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The financials looked good, but the Fates seemed to be spinning some entangling threads for VeriFone Systems Inc. during the leading point-of-sale terminal maker’s third fiscal quarter ended July 31.
There was the challenge to VeriFone’s big win in Washington, D.C., where the company’s taxicab payment and media systems are to be installed in 6,500 taxicabs under a $35 million contract that will even give VeriFone a cut of cash fares. But two losing bidders contested the contract, so now it’s under review by a local board. There was the July 7 fire in Brazil that destroyed VeriFone’s service center in that big, fast-growing payment market, disrupting operations and revenues. There were problems in France and Germany with terminals from the former Hypercom Corp., which San Jose, Calif.-based VeriFone bought last year mainly for its strong European business.
And back in the U.S., a “disinformation” campaign against VeriFone began, according to chief executive Douglas Bergeron, after Starbucks Corp.’s recent embrace of fast-growing mobile-payments provider Square Inc. Bergeron didn’t mention Square by name, but the deal raised enough questions about the future need of retailers to have hardware for accepting plastic payment cards that he addressed it twice in his quarterly call with analysts.
“Cards will be with us for the foreseeable future,” he said. “Some shoppers will use a 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 systems. And in fact, as the U.S. adopts EMV, there will need to be a lot more of them,” he said in reference to the smart-card system the card networks are now encouraging U.S. merchants and issuers to adopt as a replacement for magnetic-stripe cards.
Square, a pioneer in turning smart phones into payment terminals for small businesses and individuals selling things part time, is moving up-market and emerging as a challenger to merchant acquirers and even established providers of POS hardware such as VeriFone. Its big breakthrough came last month when it inked a huge deal that not only will bring Square’s system to Starbucks’s U.S. locations, but also makes Square the coffee giant’s merchant processor. The deal is a simultaneous win for Square’s processor, Chase Paymentech, the merchant-acquiring subsidiary of JPMorgan Chase and Co. Starbucks’s former acquirer is Bank of America Merchant Services, a joint venture of Bank of America Corp. and processor First Data Corp.
The behind-the-scenes processors were the companies Bergeron mentioned when he launched into his assessment of what Starbucks’s move means for his company. “Recently Starbucks decided to switch processors, from First Data to Chase Paymentech,” said Bergeron. “And as a result of continued disinformation, somehow this was perceived as a negative for VeriFone.” Bergeron didn’t give any specifics about the alleged disinformation or its effects. (VeriFone’s stock took a hit in August but has since made a partial recovery.) He did note that VeriFone supplies chip-card readers for Starbucks in foreign locations, but Starbucks in the U.S. plans to continue using its existing POS hardware from Micros Systems Inc. and IBM Corp.
Starbucks offers a mobile-payment system funded by a closed-loop prepaid card, but Bergeron said the providers of open-loop mobile wallets, Google Inc., Isis, and PayPal Inc., all work with VeriFone in order to extend their reach. “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,” he said. At another time during the call, he claimed that VeriFone has 5 million payment terminals installed in the U.S.
Meanwhile, Bergeron and chief financial officer Robert Dykes told analysts that the problems in Washington, Brazil, and Europe all are likely to be temporary. And the company had some good news. In the mature U.S. and Canada market, revenues grew 13% to $138.2 million from $121.8 million in the year-earlier quarter. VeriFone struck a major deal with the Choice hotel chain. And lots of growth is coming from newer, recurring revenue services such as the VeriShield Protect encryption product, which now has more than 100 merchant clients and is offered by most of the major processors.
Revenues jumped 106% to $200 million in the Europe-Middle-East-Africa region, new VeriFone’s largest, partly because of acquisitions such as Hypercom and payment processor Point. In all, VeriFone posted net revenues of $489.1 million in the third quarter, up 54% from $317 million a year earlier. Net income attributable to VeriFone shareholders jumped 43% to $37.7 million from $26.3 million.
