Verifone Holdings (NYSE:PAY) is an international producer and designer of electronic payment products. The firm's products allow merchants to integrate payment functionality into their systems such as with electronic payment products that connect directly to the internet through IP-based (internet protocol) and Wi-Fi technology.Customers of Verifone's products include global financial institutions, payment processors, petroleum companies, large retailers, government organizations and healthcare companies, as well as independent sales organizations (ISOs).  Verifone's Total Revenue increased to $922 million for Fiscal Year 2008 as compared to $902.8 million for Fiscal Year 2007 due to an increase in the sale of electronic payment system products internationally.
Verifone is expanding its international market and already has a presence in East Asia, the Middle East, Latin America, Europe, and North America. Until 2008 the firm earned the majority of its revenue from the North America market, which is comprised of Mexico, Canada, and the United States. However, economic growth abroad, coupled with infrastructure development, support from governments seeking to increase value-added tax (“VAT”) and Sales Tax collections, and the expanding presence of IP and Wireless communication networks has resulted in revenue from abroad exceeding revenue generated from domestic sales. Specifically, its' North America market share has fallen from 57.4% of total revenues in 2006, to only 39% or $359.14 million in total revenues for fiscal 2008. On the other hand, International operations went from comprising only 42.5% of total revenues in 2006 to 61% or $564.46 million of total revenues in 2008.
The company divides its business into two segments: Systems Solutions and Services. Systems Solutions consists of operations related to the sale of electronic payment products that enable electronic transactions. The Services segment includes warranty and support services. In fiscal year 2008, Verifone's Systems Solutions segment generated 87.5% of total revenues, which amounted to $807.46 million, while its Services segment contributed 12.5%, or $114.46 million in revenue.
Verifone's Net Revenue increased to $922 million for 2008 as compared to $902.8 million for Fiscal Year 2007 due to an increase in the sale of electronic payment products systems internationally. On the expense side, Verifone's Operating Expenses jumped from $270.75 million in Fiscal Year 2007 to $608.85 million in Fiscal Year 2008. The main driver was $289 million in expenses related to an impairment charge. In particular, the firm reduced the net carrying value of the developed and core technology intangible assets in the International segment due to lower revenue expectations in light of current operating performance and future operating expectations.  Operating expenses also rose due to $36.9 million in corporate operating expenses resulting from the Acquisitions of Lipman and PayWare and the related integration expenses.
The firm did see a $28.0 million increase in cash and cash equivalents during Fiscal Year 2008 as a result of changes in working capital , including a $58.4 million decrease in deferred tax balances and a $24.6 million decrease in accounts receivable due to improved revenue collections As a result of lower effective interest rates in 2008 Verifone's Interest Income decreased $0.7 million in Fiscal Year 2008 as compared to Fiscal Year 2007
Net Cash provided by Operating Cash Flow fell from $88.2 million in 2006 to $76.8 million in 2007, and to -$36.7 million in 2008.  Operating Cash Flow fell in 2008 as a result of the Company’s disappointing fourth quarter operating results, which were hindered by the severe macroeconomic conditions caused by the illiquidity of the credit markets, difficulties in banking and financial services sectors, falling consumer confidence and rising unemployment rates.
Net Income for Verifone Holdings decreased substantially in Fiscal Year 2008 due to an increase in Selling, General & Administrative Expenses (SG&A) costs as compared to previous years, as well as impairment of goodwill and intangible assets. This latter expense is a mere depreciation expense that is used to bring down the carrying value of goodwill, which is merely the value beyond the Intrinsic value beyond its assets, such as the reputation the firm has with its clients when Verifone made its acquisitions of competitors.
|Annual income data in millions||2004||2005||2006||2007||2008|
|Net Interest Income||$0||$.6||$3.37||$6.7||$6|
Verifone divides its product offerings into two segments: System Solutions and Services.
System Solutions products are designed to work in several technological configurations, including wireline and wireless IP technologies.  Verifone's System Solutions sub-segments include:
Verifone's Services segment covers warranty and support services, field deployment, installation and upgrade services, and customer specific application development. The main sub segments of this division are Client Services and Customized Application Development.
The industry’s growth continues to be driven by the long-term shift towards electronic payment transactions and away from cash and checks, in addition to an improvement in security standards that require more advanced electronic payment systems. International and national security issues have become the main drivers of Verifone's business model as customers seek means to meet ever-escalating governmental requirements related to the prevention of identity theft as well as operating regulation safeguards issued by the credit and debit card associations.These trends have been accelerated by the usage of credit and debit card based payments, especially PIN-based debit. Another key driver is the growth in single application credit card products that enable merchants to provide payment solutions in non-traditional settings such as pay-at-the-table in restaurants. 
Rapid economic growth and subsequent infrastructure development--expanding presence of IP and wireless communication networks in Eastern Europe, Latin America, and East Asia have led to significant increases in demand for Verifone's electronic payment products.Verifone has strategically gained exposure to these growing markets and its 2008 revenue breakdown is a good indication of this. In particular, during the fiscal year ended October 31, 2008, 65.2% of Verifone's net revenues were generated outside of the United States. Verifone expects the percentage of net revenues generated outside of the United States to continue to increase in the coming years.
The firm's System Solutions segment's net revenues increased $15.2 million, or 1.9% during the fiscal year ended October 31, 2008 as compared to the fiscal year ended October 31, 2007 primarily due to a $56.3 million increase in International System Solutions net revenues. This increase was offset by a decline in North AmericaSystem Solutions revenue of $41.2 million The increase in International System Solutions net revenues was largely attributable to growth in the Latin American market, primarily Brazil as several of Verifone's largest Brazilian customers made public offerings that generated money to purchase electronic payment products, as well as higher demand for prepaid top-ups, medical and health care System Solutions.. Furthermore, European net revenues for System Solutions increased by $19.4 million due to improved supply chain and sales execution in Russia and Ukraine. The decrease in North America System Solutions net revenues was primarily attributable to weakening demand for the firm's "Petroleum Solutions" and a reduction in demand from United States financial businesses.
Verifone's increased revenue from abroad has not increased its profit margins. On the contrary, International gross profit percentage declined due to the combination of increased price competition in emerging markets countries, including Russia, China, Turkey and Brazil. In addition, certain customers purchased non-PCI compliant inventory at significant discounts. In addition, revenues in Latin America, which have historically carried gross margins below international averages, increased proportionally in the fiscal year ended October 31, 2008. as international sales of Verifone's System Solutions products have tended to carry lower average selling prices and therefore have lower gross margins than its sales in North America.
The following graph depicts Verifone's changing revenue mix:
|'||2008||Change||% Change||2007||Change||% Change||2006|
|Net revenues (in thousands)|
|Total net revenues||$921,931||$19,039||2.1%||$902,892||$321,822||55.4%||$581,070|
Large telecommunication carriers have expanded their communication networks and lowered fees, which lets merchants use IP-based networks more cost effectively. This increased IP connectivity has led to faster processing speeds and lower costs, which in turn has opened new markets for electronic payment systems, including many that have been primarily cash-only industries, such as quick service restaurants (“QSRs”). Additional wireless electronic payment solutions are being developed to increase transaction processing speed and mobility at the point of sale, and offer significant security benefits that enabling consumers to avoid relinquishing their payment cards. For example, a portable device can be presented to consumers to pay-at-the-table in full-service restaurants or to pay in other environments, such as outdoor arenas, pizza delivery, farmers’ markets, and taxi cabs.The increase in IP Connectivity in several fast-growing emerging economies, in particular Brazil, Turkey, China, Brazil and Israel has fueled much of the $56.3 million increase in Verifone's International System Solutions net revenues for 2008.  However, the pervasive global bear market in 2009 has negated any positive impact on Verifone's revenues from Increasing IP connectivity in all market sectors, as well as domestic and international markets.
The development and increased use of wireless communication infrastructures are increasing demand for compact, easy-to-use, and reliable wireless payment solutions. The wireless communications industry has grown substantially in the United States and globally over the past twenty years. The increased speed of wireless communications, and ever-expanding coverage maps of standardized wireless data technologies such as General Packet Radio Service (“GPRS”), and Code Division Multiple Access (“CDMA”) makes wireless telecommunications an attractive alternative to traditional telecommunications.  The $61.5 million increase in revenue from North American System Solutions products was primarily attributable to an increase in demand for Wireless products due to customers’ interest in differentiating the service they provide to merchants, and higher sales in Canada, where merchants are preparing for a transition to a new payment card technology offered by Interac.
Industry security standards are constantly evolving, driving re-certification and replacement of electronic payment systems, particularly in Europe and the United States. In order to offer electronic payment systems that connect to payment networks, electronic payment system providers certify their products and services with card associations, financial institutions, and payment processors and comply with government and telecommunications company regulations. Not surprisingly, security has become a driving factor in its business as customers endeavor to meet ever escalating governmental requirements related to the prevention of identity theft as well as operating regulation safeguards issued by the credit and debit card associations, members of which include Visa International (“Visa”), MasterCard Worldwide (“MasterCard”), American Express, Discover Financial Services, and JCB Co., Ltd. (“JCB”).In response to increasing industry demands for high security products in the fiscal year ended October 31, 2007, Verifone incurred an obsolescence charge of $16.6 million primarily due to the implementation of new PCI security standards.
Verifone is one of the top three providers of electronic payment systems and services in the world. The markets for this company's products are highly competitive, and have been subject to price pressures. In the last two years, competition from manufacturers, distributors, and providers of similar products have caused price reductions, reduced margins, and a loss of market share. For example, one of Verifone's former customers--First Data Corporation has developed its own series of proprietary electronic payment systems for the U.S. market. Moreover, Verifone competes with suppliers of cash registers that provide built in electronic payment capabilities and producers of software that support electronic payment over the internet, as well as other manufacturers or distributors of electronic payment systems. Finally, Verifone competes with smaller companies that have been able to develop strong local or regional customer bases. All told, the market in which Verifone operates is classified as a perfectly competitive market The firm's main competitors are currently the following:
Ingenico is the largest company in the secure electronic payments industry by market share. This company makes electronic payment and credit authorization systems, including point-of-sale terminals, portable systems, and PC-based systems for offices. Ingenico also makes online payment systems and smart card readers. The company's products are used for banking, health care, postal, retail, and transportation applications. It has more than 15 million terminals in 100 countries; the Americas and Europe account for the majority of its sales. 
This company offers electronic transaction solutions through electronic transaction products and software, and a range of support and maintenance services. It sells its products to companies in the hospitality, transportation, healthcare, prepaid card and restaurant industries. During the year ended December 31, 2008, the Company developed technology in other sectors that depend on electronic transactions, including, the certification and volume roll-out of its medLine product family in Germany. It operates in four business segments as follows: Americas, Northern Europe, Middle East and Africa (NEMEA), Southern EMEA (SEMEA) and Asia-Pacific.
NCR provides financial institutions, retailers and independent deployers with financial-oriented self service technologies, such as ATMs, cash dispensers, and software solutions, including the APTRA application suite and consulting services related to ATM security, software and bank branch optimization. The company's ATM and Financial Terminal products process consumer transactions and incorporate features such as automated check cashing/deposit, automated cash deposit, web-enablement and bill payment. The company also provides Self-Service Kiosks to the retail and hospitality, travel and gaming, healthcare and public sector and entertainment industries. NCR operates in the Americas, Europe, the Middle East, Africa, Japan, and rest of the Asia Pacific.
|Company||Total Revenues (most recent filing)||R&D Expenditures (most recent filing)||Net Income (most recent filing)|
|Verifone Holdings (PAY)||$922 MM||$75.6 MM||-$425.32MM |
|Ingenico S.A (ING)||$1.2 B||$55.8 MM||$36.7 MM |
|Hypercom Corporation (HYC)||$437.3 MM||$46.1 MM||-$85.4 MM|
|NCR Corporation (NCR)||$5.3 B||$148 MM||$228 MM|