Verifone Systems (PAY) is a company in flux and one I am struggling with as to whether we want to endure the pain of short-term underperformance to benefit long-term from the big upgrade cycle. Verifone is the leading point of sale terminal solution that enables secure electronic payments like credit cards. Next time you are at the check out aisle look at the card swipe machine. Verifone most likely makes it.
This leading global provider of payment solutions has fallen on hard times. Verifone (PAY) was incorporated in 1981, introduced the first check verification and credit authorization terminals in 1984, went public in 1990 and was bought out by HP and then private equity and Douglas Bergeron who until recently was CEO. They went public again in 2005 in an IPO. Since then they have acquired a number of companies cementing their global footprint. As of June 2009 the private equity funds associated with Verifone (PAY) own less than 5%.
Verifone missed the first quarter earnings and announced they were dismissing their long-term CEO, Bergeron, and the CFO. Then the interim CEO and new management team announced they missed the June quarter and guided down for the whole year. As you can imagine investors didn’t take too kindly to this and the stock has been crushed down to $16 from $35.
Everyone knows that e-commerce is cutting into the terminal business as more and more purchases go online. But now that we are 18 years into the Internet revolution, it’s also equally obvious that bricks and mortar point of sale is not going away either. Yes, there are and will be new payment technologies but Verifone is well on their way to integrating traditional payment systems with NFC, PayPal, Google Wallet, and ISIS payment systems.
Even more importantly there is a major technological change coming to everyday usage of credit cards. Smart cards (EMV) are widely used in Europe. Come October 2015 Visa, MasterCard, American Express are mandating that U.S merchants migrate to this new technology or be responsible for customer fraud on the usage of credit cards. I doubt if this date is set in stone either. Right now the credit card companies and banks are providing the guarantee against fraud.
Verifone is estimating this switch to EMV will cause a 50% jump in their North American revenues. Considering we have the largest penetration and usage of credit card usage in the world, this is a very big deal. The question is when does the Street start looking at 2015 earnings prospects. The conventional wisdom is 6 months out. If that’s the case we may be as much as one year early on this name. We certainly want to own this name at some point. Is is prudent to wait? I don’t think so.
There is something happening now that is causing vendors to upgrade sooner than 2015. That something is NFC. Near field communication (NFC) is a set of standards for smartphones and similar devices to establish radio communication with each other by touching them together or bringing them into close proximity, usually no more than a few inches. Just about every smartphone out there except the iPhone is already shipping with NFC chips. It’s likely the new iPhone will have one. Veriphone has already partnered with Google Wallet, ISIS, and PayPal for these next generation mobile payment systems. Many analysts see a world where NFC rivals smart cards. The bottom line both standards are likely to arise and compete. The world of payments is likely to get more complicated, not less and Veriphone is well positioned to capitalize on the complexity. Already Veriphone claims to offer the most complete portfolio of NFC enabled payment devices.
Another near term catalyst- Verifone is on the hunt for a new CEO. Perhaps that is what attracted Jeffrey Stiefler, a Verifone director, when he purchased $499,131 worth of the stock, increasing his holdings by 1395%. That and of course the beaten down price.