MCRS (MM)

Shares of VeriFone Systems (PAY) plunged 42.8% ($13.65) to close at $18.24 on the heels of a dismal preliminary first quarter 2013 result. VeriFone expects to report GAAP earnings per share (“EPS”) in the range of 7 cents to 10 cents.

Excluding stock-based compensation, amortization charges, acquisition related charges and related tax effect, VeriFone expects EPS to be in the range of 47 cents to 50 cents, well short of its previously guided range of 70 cents to 73 cents.

However, EPS is likely to decline or remain flat from 50 cents reported in the year-ago quarter. Sequentially, it is expected to decline significantly from 66 cents reported in the previous quarter.

VeriFone expects first quarter revenues to be in the range of $424.0 million to $428.0 million on a GAAP basis. Excluding amortization of step-down in deferred revenues on acquisition, revenues are expected to be in the range of $425.0 million to $430.0 million, much lower than the initial guided range of $495.0 million to $500.0 million.

Revenues are expected to miss the Zacks Consensus Estimate of $493.0 million, primarily due to continued weak macro economic conditions in Europe, lower-than- anticipated revenues from certain Brazilian customers, political turmoil in Venezuela (usually a strong market for VeriFone), postponement and delay of certain projects and the cancellation of Washington D.C. taxi project.

Revenues were also negatively impacted by VeriFone’s increased focus on long-term service initiatives in multiple regions, which hurt near-term hardware and software features. Increase in deferred revenues due to higher volume shipments to a new mix of customers in the Middle East and Africa, which did not meet first quarter revenue recognition criteria, also hurt top-line growth.

However, revenues are expected to increase slightly from $420.0 million reported in the year-ago quarter. Revenues are projected to decline significantly from $485.0 million reported in the previous quarter.

We note that VeriFone has outperformed the Zacks Consensus Estimate by an average of 3.5% over the trailing four quarters. Earnings estimates have been more or less static in the last 90 days with no movement on either side. Currently, the Zacks Consensus Estimate is pegged at 64 cents per share for the first quarter.

VeriFone announced a number of steps to boost its operating results going forward. The steps include a comprehensive review of the strategic operating plan to boost near-term productivity along with increasing service offerings over the long term.

VeriFone expects to take steps to improve cost efficiencies of the acquisitions. However, it also expects an increase in research & development spending in order to offer more frequently products that have significant demand in 2013.

Despite the imminent first quarter miss, we believe that these initiatives will drive VeriFone’s results going forward. Moreover, VeriFone’s accretive acquisitions are expected to boost customer base going forward.

However, competition continues to be stiff from the likes of NCR Corp. (NCR), IBM (IBM) and MICROS Systems (MCRS) and is a major headwind. Organic growth also remains a matter of concern amid volatile macro economic conditions.

Currently, VeriFone has a Zacks Rank #3 (Hold).

 
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