VeriFone Systems, Inc Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: VeriFone Systems, (PAY)

VeriFone Systems, Inc (NYSE:PAY)

Q3 2012 Earnings Call

September 05, 2012 4:30 pm ET

Executives

Doug Reed - Vice President, Treasurer and Executive officer of Investor Relations

Douglas G. Bergeron - Chief Executive Officer and Executive Director

Robert R. Dykes - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Darrin D. Peller - Barclays Capital, Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Philip Stiller - Citigroup Inc, Research Division

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

John T. Williams - UBS Investment Bank, Research Division

Gil B. Luria - Wedbush Securities Inc., Research Division

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Keith M. Housum - Northcoast Research

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 VeriFone Systems Earnings Conference Call. My name is Chanel, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Doug Reed, Senior Vice President, Treasury and Investor Relations. Please go ahead.

Doug Reed

Thank you, Chanel, and welcome, everyone, to the VeriFone Financial Results Conference Call for the Third Quarter of Fiscal Year 2012. Today's call is being webcast with both audio and slides available via the link in the Investor Relations area of our website, ir.verifone.com, and a recording will be available on our website until September 12, 2012. [Operator Instructions] In addition, we will make the script available on our website immediately after the call. With me today in VeriFone San Jose, California headquarters is our CEO, Doug Bergeron; and our CFO, Bob Dykes.

First for the legalities. 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 Securities and Exchange Commission.

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 historical and forecast bases. Our management uses these measures to evaluate our operating performance and to compare our results to those of prior periods, as well as to those of peer companies. Please note that VeriFone expects to continue to incur types of income and expense items that are excluded from the non-GAAP results discussed today. These 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.

[Operator Instructions] Now I'd like to turn the call over to Doug Bergeron, CEO of VeriFone.

Douglas G. Bergeron

Thanks, Doug, and good afternoon, everyone. Today, I want to address 2 main topics. First, we will explain the dynamics of the third quarter and how our revenue will grow in fiscal '13. Secondly, I want to comment on recent industry news and how it affects VeriFone.

We are very pleased with the results of our third quarter of fiscal year 2013. For the 11th consecutive quarter, we posted all-time record results. Q3 non-GAAP revenues were $493 million, a 56% increase over the previous year. Excluding the impact of all acquisitions over the past 12 months, organic revenue growth accelerated to 16%. On a constant currency basis, organic revenue growth was a very strong 21%.

Non-GAAP services revenue continued to expand and comprised a record 29% of total revenues in Q3. Non-GAAP gross margins were 45.4% of revenue, an all-time high. Non-GAAP operating margins were 23% of revenue, also an all-time high. Non-GAAP fully diluted earnings for the second quarter -- I'm sorry, for the third quarter, were $0.75 per share, an increase of 53% over Q3 last year.

Today, I will review our performance by region and follow with comments on some of our strategic activities. Finally, I will turn the call over to Bob, who will provide a detailed review of the financials and update guidance.

Our international operations continued to show great momentum in Q3, posting year-over-year growth of 82%. Organic growth was 21%. On a constant currency basis, organic growth was 28%. Latin America had another impressive quarter with 45% year-over-year revenue growth and 30% growth, excluding acquisitions. On a constant currency basis, organic growth was 40%.

We experienced a setback in the last month of the quarter with a fire that completely destroyed our Brazilian staging and repair center. The impact to the quarter is less than $10 million, causing a reduction of services revenue and a major distraction to our sales efforts where all product sales depend upon services commitments. We have recently moved to a new facility and expect full coverage of our physical losses under our insurance policy. But we do expect a further impact to revenue in the fourth quarter due to the disruption. Revenues are expected to return to recent levels in Q1 FY '13 and beyond.

In Europe, the Middle East and Africa, revenues grew 109% over Q3 last year and 16% organically. Organic growth was 24% on a constant currency basis. We won a contract with one of the largest French retailers for a 3-year Wynid Managed Services contract. In the U.K., we enjoyed great wins at Halfords, Phones 4U and WHSmith.

Our African business is still very strong. We continued deployment of devices to aid the Central Bank of Nigeria's program to convert Lagos into an electronic payment society. In South Africa, we see many of the retailers now investing in rolling out our VX contactless integrated products, and we have also enjoyed significant wins in Saudi Arabia and Egypt.

In Germany, we are introducing our new H5000 product and expect to see a steady ramp of sales over the next few quarters. While in France, we are still seeing some weakness reflecting Hypercom product deficiencies that will be remedied later in fiscal 2013 with the introduction of VeriFone Systems and new software.

Point revenues were $56 million in Q3. Other than the impact of FX headwinds to this all European business, Point is performing even better than the aggressive growth plan we have established at acquisition.

All-in-one revenues were up 7% sequentially on a constant currency basis. The all-in-one business, which bundles systems and a suite of software and services into a multi-year contract, increases overall revenue significantly over the life of a contract, but does defer revenue over many quarters rather than generating an immediate benefit. The deployment of the payment-as-a-service, all in one model, across Point's home markets continues to be extremely successful.

The installed base of payment-as-a-service solutions has grown 22% compared to a year ago and 12% since the day the acquisition closed. We recently signed the largest payment-as-a-service deal in Point's history with S Group in Finland. We will provide a compressive payment-as-a-service offering that includes payment systems, software, state management, maintenance, integration, security and gateway services. S Group is one of Nordic's largest retail organizations with more than 1,600 locations and 11,000 lanes, primarily in Finland. The value of this deal should approach $20 million over the life of the contract. Deployment will begin this year with the majority of systems installed in 2013 and a scheduled completion in 2014.

Our London black cabs initiative continues to ramp up. We overachieved our goal of having 10,000 cabs signed by the Olympics and have now signed over 10,700 to multi-year contracts. Our installations have been behind schedule due to the difficulty in getting cabbies to take their cabs off the road. But we have recently passed the 6,000-cab mark and expect to have over 10,000 installed by the end of this calendar year.

Moving onto Asia. We are extremely happy with our results in the third quarter. Revenues were up 72% from a year ago and 13% organically. Growth was up 16% on a constant currency basis. We saw strong revenue growth in China. The ISO market is developing in China with over 100 licensed ISOs, and we continued to generate new business with new customers. In addition, sales to banks were strong, and we enjoyed good wins at ICBC, CCB and UMS. In greater Asia, we enjoyed great wins with the Bank of Madiri in Indonesia and with the largest Malaysian bank, Maybank. We've begun deploying an Electronic Receipt Management solution to the Bank of Ayudhya, one of the top 5 Thai banks.

In Australia, we are making great progress with our new point business. We enjoyed a great win with Bank of Queensland for a fully Australian-based Point payment-as-a-service offering. In India, we saw some slowdown in demand due to the Reserve bank of India's directive to reduce and cap the merchant discount rate for debit transactions to a level half of the current average and below the interchange rate set by MasterCard and Visa. This announcement has caused acquirers to slow down on deployments until further clarity is attained.

Now let me move on to North America. Sales were up 14% compared to a year ago and 7% sequentially. Organically, revenues were up 9%. In the third quarter, 29% of the units shipped in the U.S. were EMV enabled, and we're seeing an acceleration of interest for EMV-enabled units, which we can sell those -- the EMV software later when the U.S. industry standards are completed and announced.

Our Multi-lane Retail sales remained strong. The MX900 series continues to be the fastest launching retail product in VeriFone's history, with wins at Verizon Wireless, Century 21, Sport Chalet, North Face and Game Stop during the quarter. We signed 10 national merchants for our PayPal e-wallet software solution.

In the quarter, PayPal purchased over 15,000 VeriFone e-wallet licenses for our deployment to a growing list of our customers. We expect that this number could exceed 50,000 licenses by the end of this calendar year.

We had a great win in the transportation sector, securing a second New York Metropolitan Transportation Authority contract for bus systems and dispatching software, this time in the Bronx. Late last year, we won the Staten Island contract. We expect other Burroughs to follow with RFPs in 2013.

In the hospitality sector, we secured our first major lodging contract with Choice Hotels International to provide MX 925 EMV ready systems across their estate. Choice Hotels franchises 6,200 hotels worldwide, including the Clarion, Comfort Inn, Quality, Sleep Inn and Econo Lodge brands. This is part of the new market opportunity that EMV in the U.S. brings to us, industries where customer-facing technology was not previously required.

We made good traction with our Point USA initiative in the quarter. We signed full payment-as-a-service deals with L'Oreal, Sizzler Steakhouse, Little Caesars Pizza and Overland Rentals. The North American petroleum revenue was up 17% compared to a year ago, led by our Gemstone line of high-end kiosk systems. Topaz and Sapphire sales remained strong, as clients upgrade from our traditional industry-leading Ruby product to Topaz, our keyboard touchscreen model, and we continue to see strong demand for our powerful Sapphire site controller and web server products.

Clients upgrading to Sapphire solutions include Marathon, Cisco, Alan, BP and other major oil brands.

We saw record unit sales of our Smart Fuel Controller systems in Q3. This product integrates both pump and point-of-sale support into a single unit, simplifying installation and maintenance, reducing costs and bringing enhanced performance to the fuel island.

85% now of our retail petroleum location are now under contract for our software maintenance and help desk support services. We continue to see strong interest in our LIFT offering, which integrates with all leading retail point-of-sale systems in the convenience store and petroleum segment, including our Ruby Super System and Topaz XL systems. We are currently in pilot in many retail locations and expect some rollout decisions in Q4.

Revenues in our sales to small business sector were up a strong 17% sequentially, with sell-in now rebounding to sell-through levels. As I will explain in more depth towards the end of our presentation, we appreciate that investors are concerned with possible erosion of this business to new entrants. But we believe that our payment processor and ISO partner, our support for multiple payment types such as PayPal, Isis and Google, and our aggressive stance with mobile offering provide the solutions that most retailers need. Being locked into a closed payment wallet may work for a single coffee house chain's gift card, but most retailers understand that plastic card use will be around for decades, that they don't want multiple terminals on their counter and want to accept all wallet, electronic and otherwise, and EMV cards in the future and not to have separate devices for different payment types.

We won Washington, D.C.'s competition for all of their 6,500 cabs, including driver and passenger tablet displays, card payment processing, electronic trip reporting, safety alert systems and GPS location tracking. The 5-year contract will be worth $35 million to $45 million or more, depending on advertising revenue.

VeriFone will receive a portion of the $0.50 fare surcharge, which is assessed in all cab fares, regardless of whether the payment method is card or cash. The addition of the 6,500 D.C. cabs will increase VeriFone's taxi media footprint by 23% to over 35,000 in the U.S. alone, delivering over 10 billion advertising impressions annually.

VeriFone's superior strength and reputation in taxi systems and substantial advertising sales capabilities won the day. But unfortunately, last Friday a court in Washington put our installations on hold pending a review that has been requested by some of the losing bidders.

We also made good progress in our taxi advertising business, increasing year-over-year digital revenues 37% in New York and 110% in other markets. Now let me take a few moments to give you an update on some of our strategic initiatives.

VeriShield Protect, our end-to-end encryption software for securing cardholder data at a merchant, added a record number of new merchants in Q3, bringing the total to 105 national merchants. We now have 9 of the top 11 payment processors supporting our technology solution. These processors represent 83% of total transactions processed in the United States, and they have invested millions of dollars in de-encryption equipment and software focused on VeriFone Systems. They also act as our sales agents. This, along with our technical control of the tamper-resistant security module in our terminals, represents a formidable barrier to any other player attempting to provide encryption between our terminals and the payment processors. We have become, in effect, the de facto standards.

Last month, we surpassed the 1 billion transactions milestone. We saw another great quarter of progress with our Global Bay Mobile Payment solutions initiative, selling a record number of new software licenses in Q3 and adding new customers, including Ascena and Rue21. And we continue to work to expand our mobile payment solutions to market outside in North America.

As I mentioned at the start of the call, I want to ensure investors of the issues around the recent industry news and implications for VeriFone. We all know that not every new announcement in the payments ecosystem will eventually gain traction. But those that do generally find wide adoption by using VeriFone, the trusted and incumbent infrastructure provider. Cards will be with us for the foreseeable future. Some shoppers will use their phone, some will use plastic, some will use cash, and many will use all of the above. So retailers are going to need to provide card acceptance system and, in fact, as the U.S. adopts EMV, there will be a need to be a lot more of them. It makes more sense for retailers to funnel new forms of electronic payments through their existing electronic payment acceptance systems than try to implement and manage a number of electronic payment streams. As we mentioned nearly 2 years ago, new payment methods need to coexist with the existing world in order to minimize retail disruption, provide a consistent consumer experience, maintain security and get deployed and managed in an affordable way.

Recently, Starbucks decided to switch payment processors from First Data to Chase Paymentech. And as a result of continued misinformation, somehow this was perceived as a negative for VeriFone. We understand that investor concern is about the wider implications for there being a standard device at retailers. But please also note that Starbucks is not a VeriFone customer in the U.S., although we provide critical EMV chip and PIN acceptance capability at many of their international locations. Starbucks is an example that there have always been alternatives to VeriFone, the economics and better security that comes from accepting PIN debit transaction were never compelling to Starbucks because of their low transaction value.

The incumbent point-of-sale provider at Starbucks is MICROS or IBM, and they have not been displaced. Instead, this new mobile wallet is prefunded just like PayPal. Starbucks credit card and signature debit card transactions by plastic must continue as is.

For any new wallet to obtain wider acceptance at retailers, we have shown repeatedly that their sponsors consistently come to the conclusion that they need to work with VeriFone. That happened with Google, with Isis and with PayPal. And we invite any new wallet sponsor to work with VeriFone if they want to obtain wide acceptance of their wallets.

We continue to augment our platform with new forms of payments every day, including things like QR codes. We are working with both McDonald's and Dunkin' Donuts mobile initiatives, making use of the VeriFone platform. There will be more wallets announced over the next year.

We aim to be Switzerland and run through all systems all the viable wallets merchants want to accept. And if there's a wallet that pops up here or there that doesn't run on our terminal, it doesn't obviate us and the many payment methods that do run on VeriFone. We've never had a monopoly on all forms of payment. We don't take cash, for example.

Our vision continues to focus on offering retailers everywhere a managed service to easily accept all payment types, including the evolving alternative and mobile payment modalities being offered by Google, PayPal, Groupon, Isis, Visa, MasterCard, Discover, China UnionPay and American Express. At the same time, we can increasingly offer the new payment entrants easy and accelerated access to our worldwide installation of more than 20 million merchant lanes. As we've previously discussed, increasing complexity of the point of sale represents an opportunity for VeriFone.

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

Robert R. Dykes

Thanks, Doug. I'd like to start out by spending some time discussing third quarter revenues compared to our guidance at the beginning of the period quarter. At $493 million in revenues, we were slightly under the $495 million low end of the range and $7 million under the $500 million high end of the range. There were a number of factors, both up and down, that netted to this shortfall, as Doug discussed in his remarks.

If you're on the webcast, you'll see that this slide breaks up the adjustments we have made for acquisitions and currency. We have decided to start a constant currency discussion this quarter because the impact of currency fluctuations is now much more important for VeriFone than it was in the past. We have increased exposure due to the additions of Hypercom and Point in the past year, our significant organic international growth and recent high volatility of exchange rates. As you can see from our press release tables, we absorbed a currency headwind of $5.3 million in Q1 and $5.2 million in Q2. And now, that has grown to $14.4 million in Q3.

These numbers relate to our organic growth calculation and exclude the effect of Hypercom and Point. Including the effect of those acquisitions, the currency headwind on our pro forma growth in Q3 was $26 million and thus much relevant to understanding our number than has been the case in the past.

We've added the new slide to the deck this quarter to provide our organic revenue growth in constant currency. We have adjusted non-U.S. dollar revenues for 2012 using FX rates from the same period a year earlier. Total organic revenue grew 16% or 21% on a constant currency basis. North America grew 9% organically and also 9% on a constant currency basis.

Internationally, organic growth was 21%, but 28% on a constant currency basis. Despite continued volatility around exchange rates, core demand remained strong across all geographies. And as shown on the table, the pro forma revenue grew 5.6% in Q3, which was 11.3% on a constant currency basis.

Non-GAAP gross margins came in at 45.4%, an all-time high, and an increase of 0.8 points from our second quarter. System solutions gross margins declined very slightly by 0.1 point. Service gross margins improved by 2.8 points. Sequential improvement in service gross margins primarily reflects increased services revenue with a favorable mix towards service offerings that provide us with higher incremental margins, such as Point. And to the prior quarter, non-GAAP operating expenses decreased by $0.1 million to $111.7 million. This decrease reflects favorable FX impact and seasonal benefit from the effect of increase vacation usage on the required vacation accrual, partially offset by increased investment to grow the business. Non-GAAP other expense increased sequentially by $0.5 million, primarily due to increased hedging costs.

I'd like to take a minute to discuss our non-GAAP tax rate. Effective Q3, we have lowered our non-GAAP tax rate to 14% based on our assessment of our longer-term expected rate. The actual rate this year has been even lower than 14%. However, we were uncertain as to the impact when our 0 tax agreement with the Singapore government expires at the end of this fiscal year and did not want to change the rate until a decision had been reached on the path forward. We are now in the process of moving our international headquarters from Singapore so we can preserve a near 0 tax rate on much of our terminal sales outside the Americas. We expect that we'll continue to develop other tax strategies to keep the rate at about this level going forward. This rate change added $0.03 to our non-GAAP earnings per share this quarter.

Let's take a look at our balance sheet. Our cash balance at the end of Q3 grew $49 million from the prior quarter to $410 million. Elsewhere on the balance sheet, inventory balances increased by $2.8 million, but inventory measured as days of supply decreased by 3 days to 54 days. Accounts receivable days outstanding was up 3 days to 71 days. Accounts payable increased $45 million and days payable increased from 47 days to 51 days.

In the third quarter, cash flow from operations before changes in operating assets and liabilities was $95 million, up nearly $27 million sequentially, primarily driven by our non-GAAP net income. Cash flow from operations was $82 million, and free cash flow was $66 million. We invested $8 million in revenue-generating assets.

As we said last quarter, cash flow from operations tend to fluctuate. And while Q2 cash flow was fairly low, it bounced back this quarter as we predicted. It will continue to fluctuate in future quarters. But our very strong earnings power should be seen as the main indicator toward continued good cash flow in 2013 and beyond.

Now let's look forward to Q4. Our guidance for Q4 is for non-GAAP revenues to be between $495 million and $500 million, assuming current exchange rates. This represents high single-digit organic growth and low double-digit pro forma growth at constant currency. Factored into this guidance is an assumption that currency rates won't to materially change from current rates, continued impact from the fire in Brazil, a particular missed order because of a product issue that is now being rectified in Brazil and the follow-on effect of the items that Doug has discussed.

We are modeling Latin America revenue in the range of $65 million to $75 million, approximately $25 million less than the recent run rate for the reasons we have explained previously. But please note that we expect Latin America revenue to rebound strongly to be in the $90 million to $95 million range in Q1 of fiscal '13.

We expect our Q4 non-GAAP earnings per share to be in the range of $0.75 to $0.77. This reflects gross margin staying about the same as Q3 and continued investment in our new initiatives, partially offset by productivity improvements we continue to achieve in operating expenses.

On a full year basis for fiscal '12, our guidance is for non-GAAP revenue to be in the range of $1.893 million to $1.898 million and for fiscal '12 full year non-GAAP earnings per share to be in the range of $2.73 to $2.75.

For fiscal '13, we are announcing guidance for non-GAAP revenue of $2.05 billion to $2.1 billion and EPS in the range of $3.25 to $3.30. This represents about 10% constant currency organic growth and slightly higher growth on a pro forma basis. In North America, we see mid-single-digit growth in our traditional product portfolio, but an accelerated growth from our mobile and advertising initiatives. Total North America growth should be 9% to 10%. The significant impact of EMV is not expected until 2014 and 2015 based on prior rollout experience.

We expect Asia to continue to grow strongly and Latin America to grow well from the depressed Q4 levels. In Europe, growth will come from the new Hypercom products now being introduced in Germany and continued market share gains in several other markets, partially offset by the Hypercom product weakness in the SMB segment of France.

We expect spending on revenue-generating assets and other capital expenditures to be in the range of $90 million to $120 million. I should also note that Q1 fiscal '13 revenue will be about the same as its prior quarter due to seasonality and some of the international Q4 issues Doug discussed continuing into Q1, then subsequent revenue will grow quarter-to-quarter fairly uniformly. The Q1 constant currency growth rate is high single-digits with subsequent quarters growth moving into the high-teens at constant currency. EPS will dip a few cents in Q1 and then grow uniformly through the rest of fiscal '13.

I'll now turn it over to Doug Bergeron for some concluding remarks.

Douglas G. Bergeron

Thanks, Bob. So we're very pleased with the results and outlook that we're able to communicate to you today. We continue to focus efforts on developing our competitive advantage, which is our ability to bundle encryption services, content and advertising, gateway services, support for multiple new payment methods and e-commerce capabilities to enable our customers to reinvent the retail experience for their consumers.

We're making great strides in the conversion of VeriFone into the world's premier software and services platform for mobile payments, card payments and security.

As I said at the beginning of the call, I want to ensure investors understand the issues around recent changes in payment processors at Starbucks and how such changes should be interpreted. As Google, Isis and PayPal have demonstrated, leading-edge retailers want to support multiple electronic wallets, and they want rapid deployment across their entire establishment. They also understand that plastic cards aren't going way for decades, so they need to support them as well, and they want to do it all in a secure, PCI-certified way that increasingly includes Chip and PIN capabilities. Shoppers don't want a different payment method for each shop they visit, and retailers themselves want to minimize the complexity of implementation.

The fastest, least expensive, least disruptive way towards mass deployment is through VeriFone's ability to turn the lights on at over 70% of the U.S. retail marketplace. As we complete fiscal year 2012, we have accomplished a great amount. Our double-digit organic revenue growth accelerated to 16% year-over-year and 21% on a constant currency basis.

Gross margins and operating margins were at an all-time high percentages. North America revenues, in particular, accelerated ahead of plan. And despite a temporary disruption in Brazil, demand remains robust in all geographies around, including Latin America.

Looking forward to 2013, we see another fantastic year of revenue growth and accelerated earnings and cash flow growth resulting from expanding margins, a deleveraging balance sheet and continued success with our software and services initiatives.

Thank you for listening. And we will now open up the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Darrin Peller, Barclays.

Darrin D. Peller - Barclays Capital, Research Division

I just want to touch again on the 2013 guidance for a moment. I think the percent of growth works out to about 8% to 11%. Bob, I think you mentioned earlier that the combination of factors lead to first quarter growth being somewhat slower, but then going up to the high-teens. Is that fair? Did I hear that correctly, on a constant currency basis?

Robert R. Dykes

Yes, that's what you heard. The effects of Latin America obviously are quite severe in Q4, and then starts bouncing back in Q1. And a little bit of conservatism on some of the other geographies, but over the course of the year, the growth will resume to pretty good growth rates and into themes.

Darrin D. Peller - Barclays Capital, Research Division

All right. So had it not been for the onetime-ish type of item in Brazil, your full year organic top line growth at constant currency, it's mostly organic now also, right? Because your anniversary point by the end of the year more or less would've been closer to the mid-teens or so. Is that about right, or just to give us a sense?

Robert R. Dykes

Yes, I would say that inherently, this company is still a mid-teens growth company.

Darrin D. Peller - Barclays Capital, Research Division

All right, that's helpful. Just on the U.S. side, one follow-up on the growth rates. I mean again, it looked like it accelerated really quite well in the U.S. growth. I know last quarter, the ISO channel had experienced a decline, which led to your organic growth rate in the U.S. being somewhat flat. Can you give us a sense of what changed there? Was it the taxi business getting stronger, petroleum business, or was it actually improvement in the ISO channel?

Douglas G. Bergeron

Yes, the small business channel is starting to rebound. I think that's the first time I've said that in 4 years. I think there was some inventory adjustment by retailers. I think by distributors that services small business channel. I think they have all now adopted a leaner and meaner inventory strategy, and we had to work through that. But fundamental demand is good. As you said -- as we said earlier, petroleum was strong. Multi-lane was strong, and advertising was very strong. The benefit that we got as a result of the payment-as-a-service deal before that we announced, the bus system contract in New York, taxi -- it's been the taxi contracts, those don't even really hit the income statement because of the way the revenues is recorded over time. So we not only have financially strong results in our North America segment, our backlog of services business in deferred revenue is growing quite strongly as well.

Darrin D. Peller - Barclays Capital, Research Division

All right. And just last question for me. Doug, do you still see this being a 50% services business in a couple of years?

Douglas G. Bergeron

I hope so. We're focused on everything everywhere around services. Our general managers, our salespeople are compensated to turn what would be a complicated product sale into a more complicated services sale. It does provide a little bit of a headwind on revenue growth. I think we can manage through that. But we're out trying to solve problems for retailers who are trying to reinvent themselves, become PCI and EMV compliant, run these mobile wallets. And my sense is the more complexity that’s out there, the more of an opportunity will be for us to not sell devices, but sell services. In the developing world where product sophistication is much lower throughout Asia, Latin America, certainly in Sub-Saharan Africa, we'll still continue to sell boatloads of products versus services, and hence, that's why we still think there'll be a lot of products in our business.

Operator

Our next question comes from Tien-Tsin Huang, JPMorgan.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Just, I guess I want to ask about the Brazil issue again, just to make sure I got the facts straight. When did that happen exactly? And was it remedied? I guess what gives you confidence in that Q1 number that you're sharing with us for Latin America?

Douglas G. Bergeron

It's -- the fire occurred in the last month of the quarter, a few weeks, 2 or 3 weeks before the end of the quarter. And we are now, as of September 1, fully operational in our new facility. So there was some impact on the current quarter. Most of the quarter -- most of the impact was in August, which is our Q4 number. It not only affected services revenue, but it's hard to sell products with services contracts attached to them when the customer knows that your place is burnt down. So we've now recovered from all of that. And we have confidence that things will rebound in Q1.

Robert R. Dykes

Yes, the fire occurred July 7, just for clarity there.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

July 7, okay. Yes, that will make sense on the product side, you just said, Doug, so I guess system sales outlook for fiscal '13 in Latin America, specifically Brazil, what does your guidance assume there? Because I know, obviously, you've been getting a lot of question, I'm sure, about the tough comps with Brazil, now maybe there could be some knock-on effects from this fire, the service issue, so I'm curious what the assumption is that we should be thinking about for Lat-Am in fiscal '13.

Douglas G. Bergeron

Yes, I think Bob mentioned that we could see revenues rebounding back to the $90 million-plus range in Q1 and with some sequential improvement maybe non-monotonically, but in general, a sequential improvement to our quarter-over-quarter throughout 2013. Latin America is a very good place of business for us. We have commanding market share in most markets and at least 50% market share in Brazil. Our customers want us, need us and love us, and we'll have a great 2013.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Okay, good. Just last one. Just I appreciate all the high-level comments. It's good to hear. Just with all the stuff around cloud, QR codes, NFC, I'm curious, Doug, since the last time we spoke, I guess on a public call, what -- has your view changed on what the winning technology is going to be? And what do you think this all means for long-term ASPs for your traditional system sales?

Douglas G. Bergeron

I think, as I've said repeatedly, retailers want to play with some of this stuff. They're not all leading-edge first movers. But once a new concept is proven, in order to implement it, they want it implemented part and parcel to the rest of the infrastructure. They can't send certain consumers to certain lanes and other consumers to other lanes. So if QR codes, for example, become a bona fide way to redeem prepaid balances from a prepaid card in a coffee shop, then the retailer is going to want a QR code capability managed with its existing infrastructures. It's probably also going to want some sort of gateway or cloud-based reconciliation service, is also going to probably want to ensure that things are encrypted. So we feel very comfortable about the payment complexity at the point-of-sale increasing over time, and that's typically a very good leading indicator for ASPs and gross margin.

Operator

Our next question comes from Andrew Jeffrey, SunTrust.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Tough timing, Doug. It looks like the fire occurred middle of the day after you bought the stock. So I guess as a follow-up to Tien-Tsin's question on Brazil, as well as what you're seeing in terms of the SME market in France for Hypercom, what gives you confidence that the disruptions in these markets don't provide an opening for your competition to come in and sort of structurally change the share construct on the ground? Is -- are there specific barriers in your mind that don't make these disruptions more than transitory?

Douglas G. Bergeron

I think in every market, customers pray for the healthy exist -- coexistence of 2 suppliers. And I know we have many customers in France just waiting with bated breath for us to get through these Hypercom product deficiencies that we inherited so they can continue to resume buying from us. Brazil, I feel that we're already through the fire. We had an awful August, but we're going to have a strong September and hopefully an even stronger October. And I see no -- absolutely no long-term fundamental structural damage to our business. It's -- we went and visited every one of our customers in Brazil and explained what happened, that it was beyond our control and they were all very, very supportive of our efforts to get back to business.

Robert R. Dykes

And I'd also like to add that in France, the disruption isn't affecting our sales to the level 1 merchants. We have the bulk of the market share with the large retailers in France, and that's not affected by these issues. It's a different type of terminal than -- relative to the small SMB segment. So that level 1 merchant business remains extremely healthy for us.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

And is that as disproportionate component of your French revenues as it is in the U.S.?

Robert R. Dykes

Well, actually, right now it's even higher, yes.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Right. But normally, you're still weighted toward level 1 merchants on a normalized basis?

Robert R. Dykes

Yes. Well, in France, I mean, we're relatively weaker in the SMB business than we are in U.S. So -- and in fact, we have probably even a higher market share in Level 1 than we do in the U.S. as big as the U.S. market share is. So that weighting in France is much more skewed toward level 1 than the SMB today. But as we go through these product issues, we will rectify that in the SMB segment.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And I think you mentioned that your petroleum revenues were up 17%, is that right, north American petroleum in the quarter?

Robert R. Dykes

Yes.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

And is that in the absence of a meaningful ramp in the pump media revenue component of that business, and how should we think about that?

Douglas G. Bergeron

No, the sales of the secure pump pay system has to precede the meaningful accumulation of revenue from media. So we're busy. I don't know how many have been sold off the top of my head, or installed, but we think sales of media into that channel will begin in earnest in 2013. You just need to hit that tipping point, that critical mass that we've mentioned before of 15,000, 20,000, 25,000 screens before you can get any national interest by the major media buyers as a bona fide venue to spend some other digital out of home advertising moneys.

Robert R. Dykes

So the strength that we have in pay trade that we're referring to there is really coming from selling the POS equipment in the convenience store. When you go to the convenience store, and say you want $10 on pumps because that large device that we're selling is doing very well.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay, so not the Secure PumpPAY module per se. That still is a largely services-oriented revenue stream?

Douglas G. Bergeron

Yes, yes.

Operator

Our next question comes from Phil Stiller, Citi.

Philip Stiller - Citigroup Inc, Research Division

I just wanted to ask about the gross margin. You guys have pretty good gross margins here in the third quarter, particularly on the service side. Was there anything unusual in that? And are those the type of margins we should expect for services going forward?

Robert R. Dykes

Yes, I think what we made there was a mixed shift, the growth is all coming from the higher-margin parts of the service business. The break-fix business tends to be a lower growth. So over time, the mix will be positive. But as I indicated for Q4, we're just assuming the gross margin will be about the same as Q3.

Philip Stiller - Citigroup Inc, Research Division

And is there any impact from the Brazil fire, the margin profile of the business that we should expect in the fourth quarter?

Robert R. Dykes

Well, I guess you could say, in theory, the break-fix business have burned down. So there may be some impact there. But as...

Douglas G. Bergeron

I guess positive -- I assume percentage.

Philip Stiller - Citigroup Inc, Research Division

Yes, yes. But you hadn't thought of it that way?

Douglas G. Bergeron

Yes, hadn't thought of it that way.

Robert R. Dykes

I wouldn't -- I just assume it's about the same.

Philip Stiller - Citigroup Inc, Research Division

Okay. And what type of overall margins are implied by the fiscal '13 guidance at this point?

Douglas G. Bergeron

Well we're exiting, hopefully, Q4 with, as Bob just said, 45% gross margins, operating margins around 23%, which is outstanding performance. I know my board is very happy with that. And due to Bob's stellar work on tax, very strong net margin. Our assumption is that's the baseline for 2013. Again, Q1 might be a little lower on some of those counts because the revenue won't -- it'll be pretty flat, actually, I would think. And then potentially, some continued margin improvement throughout the year. It's -- you can map margin improvement to how we're doing on some of our higher-margin services, payment-as-a-service in Australia, in the U.S., which is taking off in the U.S. throughout Scandinavia, some of the other markets that we're introducing it in Europe. Advertising sales and more taxi contracts and advertising revenue from pumps, all will be accretive to gross margin percentages. And obviously, operating margin percentages.

Philip Stiller - Citigroup Inc, Research Division

Okay. And then just for clarity's sake, the guidance assumes the 14% tax rate going forward. Is that right?

Douglas G. Bergeron

Yes.

Operator

Our next question comes from Wayne Johnson, Raymond James.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

If we could just talk a little bit about the VeriShield Protect. If I heard correctly, the number of retailers won is 101. Is that correct?

Douglas G. Bergeron

105.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

105, my apologies.

Douglas G. Bergeron

These are named retailers. Many of them have hundreds of stores.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

And so, of the 105, how many are enabled?

Douglas G. Bergeron

I don't have that number, call it 60%, 70%, 75%. And usually between signing and encrypting, there's 3 to -- used to be 9 to 12 months. It's now 3 to 4 months because we're live at all of the processors now. We've mastered or achieved some productivity gains in terms of implementations. So there's a lag. I guess if you look at our script, 2 scripts ago, so whatever number we had, let's say 6 months ago, would be probably the number that are live now if you just assume that 6-month lag.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Right. And so how many would you target, let's say, a year from now in terms of number of retailers won, just the large retailers?

Douglas G. Bergeron

I don't know, Wayne. We haven't given that number before. I tend to feel that it's accelerating. I don't know what the shape of that accelerated curve is. And I don't want to be overly optimistic and put a number out there that we can't make. But it's the right thing to do. We're retailers that are worried about the impact to their business in the event of a breach and the impact to their brand in the event of a breach. And we expect it will continue to be a hot seller.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Okay. And if I could change topics here. So just so I'm clear, if we look at any geography, excluding the fire in Brazil, excluding the Hypercom product problems in France, is there any other area where there's weakness, just economically speaking, you thought growth was going to be 10% and it came in at 5%? Is there any pockets of weakness that we should be aware of?

Douglas G. Bergeron

I think the only other -- I don't want to sound like -- but the only other thing that we pointed to that was weak was Germany, also with the Hypercom product. The good news there is, this quarter we’ve begun shipping the next generation product there, and we're going to have a great 2013. We're not yet shipping the fixed product in France. We're still a quarter or 2 away from that, unfortunately. But every other -- and you saw it in the regional description, every other -- every geography even EMEA, that shows you how strong EMEA is really doing with the -- even considering that problem, the organic growth rates on a constant currency basis for EMEA show a very strong progress. And obviously, some market share gains as well.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

And departing question here, on the system solutions gross profit margins, how should we think about that going forward? And what's your guys target kind of 3 years out?

Douglas G. Bergeron

I don't think that's where you're going to see huge gross margin expansion. It's going to move around 50 to 100 basis points. But where they are now, I think, is likely where they'll end up longer-term. The real gross margin expansion for us will be with turning more of those sales into services sales encryption, advertising and things of that order.

Operator

Our next question comes from Julio Quinteros, Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Bob, real quick question, just in terms of the CapEx split for the guidance I think you gave for next year. Can you give us that on the revenue-generating side, as well as just the PP&E side, just so we have a percentage mix or some way to think about the splits there?

Robert R. Dykes

PP&E generally runs about 20 million a year. So...

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay. Yes, that make sense, okay. And then also similarly, on the margin assumptions, I think I might have missed it, but it sounded like you were asked about margins for next year. What were the sort of implied run rates for the non-GAAP margin assumptions for fiscal '13?

Robert R. Dykes

Well, [indiscernible] we said that you can model in about margins about flat with where they are now, and you'll end up with our EPS guidance. What Doug mentioned, though, is where we'll seek to find upside would be improvements in the percentage of services as a percentage of the total revenues. That will improve the margins. But also, the improvement of the types of services that we do, that growth is all going to be out of the Point type businesses, advertising and things like that as supposed to the break-fix. And so the margin and service themselves will go up. But I think you can reach our guidance, was about flat gross margin numbers.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay, got it, good. And Doug, just as you think about Point and the introduction of that model here in the U.S., I know that that's always a question here that we get where folks want to understand what is it about Point that's different. How do we think about that model? And I know you guys have tried to explain this ad nauseam and on different emphasis. Is there maybe just some quick 2 or 3 point way in terms of maybe how you sell it that investors and some of us here can get just a better appreciation for what it is that you're bringing to the table as far as customers are concerned? Is it the lease model, is it the Software and the services? What is it about the Point model, if you will, in that payment-as-a-service structure that we need to make sure we understand and how it will sell for you guys as you think about its transition into the U.S.?

Douglas G. Bergeron

Well years ago, these mid-sized retailers would buy systems from a processor, starting 5 or 6 years ago as our direct to retail business grew, we started selling them directly to retailers ourselves and develop a great franchise with them. The discussion typically starts around show me what I can buy today to become PCI compliant and prepare for EMV. But the sales cycle, very often, also starts talking about managing these systems, managing security updates, how to run the Google Wallet, the Isis Wallet, the PayPal wallet. And pretty soon and fairly consistent, the mid-sized retailer, I'm talking about the Little Caesars of the world, if you will, puts its hand up and says, "Wow, this is a lot of complexity. Payment used to be easy. I could buy a product. What can you do to help solve that complexity problem?" When we say, listen, instead of buying these products from us, why don't we sign a managed services agreement, and you can check this box or check that box depending on what types of additional features you need. It'll include a 24x7 help desk. It will include replacements in case of breakages. It'll include managing EMV updates remotely. And typically, you also won a gateway of services well because many of these new forms of payments aren't going to go to the payment processors. And therefore, a retailer needs a new way to reconcile all transactions, not just the traditional transaction. So we provide end of day, end of month-type and real-time web-based reconciliation reporting for those merchant. And when you look at companies like the ones I just mentioned earlier, they run at 10%, 11%, 12% operating margins. They don't have hundreds of people in payment IT. So we're solving a problem for them, keeping them compliant, keeping their names out of the paper because we're typically also bundling encryption with it, and we're solving a big problem for them for a small monthly fee per lane.

Operator

Our next question comes from John Williams, UBS.

John T. Williams - UBS Investment Bank, Research Division

Question on EMV. So thematically, I get it, it's something that's coming down the pipe. It's pretty clear, both the networks have signed on, and it will be here. And I guess, the disconnect on my side is specifically, how we can, A, think about the time line? And B, think about the impact on ASPs for your product? And I guess what I'm trying to figure out is the incremental bump that you should get in revenue related to EMV. In other words, you've got these -- got an upgrade cycle coming, how much more is it going to add?

Douglas G. Bergeron

Well, the vast majority of the 7 million payment terminals that are installed in the United States, of which 5 million are, say VeriFone, are not EMV ready. Just the ones that we're selling now, and in fact, I think we announced it, 25% or 30% of the ones that we're now selling today has the smart card slot, but they don't have the EMV softer. We will provide that at a later date once the spec has been finalized. So we're talking about single-digit percentage saturation. What we have said in terms of ASPs in the past is, we operate in a competitive world. There's an alternative for retailers. I think they prefer VeriFone, and they've got a great feeling for our products. But we haven't seen ASP upgrade -- uplifts in EMV countries. I mean, it's really more of a software issue and the software is a onetime cost for us to write and the market dynamics have kept systems prices pretty flat. The real upside for us, though, is the expansion of the addressable market. We went out of our way this quarter to show how a company like Choice Hotels, who typically would accept a new credit card, you would hand it over to a reservation agent at the front desk is now anticipating EMV entering a world where they're going to have to have a customer facing systems in front of each reservation agent. Our guess is that the total addressable market in the U.S. will move from 7 million lanes to 11 million lanes. And my guess is given our strong channel and direct sales force in the U.S. towards any competitor, we will get our lion share of that additional 4 million lane. I don't have any reason to expect that most merchants won't wait 'til closer to the deadline. The deadline is October 15. I also -- having sat through 30 or 40 other countries EMV rollouts, know that deadlines get extended by 1 year or 2. So if we get some windfall in 2013, we're not -- it's not in our guidance. We're not expecting that the new market, the place where it will hit P&L, will really be impactful until 2014. Certainly, it will be in 2015.

John T. Williams - UBS Investment Bank, Research Division

Okay. That's helpful. Another question related to Hypercom, I don't know if I missed it, did you give revenue or growth or something we can back into for Hypercom for the quarter? And the second part is, given that, that business seems to have pretty meaningfully underperformed and continued to do so, at what point do you look to potentially take a write-down on the goodwill related to that acquisition?

Douglas G. Bergeron

Well, we're operating well above any type of impairment threshold. We've been pretty catholic in terms of just declaring Hypercom's sales of Hypercom products to former Hypercom customers, we're already benefiting from sales of VeriFone products to those customers. We're calling that organic. But that's certainly one of the beneficial outcomes of the acquisition. Listen, what we said in the beginning when we acquired the business was that there would be some revenue dissynergies in a few markets, particularly in the Middle East and in Southeast Asia. That's inevitable. There were some markets in the world where it was just VeriFone and Hypercom. That was a free gift to Ingenico, obviously, and I think it's juiced their -- what they can call organic revenue growth rates for 2013. They'll have to lap for 2012, I should say. That's nonrecurring. Those -- they're going to have to grow those customers on their own now. And we didn't anticipate, but we had to deal with a less than robust product set for both France and Germany, 2 geographies that we deemed were part of the strategic rationale. If -- once those products are fully out, Germany is out now, finally, and France is coming, we fully expect that we'll achieve our revenue growth rates for the Hypercom products in those markets.

Robert R. Dykes

The Hypercom revenue is actually on Slide 17, $68.5 million in Q3.

John T. Williams - UBS Investment Bank, Research Division

And your expectation just to refresh coming into the quarter, had you -- as you said what you thought it would be?

Robert R. Dykes

I'm sorry, I didn't hear that.

John T. Williams - UBS Investment Bank, Research Division

Your expectation headed into the quarter, was there a general number, or could I find that somewhere? I just -- I don't recall...

Robert R. Dykes

Well, we -- no, I wouldn't -- I'm not going to give you a particular number, but we did indicate that part of our weakness was that SMB Hypercom business in France, maybe a little bit weaker than we expected. We know that part of the decline from the prior quarter continued to be the weakness in Germany. But that's now rectified. So to further answer your original question, as we rectify the business in Germany and France, we think that the value of the Hypercom business will meet its expectations. That's not going to be an issue. I don't anticipate they would write it down. And over time, our voice has been quite clear, that we'll end up with product rationalization where VeriFone products will replace the technically Hypercom products over time, over multiple years. So actually, it won't be a measurable number, although starting fairly soon, actually.

Douglas G. Bergeron

I might add also, having Hypercom under VeriFone has a -- hard to quantify, but certainly positive impact on overall gross margins across the portfolio. And I'll just leave it at that.

Operator

Our next question comes from Gil Luria, Wedbush.

Gil B. Luria - Wedbush Securities Inc., Research Division

So first, Bob, you talked about the free cash flow strengthening. It did a little bit in the quarter, but you're still below your reported net income for the year. You've had a lot of restructuring. You've integrated 2 large acquisitions. But now that those are integrated, looking to fiscal '13, and you're guiding $3.25 to $3.30 on earnings, is that what we should also expect for free cash flow?

Robert R. Dykes

Well, the -- if you look at our adjustments between GAAP and non-GAAP, obviously we had a lot of integration expense in the first quarter of this year. That has declined quarter-by-quarter. And it's just a few million dollars in the current quarter. So I would say those adjustments have declined. As we go forward, barring any significant acquisitions, that would just dwindle down to almost nothing. And except for that -- actually, it's a reverse adjustment that we take out some of exchange rate adjustments for Israel, where we have a tax liability that we'll never end up paying. So there's always been an adjustment there. But I would say that the -- you can expect that our working capital over time will always be slightly negative because we will have to grow working capital as the business grows. That will be the one thing to look to. And then, of course, we'll make these investments as we indicated in the revenue-generating assets. But I think, it should -- it will get fairly close.

Gil B. Luria - Wedbush Securities Inc., Research Division

Great. And then you're reducing the tax rate going forward to 14%. So next year, if you kept the 18%, it would have been, it would imply a guidance of more like $3.10, $3.15, but that's $3.25 to $3.30 because of the lower tax rate.

Robert R. Dykes

Yes. And we're are our guidance from where our analysts are at the moment, and that's the way we like to do things. So yes, you could -- yes, you could point to tax rate as being a difference. But there are whole bunch of other things you could say are up and down between the -- where we were a quarter ago and where we are now as well. I think that you should think about one thing and say well, if it wasn't for that, it would have been this other. We could say if it wasn't for the fire, it would have been another number as well, I think we...

Douglas G. Bergeron

Well, we had a $23 million, if you include the impact of FX on our acquisitions as well. $23 million headwind in the quarter in addition to the fire, due to foreign exchange, I mean -- and the foreign exchange issue continues in Q4, Q1 and even into, I guess, ends in Q2. But -- so we've got a couple more quarters to anniversary that out of these numbers, too. Remember, the -- although it's recently corrected a little bit, at one point, the U.S. dollar had appreciated 9% on a constant -- on a basket of currencies. And this is a business, the 70% of its business is outside of U.S. So that's a -- it's a big number.

Robert R. Dykes

So we think the most appropriate way is to say we raised our guidance, our EPS guidance, so lots of ins and outs.

Gil B. Luria - Wedbush Securities Inc., Research Division

Sounds good. And then on the fire, so that's about $35 million that are coming out of this year, and maybe some of it even moving into next year. Does your 10% constant currency organic growth rate account for that, account for -- adjust that $35 million back into this year, or are you factoring for that at all?

Robert R. Dykes

No, no. When we do constant currency, we don't mean constant fire or something like that. It's just constant currency. So we use the base. So if we were talking about fourth quarter of next year, we would use the fourth quarter of this year's low number, adjust that for the currency and then compare it to next year.

Gil B. Luria - Wedbush Securities Inc., Research Division

Got it. It makes sense. And then one last question. A couple of companies in a similar industry, NCR and Diebold have had some issues around FCPA and OFAC recently that have had a pretty detrimental impact on either their business or their stock price. What kind of mechanisms do you guys have to make sure that you don't have an FCPA issue? You do business in the same countries, with often the same customers. What kind of controls do you have to make sure that doesn't happen?

Robert R. Dykes

So quite extensive. We have a very effective internal audit department. And we have -- our general managers are continuing to preach too about this issue. We really worry about the term for the top and make sure that in our sales meetings, that our CEO and I talk to the general managers about this issue, and we have taken disciplinary actions, not on FCPA per se, but on other areas where people in these countries weren't operating in the most ethical manner. And we made changes. And so we made it very clear with our actions that we don't tolerate any unethical behavior, and we bounce people pretty quickly. So hasn't resolved the FCPA issues, and I think just that whole nature of us continually policing and addressing these issues on a pretty stringent basis, our case is clean in that regard.

Douglas G. Bergeron

The other mechanism we use, something that worked well for me and another company is the local controllers should not be reporting to the local General Manager. They should report to a worldwide controller, and they should be basically, a German Shepherd on-site watching every move that the local operators are doing in terms of our code of conduct in all respects. And when the police are at the side of the road, you tend not to exceed the speed limit, so it's kind of that phenomenon. It's actually short, but that is the case of VeriFone.

Gil B. Luria - Wedbush Securities Inc., Research Division

Got it. And then so -- but then on the other issue that came up for NCR was around OFAC. Do you know if there's any VeriFone terminals being sold in Syria, Iran? Do you have any control over that? Do you have special licenses to sell terminals in those countries? Any control if your distributors are selling there? Is that something you're also keeping an eye on?

Robert R. Dykes

Well, it's prohibited. So today, I'm pretty confident we don't sell terminals into those countries. We have control as special software you can get for our Oracle system that would actually catch somebody if they put a ship to address of a prohibited country. And then there are prohibited customers that the State Department issues. And so we -- the software picks up that type of thing as well. So it's not to say that it couldn't get there their third or fourth party-type situations, but our policing today is pretty thorough about those things.

Operator

Our next question comes from the line of Meghna Ladha, Susquehanna.

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

So the 2013 revenue growth guidance came in below expectations. But regarding your long-term growth targets, Doug, how confident are you in achieving the mid-teens revenue growth target that you had set for the company? And when do you think we could see that kind of growth?

Douglas G. Bergeron

Well, our -- on a constant currency basis, we're still in a range of 10% to 15%, I think around almost 11%. That's our target. I think we have a long history. But for raging fires in Brazil, we have a long history of meeting our targets. So we'll have this conversation at the end of 2013. But my hope is throughout the year, we will continue to perform, barring some macroeconomic slowdown or something that we can't control. And I remain confident given the breadth of products that we have, the breadth of markets that we serve, the fact that we're so leveraged to the emerging markets' economies with over 40% of our revenue there, and the types of innovations that we're involved with that are expanding our footprint into more areas to advertise, more encryption business, more taxi, more transportation projects that we can be a mid-teen grower for many, many years.

Robert R. Dykes

And I'd point out that in my prepared remarks, I said that the growth rate would be into the mid-teens by the end of the fiscal year. It's going to grow quarter-by-quarter on a year-to-year basis.

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Okay, got it. And my last question is that, so it seem like tablets are changing the landscape at the point-of-sale. So what kind of demand are you seeing for your Global Bay and PAYware solution? And can you just remind us how you price these services to the merchant?

Douglas G. Bergeron

We're seeing outstanding demand for both our Global Bay solutions and our PAYware Enterprise Solutions, which turn an iPod or on iPad into a bona fide secured payment solution that meets all of the PCI and even EMV capabilities. We're operating ahead of plan. I don't know that number off the top of my head, and we expect about 100% growth in 2013. There's a very large national retailer that has been in the news recently. I'm not going to name them because of their CEO's interest in reinventing retail. You're going to be seeing a lot of VeriFone encryption capabilities at that retailer over the next several months. We sold multi-million dollars of solutions to them. Many of our -- or most all of our Global Bay software is priced on a per-unit per month basis. It's Software as a Service. Some of the application lives on the client, on the tablet or on the smartphone. And some of the application is cloud hosted. So that's how that revenue makes its way into our income statement

Robert R. Dykes

Yes, so rather talking about revenue, I think to talk about the profit that we get from it is more profitable for us to sell out our Global Bay and the PAYware type solution than those actually to sell a piece of hardware because this was a quite sophisticated software that is integrated into lot of the other systems that retailers have. And so there is a significant value add in that change. So we actually are better off if the world was to have a much more of these, that is a high growth area for us and our margins.

Operator

Our next question comes from Mike Grondahl, Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Two questions. One, could you just maybe highlight for us a little bit your strategy with Point USA, how you're exactly going to the market there and your goals? And then maybe secondly in the hospitality space, you mentioned Choice Hotels and their 6,200 franchised hotels. What really drove them to VeriFone? And are there other hospitality clients or hotels that you think will be there or not?

Douglas G. Bergeron

We hope so. We also think restaurants with EMV will become a hot market for us given our excellent relationship with MICROS, in particular, and also NCR and Radiant. Consumers are not going to give up their Chip and PIN card to the waiter, nor they're going to give up their phone to the waiter. So most checkout transactions are going to be done at the table, and that's going to be helpful to us. But the sales campaign is focused on the top 1,000 national retailers. We're typically not pitching the payment-as-a-service option to the top 50 because they have fairly sophisticated payment, in-house payment integration expertise that may change once EMV is here. But it's the retailer 51 to retailer 1,000 who wants to play in this new world of payment, but wants to be secure and wants to do it without a big CapEx upfront, and wants an adult in a room, if you will, to hold their hand. They need an advocate because at 9:00 a.m. in the morning, somebody from Google shows up. At 11:00, somebody from Isis shows up. At 3:00, somebody from PayPal shows up. And by 5:00, their hair is on fire. And they want somebody to help them implement all of this stuff in a concise, secure, consistent manner that regression test against everything else and can look at them in the eye and say, "You can call me anytime in night and day and all of these wallets, and all of these old forms of payment will continue to work." That's the pitch. That's what's resonating. That's what Point has done so remarkably well in Northern Europe. That's why Bank of Queensland in Australia has recently signed on for us to take over management of their retail partners. And that's why, I think, this will be a real success for us over the years to come. It's not going to be easy prior to EMV. EMV is the killer problem, if you will. But all of these new wallets that are announced everyday are very helpful to that story. So it seems that every press report, people are saying well, was VeriFone involved, we're not involved in every pilot everywhere. But the fact is if you want to go mass deployment with it, and you don't want to rip out everything that's currently working in your stores, especially for a trial, it's best to implement it as a service on your VeriFone infrastructure.

Operator

Our final question comes from Keith Housum, Northcoast Research.

Keith M. Housum - Northcoast Research

Just to revisit Brazil one more quick moment, the business that was lost in August and some of July, do you think that went away, or is that pent-up demand that's just waiting for production to catch up to fill that demand?

Douglas G. Bergeron

That went away. I should sleep over it, Ingenico should send me a box of cigars. We're both very credible suppliers in Brazil. We're both certified, connected to all of the networks and that business went to Ingenico for sure.

Keith M. Housum - Northcoast Research

Okay, fair enough. And then you mentioned in your opening remarks, Doug, that PayPal, you guys sold 15,000 mobile licenses to for the wallet. Can you just provide a little bit of color in terms of how you guys are going to benefit from like PayPal and selling more licenses? Do you get a cut of the action, or how are you guys benefiting?

Douglas G. Bergeron

We charge the retailer or PayPal and pay the retailer or but -- in this case, buy directly from us a per lane license for the applet that has to -- that we have written with their spec, that we've certified and that has to be deployed. So it's a per lane onetime fee. But it's like any other applet or any app that you would download from App Store. As you want more features and functions, you have to repay and buy it again. So it's not a maintenance model. It's just -- it's a onetime model. But there's enough volatility and change in these e-wallets that we're very comfortable that this a real business model sitting here.

Keith M. Housum - Northcoast Research

Got you, okay. And then follow up question, I assume that Visa's coming out with their own point-to-point encryption offering. I guess any thoughts on how it's going to compete with your encryption? I mean are they complementary, or they do the same thing?

Douglas G. Bergeron

Well obviously, they encrypt. But I think when you really dig behind what Visa is talking about, it is, as they say, zone focused and mostly talking about the interaction between Visa and the payment processors, that communication. They do have some direct retailer relationships, very large retailers go direct to Visa with part of their transactions. And so there was an opportunity for us to work with them in that direct-to-retail. But for the bulk of the retailers, Visa doesn't actually have the direct relationship because they're a payment processor and we've already signed up a bulk of the payment processors for that leg of the transaction. But it's certainly viable to think of -- as multiple legs you got from the retailer to the payment processor. And that's what we have covered, they have within inside the payment processor, and so there are several companies working on that space and then you have from the payment processor to the card networks and to the -- and for the card networks actually to the card issuers. So there are other legs of the transaction. We're focused on the retailer to the payment processor.

Operator

And there are no further questions. I'd now like to turn the call back over to Mr. Bergeron.

Douglas G. Bergeron

All right. Well, thank you, everyone. We're very proud of the quarter. We have nothing to be ashamed of. I'm very proud of all the efforts that people are making inside of VeriFone, a bit of a challenge in August, but we will prevail, and we've got a great business ready for 2013. I'll see you next quarter.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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