VeriFone’s Interim CEO Eats Humble Pie As the Company Cleans Up a Bergeron-Era Mess

VeriFone Systems Inc. interim chief executive officer Richard McGinn gave a blunt review of the company’s recent past Wednesday in the point-of-sale hardware and payment software provider’s first quarterly earnings call in memory without former chief executive Douglas Bergeron.

McGinn said the company under-invested in research and development and in getting its products certified in a timely manner, which cost it customers in some markets, including Canada. A distributor, now fired, sold VeriFone equipment to Iranian banks in apparent violation of U.S. economic sanctions, potentially exposing VeriFone to as-yet unstated consequences. The company took a $69 million charge in anticipation of settling some long-standing lawsuits, including a 2008 shareholder action.

“We are well aware we have significant short-term challenges,” said McGinn, later adding that, “these are home-grown issues.”

All these issues had the effect of driving down revenues 10% in the second quarter ended April 30 to $426.3 million from $472 million a year earlier. The company posted a $58.4 million loss compared with net income of $3.48 million in fiscal 2012’s second quarter. McGinn said the financial picture for the current third quarter wouldn’t be pretty, either.

Bergeron, who headed VeriFone for 12 years, resigned in March as news of the Iranian fiasco broke and shortly after the company reported operations problems and weak financials for the first quarter of fiscal 2013 ended Jan. 31. McGinn never mentioned Bergeron by name, but he made it clear that VeriFone would be heading on a different tack from that taken by his predecessor. He’s already installed a new senior-management team. He had no details, however, at Wednesday’s earnings call about when San Jose, Calif.-based VeriFone’s board of directors would name a permanent CEO.

McGinn faulted VeriFone’s tardiness in getting products certified by processors in various countries for causing it to lose business to competitors. He mentioned discussions company brass has had with customers about such problems. “It’s been an eye-opening process. They have been brutally honest,” he said.

Loss of some customers in Canada contributed to an 8% decline in North American revenues during the quarter. U.S. and Canadian revenues combined came in at $122 million compared with $128.9 million in the prior year’s second quarter.

Part and parcel with late certifications is correction of what McGinn called an under- investment in research and development. He said spending in that area would be increasing, and it already was up by 10% in the recent quarter to $41.6 million.

VeriFone also is going to switch from making acquisitions, a hallmark of the Bergeron era, to organic growth, according to McGinn.

Not all the news was bleak. VeriFone said it displaced competitors at 12 U.S. multilane retailers in the second quarter without losing any major customers. New business overseas included a contract with Russia’s largest bank, Sberbank, to deliver 450,000 of its VX countertop terminals.

VeriFone also is planning new products for merchants using tablet computers for payments, a booming market among small merchants that may not have interest in traditional POS terminals. McGinn didn’t mention the hot mobile-payments merchant acquirer Square Inc. by name, but he referenced a processor reporting that it’s now handling $15 billion a year in charge volume, as Square recently did. Such mobile-payments processors haven’t yet had a big effect on VeriFone because the company has concentrated mostly on bigger merchants, according to McGinn. But he added that “we’ll be able to expand the marketplace” with the new tablet products.

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