynamic for investors to concentrate on at the moment.

Unidentified Participant

(inaudible).

Bob Dykes

And I will just add don't hang your head on those deadlines.

Unidentified Participant

(inaudible).

Bob Dykes

Well, the standard is set by what is called the PCI. It is a payment industry council. We sit on that council and come up with standards. Then the actual timing of them tends to be implemented. In fact they are implemented by any person that chooses this to be the gatekeeper in the process. But Visa is the largest of the gatekeepers, and so the deadlines that are based there tend to become the deadlines, but there is no reason why getting a American Express or MasterCard or one of the payment processors could also set their own standards, and says we're only going to accept transactions from equipment that is PCI compliant. For example, but today most people look to the deadlines set by Visa as the ones that you should look to.

But as I said a lot of the upgrades are being driven by people trying to protect their own brand as opposed to meeting the deadline. And I clearly set in the picture space, we don't think they will meet the deadline.

Unidentified Participant

(inaudible).

Bob Dykes

But in the gas pump business for example, it is completely gone to the kiosk. So that is a gas station, you can just use your credit cards, but they are going to go in and use the equipment that VeriFone has provided in your kiosk, to have to get out of the car and go over there as supposed to doing it actually at the pump. And so that will then become a competitive issue because one brand is driving to become compliant, and presumably they will advertise and say, hey, you can pay at the pump if you go to this brand, but the other brands you may not be able to. And in some stations that may not have it, but if you're one of the situations where you have got 4 gas stations on each corner of the intersection, but one that will actually take credit cards at the pump will have a competitive advantage. So we're hoping that will be the dynamic that will cause an upgrade, but as I say it is not going to be a big jump and then a drop off. I think it is just going to be ongoing say the upgrade over a longer period. This is actually better for the company.

Unidentified Participant

(inaudible).

Bob Dykes

Well the question is, how much of our business comes from the replacement, and then it is different geographically? Well it is. Because as I said in the North American store businesses, which are normally just replacement at the moment because as a lot of new stores are being opened being a multilane retail it is mainly a gain, but I guess replacement, but it is clearly replacing even other products that didn’t die. They are replacing to have products. Internationally, it is in Europe that is mainly replacement of products for some time, because for competitive reasons we're taking out somebody else's problem, and just replacing our own. And in the emerging markets a lot of it comes from just the growth of retailers that come take electronic payments. So you have 20% of the business in the emerging markets where the growth is quite substantial.

Unidentified Participant

(inaudible).

Bob Dykes

In these emerging markets where the growth is -- well, obviously some of it is replacement, and some of it is new products. We don't -- we can't literally measure how many of these terminals are a new terminal, but in a store that has never used the terminal before versus literally replacing them at existing terminals.

Unidentified Participant

(inaudible).

Bob Dykes

Well, yes. So, your question is, how does that business relate to the type of first data reported a pick up in transactions. I don’t think that there is very much a relationship except the fact that a pickup in transactions certainly better than deterioration in terms of the whole economy and our business is going to be more affected by the upgrade for security purposes than just the effect on the economy. So it is good, but there is not a direct relationship.

Unidentified Participant

(inaudible).

Bob Dykes

I'm sorry -- we haven't named that brand. I will let them handle that themselves. I'm not sure how public it is, exactly the brand is.

Unidentified Participant

(inaudible).

Bob Dykes

So you're asking me to give you the math on the actual replacement out of the gas pumps (inaudible) gas pumps. I can tell you there are 850,000 pumps and I can tell you that our equipment costs $2000 to $3000 a pump that is our price that is our revenue, okay. So obviously there is installation on top of that. But first we came out with a billion dollars is presumably made some assumption about the number of pumps that would chose to upgrade over some period of time, but we believe that 20% of the funds out there will have a real need to upgrade in the not-too-distant future, and others over a longer period of time. But in the middle of Nebraska, I'm sure there are pumps that never will be -- don't have credit card equipment, and they never expect to, so it is a myriad -- somebody has made assumptions in there.

Unidentified Participant

(inaudible).

Bob Dykes

We have not seen any other brands in the petroleum business providing to think of here.

Unidentified Participant

(inaudible).

Bob Dykes

So the question is what equipment do we sell difficult and to what countries and how uniform is it across the world, and again it is a little complex. We purchased a company some time ago, January 1, 2007, and that company, Litman, their equipment was already being sold around the world, and so we have not worked aggressively to push that equipment out. But in some markets such as Turkey, they have made a good transition to the traditional VeriFone equipment, we call VX brand, and so a transition has been happening in some markets.

But in China for example, it is still virtually the NURIT operating system that comes out of the Litman operation, and so you have that difference by market where Litman was strong and has stayed strong. But if you then look at the Litman equipment across all of those markets, generally it is the same equipment that they sell in the various markets, there are some differences. In Europe, for example, because of the EMV scanners, everyone swipes their card and then has to put in their PIN number, the equipment obviously is only EMV compliant. In the US some is, but a lot of equipment is not EMV compliant, because there have been very few credit cards issued that have a little chip that ask you to enter your number, the American special account that had that requirement, it has been pretty slow. In Canada, they are just moving on to the EMV standard, and so all the equipment there is compliant.

And so on the VX side of the business, the traditional VeriFone, the same difference happens with EMV versus non EMV, and because we have quite a bit of equipment sold in the US that doesn't have a PIN panel on it, it is just swipe your credit card and that is over. There is a little printer that prints out the slips, so you have some of that fairly minimum entry equipment sold here and in markets like that. In China, they still have what is called sprocket printers. You might recall the top and bottom of the old credit cards, the credit cards, the big ones, to pay, put it in a device, and then backwards and forwards, or a little right or center, well, they’ve continued with that type of technology and the devices require sprocket printer in China, and so we need to be compliant with those pieces of paper. So we have a unique equipment there as well. So a little bit different, but many of the markets are moving to relatively common equipment.

Unidentified Participant

(inaudible).

Bob Dykes

I'm sorry. Can you repeat the question?

Unidentified Participant

(inaudible).

Bob Dykes

In the US multilane retail, we have a market share. I can't give you precise numbers. We believe we're actually taking market share in multilane retail today, partly because we're the only company that actually has the end-to-end encryption available today. The competitors have it in their PowerPoint’s, we actually say, hey, we can deliver it today for you. So there is a very positive dynamic there.

We also believe that in the distribution business in the US, we have been taken market share against Hypercom because of their financial weakness, and so that’s another dynamic. Internationally I already talked about in the UK, where we believe we are taking market share. Latin America, we tend to go backwards and forwards, we have 60% share or so in most Latin American countries, about 50% in Brazil. So those dynamics tend to fluctuate a little bit. We believe we are improving our share in China, but it is high growth market anyway or has been recently. We will see what the future holds, but so the shares is fluctuating somewhat in some of these other markets. Yes?

Unidentified Participant

(inaudible).

Bob Dykes

Grey market for our terminals, certainly if you go on Pay Pal or any -- it's not a Pay Pal, on eBay, you see a lot of our terminals for sale. Now some of them are brand n new terminals, just also to sell that way, but in theory people can take a terminal and refurbish it. But one of the points that we make is, the PCI standards is coming, and I saw a reputable brand actually is not able to take a non-PCI compliant terminal out and put it back into the market. We're not supposed to redeploy a non-PCI terminal, so I would say that the gray market is definitely a lot slower these days because of the standards of print. Okay – one more question, okay.

Unidentified Participant

(inaudible).

Bob Dykes

Well, our prices varies from $300 to $700 or $800, also $2000 to $3000 for the gas pump. I can't actually quote you an average, but the dynamic you are referring to, we have seen retailers often renting it. We do rental business in Israel and in some other markets, but typically, we see in the US, where there is a rental price, that it will be an ISO who has gone into the retail and say, hey, put my terminal in there, and sometimes they don't even rent it, they will actually say, we will just take a piece of the transaction that you transact, and that will be our fee. In other cases, they rent it and also take a piece of the transaction. So worse dynamics, but in the US, any retailer could buy if they want to, the major multi line all buy their own equipment, which then enables them to drive to a lower transaction fee.

Unidentified Participant

(inaudible).

Bob Dykes

Actually I don't actually have the number.

Unidentified Participant

(inaudible).

Bob Dykes

Over many years, there definitely has been a trend down in pricing, or more precisely, functionality has gone up substantially, and pricing hasn't necessarily kept pace with that. So that is one of the reasons why we continue to have lower cost into our products as we go forward so we can improve our margins. Okay, well I appreciate your time. Thanks for coming.

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