What kind of stock can plunge 20% in one day?
That’s usually the kind of hit taken by biotech stocks after disappointing news about a particular drug. On Thursday, though, it was payment-processing technology name VeriFone Systems (PAY) that saw its shares give up one-fifth of their value, following a surprisingly bad earnings announcement that actually shouldn’t have been a surprise.
The reason for the big hit was an earnings miss — VeriFone fell short of the already-lowered estimate of 47 cents per share (operating) by bringing home 42 cents. The second-quarter bottom line also was 34% weaker than the year-ago profit of 64 cents per share.
In that light, the big dip makes sense. But, that shortfall only scratches the surface.
By the Numbers
For those not familiar with VeriFone Systems, it makes credit card swipe machines used by retailers at the point of sale. In fact, it’s the biggest name in the business.
Being at the head of the class, however, inherently makes things tough. When you’re leading the pack, everyone else in the race is gunning for you.
A lot of success also makes you a litigation target, which directly impacted VeriFone last quarter. The company earmarked $69 million in the second quarter to cover litigation expenses, leading to a GAAP loss of $58.4 million.
But how does one explain the 10% dip in revenue? Actually, there is a forgivable reason for its sales woes — a cancelled distribution agreement in the Middle East. The company also ran into a product certification headwind in Europe. Those hiccups were enough to send some of the company’s would-be customers elsewhere, buying from Verifone’s competition, instead.
The good news is that none of these problems are permanent … yet.
What’s Really Going On
While VeriFone painted the obligatory optimistic picture during its earnings report, it also dialed back its Q3 profit outlook from analyst estimates of 51 cents per share all the way down to 20 cents. The third-quarter revenue outlook of $400 million ended up being 13% below analysts’ estimates.
The company is in denial over the matter, but it’s losing ground to competition. Direct rival Ingenico (INGIY) managed to increase its revenue by 24% in its first quarter of 2013. Less-direct payment-processing competition Intuit (INTU) managed to improve its payment-processing revenue to the tune of 13% last quarter.
Translation: The opportunity is clearly there. VeriFone is just missing the boat.
One could pity the company’s struggles to get new hardware on the market, or even just get its current hardware to the market. But this is one of those scenarios where a CEO simply has to make sure the product is available to customers. Former CEO Douglas G. Bergeron, who stepped down in March and was largely responsible for last quarter’s results, didn’t do it. Some were hopeful the next CEO could take an otherwise-sound company and rejuvenate it again, but with no permanent replacement in sight after nearly three months of searching, even that hope is fading.
All of that being said, the missed hardware opportunity is only part of the company’s gradual disintegration. VeriFone Systems is even further behind on the mobile payments front and struggling to make headway on its subscription-based model.
Just for the record, VeriFone is developing mobile payment applications for both the Apple (AAPL) iPhone as well as the Android smartphone operating system from Google (GOOG). It’s not a bad decision, either; the mobile payment industry is expected to process $90 billion worth of transactions in 2017, up from last year’s $12.8 billion.
The hurdle for VeriFone is that it’s already so far behind in this race.
Intuit, ISIS, eBay‘s (EBAY) PayPal, Square, JPMorgan Chase (JPM) and a whole slew of other service providers offer mobile payment services of some sort. Worse (for VeriFone) is that both Google and Apple — the gatekeepers of the very platforms VeriFone is hoping to leverage — have their own take on phone-based payments (Passbook and Google Wallet). Neither has really pushed the technologies very firmly — they seem content to let third-party apps have their day. But heaven help anyone who isn’t Google or Apple when either one decides to turn up the heat on their own mobile payment tools.
And as a reminder, VeriFone had unveiled a mobile payment product before, called SAIL. It canned that project in December of last year, saying it was “fundamentally unprofitable.” How much could have changed in five months? Answer: Not that much.
Simply put, VeriFone isn’t doing much of anything very well, and there’s not a lot of evidence that says things are going to improve in the future. Even if the company can successfully migrate from a hardware-focused business to a service-based one, as is the plan, there’s not a lot of good news waiting for it on that side of the table.
VeriFone needs an overhaul, and fast. It needs the right CEO too, just as fast.
Steer clear of the stock in the meantime. Until both things happen, the company is apt to keep losing market share and torment shareholders.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.