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Verifone Shares Nearly Halve, Analysts Query Management

After cutting its profit outlook for the next quarter analysts are questioning the management of payments hardware provider Verifone as to how they could have been so far off on their profit estimates.



Shares of credit card swipe machine maker VeriFone Systems Inc. nearly halved in value after the company slashed its profit outlook, with analysts questioning why management was so off with its forecasting when peers were not doing so badly.

VeriFone shares slid to $17.93, their lowest in nearly three years, and at least seven analysts cut their price targets on the stock. Deutsche Bank, in a client note, said the company had finally admitted it had failed to execute on its plans to move to a more subscription-based service model.

Several analysts suggested that VeriFone's new chief financial officer had taken a more conservative accounting approach at the company, which already faces a court case for a past accusation of reckless accounting.

The company will likely be sold, SunTrust Robinson Humphrey analyst Andrew Jeffrey wrote in a note, cutting his rating on the stock to "neutral" from "buy".

"Management credibility has been lost," he said. "Market share losses are deeper and more persistent than we had previously believed."

"We believe VeriFone will be acquired before it completes its business model transition."

Deutsche Bank analyst Bryan Keane said he could not suggest who might be interested in buying the company. "...We still think the valuation is expensive, when you look at the free cash flow the company generates," he told Reuters.

VeriFone, based in San Jose, California, sells payments equipment to shops and restaurants. The company is seeking to move more to a service model for its systems, rather than straight equipment sales.

The company might have been aggressively shifting to services from hardware sales and the management took its eye off the ball in terms of product evolution, allowing rival Ingenico SA to take market share, analysts said.

Equipment and related software sales brought in $1.34 billion, or 71.8 percent of total revenue, in the year ended Oct. 31. Services revenue doubled to $527 million from a year earlier.

VeriFone largely attributed its lower-than-expected first quarter estimates to weakness in Europe, lower-than-expected revenue from large customers in Brazil, delayed customer spending on major projects, and the cancellation of a Washington, D.C. taxi project.

Deutsche, which rates the stock a "sell", slashed its price target to $15 from $27. The brokerage said past acquisitions had masked what was happening at the company and that it had long been wary of its "aggressive accounting recognition."

"The recent CFO retirement/resignation and the first-quarter revenue recognition requirements could also suggest accounting red flags in prior quarters," Deutsche said, noting the latest quarter's accounts had been signed off by the new CFO.

A U.S. appeals court revived a proposed securities class action against VeriFone in December over its 2007 restatement of results, ruling that the lawsuit properly alleged that VeriFone Chief Executive Douglas Bergeron was "reckless" as to the truth of financial reports.

"I think Douglas Bergeron is well embedded in that company, and it'll take a few more blowups before the board will kick him out," Deutsche's Keane said. "I don't think he's going anywhere anytime soon."



Until the latest quarter, VeriFone had met or beaten analysts' quarterly estimates for two years.

Analysts on Thursday rejected the company's argument that its problems came from the weak economy. While macro conditions may have had an impact on business in the quarter, the global economy has had far less of an impact on peers such as NCR Corp and Micros Systems, said Wedbush analyst Gil Luria, who cut his price target to $22 from $33.

Citi Research analyst Philip Stiller cut his rating on the stock to "neutral" from "buy" and price target to $23 from $47.

"(VeriFone) has a long uphill battle to rebuild trust and belief in the company on top of ongoing execution issues in a rapidly changing payments landscape," he said in a note.

VeriFone warned late on Wednesday that it expected its first quarter adjusted earnings to be 47 to 50 cents per share on revenue of $424 million to $428 million. That is well short of the average analyst profit forecast of 73 cents per share on revenue of $492 million.

The company forecast an adjusted profit of 45 to 50 cents per share in the current quarter, well below the average analyst forecast of 80 cents, according to Thomson Reuters I/B/E/S.

One of the company's biggest problems was the cancellation of the Washington, D.C. contract. VeriFone announced last year that it won a $35 million-plus contract to install and support payment systems in 6,500 taxis in the capital.

The contract was canceled in November after the Contract Appeals Board ruled that the process that ended up selecting VeriFone's bid had been riddled with "pervasive improprieties."

Some analysts were slightly more forgiving.

J.P. Morgan, while downgrading the stock to "neutral" from "overweight", said moving from selling equipment to more regular revenue from offering a service was difficult and it was optimistic the new CFO could clear the accounting doubts.

UBS Investment Research cut its price target to $26 from $39, saying risks had increased for the company in executing the change in approach, but it reiterated its "buy" on the stock.

"We think the problems are largely fixable over the next 6-12 months," UBS said.

But an analysis of the quality of VeriFone's earnings shows their quality is well below that of peers.

VeriFone's earnings quality score was 10 out of 100 as of the quarter ended October 2012, compared with the industry's median score of 81, according to Thomson Reuters StarMine.

The model measures the sustainability of future earnings based on past results and focuses on financial components such as accruals, cash flow, operating efficiency and one-time exclusions.

One of the main reasons for the low score was the significant rise in goodwill, which StarMine said was possibly due to acquisitions. The company has made 15 acquisitions in the past three years, according to Thomson Reuters data.

VeriFone shares closed down 43 percent at $18.24 on the New York Stock Exchange on Thursday.

Copyright 2013 by Reuters. All rights reserved.

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