VeriFone Earnings: Key Takeaways and What Investors Can Expect in 2014

VeriFone Systems (NYSE: PAY  ) proved its turnaround efforts are on track, after the electronic payment services company reported better-than-expected results for its fiscal fourth quarter and full year after the bell on Tuesday. But investors should carefully weigh the risks in this name going forward, as VeriFone's about-face could take some time to play out.

For the quarter, VeriFone posted a profit of $0.27 per share, which was a penny ahead of analyst forecasts for earnings per share of $0.26 in the period. Fourth-quarter revenue of $431 million also topped estimates. But it was a 12% decline from the year-ago period, in which VeriFone reported net revenue of $489 million.

While VeriFone's latest results topped estimates, the company forecast weak earnings for its first quarter of fiscal 2014. VeriFone now expects first-quarter earnings per share of $0.26 and revenue between $425 million and $430 million. This is well below analysts' estimates for earnings of $0.32 per share in the quarter. VeriFone also guided lower for full-year fiscal 2014. On this front, the company anticipates net revenue of between $1.77 billion and $1.8 billion, and non-generally accepted accounting principles earnings of $1.35-$1.40 per share. This compares to the Street's prediction for adjusted EPS of $1.59 on revenue of $1.78 billion in fiscal 2014.

Let's take a closer look at a few key takeaways from VeriFone's earnings call yesterday, which helped shed light on both the challenges and catalysts for the company going forward.

Strengths and weaknesses by business segment
Double-digit declines in revenue continue to threaten VeriFone's reputation with investors. In fact, VeriFone's systems-solutions business saw revenue drop 23% in its latest quarter from the prior year. On the conference call, the company said it is addressing these declines by investing more in next-generation products and making improvements in its product-certification processes. In 2014, VeriFone plans to increase research and development spending in order to bring new products to market faster.

Source: VeriFone.

One bright spot for the company is its payments as a service unit, which accounted for 40% of VeriFone's total revenue in its fourth quarter. Moreover, revenue from its services business surged to a record $179 million in the period -- an increase of 13% year over year. VeriFone's Way2ride service is fueling this growth. The new service, which VeriFone launched earlier this year, lets taxi passengers in New York City pay cab fares using their mobile devices. Moreover, VeriFone's in-cab devices now process more than 200,000 payments a day in New York City alone.

Changes in technology, including a shift to mobile-based transactions, have burned VeriFone in recent years. But innovative services such as Way2ride should help VeriFone catch up to competitors in the mobile space going forward. VeriFone's strategic partnership with American Express (NYSE: AXP  ) is also a step in the right direction. In real time, American Express members can now use membership reward points to pay for cab rides in New York City.

For AmEx, this "industry-first tech integration" is important because it allows membership rewards to be redeemed at the point of sale. "With this announcement, we're leveraging our unique technology to bring it to life at the most critical commerce touchpoint -- the physical point of sale," explained Leslie Berland, senior vice president of digital partnerships at American Express.

Given the success VeriFone has achieved with its taxi platform so far, it's likely that AmEx and VeriFone will expand this partnership outside of the Big Apple. To be sure, VeriFone plans to integrate its Way2ride service throughout its network of more than 70,000 payment-enabled taxis worldwide in the year ahead.

New leadership for a new year
With a new CEO in place, it seems VeriFone is now ready to make mobile initiatives a primary focus. The company's board of directors unanimously named Paul Galant its new chief executive officer at the end of September. Galant's prior experience as CEO of Citigroup's enterprise payments unit makes him particularly well suited for his new role.

During his first earnings call as the new head of VeriFone, Galant said he sees major opportunities for growth in mobile and that the company continues to invest in this area of the business. Looking to the future, one of the company's strategies is to leverage its 20-plus million payment devices that are already in the market by building services and products around these devices.

Ultimately, investors can expect 2014 to be a transitional year for VeriFone as the company and its new CEO work to streamline the business. This could put pressure on the stock in the near term, although by 2015 investors should see VeriFone's recent initiatives and reorganization efforts start to pay off.

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