VeriFone Results Perk up As Services Revenues Start to Kick in

Business is turning around for VeriFone Systems Inc., the leading U.S.-based point-of-sale terminal maker, as the economy shows signs of recovery and services rather than traditional hardware for processing payment card transactions account for an ever-greater share of VeriFone’s sales.

San Jose, Calif.-based VeriFone late Wednesday reported net income of $20.2 million for its second fiscal 2010 quarter ended April 30, up 88.8% from $10.7 million a year earlier. Net revenues from sales of POS equipment, software, and services grew 19.4% to $240.7 million from $201.6 million in fiscal 2009’s second quarter. Sales in the U.S. and Canada rebounded from their recent weak showings, up 27% to $105.9 million.

Chief executive Douglas G. Bergeron’s strategy of diversifying into payment services that generate recurring revenues in order to offset the more volatile sales cycles of POS hardware is showing up in VeriFone’s financials. Service revenues grew nearly 47% in the second quarter over year-earlier levels to $41.2 million and accounted for 17.1% of revenues, up from 13.9% for all of fiscal 2009. Services’ share is likely to get even higher as VeriFone rolls out PAYware Mobile payment gateways worldwide, security services such as data encryption and monitoring of POS devices to detect tampering, media services that include advertising on POS devices in taxicabs, and other ventures.

“I would not be surprised after a couple of years of these type of initiative rollouts to see it at over 30%,” Bergeron said in a response to an analyst’s question about how big the services sector might become. In his prepared comments, he said, “You ain’t seen nothing yet … we expect 2011 will be a good services year for us.”

End-to-end encryption of transaction data is one of VeriFone’s big new initiatives. Bergeron, without giving an exact number, said more than 10 merchants are using VeriFone’s flagship security product, dubbed VeriShield Protect. One retailer with more than 6,000 locations will start rolling out VeriShield Protect in 800 stores next week. Prompted by an analyst’s question, Bergeron couldn’t resist taking a pot shot at competitors’ end-to-end encryption systems. “We’re not aware of one other instance of a live end-to-end encryption alternative product out there,” he said. “There’s a lot of chatter and a lot of press releases issued, but the fact is VeriFone is encrypting thousands of transactions a day across many, many locations, and this is becoming the de facto standard.”

One of those competitors is merchant acquirer Heartland Payment Systems Inc., which is embroiled in lawsuits with VeriFone over an encryption patent and other issues (Digital Transactions News, Dec. 28, 2009). Heartland on Monday announced the commercial rollout of its proprietary E3 end-to-end encryption technology. Heartland requires a merchant to get its proprietary E3 terminal, but the processor says it doesn’t charge transaction-encryption fees going forward—a veiled reference to VeriFone and other companies seeking recurring revenues from encryption services. And on Thursday, rival POS terminal maker Hypercom Corp. said its HyperSafe Secure suite of encrypting technologies meets guidelines set by the Secure POS Vendor Alliance trade group. Hypercom claims it introduced the payment industry’s first end-to-end encryption technology back in 2006 with its so-called HyperSafe Secure EFTSec Server.

Meanwhile, Bergeron said sales in Apple Inc.’s stores of a VeriFone hardware sleeve that enables Apple’s iPhone smart phone to accept swiped card transactions are “picking up nicely” after being overshadowed by the release of the Apple iPad device in early April. Not only does the sleeve put a VeriFone product into retail outlets frequented by the company’s target customer base of small-business owners, but it also drives traffic to VeriFone’s PAYware Mobile gateway (Digital Transactions News, March 4).

North America accounts for 44% of VeriFone’s revenues. Multilane lane retailers, U.S. petroleum merchants—a sector running up against a July deadline from Visa Inc. to upgrade data encryption on fuel pumps’ PIN pads—and advertising revenues from taxis using VeriFone equipment drove the second-quarter North American sales increase. Mom-and-pop merchants are still struggling. “We’re starting to see some signs of life in small business, but nothing to wave a flag about,” Bergeron said. VeriFone expects a sales lift from its new VX Evolution terminals, the next generation of its VX product line.