VeriFone Earnings – Behind The Headlines
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes the market doesn't know an earnings beat when it gets one.
A great example is VeriFone (NYSE: PAY), which recently reported earnings that beat estimates by $0.03. What did the stock do in response? Sold off by 12% the next day.
Since that sell-off last week, the stock has slid lower still, trading today at about $36.87. Here's the thing -- it's not like the stock was ridiculously overpriced even before earnings. With a forward P/E of 16.84 and growth expected to come in at 25%, I would say the stock was priced reasonably well. Let's take a look at what the company reported to make the market drop the shares.
First, a little background on VeriFone. This is a company that produces many of the credit card payment systems we use every day. The company was already a huge player in the payments industry, but in the last two years VeriFone stepped up its game by acquiring both HyperCom and Point International. With big acquisitions both domestically and internationally, VeriFone is making a bid to be the payment provider of the future. The next time you're at a cash register, look at the little pin pad on the counter. I'll bet it will have the VeriFone or HyperCom logo on it. You would expect that a company with huge reach in the industry would report great earnings, and that's exactly what happened.
In the company's most recent earnings report, on the surface the numbers were excellent. Keep in mind the company's results are somewhat skewed since they acquired HyperCom in the last year. Including HyperCom, revenues were up 61.4%, excluding HyperCom revenues were up 15%. Non-GAAP earnings per share grew by 39% to $0.64, versus analyst estimates of $0.61. With an earnings beat, the stock should have popped right? Not quite -- we haven't talked about the company's guidance yet.
For the third quarter, the company expects to deliver revenue of $495-$500 million. While revenue would meet estimates, the company's guidance for EPS was a little low. VeriFone expects EPS to come in between $0.68 and $0.70 per share. With analysts expecting $0.70 per share, at worst the company would miss by $0.02, and at best the company would meet estimates. Keep in mind, the company beat earnings for the second quarter by $0.03, so even a miss of up to $0.02 would still leave investors with better than expected results between the two quarters. It doesn't look like the third quarter guidance was all that bad when you look at the overall picture. What investors did not like was the company's full year guidance.
With analysts expecting full year earnings of $2.67 per share, the company suggested that EPS would fall between $2.60 and $2.66. At best, the company is saying it would fall just short of earnings, at worst, the company might miss by 2.62%. The fact that the stock sold off by over 17%, based on 2.6% lower guidance at first seems like an overreaction. However, there are at least three different line items that worry me.
While total revenues grew by 61.4% year-over-year, the cost of revenues grew even faster at 64.8%. The second issue is the “General and Administrative” line item increased by 152.4% on a year-over-year basis. I'm sure that some of this is overlap from the HyperCom and Point International acquisitions, but SG&A shouldn't rise at nearly triple the rate of revenues. The third factor that affected earnings was the company increased its share count by nearly 19% in the last year. These challenges notwithstanding, VeriFone announced one huge piece of news that might trump all the other numbers and facts.
VeriFone signed an agreement with eBay's (NASDAQ: EBAY) PayPal unit. This agreement will allow VeriFone to partner with PayPal to bring this payment method to retail stores. Since VeriFone's customer base includes “80% of the top 2000 largest retailers in the U.S.,” this gives PayPal access to “over one million high volume points of sale.” VeriFone gets to partner with the established leader in online payments, and the companies should be able to help each other to penetrate markets that they would struggle to reach on their own. With a huge partnership like this, what else should VeriFone do to reverse their recent slide?
VeriFone needs to make sure that they are working through the HyperCom and Point International mergers, to make sure they realize the cost savings that they should. In the payments industry, larger companies should be more profitable and more efficient as they can spread their fixed costs across a larger base. With two big mergers in the last year or so, VeriFone is much larger -- the question is now can they get back to being more efficient? The PayPal deal gives the company an additional growth avenue. With the stock selling at about 13-14 times forward earnings the stock seems reasonably priced, if not cheap. With earnings growth for 2012 expected to show at least a 35% increase, I don't see a good reason for the shares to stay down for long. Market of 2012, thy name is over-reaction.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of VeriFone Holdings. Motley Fool newsletter services recommend eBay. 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.If you have questions about this post or the Fool’s blog network, click here for information.