I have long been an admirer of electronic payment solutions company VeriFone Systems Inc. (NYSE:PAY). The first time I looked at the stock nearly six months back, it was trading near its 52-week low. I thought that the stock would make for a good buy. VeriFone was growing its top line at a rapid pace, and looked well-positioned to benefit from the digital payment revolution.
But all expectations came crashing down last month when VeriFone Systems Inc. (NYSE:PAY) sounded out a terrible earnings preview for the recently reported first quarter. This sent the stock to another 52-week low as it dropped around 40%.
Fellow Fool blogger Leo Sun remarked that very bad times lie ahead for VeriFone, and rightly so. The changes that the company brought about in its business, and the acquisitions it made, set it up for failure. Hence, it’s not surprising that VeriFone’s top line grew just 1% in the previous quarter, a far cry from the solid growth it used to record.
VeriFone Systems Inc. (NYSE:PAY)’s poor acquisition strategy, underinvestment in customizing its payment devices according to requirements of customers, and poor sales planning and execution hurt the company badly. The overturning of the D.C. taxi smart meter contract, delayed tenders, weak spending due to economic conditions, and internal execution challenges have pushed VeriFone into a corner apart from leading it to lose market share.
However, it seems that VeriFone Systems Inc. (NYSE:PAY)’s CEO Douglas Bergeron has had enough now. Bergeron went on the offensive on the latest conference call, and signaled his intent of shaking up the management and fixing up the company by the end of the fiscal year. His commentary was received positively by the Street, and the stock soared even after a lackluster quarterly report.
But a difficult walk
But it remains to be seen how VeriFone Systems Inc. (NYSE:PAY) walks the talk, as the challenges it faces during this period of “rebuilding” are quite formidable. From economic troubles in Europe to government regulations in India and currency issues in Venezuela, VeriFone has a lot on its plate. The company understands that these external factors can’t be controlled; hence it is trying to bring its innovation and execution up to speed.
Moreover, stiff competition from the other big name in the industry, Ingenico, would be another sticking point to contend with. Ingenico seems to have taken advantage of VeriFone’s woes and execution challenges by grabbing market share. The French company did what VeriFone failed to do by customizing its products as required. It capitalized on a “changing competitive landscape” and grew its business across the world, right from Europe to emerging markets.
But, as usual, there is a generous scoop of positives that we usually associate with VeriFone Systems Inc. (NYSE:PAY). The company is making investments in order to enhance its software services portfolio, and is also addressing the customization conundrum that it had to face in the previous quarter. One undeniable advantage for VeriFone is its relationship with leading players in mobile payments.
Last year, the company had struck a deal with eBay Inc (NASDAQ:EBAY)’s PayPal. Through this deal, PayPal gained access to over a million NFC-enabled points of sale. PayPal users would be able to make in-store payments where VeriFone terminals are installed.
Partnerships such as this, and with other illustrious names, are a good sign for VeriFone in the long run. But, the company needs to focus on its hardware business with renewed vigor in order to make the most of its partnerships.
Even after the massive hits, VeriFone Systems Inc. (NYSE:PAY) shares trade at a trailing P/E multiple of 28. Earlier, I would have easily suggested buying shares despite the expensive valuation, since VeriFone was exhibiting terrific revenue growth. But after what happened last quarter, the same cannot be said anymore.
Although the company is finally looking to take corrective measures, there’s still a long way to go. Investors might accumulate some shares, but the company’s prospects would light up only after it addresses the challenges it is facing, and brings its revenue growth back to the glory days of old.
The article Can VeriFone Systems Walk the Talk? originally appeared on Fool.com and is written by Harsh Chauhan.
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