VeriFone Systems - Uncertainty About Long-Term Business Model Makes Me Stay On Sideline

Sep. 6.12 | About: VeriFone Systems, (PAY)

Shares of VeriFone Systems (PAY), the provider of secure electronic payment solutions, reported its third quarter results on Wednesday after the close. Investors are not pleased with the results, sending shares 11% lower before the market open. Shares are currently trading hands around the $31 mark.

Third Quarter Results

VeriFone reported third quarter revenues of $489 million, up 54% on the year. Organic revenues rose 16% on the year, and 21% on a constant currency basis. Revenues missed the analysts consensus of $498.7 million.

Non-GAAP earnings per share rose from $0.49 last year to $0.75 in the third quarter. The headline number beat analysts consensus of $0.70 per share, as effective tax rates came in lower. GAAP earnings came in at $37.7 million, or $0.34 per share. This compares to second quarter earnings of $0.03 per share. Last year, VeriFone earned $0.28 in its third quarter.

The company had a tough quarter as a result of a strong dollar, severe competition in France and Germany, as well as a fire in Brazil.

CEO Douglas Bergeron commented on the results, "We are very proud of our performance in Q3. Despite continued volatility around exchange rates, our business remains vibrant in all geographies. In the U.S., growth accelerated as we saw the beginnings of the adoption of EMV-based systems and the first significant payment services deals in the quarter."

Outlook

For the fourth quarter, VeriFone is expected to report non-GAAP revenues of $495-$500 million. The company is expected to earn $0.75-$0.77, on a non-GAAP basis. This compares to non-GAAP third quarter earnings of $0.75 per share.

For the full year of 2012, non-GAAP revenues are expected to come in between $1.893-$1.898 billion. Non-GAAP net income is expected to come in between $2.73-$2.75 per share.

For the full year of 2013, revenues are expected to come in between $2.05-$2.10 billion. Non-GAAP net income per share is expected to come in between $3.25-$3.30 per share. Analysts expected VeriFone to guide for annual revenues of $2.16 billion for next year.

Valuation

VeriFone ended its third quarter with $410 million in cash and equivalents. The company operates with short and long term debt of $1.32 billion, for a net debt position of around $900 million.

For the first nine months of 2012, VeriFone reported revenues of $1.38 billion. The company net earned $38 million, or $0.34 per diluted share.

Factoring in an 11% decline in the share price, the market values VeriFone at around $3.5 billion. This values the firm at 1.8 times annual revenues and 11-12 times annual non-GAAP earnings.

Currently, VeriFone does not pay a dividend.

Investment Thesis

Year to date, shares of VeriFone trade with losses of around 10%. Shares steadily rose from $36 to highs of $55 in April. Shares lost almost half of their value to lows of $30 in the summer. VeriFone's chairman left the company and the company issued a soft outlook for the past quarter. Shares are trading around the $31 level in pre-market trading.

Shares of VeriFone traded as low as $4 amidst the darkest days of the crisis in 2009. Shares steadily rose to peak at $55 in the beginning of 2011, a level seen again in the spring of this year. Revenues rose from $922 million in 2008 to an expected $1.9 billion in 2012. Profitability rose steadily across time. In 2008, VeriFone lost $410 million, of $4.88 per share. In 2012, non-GAAP earnings are expected at $2.74 per share.

Innovations in the payment industry are developing rapidly, which makes me unsure about the prospects for the business. I find it hard to judge whether VeriFone's business model might be obsolete in five years time, or whether it has grown into an industry standard. Because I cannot make an accurate judgment, I will stay on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.