Components: Equinox Looks for a Summer Solstice

Jim Daly

Can the old Hypercom Corp.’s reborn U.S. operation make a go of it with a new name, new owner, and new products in a fast-changing POS terminal market?

After 15 months in the Makeover Department, the U.S. operation of the former Hypercom Corp., now known as Equinox Payments LLC, is ready for a coming-out party.

While it has made the routine appearances that would be expected of a point-of-sale terminal maker, such as exhibiting at merchant-acquiring industry trade shows, Scottsdale, Ariz.-based Equinox otherwise has drawn little attention to itself since the U.S. Department of Justice in August 2011 approved the $485 million sale of Hypercom to its archrival, VeriFone Systems Inc.

The DoJ signed off only on the condition that VeriFone, which wanted struggling Hypercom mainly for its strong European operation, divest Hypercom’s U.S. assets lest the leading POS terminal maker get too big a share of the American market.

The DoJ rebuffed VeriFone’s plan to sell the assets to France-based Ingenico S.A., the No. 2 U.S. player, saying that the $54 million proposal would leave the country with only two major payment-terminal suppliers.

ViVOtech Inc., a specialist in contactless terminals that is now going out of business, expressed interest in the Hypercom operation but never consummated a deal. Those developments paved the way for a unit of Los Angeles-based private-equity firm The Gores Group LLC to pick up the assets for an undisclosed price.

Since then, Gores has rebranded the U.S. operation as Equinox Payments and brought in new leadership. In June, Gores named Patrick K. Hazel, the former president and chief executive of Semtek Corp., a security-technology company acquired by VeriFone in 2010, as Equinox’s new chairman and chief executive.

Over the past few months, Hazel has overseen the development of new products and the total reconfiguration of Equinox’s supply chain.

Out of the Shadows

The big question is whether Equinox, even after receiving tender loving investment care from Gores, can thrive in a fast-changing POS terminal market dominated by VeriFone and Ingenico, and which also includes a growing number of private-label terminals from processors. In 2009, Hypercom had only 18% of the U.S. market, compared with 48% for VeriFone and 26% for Ingenico, according to a DoJ court filing.

And not just Equinox, but all of the terminal makers face new challenges. Silicon Valley companies such as Square Inc. and PayPal Inc. are going after in-store payments, and they don’t have the ties to terminal makers that merchant acquirers and POS equipment distributors do. Meanwhile, smart phones and iPads are morphing into the payment terminals of choice for many small merchants.

And merchants, acquirers, card issuers, and industry vendors are all trying to make sense of the payment card networks’ plans to chuck the magnetic-stripe card in favor of EMV chip cards. EMV could give a nice sales lift to the terminal makers, but the changeover is likely to take years.

Hazel is sure that Equinox is up to the challenges, and he rebuffs any notion that his company doesn’t have the scale to meet them.

“There’s a lot of mythology about scale,” he says. “We’re not aware of any vendor, either domestic or global, that has any material advantage over us.”

In 2010, its last full year as an independent company, Hypercom reported that only 13.5% of its $468.4 million in revenues came from the U.S. Hazel says Equinox’s annualized revenues are running well ahead of the $63.2 million Hypercom’s 2010 percentage implied. He adds that, unlike the old Hypercom, “we’re healthily profitable.”

And so, after more than a year in the shadows, he says Equinox is ready to talk a bit about what’s ahead.

“We’ve been purposely quiet because we want to make sure we’re operating effectively and can stand behind our clients,” he says.

‘Leading Technology’

Although Hazel won’t say how much Gores has invested in Equinox, it’s apparent that the private-equity firm sees an opportunity in payments. Gores specializes in investing in technology and telecommunications companies and is no stranger to the POS terminal business. It owned VeriFone for a time after Hewlett-Packard Co. spun it off in 2001. (A former Gores executive, Douglas Bergeron, has headed VeriFone for more than a decade.)

Gores, says Hazel, understands “an industry in disruptive change. They’ve got the stomach for that. They’ve got the resources to go through ups and downs.”

In Hypercom, he says, Gores saw that the company’s products “were not inferior” and that it could build on that base with newer, software-based services.

“They understand that when you combine the footprint of a POS terminal company with a server-side mentality, you’ve really got something interesting,” says Hazel.

The first major fruits of Equinox’s efforts, however, will be a more traditional product, a countertop terminal expected to debut in early 2013. The new boxes will succeed Hypercom’s Optimum line of terminals, which Hazel says “is nearing the end of its life.”

The chief executive describes the new product as “completely new, 100% Equinox design, 100% our [intellectual property].”

Equinox also has rebuilt Hypercom’s line of L5000 terminals for multilane merchants “from the code up,” says Hazel. With those refreshed products, Equinox is making a play for the large-retailer market dominated by Ingenico and VeriFone. Hazel won’t identify users, but he says some retailers already are “transitioning from long-time vendors.”

“We weren’t supposed to compete [for] the top 10 merchants, but what do you know, we have a handful of them,” he says.

At the same time, Equinox plans to develop more of what Hazel calls server-side products, including security services. Hazel, who became very familiar with data protection at Semtek, says he can’t yet give specifics, but adds: “Our security services, we think, will be very, very competitive.”

Hazel notes that Equinox inherited from Hypercom a system for remote management of keys for encrypting data. “We have the leading technology to do that,” he says.

‘Adoption Curve’

San Jose, Calif.-based VeriFone, with its PAYware Connect gateway and PAYware mobile services and VeriShield Protect security products, is big into software-based products that generate recurring revenues. Such software products represent the payments industry’s future, according to Henry Helgeson, chief executive of Merchant Warehouse, a Boston-based independent sales organization.

“The VeriFone PAYware platform gets more robust and valuable every day,” Helgeson says. “I’m waiting to see what Equinox has in store on that side.”

In clearing its new strategic path, Hazel says Equinox is going to be a “trusted third party” careful not to sell products and services that the company’s primary customers, merchant acquirers, would view as competing with their own offerings.

“Mr. Acquirer, we’re not going to be competing against you,” he says.

And Hazel suggests that Silicon Valley companies such as Square, PayPal, and Intuit Inc. may prove to be more disruptive to the acquiring industry than new services from the POS terminal makers.

Square started out targeting tiny new businesses and individuals who sell things occasionally with a smart-phone-based payment system but is moving upmarket—its clients now include Starbucks Corp. Online payments leader PayPal is carrying out a sweeping plan to be accepted at the point of sale.

But for companies such as Equinox and its rivals, the next big opportunity at the point of sale is terminals that accept the EMV chip card, which the four major general-purpose payment card networks have anointed as the successor to the fraud-prone magnetic-stripe card.

Starting with Visa Inc. in the summer of 2011, the networks all have come out with somewhat vague EMV conversion plans that will require the “re-terminalization” of about 7 million merchant locations in the coming years.

VeriFone in recent conference calls with analysts has cited the potential revenues from EMV. Some large merchants already are EMV-capable, but small merchants may be tough sells even if liability shifts to them, as it will under the network plans, for counterfeit fraud originating from non-EMV terminals beginning in 2015.

“EMV is certainly an opportunity,” says Hazel, adding all of his company’s new products will support chip cards. “We and everybody else wishes it [the conversion] was a little more orderly process. I think EMV at this stage is considered to be a fait accompli, it’s just a matter of the adoption curve.”

Equinox, however, is not going to resort to what Hazel calls FUD—fear, uncertainty and doubt—to drive sales of EMV terminals. He says that in the pre-smart-phone era, full adoption might have taken four to six years, but the coming of mobile payments could change that. “Cards are not going to be alone as a way to pay for stuff,” he says.

‘A Huge Hit’

EMV is fraught with uncertainties, but conversion will be critical to the futures of the POS terminal companies, according to acquiring-industry researcher Paul R. Martaus, president of Mountain Home, Ark.-based Martaus & Associates.

“If they don’t adapt and adopt EMV, this industry will cease to be relevant in the POS world,” he says. “The likely replacement is QR tags like you see at Starbucks.”

EMV and other big issues aside, a large part of Hazel’s job involves improving the supply chain Equinox inherited from Hypercom, a chain that relied on several Asian contract manufacturers.

That’s all changing. As of the end of October, plans called for nearly all of Equinox’s production to be done in North America, including Mexico. The only exception is one product line that will continue to be manufactured in Singapore.

“We have been involved in a top-to-bottom redesign of our logistics chain,” says Hazel.

In addition to closer-to-home manufacturing, the plan calls for customers to be no more than two time zones away from their primary equipment depot. That will reduce customers’ inventory needs, provide for faster customization, and reduce repair times, according to Hazel.

“Our customers raised many, many issues about their vendors, where they make stuff and how long it takes to get it repaired,” he says, adding that the two-time-zone policy already “has been a huge hit.”

Distancing from Hypercom

While it outsources manufacturing, Equinox does its design and software-development work itself. The company’s approximately 250 employees include what Hazel calls a handful of software developers in Latvia.

“Their particular specialty is the EMV world,” he says. “We’re holding on to that part of our talent base.”

Besides new products and services, merchants and acquirers can expect the public face of Equinox to gradually move away from the old Hypercom brand and toward Equinox’s brand.

“The Hypercom name equals VeriFone,” says Hazel. “We’re taking an orderly approach to distancing ourselves from the Hypercom brand.”

Gores typically holds a portfolio company for three to five years, usually followed by an IPO or a sale to another private-equity firm or strategic buyer. Whatever comes, Hazel says Equinox will be in good shape and ready for more growth.

“The important thing is they’re selling to the entity that kicks it to the next level,” he says.

An Equinox Payments Snapshot

U.S. operation of the former Hypercom Corp., which VeriFone Systems Inc. bought in 2011.

Owner: The Gores Group LLC, a private-equity firm.

Headquarters: Scottsdale, Ariz.

CEO: Patrick K. Hazel, appointed June 2012. Previously CEO of data-security technology provider Semtek Corp. (2006-10), CEO of payment processor EWI Holdings Inc., and worked at several media companies.

What’s New

Preparing to introduce new countertop terminal to succeed Hypercom’s Optimum line.

Rebuilt the Hypercom L5000 terminals for multilane merchants.

Completely reconfigured supply chain, bringing most manufacturing to North America from Asia.

Source: Equinox Payments, Digital Transactions