Estimates have been on the rise in the last seven days after VeriFone Systems Inc. (PAY) reported strong results for the fourth quarter of fiscal 2010 and provided positive guidance for the next quarter and fiscal 2011. This has led to positive and significant estimate revisions by the analysts covering the stock driving a surge in earnings estimates and signifying a strong positive sentiment.
Fourth Quarter Earnings Flashback
VeriFone reported revenues of $276 million in the fourth quarter of fiscal 2010, up 27% year over year and up 6% sequentially. The growth in revenues was driven by solid sequential growth in international markets. Asia and Europe were the growth engines recording sequential growth rates of 28% and 13%, respectively.
Gross margin (excluding stock-based compensation and one-time items) came in at 40%, up from 39% in the previous quarter and 38% in the year-ago quarter. The growth in gross margin was driven by strong margins in the services business and continued improvement in system solutions due to cost savings and product mix. Excluding one-time charges but including stock-based compensation expense, net income was 33 cents per share, easily beating the Zacks Consensus Estimate of 30 cents.
Estimate Revisions – Overview
Following the positive guidance provided by VeriFone last week, almost all the analysts covering the stock have increased their estimates for fiscal 2011 in the last seven days depicting a strong positive sentiment.
Agreement – Estimate Revisions
For fiscal 2011, all of the five analysts covering the stock have raised their estimates in the last seven days. The accretion is partly due to the acquisition of Hypercom Corporation (HYC) which is expected to close in the second half of 2011.
For the fiscal first quarter, three out of five analysts increased their earnings estimates in the last seven days with no movement in the opposite direction.
Analysts were bullish for fiscal 2012 as well. For fiscal 2012, three of the four analysts covering the stock have raised their estimates in the last seven days.
Magnitude of Estimate Revisions
Not only is there strong consensus among the analysts covering the stock, the magnitude of revisions is significant as well.
The current Zacks Consensus estimate for 2011 is $1.47, up by 12 cents in the last seven days. For 2010, the estimates range from $1.40 to $1.58.
In addition to the acquisition of Hypercom, VeriFone continues to post strong gross margins in the services business and drive improvement in system solutions due to cost savings and product mix, resulting in bottom-line improvement.
The current Zacks Consensus estimate for the fiscal first quarter is 33 cents, up by four cents in the last seven days, in tandem with management. The estimates in the current Zacks Consensus for fiscal first quarter range from a low of 32 cents to a high of 34 cents.
For fiscal 2012, the current Zacks Consensus estimate for 2012 is $1.72, up by 12 cents in the last seven days.
VeriFone’s core business – petroleum – continues to be strong and is driving growth as businesses recover in North America. Business has revived robustly for the company after the slowdown in fiscal 2009, especially the point of sale (POS), petroleum and taxi businesses. New product initiatives such as VeriShield and PayWare Mobile continue to gain traction.
We remain impressed by management’s sincere efforts to expand business in new areas. In October, VeriFone announced a strategic partnership with Gemalto, a world leader in digital security solutions. The two companies are in exclusive discussions for VeriFone to acquire Gemalto's point of sale (POS) solutions business.
Both the companies believe customers of Gemalto’s POS solutions will benefit from access to VeriFone’s full payment solutions product line. VeriFone expects the POS solutions business to act as an ideal launching pad for VeriFone's planned European expansion campaign. Most recently, in an effort to accelerate expansion in key international markets such as Europe, VeriFone will acquire Hypercom.
We believe the company is well placed, driven by solid demand for newer services, and we see a lot of potential for growth in the coming quarters. Hence, we maintain our Outperform recommendation on the stock supported by a Zacks #2 Rank, which translates into a short-term rating of Buy.