VeriFone: An ATM for Short Sellers

 | Jun 06, 2013 | 9:00 AM EDT  | Comments
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I have been following VeriFone (PAY) on and off for years. VeriFone's payment machines are ubiquitous. You see them at grocery stores, gas stations, and merchants of all types. Wherever there's a credit or debit card, VeriFone is there to read it.

As a short seller, VeriFone is money in the bank. As far back as I can remember VeriFone has a history of missing estimates. VeriFone is like an ATM for short sellers.

After the close, VeriFone missed second quarter by $0.05 and posted revenues below consensus. Revenue fell 8.9% to $430 million vs. the $440 million consensus. If that wasn't enough, management guided the third quarter lower as well. Second quarter guidance was a disaster, and much lower than even I expected. The company said the third quarter would likely come in around $0.20, vs. the $0.50 Street estimate. The stock fell almost 17% in the afterhours.

But the second quarter and the third quarter weren't the only quarters stinking up the joint. If you recall, the first quarter didn't turn out so great, either. VeriFone preannounced a "materially weak" first quarter back in February and promised investors it would take just a few months to fix the business. The company blamed weakness in Brazil and late payments from clients in Africa and the Middle East. Apparently, the company's troubles are deeper than management expected.

I guess what really irritated people was the fact the company reiterated its second quarter and third quarter guidance as early as March, just after Chief Executive Officer Douglas Bergeron stepped down. Investors who bought the stock off the soothing comments were totally burned.

It wasn't always this way. Investors had high hopes for VeriFone as early as late April. Stories made the rounds that French competitor Ingenico  had lost market share to VeriFone. The stock traded higher on the news. And in early January MasterCard (MA) announced ambitious plans to launch its new EMV technology, which would mean over 5 million VeriFone terminals, would have to be replaced.

But this quarter was a mess. A distributor was caught selling terminals to an "embargoed" country and the company terminated the distributor, which hurt sales. VeriFone also keeps losing market share to competitors who are able to move through the terminal certification process faster.

Certification is important to customers and banks, since a lot of financials data runs through the terminals. Customers demand these products be 100% reliable and secure. It seems a competitor in Brazil has certified their equipment first and is out to an early lead. Brazil is especially important because the World Cup and Olympics are coming and the country needs terminals in taxis, hotels, restaurants and other venues to make it easier for tourists to pay for goods and services.

Gross margins took a big hit during the quarter. Gross margins fell 140 basis points sequentially and were down 240 basis points from the year ago period. Pricing pressure in Europe, Mid-East, and Africa served to weigh down margins as well.

I guess the kicker came at the end of the management's comments. Chief Financial Officer Marc Rothman gave investors little hope for the fourth quarter, calling it a "rebuilding quarter." Rothman also was reluctant to give much guidance for next year. (I hate rebuilding quarters!)

After the initial pounding the stock will get today, I think the shares will be stuck in a tight trading range. Management needs time to rebuild investor confidence and trust. I plan on covering my short, but I would look to reestablish my short if the stock moves materially higher.

Competitive and pricing problems in so many regions of the world just simply don't work themselves out very easily over a quarter or two.  If you like to short stocks, keep an eye on VeriFone -- you might get paid.

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