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Verifone Systems, Inc. (PAY)
Q4 2017 Earnings Conference Call
Dec. 12, 2017, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Verifone Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder this conference is being recorded. If anyone should require assistance while the conference is in progress, please press * then 0 on your touchtone telephone to reach an operator. As a reminder, this conference is being recorded.
I would now like to hand the floor over to Chris Mammone, Vice President of Investor Relations. Please go ahead, sir.
Christopher Mammone -- Investor Relations
Thank you, Karen, and welcome everyone to Verifone's Third Quarter Fiscal 2017 Conference Call. With me today is our CEO, Paul Galant; our CFO, Marc Rothman; and our Chief Strategy Officer, Vin D'Agostino. After our prepared remarks, there will be a question and answer period and which we ask that you limit yourself to one question and one follow-up. An audio recording of this call will be available on our Investor Relations website for the next 30 days.
Certain information you will hear on this conference call consists of forward-looking statements, including management's view of future events and financial performance. These statements are subject to various factors, risks, and uncertainties that could cause actual results to differ materially from our outlook. For more information, I refer you to our SEC filings, including today's earnings release and our most recent 10-K and 10-Q. Any forward-looking statements speak only as of today, and Verifone is under no obligation to update these statements to reflect future events or circumstances.
Please note that on today's call, we will refer to certain non-GAAP measures. Reconciliations of these measures to their most comparable GAAP measures and other information regarding the non-GAAP measures are presented in our earnings release, which is also, available at ir.Verifone.com. Please always refer to this information for a comprehensive review of our financial results.
Now, I'd like to turn the call over to Paul Galant, CEO of Verifone.
Paul Galant -- Chief Executive Officer
Thank you, Chris, and good afternoon, everyone. Today, I'm going to highlight our Q4 and Fiscal '17 results and accomplishments and then I'll discuss our strategic priorities that will return Verifone back to revenue and earnings-per-share growth in Fiscal '18.
Our Q4 revenue and earnings results were better than the outlook we shared with you back in September. Verifone delivered year-over-year and sequential growth in both systems and services revenue for the first time since the peak demand period for USCMB upgrades in mid-2016. And we're especially pleased with our record Q4 services revenues.
For the full fiscal year, Verifone generated $1.874 billion in non-GAAP total revenue and delivered $1.31 in non-GAAP earnings per share. We made meaningful progress executing our strategy to transform Verifone from a terminal sales company to a platform services company, delivering payment and commerce solutions that help our clients generate new sales and reduce operating costs, while enabling Verifone to grow our base of recurring services revenue.
To summarize, we accomplished four top strategic objectives in Fiscal '17. First. We launched our next-generation devices. Second, we connected a significant amount of our device footprint to our services platform. Third, we grew services capabilities in all of our regions. And, fourth, we streamlined our business portfolio to enable us to focus resources and capital on our core business.
I'll now provide some context around each of these four achievements. First, we launched our next generation products. So, 2017 was a launch year for our new Engage, Carbon, and mobile devices. We achieved PCI certification and started selling Engage in countries which, today, represent nearly half of Verifone's total revenue. For Carbon, we launched our second device in what would be a multi-device family of secure Android-based solutions delivering an integrated point of sale globally.
We initiated our successful pilot with Vantiv and built a robust pipeline of new client engagements for Carbon with many large merchant acquirers, banks, and retailers in North America and around the globe. For mPOS, the introduction of a new mid-range device enhanced our mPOS lineup that, overall, generated 25% revenue growth globally this past year.
All of our regions have now started to market Verifone's next generation products to clients. They're starting to achieve their certifications, they've launched pilots, and in Q4 they began to generate respectable sales volume for our next generation devices.
Second, we connected more devices. Verifone's global network of 30 million plus terminals at the last inter-consumer payments is a truly unique asset and we're aggressively connecting our devices to our services platform, enabling us to better serve our clients, capture market share, and generate important, high-margin annuity services revenue from each device we deploy.
Connecting Verifone's devices is a key growth driver for our company. By the end of Fiscal '17, we grew our connected device footprint to approximately 1.8 million terminals, enabling us to generate more than half a billion dollars in recurring services revenue, growing at a high single-digit annual run-rate.
A strong contributor to this growing base of connected devices is our payment-as-a-service solution in North America, which in Fiscal '17 more than doubled our footprint of connected devices in this region to approximately 400,000. Given our current backlog of business wins, a strong pace of new sales, and new channel expansion opportunities, we believe this services business will continue to grow organically at a double-digit rate for the foreseeable future. Now, outside of North America, we've laid the groundwork for Fiscal '18 growth through additional gateway and estate management infrastructure investments.
Moving onto our third strategic accomplishment, adjusted for recent divestitures, we grew our total services revenue in Fiscal '17 by 8%. All regions contributed positively to this growth. In EMEA, where our services platform is the most advanced, we've worked to expand our payments acceptance infrastructure from card-present to more omni channel and services revenues now contributes 48% of total EMEA revenue and that's up from 46% last year. In North America, we grew services sales with QSR enterprise clients and we entered several new growth verticals within hospitality, such as pay-at-the-table and lottery. In Latin America, we grew our services business by 34%, driven in part by our device services operation in Brazil, which now comprises nearly 50% of Verifone's revenue in that country. In our Asia-Pacific region, which grew services revenues at 7% during Fiscal '17, has built a strong pipeline of enterprise-level outsourcing deals with banks and merchant-acquired clients, each of which has the potential to contribute meaningfully to the future growth of our services business in that part of the world.
And, lastly, our fourth accomplishment, for Fiscal '17, we streamlined and further optimized Verifone's business portfolio. Earlier in the year, we contributed our petrol-media business to a joint venture and divested our Lyft, retail, and China operations. Now, in the first quarter of Fiscal '18, we're pleased to announce that we have completed the sale of our Taxi business. Our Taxi sale marks the successful completion of Verifone's divestiture of our non-strategic businesses that we identified last year. These divestitures now enable us to better focus Verifone's resources and capital on executing our business strategy and core growth opportunities.
Turning now to Fiscal '18, the Verifone team is shifting execution focus from launching to scaling and our top three strategic priorities for this fiscal year are, No. 1, to deploy our new devices across the globe So, they are a meaningful percentage of all the devices that we sell; No. 2, connect more of our footprint through Verifone's gateways and estate management solutions to our services platform; and, No. 3, enable our merchant acquirer and bank clients to serve their merchants with a fully right-labeled services platform delivering business, vertical-specific solutions, and consumer payments and commerce experiences.
Verifone will connect a growing percentage of all the devices that we sell to our gateways and estate management systems. Our Fiscal '18 plan is to surpass 2 million connected devices globally. We look forward to updating you regularly on our progress with this important KPI.
Now, for the last several years, we've been building our global payments and commerce services platform and Fiscal '18 is the year that Verifone will formally brand and launch this platform, ensuring that it is every bit as tangible a product for our clients as our devices are today and every bit as powerful a face of the Verifone brand as our terminals have been for more than 35 years.
Our vision is for Verifone services platform to enable our acquirer and bank clients to deliver a frictionless merchant experience, starting with a streamlined and intuitive application and on-boarding process. Once on-boarded, our platform is designed to deliver a highly secure consumer payment experience in a business vertical-specific and fully integrated merchant solution.
As we move further into digital services, we're not nearing the launch of our advanced Verifone Application Marketplace as a key part of our services platform. And, with our developer portal, we have a strong pipeline of third-party developers building and porting their consumer payment and business applications onto our services platform. Executing these top three strategic priorities will enable us to deliver Fiscal '18 revenue of $1.775 to $1.8 billion and earnings per share of $1.47 to $1.50.
In closing, we exceeded our Q4 commitments, we made meaningful progress further transforming Verifone from a terminal sales company to a platform services company. And, building upon our success of the past year, we're shifting our execution from launching to scaling. We're confident that our execution roadmap will enable us to get back to growth in Fiscal '18 more than offsetting the financial headwinds brought on by the three-year outdoor EMV pushout impacting our North American petroleum business and last year's terminal sales surge in India.
Marc will provide more details on our Fiscal '18 and Q1 outlook during his remarks. But, before I turn over the call, I'd like to take a moment to thank all of Verifone's clients and partners, as well as our employees around the world for their tireless efforts and dedication over the past year in helping to further architect our next generation solutions, drive greater efficiency gains, and execute our strategic objectives.
With that, let me now hand the call over to my partner, Marc, for his comments. Marc?
Marc Rothman -- Chief Financial Officer
Thank you, Paul, and good afternoon, everyone. For the fourth quarter, non-GAAP net revenues of $477 million exceeded our guidance and grew 2%, versus the prior year period. Verifone returned to year-over-year growth for the first time in six quarters, topline results in Q4 benefited from significant strength year-over-year in both Latin America and EMEA, offset by anticipated declines in North American petrol, as well as Asia-Pacific, both of which were impacted by our recent divestiture activity.
Our consolidated non-GAAP gross margin in Q4 was 41.4%, 190 basis points better than the prior year and our operating expenses were down sequentially once again. Operating income margins of 13.9% were up 350 basis points from the prior year and up 140 basis points sequentially. In all, we delivered $0.44 of earnings per share for the quarter. For the full fiscal year, Verifone delivered $1.874 billion in total non-GAAP net revenue and we earned $1.31 per share.
Let me now discuss Q4 non-GAAP results by business. Revenue for a systems business was $268 million, up approximately 2% year-on-year. This reflects return of positive growth trajectory in our core North American franchise outside of the petrol vertical with other notably strong contributions coming from Latin America and EMEA. System margins of 37.7% in Q4 were slightly lower sequentially, but represented a 250-basis point improvement, versus the prior year, mainly due to product line mix shifts. We are projecting improved product margins throughout 2018 as new products are launched on our lower-cost platform.
Our services business delivered record revenue of $208 million in Q4, up 2%, versus the previous record high. Also, excluding the results of petrol-media and our Taxi business in both periods, adjusted services growth was approximately 10% year-on-year. Service gross margins were 36.2%, up 180 basis points from the prior year quarter and reflect a multi-year high -- excuse me, from the prior quarter and reflect a multi-year high. Year-over-year results benefited from our divestitures and operating leverage from increased volume.
Our Q4 consolidated non-GAAP operating expenses were $131 million, down sequentially and also, reflect a $5 million or 3.5% reduction, compared with the prior year, driven by our focus on restructuring and efficiency initiatives, including operating system consolidations as well as streamlining back office operations.
Let me now discuss performance by geography. In North America, we delivered revenue of $154 million, up 1% sequentially, solid sequential performance in our core retail and small and medium business verticals were somewhat offset by the expected decline in our petrol vertical and primarily related to forecasts and reductions due to the EMV liability shift delay previously discussed.
Overall, we are quite pleased with the trajectory of our core North American business during Q4. Double-digit growth in our retail vertical came as a result of several large QSR deployments, robust demand for our mPOS devices, as well as continued refreshed business with the earliest Tier 1 retail adopters of VMV. In our SMV vertical grew more than 20% year-on-year, returning to a double-digit growth trajectory for the first time since early 2016. And, for its part, we believe petrol's back to more normalized levels of demand, albeit down from peak VMV levels.
In Latin America, revenues for Q4 were $80 million, a multi-year high for the region and up 17% year-over-year. We benefited from strong year-on-year growth in Argentina and Mexico. And, in Brazil, key recent highlights include momentum with our newer value-based device offerings and an uptrend in margins due to improved mix from new service wins. Of note is that service revenues grew significantly in 2017 and now account for close to 50% of Brazil's results.
Strength in Argentina is attributable to recent marketwide initiatives to foster greater e-payment adoption, while Mexico benefited from market share gains with key partners and momentum in multi-lane retail.
In Europe, Middle East, and Africa, revenues of $196 million were up 8% from the prior year and up 1% sequentially. The year-over-year strength was fairly widespread -- we continue to see very good momentum from our first out Engage markets, including France and Germany, salvage double-digit growth rates across several countries within our leading Nordics franchise as well as strong growth from eastern Europe. Our service business, which reflects approximately 48% of revenues in the region, continues to outpace overall company growth, up 10% versus the prior year during Q4.
And, finally, in Asia, Q4 revenues of $46 million were down 6% sequentially and 4% year-over-year. On an adjusted basis, excluding the sales contributions from China in the prior year, our Asia-Pacific business was up 3%. Thailand and New Zealand were among the main drivers of the growth. And, as expected, our second half results have been more normalized after first-half demand surge in India created from the start of demonetization. India drove records sales during the first half before pausing as the market adjusted to the initial wait. As one of the market leaders there, we believe we are maintaining a share and are well-positioned to benefit from opportunities to grow our services offering.
Turning to the balance sheet and cash flow results, we delivered solid performance again in Q4. We ended the quarter with total cash of $131 million, gross debt of $831 million and net debt of $700 million. Our net debt levels are down approximately $121 million since mid-2016, driven by free cash flow generation.
What's in our working capital metrics, our cash conversion segment also, improved with 55 days in Q4, versus 56 days in Q3. This metric reflects a two-day improvement in days accounts receivable that was attributable to better linearity. We held inventory levels consistent sequentially, allowing for three-day improvements and days of inventory, given our stronger topline results.
And, for the quarter, we delivered $26 million in cash flow from operations and free cash flow of $11 million. A reduced capital expenditure levels, reflected divestiture of capital intensive businesses and are now at multi-year lows with total outlays of $15 million. Our FY '17 capital expenditures of approximately $67 million represents a 35% reduction from recent prior year levels. We expect Fiscal '18 CapEx to be comparable to this new baseline, adjusting for increases in volume.
Now let me now transition to strategic and fiscal initiatives. Yesterday, Verifone reached an agreement to sell its Taxi Solutions business for cash consideration of approximately $30 million while also, retaining a minority interest in the company. Our Taxi sale marks the successful completion of Verifone's divestiture of non-strategic businesses that we identified last year.
These divestitures enabled us to better execute our business strategy, improve operating margins, reduce capital-intensive operations, and focus our resources and capital on core growth opportunities. We intend to use the net proceeds from the taxi sale plus our available cash to complete the remaining $50 million authorized under our previously announced $200 million stock buyback program. Furthermore, our board of directors has authorized an additional $100 million stock repurchase program, which we intend to execute over the coming 12 to 18 months, subject to market conditions, allowing us to deliver to shareholders a meaningful percentage of our free cash flow generated during this period, which is consistent with our capital allocation strategy previously discussed.
Let me now turn to our financial outlook and I'll cover guidance and modeling points. First, to be clear, the guidance that we are providing today reflects the impact of material businesses recently divested as soon as the beginning of Fiscal 2018 and, on a like-for-like basis, is relatively consistent with 2018 consensus growth expectations. We have provided divestiture financial details in our press release and on our IR website to supplement this guidance and we believe this will be helpful from a financial modeling on a go-forward basis.
Now let me go to specifics. Our fiscal 2018 revenue outlook of $1.775 to $1.8 billion compares to net revenue in Fiscal '17 of $1.756 billion when excluding the material divestitures of China and Taxi. This growth guidance also, reflects revenue headwinds of approximately $70 million created by the higher 2017 North American petrol sale generated prior to the three-year EMV liability shift pushout and the 2017 India terminal demonetization surge.
Our FY '18 non-GAAP EPS outlook is $1.47 to $1.50. This compares to adjusted earnings in Fiscal '17 of $1.40, which has been adjusted to reflect, once again, the material divestitures of both China and Taxi. This earnings-per-share growth guidance reflects core revenue growth, higher gross margins based on a greater mix of next generation products, and accretion from share repurchases, offset partially by increased operating expenses related to normalized variable compensation and increased investments in research and development to support our next generation products and services.
Additionally, we are now adjusting our non-GAAP effective tax rate to 20% from 15%. This change primarily relates to our expected regional profit mix and the impact from divestiture activity. Also, based upon the current provisions of U.S. tax reform legislation, we do not expect further impact on our non-GAAP effective rate, given our net operating loss position in the United States.
Additionally, we expect free cash flow in Fiscal '18 of approximately $125 million, reflecting a meaningful improvement in our free cash flow conversion, versus the prior year. Going forward, as we complete previous restructuring-related activities, our free cash flow conversion profile will continue to improve into a target range of now 80% to 85%.
Let me provide some quarterly color. For the first quarter, we are guiding non-GAAP revenue of $418 to $420 million and non-GAAP earnings of $0.22 per share. This guidance reflects normal Q1 seasonality and is based on a more balanced view of North America due to lower petrol revenue on a sequential basis.
Additionally, we are planning somewhat improved Q2 revenue from a Q1 guidance and expect the second-half 2018 to increase approximately 6%, versus 2017 second half results. Please also, refer to Slide 19 of our earnings presentation for other supplemental forward-looking financial information, including further revenue and expense assumptions.
Thank you and, with that, we will now open up the call to take your questions.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, if you have a question at this time, please press * followed by the number 1 key on your telephone keypad. If your question has been answered or if you'd like to remove your line from the queue, you may press the # key. Our first question comes from the line of James Schneider with Goldman Sachs.
James Schneider -- Goldman Sachs -- FinTech Equity Research
Good afternoon. Thanks for taking my question. [Audio interference].
Paul Galant -- Chief Executive Officer
Unfortunately, Jim, your line broke up.
Operator
James, your line is open. Could you check your mute button?
Paul Galant -- Chief Executive Officer
Karen, why don't we come back to Jim in a moment? Can we bring up another question?
Operator
Certainly. Our next question comes from the line of Peter Christiansen from Citi.
Peter Christiansen -- Citi -- Vice President of Payments, Processing, and IT Services Equity Research
Good afternoon. Thanks for taking my question. I just, in previous quarters, you've alluded to 2018 on the systems side with new products representing roughly 20%, 25-ish% of total revenue. I'm just curious to see if that assumption still holds and, given a recent product introduction from a competitor in the integrated payment side, has that changed your strategy at all in terms of pricing or on how you intend to scale some of the new products, particularly in Carbon?
Paul Galant -- Chief Executive Officer
Thanks for the question, Peter. With regard to next gen devices, we talked about a 15% to 20% sales in 2018, versus all systems revenue and we're consistently looking at that, as well. So, today, we mark it at 15%, but the range is still consistent at 15% to 20%.
With regard to competitors for Carbon, I think that Carbon has stood on its own, candidly. It's been extraordinarily well-received. People see it not just as a single device, but they see it as an entire device family, which starts with a large footprint 10-inch Carbon for retail-type situations, goes to the smaller 8-inch for more portable things, and, of course, we've now extended our product range to also, incorporate single-screen Android devices that go all the way down to 8-inch single-screen, and then 5-inch single-screen, and then we have some others that look a lot more like just pure mPOS devices.
So, I think it's unique and I would tell you that, by and large, what people are most interested in are not just the physical device, they're interested in the services platform that we have driving it, including our soon-to-be-launched advanced marketplace for applications, as well as our other services that we talked about, which are device services, payment services, commerce services, and omni channel.
Peter Christiansen -- Citi -- Vice President of Payments, Processing, and IT Services Equity Research
And then, I guess, as you think about white-labeling some of your services through indirect channels, are you competing with any of your partners there in the distribution front and how do you think about how your software solution -- particularly, as it relates to payment-as-a-service -- to some of the offerings that maybe some of the merchant acquirer or the bank channels provide?
Paul Galant -- Chief Executive Officer
I think we've been very clear that we do not compete with our clients and So, our objective is to be the technology provider. Merchants acquirers and banks across the globe are facing a pretty unbelievably tumultuous environment. They're seeing disruption occur in their underlying core acquiring business from folks that have different business models, that have different kinds of technology, and these banks and acquirers need help and they need help from someone who does not compete against them.
And So, that has been our strategy -- the entire product roadmap is dedicated to that -- and we see a lot of interest. What we're offering is really a white label solution for them to take and it's not pieces of the service -- it's the end-to-end solution, soup-to-nuts. And what they have the ability to do is put their brand on it and then to enhance it with some of the modular capabilities that they may have invested on over the years. It's a pretty unique set of solutions -- it's a pretty powerful set of solutions -- and, best that I can tell, we're not really competing against anybody in our current distribution channels because they're just not offering this.
Peter Christiansen -- Citi -- Vice President of Payments, Processing, and IT Services Equity Research
Very helpful. Thank you.
Operator
Thank you. Our next question comes from the line of Brad Berning with Craig-Hallum.
Brad Berning-Craig-Hallum -- Senior Research Analyst
Good afternoon, guys. Just to follow-up on that, can you talk a little bit about where you're at --from a certification process where you're at with the pipeline process on the new products? What are the benchmarks and hurdles that you need to hit and execute on the plan this year or is it all in the pipeline already? Just help us understand your visibility on that?
Paul Galant -- Chief Executive Officer
Yeah, we run a process that we call "IDD" and what IDD does is it actually starts with a physical product that we have just received the certification from DCI on -- it is what we call "designed released" -- and then what we do is we go client by client, country by country, region by region and we prioritize where we're going to start our certification. That process, we now have locked for all of 2018 and this is a very, very detailed process because it involves our clients, it involves testing labs, and So, all of that now is laid out. And so, when you think about where we're going to go in terms of certifications, just starting with PCI, we now have six PCI certs on our engaged devices and these are all PCI-5 certifications So, our multi-lane, our portables, our countertops, mPOS, and then, of course, Carbon -- So, we've got that.
We've got these IDD locks on our major acquirer clients throughout the world and, each quarter, we go from piloting with these folks to being fully certified and that's when the sales volume comes in. So, we have this laid out -- it's interesting because I would say the only difference between where we are today and in the past is really two-fold. One is that certifying our next generation devices, if we certify one device in a device family -- like say I certify a single engaged device that is a portable -- to certify the rest of the family which includes a countertop, a multi-lane, a portable, an mPOS is much, much faster, much, much easier. And I'm not just talking about certification for PCI -- I'm really talking about certification with the acquirers So, we can start the fell.
So, that's a major, major change. The second is that the time for us to actually write a payment application on these next generation devices is about three to four times faster than what it was on VX and MX. The reason for that is because we have changed the architecture where we have an operating system today which incorporates an ADK that has a lot of the payment app functionality built in So, that middle layer allows our developers that are working with acquirers to much more quickly develop the final payment app. Right? So, the two accelerators are quicker to write the application and second is far quicker to certify the whole family and that's what's driving, we think, the growth for us.
Brad Berning-Craig-Hallum -- Senior Research Analyst
Much appreciated. Just real quick, accounting follow-ups: you talked about higher gross margins in 2018. If you could just give a range of what you're thinking on that? And, secondly, a follow-up on the slide of the China/Taxi impact -- can you break those two apart? Because I think China might have been flat to negative and just want to make sure we understand the difference between those two.
Marc Rothman -- Chief Financial Officer
I sure will. Hey, Brad. Let's talk about gross margin first and let's talk about it 2017 going into 2018 for the full year. So, I want to start with the reported... So, we did 40.2% gross margin and I think I'm going to add operating margin there for the discussion, as well, 11.3%. Okay? So, both Taxi and China were dilutive -- So, both gross margin and operating margin in 2017 -- so, when we, if you will recap the 2017 numbers, the gross margins would look more like 42% and the operating margin would be closer to 12.7% So, let's start with that as framework for getting grounded.
As we move into 2018, we see gross margins, overall for the business, going from this 42% to something more like 43% -- the mid-43% -- range. And, if I broke that down and we look at the hardware margins, we see a 200-basis point improvement so, as Paul just mentioned, new product introduction, roughly, let's call it mid-teen type new product introduction revenue. That's a strong contributor to the margin accretion -- so, lower costs, flat forum, we're assuming comparable ESPs, we're taking into account mix changes, and we see a 200-point basis point improvement on the hardware side.
The services margin, when we look at it, again, post-divested businesses, they look more like 43% and we see that moving up for the full year. Actually, we were 43% -- with the divested businesses out, then we're more like 47% and we see that level again in 2018. And operating margins, of course, will follow. We see operating margins for the full year 2018 post-divestitures, in the high 13%, closer to 14%.
With respect to the breaking down, China and Taxi business, let's talk about China first. On the revenue side, the revenues were $106 million -- and we provided a lot of this... Excuse me, Taxi was $106 million and you'll see that, also, in some data we provided in the press release when you get a chance to stroll through the details. I think we've made it easy with some information on the IR website, as well. On the China business, the revenues were approximately $11 million for the full year.
When it comes to looking at the earnings per share impact of both, China was more dilutive. We divested that in mid-summer and the Taxi business impacted 2017 results by $0.06 So, that goes away. And, with respect to the Taxi business, when we looked at the full year, taking into account the last quarter, it lost about $0.03. So, the net is we pick up close to $0.10 accretion in earnings per share as a result of these divested businesses. That's why we recasted the reported results from $1.31, actually, $0.09 up to $1.40. So, that's the new baseline. We try to spell out pro forma businesses, which is the $1.756 billion of revenue with the now recasted $1.40 per share going up to the ranges that I provided earlier, $1.775 to $1.8 billion on revenue and $1.47 to $1.50 in earnings per share.
Brad Berning-Craig-Hallum -- Senior Research Analyst
Very helpful. Thank you.
Operator
And our next question is from the line of James Schneider with Goldman Sachs.
James Schneider -- Goldman Sachs -- FinTech Equity Research
Hi, this is actually Lara Forman subbing in for James, who's having trouble connecting. We were just wondering, on the Q1 gross margin guidance, just when we think about how much stronger it is for the full year versus Q1, is that just because of some of the India and petrol headwinds being in the first half of the year versus how much was just from new product sales ramping throughout the year?
Marc Rothman -- Chief Financial Officer
Thank you for the question. I'm sorry we weren't able to pick up Jim earlier. It is a function of mix. North America was much more significant revenue in Q4 and that tends to carry a higher margin relative to the emerging market. And, of course, as I played out, we reported on the trajectory here in North America is down sequentially from Q4 significantly due to the petrol matter you just mentioned. So, therefore, my systems margins come down, even off the Q4 levels but we do see a significant ramp as the new products get introduced in a more significant amount in Q2 and the second half So, there is significant trajectory in systems margins, in particular, during the year.
When it comes to services, services will be down sequentially in revenue and that's more based upon seasonality. And because we get such good leverage from additional service revenues, the services revenues come down -- percentage margins come down slightly -- but, as that transitions to the rest of the year, we may make it up in volume and in accretes to improved margin in services, as well.
Paul Galant -- Chief Executive Officer
Let me just give you a little bit of color on the timing of the ramp in sales for our new products. We're selling these new products, by and large, not just as boxes. Right? We're introducing a lot of service capabilities, most of which are connected to us through gateways and our terminal management systems. So, the pilot period for a box is relatively short. Right? If you're just using it for a payment acceptance, what you're testing is going to be very much limited to the kinds of payments that you hope to be able to process. When you move into more services, the payment test scripts are longer because you're testing many more scenarios, which is why some of these Engage and Carbon solutions, when attached to our services platform, take a bit longer in the pilot seat and So, you start to ramp up, typically, after a pilot. So, we do have, with a number of our clients who are major volume clients, they are taking longer to pilot but, for us, it's absolutely worth it because, with it, comes behind margin annuity services revenue and we'd rather push for that than anything else.
James Schneider -- Goldman Sachs -- FinTech Equity Research
Got it. How long is a pilot, usually, for the newer products versus the older ones?
Paul Galant -- Chief Executive Officer
The pilots for the new stuff tend to be in the 90-day to 120-day period, whereas, again, if you're going to pilot a stand-alone terminal, you can pilot it 30 to 60 days.
James Schneider -- Goldman Sachs -- FinTech Equity Research
Thank you.
Operator
Our next question comes from the line of Ramsey El-Assal with Jefferies.
Ramsey El-Assal -- Jefferies -- Senior Vice President and Analyst
Hey, guys, thanks for taking my question. I wanted to hop over to the revenue side of guidance and, I guess, even factoring in the Taxi divestiture, the revenue guidance came in a bit below our model. You quantified some headwinds next year -- petrol and demonetization. Are there any other factors or headwinds to call out? Any incremental underperformers you're expecting versus prior expectations or is it really just those two factors that are weighing on performance next year?
Marc Rothman -- Chief Financial Officer
I'll take that, Ramsey. Good afternoon. No, I think that it's many, from a material perspective, it was petrol and the India demonetization that drove the change and that $70 million is a 4% impact on revenue. So, when you take that out, we've ranged it at the high end -- the 1.8% and 2.5% -- so, perhaps, it's slightly above but what we think is in the fairway of many of the consensus estimates. I can provide -- and I probably should -- perhaps, some more regional color and then you can make your own assumptions, relative, too. For North America, for the full year, given the petrol EMV shift that we've talked about just now, we see revenue effectively flat year-on-year and, as I said, on that, it's a 6% impact -- it's a $30 million impact on that business -- So, it's significant. Had we not had that delay, we would have had a very robust North American business, but it is what it is.
What we're excited about is that retail and SMB continue to provide momentum and both are up meaningfully as we go into 2018. So, we've got to deal with that petrol impact but the core business is doing well and it's driven by a combination of both Engage and Carbon launches. And we've talked about Vantiv and there's a lot of other Carbon opportunities in the pipeline that we're driving and, of course, that's wrapped around the success we've had in the North American payment-as-a-service business where connected devices are up to $400,000. So, the franchise is solid, we're guiding flat -- don't know how that compares to models -- but that's the color relative to North America.
In EMEA, we actually see mid-single-digit revenue growth, probably 5% to 7% in EMEA, and it's really across the board. We're seeing growth in southern and eastern Europe. The Nordics momentum continues. We have some slight FX favorability. We lost a little bit of that -- perhaps that's somewhat relative to a small disconnect in some of the consensus number or analysts' numbers -- but we continue to do very well in France, Germany, first out launches with Engage.
In Latin America, you see another great trend there, as well, same type of guidance to provide mid-single-digits -- let's call it, again, 5% to 7%, probably closer to a higher end there -- and it's really driven by both a combination of physical and digital services. So, the region is stabilized, there's a lot of excellent initiatives, we're winning market share in many countries, and we're really building a nice book of physical services and have a lot of prospects for digital services going into next year.
And, lastly, Asia -- and, of course, we enjoyed the India surge in the first half 2017, but for that, it creates a difficult comp -- so, overall, we're guiding Asia down, higher single-digits, closer to 8% year-on-year. Of course, $35 million of India sales that come out put us into the negative territory. Had we not had that, we would have actually had high single-digit growth. So, the opportunities there, they're still in Australia, Indonesia, we expect some momentum, Thailand's doing well, and, of course, the opportunity in Japan where we launch some of our Engage products to-date. So, I hope that regional color helps the community out and, perhaps, finds this, perhaps, small dislocation on the topline.
Ramsey El-Assal -- Jefferies -- Senior Vice President and Analyst
That's extremely helpful. Thanks. A follow-up on a different subject: I wanted to ask about your balance sheet deployment strategy. It's good to see you diluting your allocations for share buybacks but, at the same time, there's a lot of change happening on the payment landscape and I'm sure there's an internal debate about whether that capital could also, be deployed toward new technology or other assets that might enhance your competitive mode or speed up time-to-market with new products. Can you just talk about -- update us -- on your balance sheet deployment strategy, balancing those two priorities?
Marc Rothman -- Chief Financial Officer
I'll start and I'm sure Paul would like to make a few comments on strategy and M&A. Our capital allocation policy is similar to what we've previously laid out. We'd like to have our debt leveraged at between 2X and 3X. Even today, we're toward the high end of that, which is fine -- I'm comfortable with that, especially given the trajectory on EBITDA going into 2018. And, with respect to the organic investments, we've been able to take out some of the more capital-intensive businesses, but we're going to continue to invest capital to drive the organic strength -- So, de-leveraging, internal investments. The opportunity for M&A is absolutely there -- we've got a good funnel. We're looking for the right fit. When we find that, we'll be able to have availability under our existing credit arrangement or we, perhaps, if it was large enough, we'd be able to find financing, but that's not a hang-up relative to returning capital back to shareholders.
We announced the $200 million authorization about two years ago. We got through three-quarters of it. With this divestiture activity, we think it's a good return and a good use of capital to finish that program off if market conditions make sense in the short-term, here. And then, lastly, the $100 million, again, because we haven't engaged in material M&A, we think it's important authorization and capital strategy to put out there.
If factors change in the market -- if the right transaction makes sense, we'll adjust the strategy as we progress it. We expect to be able to do it in 12 to 18 months and it's a nice part of our cash flow, but we have liquidity -- we have $130 million in cash on the balance sheet, we have significant capacity under our revolver. We'll get close in the next couple quarters to refinancing our paper, likely on more favorable terms and we'll look at additional liquidity requirements or opportunities to give us flexibility. So, we think it's well-balanced.
Paul Galant -- Chief Executive Officer
Yeah, I concur with what Marc just said, of course. M&A, for us, is about accelerating the execution of our strategy. Up to this point, I will tell you that the entire focus of this team has been on improving organic execution. Right? As we move into the services space, it is much more about software, it's much more about platform architecture, and those things, we find, best done organically by bringing in extraordinary talent to supplement the great people that we have here at Verifone today.
That is my first and foremost primary goal. I would not do M&A that, in any way, puts me in competition with my clients. That's a rule for us here. We think it's important. And that type of M&A, which would put us into financial services -- either acquiring or otherwise -- generally has a very, very high price tag, high multiple, and, candidly, is not very easy to integrate So, we stay away from that.
Where we do focus our interests is in, really, three buckets. One is to the extent that we can find tuck and acquisitions that help us with capabilities in our services platform -- they're mostly software companies -- we absolutely look at those. No. 2, we look at anything that helps us to accelerate our infrastructure for connectivity -- So, gateways, whether they're online, or offline, or card-present. As you know, online gateways carry just nosebleed valuations So, we just can't make those numbers work for Verifone and we try to partner with those kinds of players. For card-present gateways, that's a different story and we have a lot of gateways -- they do $7 billion transactions a year -- but we always look at gateway assets.
And then, lastly, I would tell you that, as we move more aggressively into services, we need more talent on the ground because it's that talent on the ground that understands the local payment schemes, that understands software on the ground and integration on the ground. Those are the kinds of assets we buy. Sometimes, we find them in the form of a distributor -- So, an existing Verifone distributor that knows our devices, that has a good relationship with us. As we want to do more services, we do consider, from time to time, acquiring some of our distributors or other distributors in the market.
When you look at that agenda, right -- focus is services, focus is organically building out our platform -- and then you look at the three buckets of things we think are in our wheelhouse, I would say that this $150 million worth of stock buybacks -- $50 million immediately and $100 million over the next year -- is more than doable for us and I don't think it limits us very much.
Ramsey El-Assal -- Jefferies -- Senior Vice President and Analyst
Thank you So, much. That is a great answer. Thank you.
Operator
Thank you. Our next question comes from the line of Tien-Tsin Huang with JP Morgan.
Tien-Tsin Huang -- JPMorgan -- Wall Street Analyst
Thanks. You guys have covered a lot of ground already. I just wanted to ask, I was really surprised -- pleasantly surprised -- by the North America retail in the SMB performance. I think SMB, you mentioned, was up 20 So, can we conclude that, maybe, the E&B flush is behind us? And I think this doesn't even include the new devices that are coming out now So, just trying to understand the sustainability of this type of growth in these two segments as we look to '18 and even beyond?
Paul Galant -- Chief Executive Officer
That's a great question, Tien-Tsin. Thanks for asking. So, yeah, listen, we're really happy that two of the big important businesses in North America are starting to really drive some growth. SMB, as you know, was a long-suffering vertical. It has started to turn around -- 20% growth in Q4 is something that we're very happy about. There are a couple things that factor into our projection into 2018 in that particular vertical. We still have about 50% of SMB and Greenfield that have not updated to the EMV devices, curiously enough. And, so, the April '18 liability shift date that is upon us, unless Visa/Mastercard put in another delay -- which I hope they don't -- but, if that comes to fruition, people might be reminded of the pain of charge-backs and So, we may see some growth in the pace of SMB and Greenfield device sales. So, that's one area that we are excited about.
The second area, of course, is the new category of devices, Carbon, which really replaces the Casio cash register or some other traditional device so, that, we feel good about, both for SMB and Greenfield, but also, occasionally, you see it in Tier 1 retail -- you see department stores that have kiosks and there's a bunch of use cases, which we, candidly, were quite surprised the people would adopt a Carbon for, So, that might drive some growth in SNB and Tier 1.
The big negative, when you look at the North America number is that this petroleum delay really crushes that segment for '18. And So, there are just big ins and big outs and that's why we are where we are for '18.
Tien-Tsin Huang -- JPMorgan -- Wall Street Analyst
Okay. No, that's good. Just a quick one, then, for Marc. Just I heard the geographic guidance, but what about systems versus services? I heard double-digit for services longer-term, but how should we consider '18 between those two lines?
Marc Rothman -- Chief Financial Officer
Thanks, Tien-Tsin. So, for full-year '18, we're planning and modeling the systems business flat to slightly up and, of course, the biggest change in systems is indeed demonetization as well as petrol So, that hurt us. Most of the $70 million was petrol with some services in there, but mostly on petroleum. And then we look at the services business to be mid-single-digits growth.
Tien-Tsin Huang -- JPMorgan -- Wall Street Analyst
Got it. Terrific. Thanks. Have a good end of the year, guys. Appreciate it.
Operator
Our next question comes from the line of Andrew Jeffrey with SunTrust.
Andrew Jeffrey -- SunTrust -- Fin-Tech Equity Research Analyst
Hi, guys. Thanks for squeezing me in, here. As I think about your services strategy which seems to be coming together nicely and, particularly, in North America, can you maybe bifurcate it a little bit and talk about the services-value prop in SMB versus the services-value prop at location retail and whether those are meaningfully different and whether the growth rates of those are something that we should be thinking about as we hear you talk about services, generally?
Paul Galant -- Chief Executive Officer
Right. So, the services platform that we will be branding and officially launching as an end-to-end solution is beneficial for SMB, it's beneficial for medium, and it's beneficial for Tier 1. So, it's a platform that connects to Carbon, and it connects to Engage, and to some of our new mPOS devices. So, let's just start with the fact that we took an architectural approach which says, if it connects back to Verifone, we should be able to do more than just accept the payment on it. Right? So, that's the overarching theme. I would say that, when we developed this architecture and the platform design, we really came at it from our current distribution. 25% of Verifone's business comes from direct-to-merchant and 75% of our business goes through our acquirer and bank partners So, the platform was really designed to be able to leverage value across both of those segments.
The SMB segment, it's also, a little unique for us because we have direct-to-SMB business in places like the Nordics and so, when we think about how this services platform interfaces, we build direct-to-small and medium merchants in the Nordics, like we test the living daylights out of how those merchants interact with it, what they like about it and then we take all those learnings and we, of course, bring it to our bank acquirer, merchant acquirer, partners and we say, "Hey, look, here's the test bed, here's how they're using it, here's what you can do with it, and here's a Carbon device that you can sell with all of this capability, and here's an Engage device you can sell with all this capability." And they know which of their merchants wants either.
In our direct-to-Tier 1 space, I will say that that area is really dependent on the business vertical in Tier 1 so, in the QSR space -- which are all gigantic merchants -- they have an absolute number of needs. So, they might say, "Hey, Verifone, we want to do order-ahead. Help us to do that," So, that's where the services platform comes in. So, it's not an end-to-end solution like it is for SMB -- it's much more of a targeted, "We want to create the following experience for our consumers. It may require us to make changes with software at the point-of-sale. It may require us to create omni channel solutions between our web and our in-store systems." And So, that's where our services platform has to come in and be able to create that technology. Is that helpful?
Andrew Jeffrey -- SunTrust -- Fin-Tech Equity Research Analyst
Thank you. Yeah, it is helpful. And, just as a follow-on quickly, when you think about SMB, in particular, how do you philosophically view partnering? I'm thinking about QuickBooks-type partnership in the services ecosystem, for example, as a means of driving adoption, for example, as the environment gets more competitive and you see more small businesses using next gen systems as, really, ERP platforms.
Paul Galant -- Chief Executive Officer
Yeah. No, it's a great question. So, when we're talking about Engage devices, Engage devices run services, by and large, that are consumer-facing services -- So, accept the payment, do an installment payment, sign up for loyalty, maybe a rating of the service -- So, that's how we target that. When we talk about the Carbon and small business solutions, in addition to all those payments, we're providing tools for the merchant to help them run their business -- cash register software, accounting software like QuickBooks, employee management software like Home Base, etc., etc., there are many.
Our strategy and the way we go to market is we do not put a bunch of apps on our marketplace and say, "Figure it out, merchant," or, "Figure it out, acquirer." We go to market with business verticals for that SMB space and we curate what we believe is a great solution that includes all the types of software, and connectivity, and solutions that a small business might need in the retail space, in the restaurant space, in the beauty salon space, whatever. And then the marketplace allows them to modify that curated solution so, if they prefer to use Sage Accounting software to QuickBooks, they can easily swap that out in the bundle. Right? And that is our approach. I can't tell you that we've tested it with every scenario, but that is the way we're starting to go to market now and I'm sure we'll pivot when necessary, but we think this is the right way to do it.
Andrew Jeffrey -- SunTrust -- Fin-Tech Equity Research Analyst
Thanks a lot.
Operator
Thank you. And we have time for two more questions for today. Our next question comes from the line of Jason Deleeuw with Piper Jaffrey.
Jason Deleeuw -- Piper Jaffrey -- Senior Research Analyst, Financial Services and Technology
Yes, thanks for taking my question. Just, on the margins, I'm just trying to get a sense for the margin improvement that's in the guidance for this year. How much of that is just from the new products rolling out and how much is from just process improvement or just platform enhancements? I'm trying to get a sense of are there platform enhancement benefits to come or are we getting some of that this year, also?
Paul Galant -- Chief Executive Officer
Thank you. So, a substantial amount -- the majority of the savings -- that come into the hardware gross margins in 2018 are delivered from the lower cost platform under new products, for sure. The team continues to be very aggressive on supply chain in terms of take-out costs on the legacy product -- which, by the way, is still in 80+% of our revenues So, the team continues to be aggressive on that -- and certainly getting benefits on the old products while you're leveraging supplier base on the new ones, So, that's factored into our calculus. And then there's continued opportunities, really, in all the major categories of freight, inventory management -- we're pleased that the inventory continues to remain at a lower historical level, $127 million -- helps us with write-offs, and scrapping, and what-not. So, it's end-to-end, but the majority of the savings comes from the new product introductions and that's why it ramps more significantly in the second half in the hardware side.
And, on the services side, we had great margins on a divested basis in Q4. We tempered those a little bit into next year, but they're still very significant relative to the past because the services revenue continues to hit record-type levels there. And we'll get the leverage, but we still have to invest in the platform So, part of the growth strategy is to invest in new gateways, light up new estate management systems in markets for which we see the greatest opportunity, and that's why, perhaps, the growth isn't flowing directly down to the bottom line, although service margins are relatively consistent on divested basis with last year.
Jason Deleeuw -- Piper Jaffrey -- Senior Research Analyst, Financial Services and Technology
Great. That's very helpful. And then, also, I'm just trying to think about -- or how should we think about -- the performance objectives through 2020 with the 2018 guidance and the 2017 performance? Any framework or any help that you can give us in terms of trying to think about the performance objectives that you've laid out before?
Paul Galant -- Chief Executive Officer
I appreciate you asking that question. So, back in early 2017, we had our Analyst Day Meeting and we set out long-term projections from the topline to the bottomline. The topline was 5% to 6%. That's still our medium, although perhaps our balance, let's not aspirational goals, but we said 5% to 6% on the topline and we're not coming off that. The material changes that have happened definitely to the positive is the gross margin trajectory. We showed 41% going to 44% -- we think that goes up 200 basis points in the medium-range planning cycle and we get leverage from that.
We get leverage from the operating expenses, as well, with the divested businesses coming out that we're losing money. The operating margins follow. So, we had said 15% to 16% operating margins back in January of this year. With the divested businesses coming out on this trajectory and gross margins being more favorable, we would up those operating margin targets to closer to 17% to 18%, which is probably more consistent with our top tier group.
Jason Deleeuw -- Piper Jaffrey -- Senior Research Analyst, Financial Services and Technology
That's great. And then, just the revenue growth -- is there any update to think about the revenue growth?
Marc Rothman -- Chief Financial Officer
We're going to hold constant. At some point, we'll bring the community back together, probably early next year -- if we have any material thoughts in between, we'll share it -- but, for now, the guidance and long-range planning that we provided back in January still makes sense along with where we see the business today.
Paul Galant -- Chief Executive Officer
Yeah, and I would say we're not leaning into these things. What we have learned is that it's important to show, not tell, So, we want to be able to demonstrate tangible solutions in-market, at high-volume, generating the kind of growth that I think you all expect from us. And So, we're going to continue to be at the levels we've discussed until such time that we have an update to them. But they're not going to be in things that are in our lab or in pilot -- they're going to be things that are scaling. I think that's what you all want to hear from us and, when it's time for us to say that, that's what we'll do.
Jason Deleeuw -- Piper Jaffrey -- Senior Research Analyst, Financial Services and Technology
Thank you. Very helpful. Thank you.
Operator Jason Deleeuw -- Piper Jaffrey -- Senior Research Analyst, Financial Services and Technology
Thank you. And our final question comes from the line of Jason Kupferberg from Bank of America-Merrill Lynch.
Jason Kupferberg -- Bank of America-Merrill Lynch -- Senior Equity Research
Hey, guys, this is Ryan Carrion for Jason. I'll keep it quick -- I know we're running a little long. It sounds like the mobile channel continues to do really well. Looking forward, do you see that the 20% growth is a trend that should continue into 2018 and beyond? And then, digging a little bit deeper into mobile, have you ever called out what percentage of shipments are currently mPOS devices?
Paul Galant -- Chief Executive Officer
I don't believe we have and, for competitive reasons, we'll just continue to not do that. But, yeah, no, growth in mPOS and mobility continues to be strong. Our strategy is to put as much of mobile in the cloud as we possibly can to lower the cost of the actual device So, that we can get to-scale quicker. I think, if you're Visa and Mastercard and others and you think about acceptance in the emerging markets -- especially given all the alternatives that are now coming up -- they want to create lightweight, robust, secure, and fast acceptance solutions for merchants and we're right there with them, building that into our mPOS roadmap. So, yeah, we see continued growth, strong margins in that space, and, again, we think that's, over time, a pure services play, not a hardware play.
Jason Kupferberg -- Bank of America-Merrill Lynch -- Senior Equity Research
Got it. And just, last one from me: it sounds like the QSR opportunity has been a tailwind for the last several quarters. You've had a number of really nice wins. Are still a lot of QSRs that have not yet converted to MVM? I'm just trying to get a sense of how penetrated this vertical has become and how long QSR can continue to be a tailwind?
Paul Galant -- Chief Executive Officer
Yeah, So, QSR has been a very, obviously, good business for us. So, we won 9 out of the top 10 QSR providers in North America -- all of them are using Verifone hardware and services. We won 20 of the top 30 and there are 5 more RFPs that are out there up for grabs. We've won a bunch of deals that, actually, we've not rolled out yet because of, obviously, holiday timing -- people wanting to postpone post-January. So, there's more to come, for sure. I'd say that, today, if you think about QSR as a major driver for our point business in North America -- our payment-as-a-service business -- there's at least another 100,000 devices, much of which is QSR-related that we have not yet rolled out that we have contracted. So, that's how we're going to go from about 400,000 connected terminals in North America to 500,000 plus by the end of Fiscal '18. Is that helpful?
Jason Kupferberg -- Bank of America-Merrill Lynch -- Senior Equity Research
That's perfect. Thank you So, much for taking my question.
Paul Galant -- Chief Executive Officer
Thank you. Well, at this point, we're going to wrap it up. We thank all of you for being on the call and we wish you a happy and healthy holidays and a wonderful and joyous new year. Thanks So, much. We'll speak to you soon.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.
Duration: 74 minutes
Call participants:
Christopher Mammone -- Vice President of Investor Relations
Paul Galant -- Chief Executive Officer
Marc Rothman -- Chief Financial Officer
James Schneider -- Goldman Sachs -- FinTech Equity Research
Peter Christiansen -- Citi -- Vice President of Payments, Processing, and IT Services Equity Research
Brad Berning -- Craig-Hallum -- Senior Research Analyst
Ramsey El-Assal -- Jefferies -- Senior Vice President and Analyst
Tien-Tsin Huang -- JPMorgan -- Wall Street Analyst
Andrew Jeffrey -- SunTrust -- Fin-Tech Equity Research Analyst
Jason Deleeuw -- Piper Jaffrey -- Senior Research Analyst, Financial Services and Technology
Jason Kupferberg -- Bank of America-Merrill Lynch -- Senior Equity Research
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