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GMI Ratings Governance Issue | VeriFone Systems Inc.
Posted by: GMI Ratings (IP Logged)
Date: May 25, 2012 04:36PM

VeriFone Systems Inc.'s CEO Douglas G. Bergeron is aggressively pushing to expand the electronic payments company by doing acquisitions. In the process, he's exposing his investors to the risk of surprises such as the stock's price drop on Friday.

Bergeron said Thursday that the San Jose-based company had earned 13 cents a share in the three months ended April 30, down from 27 cents per share during the same period a year earlier.

VeriFone is in the middle of major transition. In August it said it completed its merger with the electronic payment company Hypercom Corp. for around $485 million. Then this January Bergeron announced that he finished his acquisition of Point, a payment and gateway services provider in Northern Europe, for around €600 million and the retiring of around €170 million in Point debt.

Taking out items such as the costs from its acquisitions, VeriFone would have made 64 cents a share in the quarter ended April, up from 46 cents in the second quarter of 2011. Bergeron said he expects between 68 and 70 cents per share in the next quarter this year.

Investors had hoped for more. VeriFone's stock plunged nearly 15% in value to trade at $38.26 per share intraday on Friday compared to Thursday's closing price.

Bergeron emphasized on a conference call with analysts Thursday that his decisions have already begun to show positive results. For example, his team kicked off its Point business plan expansion in in Germany, the Netherlands, Poland and Australia during the second quarter. McDonald's even signed on to an offering from Point that will enable customers to preorder and pay for food on the menu by clicking on their mobile devices.

But VeriFone's recent acquisitions are still in the early stages. In the meantime, Bergeron is betting a lot for the future. Since VeriFone paid more than book value for Point and Hypercom, its goodwill rose to $1.203 billion in the quarter ended January from $207.7 million in the July quarter. If the acquisitions turn out not to deliver as much as Bergeron expects, he'll have to surprise his investors down the line by adjusting those large numbers downward in a hit to earnings.

Meanwhile VeriFone's business is tied to the euro's value against the dollar, making it vulnerable to the unpredictability of currency fluctuations. Bergeron said in the conference call that the dollar's recent strength took away the increase he would have otherwise included in his forecast of between $2.60 and $2.66 per share in fiscal 2012.

In part due to its recent acquisitions, VeriFone's financial statements reflect an AGR of 8, indicating more accounting and governance risk than 92% of companies. In June 2011 the score was a 16. This doesn't necessarily mean that the company is doing anything wrong — GMI gives VeriFone a C overall on its corporate governance — but it does show the uncertainty that goes along with Bergeron's aggressive bets.



Earnings numbers are complicated because they consist of many components, including expectations about what will happen in the future. Cash flow, on the other hand, is more along the lines of what a company actually makes. VeriFone's cash flow in the quarter ended April amounted to around $13 million, while its adjusted net income was about $71 million.

Gil Luria, of the research division at Wedbush Securities Inc., asked Bergeron on the conference call when he expects to report a free cash flow number that's closer to the earnings announcement.

"The integration expenses are getting beyond us," Bergeron said. "Yes, over the next few quarters, we'll get it back to — on track, so it will be relatively close."

How close is "relatively close?" Only time will tell.

Region: North America
Industry: Technology
Sector: IT Services / Consulting
Market Cap: $4,723.6 million (Mid Cap)

ESG Rating: C
AGR: Very Aggressive (8)


Stocks Discussed: PAY,
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