Buying VeriFone is a Strong Portfolio Solution

A leader in secure payments in a growing market

Buying VeriFone is a Strong Portfolio Solution

VeriFone (NYSE:PAY) is the global leader in secure electronic payment solutions and services. It is on the cutting edge of this current game-changing trend, but the business has been around a while.

The company was founded more than 30 years ago (1981) and offered the first check verification and credit authorization devices used by merchants. (Remember checks? They’re closer to being extinct than cash is.)

A few years later in 1984, VeriFone became the first mass market electronic payment system processor – intended, at the time, to replace manual credit card authorizations.

VeriFone has changed with the times, and today it offers a variety of products and services, most notably point of sale (POS) electronic payment devices that let us pay by credit, debit or smart card. Yes, those ubiquitous swiping machines.

These devices are in 20 million locations in 110 different countries, and VeriFone is number one or number two in most markets. An increasing number of these payment devices are connected to processing gateways operated by VeriFone, where they integrate payment as well as other functionality we talked about – such as couponing, advertising and NFC-based services.

PAY makes the bulk of its money from sales of these payment systems, but services have become an increasingly important part the business, accounting for 20% of revenues in the last fiscal year (which ended October 31, 2011). These services include repair and maintenance, large-scale customization services for customers, advertising, and a payment processing service for the taxi industry.

Three Catalysts for Growth

As you’ve probably noticed, these point-of-sale devices are pretty much everywhere these days. Here in the U.S., there are approximately 33 installed POS devices for every 1,000 people. That may not sound like a lot, but it does indicate the market is relatively mature.

Take a look internationally, however, and you see a much different picture. The game is still changing there, and there is a lot of room for growth.

Even in developed countries, there are considerably fewer machines installed than in the U.S.: 18 per 1,000 people in Italy; 13 per 1,000 in the U.K., 11 per 1,000 in France, and 9 per 1,000 in Germany.

As you would expect, the numbers are lower in still-developing nations, with 13 per 1,000 people in Brazil and less than 5 per 1,000 in China and India. In the most recent quarter, 45% of PAY’s sales came in emerging markets, so they are well-positioned to profit as more nations follow the U.S. in the path to electronic transactions.

The U.S. market may be the most mature in the world, but there is still sizable growth potential that has a good chance of being realized. The reason is pretty interesting. Visa (NYSE:V) and MasterCard (NYSE:MA)are among the leaders of a group of companies pushing for global technology standards called EMV, which stands for Europay, MasterCard and Visa. These are smartcards with little chips in them that can be used all over the world.

MasterCard and Visa are incenting U.S. retailers with lower audit fees if they install such systems by the end of this year, and if they do not switch by 2015, MasterCard and Visa will shift all fraud liabilities directly to retailers.

This will strongly encourage — and practically force — between three million and four million U.S. retailers who operate with only a cash register (which uses older means of verification and processing) to adopt point-of-sales systems. VeriFone anticipates these changes will grow their addressable U.S. market by 50%. That’s significant.

The third catalyst is the new mobile payment systems we talked about, such as Google (NASDAQ:GOOG)  Wallet and PayPal. VeriFone is in excellent position here even as the game continues to change because it can retrofit its systems to accept these, and in fact has already retrofitted 40,000 systems to accept Google wallet.

There will also be more mobile wireless POS systems in stores, like the ones used in Apple (NASDAQ:AAPL) stores. To help in this exciting new area, VeriFone acquired GlobalBay Mobile Technologies last November. GlobalBay provides mobile retail software applications, and its products complement VeriFone’s mobile enterprise device that fits around an iPhone or iPad to accept mobile payments.

VeriFone actually made several acquisitions in the last few years that will boost growth. Two more in particular stand out: Last August, PAY acquired Hypercom, which also provides electronic payment solutions and value-added services at the point of transaction (like couponing), for $644 million. The deal helped VeriFone broaden its product and service offerings globally, and the payoff has been fast. Revenue recognized from Hypercom in fiscal 2011 was $65 million, or 25% of the company’s total.

An even more significant acquisition came at the end of last year when VeriFone bought Point International, a Swedish company that is Northern Europe’s largest provider of payment and gateway services and solutions for retailers. The deal was worth approximately 600 million euros plus payment of Point’s outstanding debt of 170 million euros.

It’s important to understand that Point International is not a payment processor; it provides payment-related services to retailers, connecting them with banks and processors. This acquisition expands VeriFone’s services, gives them a good deal of recurring revenues, and also enlarges the company’s under-penetrated presence in Northern Europe.

Building on Already Strong Results

In fiscal 2011, VeriFone’s adjusted earnings jumped 45% to $1.92 a share; revenues grew 31% to $1.31 billion. One of the main drivers was a 43% increase in systems sales to foreign countries, which would have been only a 20% increase without the acquisitions we just talked about. Service revenues soared 54%, driven by acquisitions as well but also showing a strong 41% increase in organic sales in North America. These were the result of various efforts, including the company’s taxi payment services. International service revenues grew 28.5% on an organic basis.

Strong growth continued in the first quarter of fiscal 2012 (reported March 5), with adjusted earnings growing 35% to 58 cents a share from 43 cents the year before. Revenues were up 50%, again largely due to the acquisitions made in 2011 but also featuring good internal growth with system revenues up 7% and service revenues up 10% organically.

Even with the current earnings momentum, PAY sells for approximately 20X estimated earnings for the current fiscal year. That’s a reasonable valuation that becomes even more attractive when you consider the company’s potential.

Electronic payment processing remains a growing industry, especially in foreign markets where there’s still significant opportunity, but also with the game-changing innovation taking place as companies scramble to be among the early leaders in mobile payment. VeriFone’s large installed base of devices and systems almost assure that it will continue to be a leader for some time to come.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/buying-verifone-is-a-strong-portfolio-solution-pay-v-ma-goog-aapl/.

©2014 InvestorPlace Media, LLC

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