VeriFone Systems, Inc F2Q10 (Qtr End 04/30/2010) Earnings Call Transcript

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 |  About: VeriFone Systems, Inc. (PAY)
by: SA Transcripts

VeriFone Systems, Inc (NYSE:PAY)

F2Q10 (Qtr End 04/30/2010) Earnings Call

May 26, 2010 4:30 pm ET

Executives

William Nettles - Vice President of Corporate Development & Investor Relations

Douglas Bergeron - Chief Executive Officer and Executive Director

Robert Dykes - Chief Financial Officer, Prinicipal Accounting Officer and Senior Vice President

Analysts

Robert Dodd - Morgan Keegan & Company, Inc.

Tien-Tsin Huang - JP Morgan Chase & Co

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Gil Luria - Wedbush Securities Inc.

Wayne Johnson - Raymond James & Associates

Darrin Peller - Barclays Capital

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2010 VeriFone Systems Inc. Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] I will now like to turn the conference over to your host for today, Vice President of Corporate Development and IR, Mr. William Nettles. Please proceed.

William Nettles

Good afternoon, and welcome to the VeriFone financial results conference call for the second quarter of fiscal year 2010. Today's call is being webcast, and a recording will be available on our website until June 2, 2010. With me today is our CEO, Doug Bergeron; and Bob Dykes, our CFO.

First for the legalities. I want to remind everyone that VeriFone desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements in this conference call, including management's view of future events and financial performance are subject to various factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For a description of these factors, I refer you to our filings with the SEC. Any forward-looking statements speak only as of today, and VeriFone is under no obligation to update these statements to reflect future events or circumstances.

In addition, today's call will cover certain non-GAAP financial measures on both a historic and forecast basis. Our management uses these measures to evaluate our operating performance and to compare our results to those for prior periods, as well as to those of peer companies. These non-GAAP measures are not substitutes for disclosures made in accordance with GAAP. Reconciliations of these measures to the most comparable GAAP measures are presented in our earnings release, which is available on our website at verifone.com. [Operator Instructions] Now I'd like to turn the call over to Doug Bergeron, CEO of VeriFone.

Douglas Bergeron

Thanks, William. Good afternoon, everyone. Our revenues of $241 million were the highest we've ever recorded in the second quarter, increasing 8% sequentially and 19% from the previous year. Services revenue, which includes the result of our transformational initiatives, increased 16% sequentially and 47% compared to the second quarter of 2009. Non-GAAP earnings for the second quarter were $0.29 per share. Non-GAAP operating margin was consistent with the levels of the prior quarter at 540 basis points higher than the comparable period results in 2009.

Today, I will review our performance by region, follow with an update on VX Evolution, VeriFone's next generation of core payment systems, and update you on some new developments with our transformational services initiatives. Finally, I will turn the call over to Bob who will provide a detailed review of the financials and update guidance.

VeriFone's second quarter revenue, like that of the first quarter, was driven by robust PCI PED upgrade demand in North America and a rebounding Latin America business. These increases offset an anticipated seasonal decline in Asia and some weakness in the Balkans.

Let's start with North America, where revenue increased by 18% sequentially and 27% on a year-over-year basis. Petroleum, Multi-lane Retail and Media Solutions were the standout verticals in the quarter.

Second quarter Petroleum revenue increased by almost 40% from first quarter results, and approximately 100% from the second quarter of 2009. Demand for indoor solutions was particularly strong, and we shipped to record volumes of MX, Sapphire and Topaz systems. We also received a multi-million-dollar Secure PumpPAY contract from Tesoro, a major independent refiner and operator of hundreds of retail stations. Tesoro selected VeriFone because of our security expertise and because we offer a uniquely common platform across all pumps. The multiple pump manufacturers who supply Tesoro could not individually address this requirement. We are encouraged by this feedback and think that Secure PumpPAY will be an important contributor to our Petroleum business over the next couple of years.

Our Multi-lane Retail business had one of the best quarters in its history. We also continued to win the majority of new opportunities in this segment. This quarter, our wins included Pep Boys and Foot Locker, amongst many others.

Our Media Solutions business had a solid quarter. We completed the integration and training of the acquired taxi media sales force early in the quarter and saw the benefits of increased sales coverage on our top line. We also started to see the benefits of the economic recovery, with an uptick in digital advertising demand from both existing and new customers such as Microsoft.

Finally, in the past months, we've provided customers with a preview of VeriFone's new in-taxi video advertising platform that contains an enhanced visual experience and a number of features appealing to advertisers. For example, advertisers will be able to geo-target riders is at various locations such as the airport, theater and shopping districts. Advanced interactive features will allow riders to self-select advertising content for a particular merchant. We expect that this platform will go into production in the third quarter.

Now let me discuss our International business, which grew 1% sequentially and 14% over the second quarter of 2009. Compared to the first quarter of 2010, Latin America increased by 24%, Europe declined by 4% and Asia declined by 25%. On a year-over-year basis, Latin America increased by 25%, Europe increased by 4% and Asia increased by 26%.

In Latin America, growth was driven by healthy demand in Brazil, Venezuela, Argentina, Chile, Paraguay and Columbia. Vertical solutions, particularly in Brazil and Mexico, played a prominent role in our business expansion. In Brazil, revenue from our non-processor-based vertical offerings, private label card solutions, merchant branch banking and cell phone top-up accounted for 1/3 of total sales.

In our Brazilian Petroleum business, we made important strides in the creation of a new solution now in pilot with two major retail operators. This solution enables full-service attendants to administer consumer loyalty programs right at the driver's window. In addition, our back-office acquiring solution offers these same petroleum companies a migration path to become an acquirer and process the transactions from their own private label cards.

In Europe, we posted a good quarter and made excellent progress with multi-lane retail environments. A number of wins, including Waitrose, Hutchison 3G and the DSG group was driven by PCI compliance initiatives or programs to integrate loyalty programs with contactless solutions.

In Spain, we closed our first MX deal with a major bank that sells services to a large number of multi-lane retailers. In Turkey, we obtained a multi-million-dollar order from Turkcell to implement our VeriFone 360 solution. VeriFone 360 is a complete solution for retail chain store management. Previously sold only in Israel, VeriFone 360 integrates with an electronic cash register and addresses operational needs for the point of sale, store back office and headquarters back office. Excellent teamwork by our Turkish and Israeli engineering groups to localize the product for the Turkish market laid the foundation for this important order. We expect to build on this success with similar efforts in other countries.

Our Banking business was strong across Europe, particularly in the U.K., where we shipped the popular Vx 810 DUET and Vx 670 Bluetooth pay-at-the-table solutions in substantially higher amounts than the first quarter level. The Balkan countries declined sequentially due to economic instability in the region at large. The Netherlands also declined following record revenues in the first quarter. The balance of our European portfolio performed as planned.

Now let's move on to Asia. Business activity was lower than last quarter due to the Chinese New Year. Revenues met our internal expectations and represented a 26% increase over their results in the second quarter of 2009. In China, we had a good quarter. Winning a number of deals with major financial institutions, including China Construction Bank, Bank of Communications and Allen Pay, an emerging debit network. At ICBC, we strengthened our competitive position by qualifying the Vx 670 and the Vx 810 solutions. In one of China's largest provinces, VeriFone obtained an important order with the provincial government for a solution that provides secure communication for a number of government agencies. Police officers, for example, will use the Vx 670 to record driver tickets -- drivers' traffic infractions. At provincial health clinics, patients present their ID card to authenticate insurance entitlement and initiate copayments. In the future, this solution will be more tightly integrated with the government healthcare system at large, allowing providers to access patient medical information.

Elsewhere in Asia, results were solid. There have been some recent well-publicized data breaches in Australia and Malaysia, prompting some customers in the region to accelerate their upgrade plans. In Singapore, we continue to deploy the country's first contactless solutions. In Indonesia, Thailand and the Philippines, sales to banks were strong. And in Vietnam, we received our first order for taxi payment systems.

Now I would like to provide an update on VX Evolution, VeriFone's next-generation family of core payment solutions, and fill you in on some developments in end-to-end encryption, PAYware Mobile, PAYware Connect and VPAS, our new security monitoring service. At the April ETA show, we announced the VX Evolution, the next generation of the popular Vx payment solutions family with market-leading enhancements, including integrated contactless and end-to-end encryption. This launch puts our core business indisputably ahead of our competitors, as we refresh all major solution categories. Desktops, portables, PIN pads simultaneously. Today, only VeriFone can provide a common operating system, payment applications and shared components across solution categories, optimizing our customers operations. Finally, with the VX Evolution launch, VeriFone has led the way in payment security with our full portfolio of devices designed to meet newly announced PCI PED 2.x standards, which must be adopted by customers by 2014.

Now let's move on to end-to-end encryption. Our EMV release of VeriShield Protect is in the final stages of development, and we are currently in the pilot phase with a major United Kingdom retailer. Following completion of the pilot, we will address a full pipeline of financial, petroleum and retail customers there, who want to evaluate VeriShield Protect in their environments.

In United States, our main focus in the second quarter was to quickly build out our implementation network now that VeriShield Protect has become the de facto solution of choice for the payments industry. In order to meet the demand that we see for implementation projects, we must build out our partner network of integrators and gateway providers. We are collaborating with an expanding ecosystem of infrastructure solution providers that have now been trained to support VeriShield Protect and are helping to create a cottage industry around deployment and integration of this service by retail industry integrators and solutions providers. Regarding VeriShield Protect sales, we enjoyed a number of new wins in Q2, including our largest deal to date with a major retailer with over 6,000 sites. We start the rollout of the first 800 stores next week.

Continuing with our discussion of payment security, yesterday, we announced VeriFone PED Authentication Service or VPAS. This service protects acquirers and merchants from criminals who steal PCI-compliant payment devices and replace them on site with seemingly identical but compromised systems that are equipped with electronic bugs or schemers that capture card data. Several well-publicized breaches of this kind have been reported in the last couple of months. VPAS ties the unique idea of a point-of-sale location to the unique ID of the PIN Entry Device and compares the two IDs against the database of pre-registered devices. If there is a mismatch, alerts and reporting are provided to retailers, processors and banks, so that action can be taken and rogue devices removed. Acquirers and merchants can activate VPAS and protect over 10 million active VeriFone devices, including the Vx, MX, Omni and SC 5000 families.

Since VeriFone solely possesses the secret manufacturing ID of each of these previously shipped systems, we are uniquely positioned to provide this service. Next week, our sales force will begin offering VPAS to large national merchants and processors. With basic service agreements starting at only $2 to $3 per month per device, and premium services such as transaction-based authentication and advanced direct-to-VeriFone monitoring available at an additional costs, we believe that this has a possibility of becoming a very important services initiative for VeriFone.

On the PAYware Mobile front, the secure payment solution for the iPhone and other smartphones, we are making good progress with our online campaign, the Apple Retail channel and sales initiatives to direct sales enterprises, companies that sell products to consumers through thousands of in-home sales agents. After PAYware Mobile launch in Apple Retail that was overshadowed by the iPad launch, sales have been picking up nicely over the last few weeks and nearly doubling every week. Our online campaign now leverages Facebook, and we are seeing quite substantial lead generation from that channel. Our direct sales enterprise channel continues to make good progress, while these elephant deals will take time to close and require deep integration with field management systems.

Our smartphone initiative is designed to drive recurring traffic to PAYware Connect, our highly-regarded gateway. Nine months ago, PAYware Connect supported only point-of-sale resellers and integrators and a small number of ISOs. Including our successful efforts in marketing VeriFone Connect to tier two multi-lane retailers, we have now grown transaction revenue to over 4 million transactions a month. We now have over 5,000 customers and see robust demand not only for micro merchants who purchased PAYware Mobile, but also multi-lane retailers who value an expanded partnership with VeriFone.

Finally, before turning the call over to Bob, I would like to comment briefly on our acquisition of Orange Logic of the Republic of Korea. With this acquisition, VeriFone gains the people, infrastructure and customer relationships to introduce VeriFone's solutions into the South Korea market, supplementing Orange Logic's existing domestic product line. Although South Korea is second only to the U.S. market, with more than 2.4 million deployed electronic payment systems, only 10% to 15% of these meet government security requirements for compliance with the international EMV standard. The acquisition is expected to expedite the certification and availability in South Korea of VeriFone's recently announced VX Evolution systems, which will provide Korean processors with greater options to meet EMV mandates.

Now I would like to turn the call over to Bob to discuss in more detail the P&L, balance sheet, cash flow statement and guidance.

Robert Dykes

Thanks, Doug. Before proceeding with the financial review, I would like to remind our investors that a succinct spreadsheet of our non-GAAP financials and a reconciliation between non-GAAP to GAAP financials is available on the Investor Relations tab of our corporate website at www.verifone.com. In addition, I'd like to mention that last week, the company name was changed from VeriFone Holdings to VeriFone Systems. This change reflects the identity we've established as the global leader in delivering electronic payment system solutions. There is no impact on our outstanding shares and the core business entity continues to operate as VeriFone, Inc.

As Doug discussed revenue in some detail, I'll begin with non-GAAP gross margins, which came in at 39.2%, consistent with the first quarter performance, and an increase of 540 basis points compared with the 33.8% reported in the second quarter of 2009.

Compared to the first quarter, geography and product mix was slightly favorable, and corporate costs comprised of costs not easily allocable to the regions was slightly higher. Compared to Q1, operating expenses increased by $3.5 million to $55.5 million. Sales and marketing increased by $1.7 million. R&D increased by $1.3 million. And G&A increased by $0.5 million. The increase in sales and marketing expense was due to investments in Media Solutions, PAYware Mobile channel development and Asia headcount. The R&D increase was primarily due to the VX Evolution products introduction. The G&A increase was primarily due to normal fluctuations in the provisions for bad debt. The foreign currency impact on operating expense was favorable by $350,000 compared to the prior quarter.

Non-GAAP net interest and other expenses was $3.7 million in the second quarter compared to $4.4 million in the first quarter of 2010. This decrease is due to a one-time subsidiary adjustment in minority interest.

This quarter, we excluded from the other income and expense line of our non-GAAP results a $1.5 million gain from the reversal of an Indian sales tax liability, while other non-GAAP adjustments this quarter are customary.

Now let's take a look at our cash flow and balance sheet. Cash increased by $4 million in the second quarter, certainly less than the increases of recent periods as we made significant cash investments during the quarter. We bought an equity position in Trunkbow International Holdings of China. We acquired the remaining minority interest in VeriFone Transportation Systems. And we built inventories to meet expanding customer demand. From a balance sheet perspective, the highlight of the quarter was a seven-day DSO reduction from last quarter to 57 days, the lowest DSO in four years as we continue to even out shipments throughout the quarter.

Debt covenant metrics are in compliance by a wide margin. Rather than take time on the call to discuss each calculation, I instead refer you to the Investor Relations tab of our corporate website at www.verifone.com, where you can find published details of the compliance ratio calculations. For those investors evaluating our balance sheet, I remind you that last quarter, we adopted our APB 14-1, which is now known ASC 470-20, for the accounting of our senior convertible notes. The cumulative effect of the adoption has a reported long-term debt, which is $33 million below the value of the principal.

Let's now look forward. We're revising our revenue guidance for 2010 to be between $960 million and $970 million, up from the guidance of $925 million to $940 million that we provided in the last quarter's earnings call for fiscal 2010. Non-GAAP earnings per share are now projected to be in the range of $1.12 to $1.15, up from the range of $1 to $1.10 provided last quarter.

Our guidance for the third quarter is for revenue to total between $245 million and $250 million, representing growth of 16% to 18% over the third quarter of 2009. We expect non-GAAP earnings per share in the range of $0.29 to $0.30.

I will now turn it over to Doug for some concluding remarks.

Douglas Bergeron

Thanks, Bob. In summary, we are very pleased with the results of our second quarter 2010 and are increasingly confident about our prospects going forward. Growth is being driven by the tremendous businesses we have built in the fastest-growing economies of the world, as well as our recent transformational services initiative. North America is clearly rebounding, and we believe that momentum will continue. Any weakness in Continental Europe, our least relevant geography, will be disproportionately felt by our competitors.

It is worth noting that the payment industry is rapidly evolving. And we saw a further evidence of this in the past quarter with Visa's acquisition of CyberSource, a gateway systems provider. The traditional role played by each actor in the payment ecosystem, once clearly defined, are now changing quickly. Our most prominent competitor in Europe has purchased the payment processor. Card networks are implementing gateway services. And VeriFone, once largely known for industry-leading devices, is now the preeminent payment security company. It seems to us that the winners in all of this are the companies in this ecosystem that possess differentiating technology and have intimate and technologically rich relationships with the end users, the retailers.

Thanks for listening, and we will now open it up to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question coming from the line of Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang - JP Morgan Chase & Co

I want to ask about the strength in North America. Can you maybe, Doug, just go into a little bit more detail exactly what came in above plan and if there was any pull forward particularly in the petroleum vertical?

Douglas Bergeron

The standout segments in North America were Petroleum, Multi-lane and Media. We're starting to see some signs of life in small business but nothing really to wave a flag about. And there was no pull forward at all. In fact, we see robust demand going forward in all of the segments I just mentioned.

Robert Dykes

As we've outlined in, probably, for more than a year now, we have a tremendous opportunity to upgrade at the pump componentry, which largely doesn't have any VeriFone equipment out there until just recently. And there are 800,000 guest pumps out there, about 400,000 need to be upgraded. And so this can be a very long-term trend to upgrade at the pump and shorter-term trend for upgrading in the kiosk.

Tien-Tsin Huang - JP Morgan Chase & Co

I'm curious, has First Data started to come through now in terms of a new demand?

Douglas Bergeron

We have a phenomenal relationship with First Data. And I'm convinced that in every market in which they trade that we're doing more business than anyone else with them. We believe we begin shipping our co-branded product late in this quarter, early in the fourth quarter, but nothing was in the second quarter results regarding the replacement for their homegrown stuff at their end of lifing [ph] (29:54).

Tien-Tsin Huang - JP Morgan Chase & Co

And then I guess I want to expand upon with Europe a little bit. I heard a commentary about the Balkan states in the Netherlands, et cetera being weak. But I get this question a lot, obviously, about your exposure to the pigs, to Europe in general. I understand that your exposure relative to Ingenico is much lower. But I'm curious, how should we frame the potential for that is billing to potential weaker demand out of your Europe-based business?

Douglas Bergeron

We're cautious, but we're not at all fearful. I mean, it's our least relevant segment. In fact, even within Europe, our strength is in Eastern Europe, the U.K. and the Nordics and the Middle East. And our weakness is in classic old Europe, Italy, Spain, Portugal, France and Germany. So we just, I think, this kind of out of luck happened to be in all the right places and not in all the places there having a severe economic contraction. The total revenue, I think, in between Ireland, I'm trying to list all the pigs here, Portugal, Island, Greece, Italy and Spain is probably less than $40 million, $50 million a year, which should be less than around 5% of revenue. So we'll more than make up for that with all of the tailwinds we have going on everywhere else.

Tien-Tsin Huang - JP Morgan Chase & Co

Last one for me, just the currency question tied to that 5%. I understand that you get paid in dollars in a lot of cases. Just curious about your exposure to the euro.

Douglas Bergeron

The only exposure we have to the euro is in France, Italy and Spain. Even in Germany and the Netherlands, we get paid in dollars. So our revenue exposure to the euro is probably sub $25 million, $30 million out of $960 million to $970 million. And we actually have more expenses there than that, so we probably have a net positive but not meaningful P&L effect as a result of this.

Operator

Your next question comes from the line of Andrew Jeffrey with SunTrust.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Nice lift sequentially in the service revenue line. We're starting to see that really increase as a percent of total revenues. Can you quantify, Doug, some of the contribution maybe this quarter from Media? And then you made some qualitative comments about PAYware Mobile, and I know you'd made some comments at a conference maybe last week, the week before, about sort of exit rate quarterly revenue from somebody's new initiatives. Can you flesh that out a little bit for us?

Douglas Bergeron

Yes. I mean, we've got four or five global services initiatives that we're putting a lot of money and management time behind. We're certainly not going to break them out on a line item basis. But just to be consistent with what we've said in the webcast call in Boston last week at the JPMorgan Conference was just our Taxi business, which is taxi revenue and media from taxis should exit Q4 in the $10 million to $15 million quarter range. That's excellent. We've built in a matter of a couple of years a business out of zero to something that will go into 2011 at $60 million and growing nicely. The other services business that we're getting that helped comprise the $40 million in services revenue this quarter is a combination of all the things we've been talking about. Our gateway is starting to do well. The merchants signing on to the gateway, both through Tier 2 retail and also through the iPhone, are starting to be meaningful. And as we get more of these implementations and encryption and then encryption solution done, both will start to accrete to the P&L quicker. So I think you really hate to see nothing yet. I think we're doing a lot more behind the scenes that hasn't really hit the services line yet, and we expect that 2011 will be a very good services year for us.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

So it sounds like you wouldn't be getting too far out in front of us. You used to say that new services initiatives, in aggregate, could run close to $100 million on what they're of in fiscal '11?

Douglas Bergeron

Well, it shouldn't be the ones we've already announced.

Robert Dykes

Right.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

And then with regard to gross margin, given the strength in North America and given the lift in services revenue, we would've expected gross margin to expand. Is there something -- you had mentioned some difficult to allocate corporate costs that run through COGS. Is that really nonspecific? Or is it more recurring? How do we think about that? And I would think the gross margin that these trends continue should get north of 40 in a hurry, right?

Douglas Bergeron

Yes. I mean, our services initiative, they all have the kind of the complexion of businesses that have tremendous margin expansion capability beyond some tipping point. So they're not accretive to average gross margins yet, but they will be. They just really have to achieve that critical mass. At this point, we're building help desks and doing a lot of things to support all of these things. So you shouldn't be too -- to use your term, get your skees out too far in front on you on that. But we just announced our next-generation payment product and very few have shipped yet. And that's going to be accretive to gross margins going forward. I don't think it was anything squarely in the quarter that does not really -- the quarter was pretty clean.

Robert Dykes

The applets will come from these new initiatives than from the rollout of the evolution.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Doug, you'd made reference to maybe more linear quarters. Is that just evolution of the business? Or is that something you're doing intentionally in a focused way?

Douglas Bergeron

Well, it's a high-class thing to have if you can have it. But it's largely due to our very robust demand and our competitive position probably being better than it's ever been. And you see it in DSOs. We're booking a lot of business in the first month of the quarter and collecting those receivables before we even close the lights on the last day of the quarter. So I don't recall when we've had DSOs this low. I guess it was four or five years ago, but it's very helpful to the supply chain. It's very helpful to my blood pressure. It's very helpful to a lot of things throughout the company when we can be ahead of the curve, and that's where we are.

Operator

Your next question comes from the line of Darrin Peller with Barclays.

Darrin Peller - Barclays Capital

First of all, on the new initiatives, I mean, it sounds like with now VeriFone 360, which I think is the ERP system, and the gateway opportunities, other add-ons. In addition to really the three previously discussed newer initiatives, it sounded like there's quite a few more coming out in the pipeline. Maybe you can help us understand, first of all, in your guidance raise, how much of the raise actually have to do with the core business or the petroleum, including the core business, first is the newer initiatives, the three in the previously mentioned, and maybe the newer ones as well?

Douglas Bergeron

Well, at $950 million to $970 million, I can't do the math in my head, but that looks like 15%, 16% growth year-over-year. Some of that was because 2009 was such an awful year for everyone, so our core business will probably grow better than 10% this year, which is the long-standing growth rate that we think we can continue to achieve. This year is probably a positive correction year based on the bad comps for 2009 and a few percentage points, maybe 350, 300 is probably due to the new stuff. And that's going to be the fastest-growing stuff in the portfolio.

Darrin Peller - Barclays Capital

It sounds like, I mean, there's a price for the upside on the new initiatives trajectory, I guess. The . . .

Douglas Bergeron

The advertising demand in our Media Solutions business couldn't have come at a better time. We're seeing just a real run to quality there. Recently, there were some municipal regulation passed in the Europe that required a tearing down of scores of billboards, which we're seeing a lot of advertising revenue that had already been dedicated to outdoor advertising move to inside the taxicabs. And plus, the recovering economy is very helpful to that business as well.

Darrin Peller - Barclays Capital

And then the PAYware Mobile attraction you mentioned. I mean, sale is doubling for a week. Is that actually in your guidance for this year? Or is that really more still a 2011 amount?

Douglas Bergeron

I didn't say it's going to double every week. Otherwise, it will be bigger than VeriFone and above, but we could do the math. But I got a slower than anticipated start because of the iPad launch, so part of that is normalizing. But we think this will be a great home run for us long term where it gets adopted virally the best advertisers or the people that see other people using it, and we're making sure that our customers have a great experience. These transactions always work, and they say good things to their peers about it. And over time, it's going to be a very meaningful number. We're very excited by it.

Darrin Peller - Barclays Capital

And then real quick on the end-to-end encryption. I think last quarter, you mentioned having 10 retailers undone. You gave some color on your call. I don't know if you mentioned the number of retailers now. Is there any you can help us about?

Douglas Bergeron

Yes, it's more than 10. We decided if we start repeating numbers every quarter, then it's going to be a bit of a tax on the company. It's developing good traction. We did spend a lot of management time this quarter developing out the integration and implementation network. We, frankly, were somewhat resource bound right now in terms of getting the systems implemented, but we'd continue to make good progress. We're not aware of one other instance of a lot end-to-end encryption alternative product out there. So there's a lot of chatter and a lot of pressure leases issue. But the fact is VeriFone is encrypting a thousands of transactions a day across many, many locations, and this is becoming the de facto standard.

Darrin Peller - Barclays Capital

And then, Bob, do you still expect gross margins to exit the year north of 40%?

Robert Dykes

Yes, we'll continue to work on that. I said that's all we're aiming for and to get above it in the subsequent year as well. So there will also always be noise up and down, but we think that there's a good chance for that.

Operator

Your next question comes from the line of Wayne Johnson with Raymond James.

Wayne Johnson - Raymond James & Associates

On the services side, just looking out over the next several years, how should we think about that particular revenue source as a percentage of revenues? It seems to be growing quite rapidly the fashion that we had modeled, which really seems to have a positive impact on overall results. So if you could give a little color on that, that would be terrific.

Douglas Bergeron

Sure. And it's also, I think, an insurance policy against unforeseen economic downturns. I think it lowers the data a little bit in the overall revenue mix. But I would not be surprised after a couple of years of these types of initiative rollouts to see it at over 30%. But it's going to take a lot of management attention. We're going to have to continue to introduce more and more of them. And we're going to have to, when things don't work, have the humility and the ingenuity to modify our marketing strategy or our pricing strategy or whatever. In a lot of cases, we're offering solutions that nobody else has offered before. Nobody in the industry, including the processors, knows where their payment devices are installed. It's a shocking commentary, but the fact is we've sold 10 million payment systems over the last four or five years to large merchants and processors, who aren't sure which serial numbers and which products that we can index by a secret manufacturing ID are located where. And to provide that service for a de minimis amount per month per system can provide a tremendous amount of security and protection for a large organization. So we're going to have to tailor these solutions as the market evolves. But it's worth noting these are not copycat solutions. These are innovation solutions at work.

Wayne Johnson - Raymond James & Associates

The few years you get to 30%, would you say that's three years? What kind of range for that would you give?

Douglas Bergeron

Well, let's say we could exit 2012, enter 2013 with that type of mix.

Wayne Johnson - Raymond James & Associates

And so that would be international, that would be all over the world for the services. Is that correct?

Douglas Bergeron

Yes. I mean, what we do with most of these services initiatives is we test them out here. We roll them out here. We learn from them. And then we have to adopt them with EMV in mind for international markets, which is a bigger investment. It's incremental and it's bigger in many cases. So that's what we've done with encryption. We incubated it in the U.S. and now we're exporting it internationally. That's what we did with the iPhone. Our EMV version of the iPhone will be announced in the beginning of Q4. And we're setting up four or five gateways across the world, as we speak, in some of our bigger locations. So we like to incubate them frankly close to me, so I can get my hands around them. But as soon as we find out where they're competitive and how they get their stride, we're quick to put them in our international channel, which I remind you is about 65% of our whole business.

Wayne Johnson - Raymond James & Associates

And just as a reminder, for the service side, the percentage of recurring revenue per service is 90%, 95%. What would you say that is?

Douglas Bergeron

It's almost all. I can't do the math in my head. I mean, inside the services, you get the odd software projects . . .

Wayne Johnson - Raymond James & Associates

So 90% plus usually without . . .

Douglas Bergeron

Yes. I mean, it's mostly either per lane, per month, per transaction kind of model.

Operator

Your next question comes from the line of Robert Dodd with Morgan Keegan.

Robert Dodd - Morgan Keegan & Company, Inc.

Just to get back to that question on the 10 million devices again, I mean, you say the processes don't necessarily know where they are. But for the market opportunities, for you guys, is kind of one of the questions obviously is what kind of devices? And you know how many you've made and which kind at least. Can you give us any color on -- of the 10 million that you've made, how many of those were multi-lane versus petro versus stand-alone? Could you give us some idea of [indiscernible] (46:36)?

Douglas Bergeron

What we said was the opportunity set for us was 10 million systems that involved VX, MX, Omni and, obviously, we did even mention the petroleum products as well. So probably, anything shipped over the last five or six years, some of the really old trend stuff that you still see in the market is not PCI compliant and is not a PED device that you would want to keep track of anyway. In fact, if you lose some of that stuff, you'll be probably be better off. So the opportunity set for us is the 10 million or so later-generation products that I just mentioned.

Robert Dodd - Morgan Keegan & Company, Inc.

Just on the VX Evolution, I mean, obviously, you guys have a pretty good track record of when you launch it, you get it certified pretty quick. I mean, what are your expectations there on first sales of those in the . . .

Douglas Bergeron

It will not be in the U.S. We're perfectly happy with our product and margin profile in the U.S. It will be aimed after higher growth countries in Turkey, Brazil and urban China for this year.

Robert Dodd - Morgan Keegan & Company, Inc.

When you bring that family to the U.S. or even with the common family in it, are you planning on putting any kind of in-box advertising for some of these new products or even on terminal here plus the terminal the first time it pops up and says, "Hey, do you want to connect to VPAS?" Any of those kind of things you're contemplating?

Douglas Bergeron

Yes. We're not going to describe all that today, but many of the models of our VX Evolution product line have very large color screen displays even for stand-alones, single-purpose payment terminals. So there is an opportunity for us to take both our advertising and our other service initiatives across our future base of payment terminal line.

Operator

[Operator Instructions] And your next question comes from the line of Gil Luria with Wedbush.

Gil Luria - Wedbush Securities Inc.

It sounds like you've made a few run on exact revisions this year. The Taxi business one in [indiscernible] (49:09), that sounds like one in China. Can you tell us [indiscernible] (49:13) your revenue run rate looks for those businesses, at least for the aggregate of those businesses?

Douglas Bergeron

Well, the Taxi business was -- we acquired the minority interest, so we are already reporting all of the revenue. We are just deducting the non-minority interest out of the bottom line, and the China Mobile business is an investment that we don't consolidate at all.

Gil Luria - Wedbush Securities Inc.

And the Korean business?

Douglas Bergeron

The Korean business has a $2 million or $3 million, $5 million run rate, but we think there's great opportunity -- which none of it is in the P&L currently. But it could contribute $1 million a quarter going forward, but the opportunity is to sell $10 million in the quarter over the next few years for VX Evolution line.

Gil Luria - Wedbush Securities Inc.

What percent of revenue in the quarter was from Petroleum?

Douglas Bergeron

We don't break out our Petroleum business from our other U.S. businesses. I will tell you that the majority of our Petroleum business is still U.S.-based, although we have a nice Brazilian Petroleum business that's developing. And historically, our Petroleum business has been in the 25% neighborhood of our U.S. business. I would give you that it was a little bigger than that this quarter.

Gil Luria - Wedbush Securities Inc.

And then finally on the PAYware Mobile. I think last quarter before the launch, you talked about thinking of this as a few tons of thousands by the end of the year. Is that still the run rate that you're looking at to get to at the end of the year? And then, without a layer [ph] (51:08), or would you need a layer [ph] (51:10) like Mary Kay or something like that to get to that? And then of the unity you have out there right now, what's the breakdown between the Apple channel, the website, the ISO and your direct sales even just directionally?

Douglas Bergeron

I think the targets that we had set for ourselves as a run rate by the end of the year is still achievable. Part of it will come from our international piece that's going to begin in Q4. If you look at the current growth, which is somewhat geometric in nature, you get there. But who knows if that continues? We're hopeful. We do count on some of the DSEs that we had great conversations with signing up. But at the end of the day, it's the future and we can't predict the future.

Operator

At this time, I'm showing no further questions in queue. I would like to turn the call back over to the CEO, Mr. Doug Bergeron, for any closing remarks.

Douglas Bergeron

No, that's it. We really, really had a great quarter and feel great about the business and look forward to talking to you next time. Goodbye.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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