Non-GAAP net income per diluted share for Q3 FY12 was $0.75, compared to $0.64 in the prior quarter and $0.49 for the three months ended July 31, 2011 ("Q3 FY11"), a 53% year-over-year increase. GAAP net income per diluted share for the latest quarter was $0.34, compared to $0.03 in the prior quarter and $0.28 in Q3 FY11.
Non-GAAP net revenues for Q3 FY12 were $493 million, compared to $479 million in the previous quarter and $317 million for Q3 FY11, a 56% year-over-year increase. GAAP net revenues were $489 million for the latest quarter, $472 million for the prior quarter and $317 million for Q3 FY11.
In Q3 FY12, Organic non-GAAP net revenues, which exclude net revenues from businesses acquired in the past 12 months, increased 16% from the year-ago quarter and 21% at constant currency, which assumes currency exchange rates remained the same from a year ago. North America Organic non-GAAP net revenues grew 9% both unadjusted and at constant currency, while international Organic non-GAAP net revenues grew 21% from the year-ago quarter and 28% at constant currency.
Non-GAAP gross margins were 45% for Q3 FY12, compared to 45% in the prior quarter and 43% in Q3 FY11. GAAP gross margins were 42% for the latest quarter, 41% for the prior quarter and 42% for Q3 FY11.
Net cash provided by operating activities was $82 million in Q3 FY12 as the total cash balance grew by $49 million in the quarter.
"We are very proud of our performance in Q3. Despite continued volatility around exchange rates, our business remains vibrant in all geographies," said Douglas G. Bergeron, Chief Executive Officer. "In the U.S., growth accelerated as we saw the beginnings of the adoption of EMV-based systems and the first significant payments services deals in the quarter. We are excited about our prospects for 2013 and beyond."
Highlights Since Last Earnings Release
On August 23, Verifone announced that it has received orders to date for 80,000 units of its VX 520 payment solution as banks and merchants seek to meet the requirements of the Central bank of Nigeria's (CBN) "Cash-Less Lagos" initiative. Orders for Verifone solutions represent more than half of the 150,000 total systems that the central bank expects will be deployed by the end of this year to comply with its mandate. With GPRS capability and extended battery life, the VX 520 is ideal for the country's telecom infrastructure and is exceptionally durable with broad functionality and low cost of ownership. It features a dual SIM, which allows merchants to switch cellular networks quickly and easily, thereby overcoming issues of erratic network coverage – a frequent challenge for merchants across Nigeria.
On August 15, Verifone announced that its Point Group has won its largest to date payments-as-a-service (PaaS) contract, with an agreement to supply Finland's S Group a complete range of payments services in their 1600 locations. Point will provide a comprehensive PaaS offering including software, estate management, maintenance, integration, security and gateway services. The agreement also included new payment systems that account for about 15 percent of the total contract value. Point will provide S Group with a range of stand-alone, portable and unattended payment systems in food market checkout lanes, restaurants, retail gasoline outlets and pumps, and other locations. Deployments will begin this year with the majority of systems being installed in 2013 and completion scheduled for 2014.
On August 9, Verifone announced that it will provide the merchant payment solutions in the initial phase of the first major contactless payment rollout in Mexico City by the Mexican bank Banamex, which is part of Grupo Financiero Banamex and a member of Citi. The bank will deploy the VX 520 to merchants that use traditional standalone countertop systems and the VX 820 advanced PIN pad to larger retailers that integrate payment systems to electronic cash register systems. In the first phase, several thousand Verifone contactless-enabled card acceptance systems will be deployed to 1,900 merchants in the Mexico City metropolitan area. By the end of 2012, the bank expects to have deployed 12,000 payment acceptance systems.
Guidance for Fourth Quarter 2012, Fiscal Year 2012 and Fiscal Year 2013
For the fourth fiscal quarter ending October 31, 2012 ("Q4 FY12"), Latin America non-GAAP net revenues, which are reported separately, are expected in the range of $65 million to $75 million, approximately $25 million less than the run rate of recent quarters due to isolated events, and are expected to rebound to $90 million to $95 million in the first quarter of fiscal 2013.
Verifone expects to report total non-GAAP net revenues for Q4 FY12 in the range of $495 million to $500 million and non-GAAP net income per diluted share in the range of $0.75 to $0.77. Such numbers imply full fiscal year 2012 non-GAAP net revenues of $1.893 billion to $1.898 billion and non-GAAP net income per diluted share of $2.73 to $2.75.
The company expects FY13 non-GAAP revenue of $2.05 billion to $2.10 billion and non-GAAP net income per diluted share of $3.25 to $3.30.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This press release includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations or beliefs and on currently available competitive, financial and economic data and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the forward-looking statements herein due to changes in economic, business, competitive, technological and/or regulatory factors, and other risks and uncertainties affecting the operation of the business of Verifone Systems, Inc. These risks and uncertainties include, but are not limited to: our assumptions, judgments and estimates regarding the impact on our business of the continued uncertainty in the global economic environment and financial markets, our ability to identify and complete acquisitions and strategic investments and successfully integrate them into our business, whether the expected benefits of our business initiatives are achieved, our ability to protect against fraud, the status of our relationship with and condition of third parties such as our contract manufacturers, distributors and key suppliers upon whom we rely in the conduct of our business, our dependence on a limited number of customers, risks and uncertainties related to the conduct of our business and operations internationally, our ability to effectively hedge our exposure to foreign currency exchange rate fluctuations, our dependence on a limited number of key employees, short product cycles, rapidly changing technologies and maintaining competitive leadership position with respect to our payment solution offerings. The forward-looking statements in this press release do not include the potential impact of any acquisitions or divestitures that may be announced and/or completed after the date hereof. For a further list and description of the risks and uncertainties affecting the operations of our business, see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Verifone is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.
About Verifone Systems, Inc. (www.verifone.com)
Verifone Systems, Inc. ("Verifone") (NYSE: PAY) is the global leader in secure electronic payment solutions. Verifone provides expertise, solutions and services that add value to the point of sale with merchant-operated, consumer-facing and self-service payment systems for the financial, retail, hospitality, petroleum, government and healthcare vertical markets. Verifone solutions are designed to meet the needs of merchants, processors and acquirers in developed and emerging economies worldwide.
This press release and its attachments include several non-GAAP financial measures, including non-GAAP net revenues; net revenues from businesses acquired in the past 12 months; organic non-GAAP net revenues; North America organic non-GAAP net revenues; international organic non-GAAP net revenues; organic non-GAAP net revenues at constant currency; non-GAAP cost of net revenues; non-GAAP gross margin; non-GAAP research and development expense; non-GAAP sales and marketing expense; non-GAAP general and administrative expense; non-GAAP operating expenses; non-GAAP operating income; non-GAAP interest expense; non-GAAP interest income; non-GAAP other income (expense);non-GAAP net interest and other income (expense); non-GAAP income before income taxes; non-GAAP provision for income taxes; non-GAAP income tax rate; non-GAAP consolidated net income; non-GAAP net income attributable to noncontrolling interests; non-GAAP net income attributable to Verifone Systems, Inc. stockholders; non-GAAP diluted shares; non-GAAP net income per share; non-GAAP net income per diluted share, as well as some of these non-GAAP financial measures as a percentage of non-GAAP net revenues. In order to assist investors, this press release provides consolidated statement of operations information on a non-GAAP basis, reflecting the adjustments made in the non-GAAP measures listed above.
Reconciliations for the non-GAAP financial measures presented in this press release to the most directly comparable GAAP measures are provided at the end of this press release.
Management uses non-GAAP financial measures only in addition to and in conjunction with results presented in accordance with GAAP. Management believes that these non-GAAP financial measures help it to evaluate Verifone's performance and operations and to compare Verifone's current results with those for prior periods as well as with the results of peer companies. Verifone incurs, due to differences in capital structure and investment history, certain income and expense items, such as stock based compensation, amortization of acquired intangibles and other non-cash expenses, that differ significantly from Verifone's competitors. The non-GAAP financial measures reflect Verifone's reported operating performance without such items. Management also uses these non-GAAP financial measures in Verifone's budget and planning process. Management believes that the presentation of these non-GAAP financial measures is useful to investors in comparing Verifone's operating performance in any period with its performance in other periods and with the performance of other companies that represent alternative investment opportunities. These non-GAAP financial measures contain limitations and should be considered as a supplement to, and not as a substitute for, or superior to, disclosures made in accordance with GAAP.
These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and may therefore differ from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures do not reflect all amounts and costs, such as acquisition related costs, employee stock-based compensation costs, cash that may be expended for future capital expenditures or contractual commitments, working capital needs, cash used to service interest or principal payments on Verifone's debt, income taxes and the related cash requirements, and restructuring charges, associated with Verifone's results of operations as determined in accordance with GAAP.
Furthermore, Verifone expects to continue to incur income and expense items that are similar to those that are excluded by the non-GAAP adjustments described herein. Management compensates for these limitations by also relying on the comparable GAAP financial measures.
Note A:Non-GAAP net revenues. To determine non-GAAP net revenues, Verifone adjusts GAAP revenues to exclude the fair value decrease (step-down) in deferred revenue at acquisition. Although the step-down is reflected in our GAAP financial statements, it results in net revenues immediately post-acquisition that are lower than net revenues that would be recognized in accordance with GAAP on those same services if they were sold under contracts entered into post-acquisition. We make this adjustment to achieve comparability to net revenues of the acquired entity earned pre-acquisition and to our GAAP net revenues to be earned on contracts sold in future periods.
Note B:Organic non-GAAP net revenues. "Organic non-GAAP net revenues" is a non-GAAP financial measure of net revenues excluding "net revenues from businesses acquired in the past 12 months" (as defined below). Verifone determines organic non-GAAP net revenues by deducting net revenues from businesses acquired in the past 12 months from non-GAAP net revenues. This non-GAAP measure is used to evaluate Verifone net revenues without the impact of net revenues from acquired businesses, as Verifone analyzes performance both with and without the impact of our recent acquisitions.
Net revenues from businesses acquired in the past 12 monthsconsists of net revenues derived from the sales channels of acquired resellers and distributors, and net revenues from system solutions and services attributable to businesses acquired in the 12 months preceding the financial period presented. For acquisitions of small businesses that are integrated within a relatively short time after the close of the acquisition, we assume quarterly net revenues attributable to such acquired businesses during the 12 months following acquisition remain at the same level as in the first full quarter after the acquisition closed. During periods prior to each acquisition, net revenues from businesses acquired in the past 12 months consists of sales by Verifone to that acquired company prior to our acquisition of the company.
Note C:Organic non-GAAP net revenues at constant currency. Verifone determines organic non-GAAP net revenues at constant currency by recomputing organic non-GAAP net revenues denominated in currencies other than U.S. Dollars in the current fiscal year using average exchange rates for that particular currency during the corresponding financial period of the prior year. Verifone uses this non-GAAP measure to evaluate performance on a comparable basis excluding the impact of foreign currency fluctuations.
Note D:Acquisition-Related Expenses and Restructuring Costs. Verifone adjusts certain expenses that are the result of acquisitions and restructurings. These adjustments include the amortization of purchased intangible assets and fixed asset fair value adjustments, incremental costs associated with acquisitions (such as professional fees, legal fees related to litigation assumed as part of acquisitions, and one-time charges related to acquired balances), acquisition integration expenses, loss on financial instruments entered into to fix the acquisition purchase price in U.S. dollars when it is payable in foreign currencies and fair value increase (step-up) of inventory on acquisition. These adjustments do not include the fair value adjustments relating to certain contracts acquired as part of an acquisition whereby third parties have yet to fulfill their contractual obligations. In addition, we adjust for changes in estimate or final settlements of contingencies that existed at the time of acquisition. Acquisition related expenses also result from events which arise from unforeseen circumstances which often occur outside the ordinary course of business. Accordingly, Verifone analyzes the performance of its operations without regard to the adjusted expenses. In determining whether any acquisition-related revenue or expense adjustment is appropriate, Verifone takes into consideration, among other things, how such adjustments would or would not aid the understanding of the performance of its operations.
Note E:Stock-Based Compensation. Our non-GAAP financial measures eliminate the effect of expense for stock-based compensation because they are non-cash expenses that management believes are not reflective of ongoing operating results. In particular, because of varying available valuation methodologies, subjective assumptions and the variety of award types which affect the calculations of stock-based compensation, we believe that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Stock-based compensation is very different from other forms of compensation. A cash salary or bonus has a fixed and unvarying cash cost. In contrast the expense associated with an award of an option or other stock based award is unrelated to the amount of compensation ultimately received by the employee; and the cost to the company is based on valuation methodology and underlying assumptions that may vary over time and does not reflect any cash expenditure by the company. Furthermore, the expense associated with granting an employee an option or other stock based award is spread over multiple years and may be reversed based on forfeitures which may differ from our original assumptions unlike cash compensation expense which is typically recorded contemporaneously with the time of award or payment.
Note F:Other Charges and Income. Verifone excludes certain expenses and income that are the result of either unique or unplanned events that are noted below. It is difficult to estimate the amount or timing of these items in advance. Although these events are reflected in our GAAP financial statements, these expenses may limit the comparability of our on-going operations with prior and future periods.
Patent litigation loss contingency expense related to periods prior to the jury verdict and, as such, were not anticipated, are excluded from operating expenses to enable comparability between periods.
- Gains or losses on financial transactions, such as the accelerated amortization of capitalized debt issuance costs due to the early repayment of debt, which result from unforeseen circumstances and typically occur outside of the ordinary course of business are excluded from Other income (expense), net to enable comparability between periods.
- Non-cash interest expense recorded relating to the adoption of ASC 470-20Debt with conversion and other optionsis excluded to promote comparability of our non-GAAP financial results with prior and future periods and best reflects our on-going operations.
- Income taxes are adjusted for the tax effect of excluding items related to our non-GAAP financial measures, in order to provide our management and users of the financial statements with better clarity regarding the on-going performance and future liquidity of our business. Our non-GAAP tax rates were 14% for the period since May 1, 2012, 18% for the period December 31, 2011 through April 30, 2012, and 20% for the period November 1, 2010 through December 30, 2011.
Because of these factors, we assess our operating performance with these amounts included and excluded, and by providing this information, we believe that users of our financial statements are better able to understand the financial results of what we consider to be our continuing operations.
Note G:Non-GAAP diluted shares. In connection with our 1.375% Senior Convertible Notes we had entered into certain note hedge transactions. We repaid these Notes in cash upon maturity on June 15, 2012, and the then outstanding note hedge transactions expired unused on June 15, 2012. Non-GAAP diluted shares reflect the offset of shares that would have been deliverable in the periods presented prior to the maturity of the Notes pursuant to note hedge transactions. Under GAAP, shares delivered in hedge transactions are not considered offsetting shares in the fully diluted share calculation until they are actually delivered.
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