Will VeriFone Earnings Invite a Buyout Bid From Visa or MasterCard?

VeriFone Systems (NYSE: PAY  ) will release its quarterly report on Tuesday, and investors have started to believe in the electronic-payments company once again. Even though VeriFone earnings are expected to drop again this quarter compared to the year-ago period, the stock has started to climb back from its lows. Moreover, some believe that the maker of verification equipment could be an attractive buyout candidate for Visa (NYSE: V  ) or MasterCard (NYSE: MA  ) , both of which have sought to hold off mobile payment innovator eBay (NASDAQ: EBAY  ) and its rivals from gaining any more traction in the industry.

The electronic-payments industry is going through a massive transformation, as consumers and merchants both move away from traditional payment methods toward finding new, more convenient ways to use mobile technology to facilitate their transactions. For a while, VeriFone's management seemed to be too slow to move in the mobile direction, but new CEO Paul Galant has seen the importance of building up a high-margin mobile-payment system that can compete with eBay's PayPal as well as other rival offerings. But if VeriFone is successful, will Visa or MasterCard simply swoop in to buy up the company in order to further their own mobile ambitions? Let's take an early look at what's been happening with VeriFone Systems over the past quarter and what we're likely to see in its report.

Stats on VeriFone Systems

Analyst EPS Estimate

$0.26

Change From Year-Ago EPS

(66%)

Revenue Estimate

$421.5 million

Change From Year-Ago Revenue

(13.7%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Will VeriFone earnings finally recover?
In recent months, analysts have gotten a bit more optimistic about VeriFone earnings, boosting their calls for fiscal 2014 by $0.02 per share. The stock has also regained some lost ground, rising 9% since mid-September.

VeriFone brought some positive momentum into the quarter, reporting July quarter results that satisfied investors. Even though adjusted net revenue fell 15%, VeriFone gave positive guidance for the October quarter, suggesting that both net income and sales would post less dramatic declines than investors had expected. Richard McGinn, who was serving as interim CEO at the time, pointed to its acquisition late last year of New Zealand's ENZ as having promising prospects for the future, and also emphasized a key rise in revenue from its services division.

VeriFone has worked hard to shore up its position in the electronic-payments space. By boosting spending on research and development, VeriFone hopes to remain on the cutting edge of new mobile-payment technology. Its Way2ride New York taxi platform allows riders to pay fares by mobile device, and VeriFone has partnered with American Express (NYSE: AXP  ) to combine the system with using AmEx Membership Rewards points to pay for fares. That partnership might seem to suggest that Visa and MasterCard might be less interested in VeriFone, but the major card-network companies deal with similar conflicting partnerships regularly, making it less of a deterrent than one might otherwise think.

At the same time, though, VeriFone has also worked to bolster its partnerships with major retailers both in the U.S. and around the world. Wins in Russia, India, and Brazil point to the immense opportunity in emerging markets that VeriFone has. In particular for Visa, which has lagged behind MasterCard in international growth, those wins could make VeriFone look more attractive.

Still, VeriFone faces plenty of competitive threats. eBay's PayPal has also moved aggressively toward creating more mobile-payments innovations, including its recent PayPal Beacon to allow hands-free Bluetooth-based payment transactions at selected stores. Even as VeriFone tries to work with mobile-device makers to offer tablet-based payment systems that small businesses can use more efficiently, rivals like Square are looking to consolidate their growth and expand into similarly lucrative niches of the payments space.

In the VeriFone earnings report, watch for Galant to give his view of the long-term strategic vision for the company. Depending on which direction he chooses, VeriFone could easily set itself up as a potential buyout candidate for MasterCard or Visa to pursue -- or Galant could signal unambiguously that he intends VeriFone to maximize its growth opportunities on its own.

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