Is VeriFone Worth an Investment?

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The electronic payment industry is becoming increasingly attractive with each passing day. There is stiff competition among the industry players, who are making unpredictable efforts to capture the largest share of the market. Endless strategies are making it difficult for most of the players to survive, and one of them is VeriFone Systems (NYSE: PAY).

Though VeriFone posted a decent fourth quarter, its dull outlook was a major cause of concern for investors. However, this is not the first time that the company has posted a good quarter accompanied by a downward revision of its outlook.

The Quarter in Detail…

Driven by host of acquisitions, revenue jumped 18%, clocking $489 million. However, if we get rid of the impact of acquisitions, the top line registered a growth of only 4%. This highlights the importance of buyouts for VeriFone, especially its expansion in Europe, since most of the acquisitions made in the last year were to expand and strengthen its position there. The company’s addition of Point helped in adding 11 new European countries to its reach.

Excluding the impact of acquisitions, both VeriFone’s products and services segment witnessed growth. The service segment, though smaller in revenue contribution, has been showing great growth over the last few quarters.

The company experienced great response in terms of its new rollouts, such as selling lottery tickets and coupons at petrol pumps, which has been expanded further. VeriFone has also completed a new rollout for bus systems, part of a New York Transportation Authority Contract.

The payment provider has also signed a new contract with Frias Transportation Management, which serves as a great opportunity for the company since it is the biggest transport company in Las Vegas. The deal, which extends for 10 years, will help generate more advertising revenue.

The Key Pullback – SAIL

VeriFone Systems has recently announced its decision to divest SAIL, its business related to micro-merchants, since it has been unprofitable. It believes that the business has very thin margins with very low volume. However, it will continue to offer services to these small merchants through indirect distribution channels. This might prove to be a setback for the company, since competitors could fill up its gap easily.

Competition Gets Tougher

Although VeriFone has been making a lot of moves, its competitors have not been sitting idle. The biggest threat to the company has been the private player Square, who was the first one to capture the market through its mobile payment services in collaboration with Starbucks (NASDAQ: SBUX). Also, Square has recently entered into the gift card market, which allows users of Square Wallet to send or receive gift cards.

Even Starbucks app users are eligible to use the gift card system. The Starbucks Card app has been the most successful mobile payment app, managing to attract maximum attention. With the success of the application, Starbucks has launched Cardfree, a tool which will help merchants to create a mobile payment system specific to their needs. All these initiatives might prove to be harmful to VeriFone’s future if the company is unable to keep up with the trend.

For example, peer NCR Corporation (NYSE: NCR) had been suffering due to lack of innovation. However, NCR has realized the need for change and has recently announced some of its initiatives to combat competition. It has launched its NCR Mobile Pay, which will enable customers at restaurants to place orders as well as know their bill. Also, it has announced its plans to acquire Retalix, a point-of-sale service provider, to enhance its portfolio of offerings.

The Takeaway

Nonetheless, VeriFone has been trying its best to stay afloat. Its moves such as strengthening its digital wallet platform for cabs and other transport services, partnering with Fujitsu to offer mobile retailing solutions to retailers, and increasing R&D investments might prove to fruitful in the days to come. However, with interesting moves by competitors and the decreasing importance of a credit card swipe payment mode, the company might find its journey has become tough. Hence, it will be prudent to stay on the sidelines and wait for an opportunity to jump into this payment provider.

justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of VeriFone Holdings and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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