* Shares fall to lowest in nearly three years
* At least seven analysts cut price targets
* "Management credibility has been lost" - SunTrust Robinson
(Adds details, updates share price)
By Sruthi Ramakrishnan
Feb 21 Shares of credit card swipe machine maker
VeriFone Systems Inc nearly halved in value after the
company slashed its profit outlook, with analysts questioning
why management was so off with its forecasting when peers were
not doing so badly.
VeriFone shares slid to $17.93, their lowest in nearly three
years, and at least seven analysts cut their price targets on
the stock. Deutsche Bank, in a client note, said the company had
finally admitted it had failed to execute on its plans to move
to a more subscription-based service model.
Several analysts suggested that VeriFone's new chief
financial officer had taken a more conservative accounting
approach at the company, which already faces a court case for a
past accusation of reckless accounting.
The company will likely be sold, SunTrust Robinson Humphrey
analyst Andrew Jeffrey wrote in a note, cutting his rating on
the stock to "neutral" from "buy".
"Management credibility has been lost," he said. "Market
share losses are deeper and more persistent than we had
"We believe VeriFone will be acquired before it completes
its business model transition."
Deutsche Bank analyst Bryan Keane said he could not suggest
who might be interested in buying the company. "...We still
think the valuation is expensive, when you look at the free cash
flow the company generates," he told Reuters.
VeriFone, based in San Jose, California, sells payments
equipment to shops and restaurants. The company is seeking to
move more to a service model for its systems, rather than
straight equipment sales.
The company might have been aggressively shifting to
services from hardware sales and the management took its eye off
the ball in terms of product evolution, allowing rival Ingenico
SA to take market share, analysts said.
Equipment and related software sales brought in $1.34
billion, or 71.8 percent of total revenue, in the year ended
Oct. 31. Services revenue doubled to $527 million from a year
VeriFone largely attributed its lower-than-expected first
quarter estimates to weakness in Europe, lower-than-expected
revenue from large customers in Brazil, delayed customer
spending on major projects, and the cancellation of a
Washington, D.C. taxi project.
Deutsche, which rates the stock a "sell", slashed its price
target to $15 from $27. The brokerage said past acquisitions had
masked what was happening at the company and that it had long
been wary of its "aggressive accounting recognition."
"The recent CFO retirement/resignation and the first-quarter
revenue recognition requirements could also suggest accounting
red flags in prior quarters," Deutsche said, noting the latest
quarter's accounts had been signed off by the new CFO.
A U.S. appeals court revived a proposed securities class
action against VeriFone in December over its 2007 restatement of
results, ruling that the lawsuit properly alleged that VeriFone
Chief Executive Douglas Bergeron was "reckless" as to the truth
of financial reports.
"I think Douglas Bergeron is well embedded in that company,
and it'll take a few more blowups before the board will kick him
out," Deutsche's Keane said. "I don't think he's going anywhere
FALL FROM GRACE
Until the latest quarter, VeriFone had met or beaten
analysts' quarterly estimates for two years.
Analysts on Thursday rejected the company's argument that
its problems came from the weak economy. While macro conditions
may have had an impact on business in the quarter, the global
economy has had far less of an impact on peers such as NCR Corp
and Micros Systems, said Wedbush analyst Gil
Luria, who cut his price target to $22 from $33.
Citi Research analyst Philip Stiller cut his rating on the
stock to "neutral" from "buy" and price target to $23 from $47.
"(VeriFone) has a long uphill battle to rebuild trust and
belief in the company on top of ongoing execution issues in a
rapidly changing payments landscape," he said in a note.
VeriFone warned late on Wednesday that it expected its first
quarter adjusted earnings to be 47 to 50 cents per share on
revenue of $424 million to $428 million. That is well short of
the average analyst profit forecast of 73 cents per share on
revenue of $492 million.
The company forecast an adjusted profit of 45 to 50 cents
per share in the current quarter, well below the average analyst
forecast of 80 cents, according to Thomson Reuters I/B/E/S.
One of the company's biggest problems was the cancellation
of the Washington, D.C. contract. VeriFone announced last year
that it won a $35 million-plus contract to install and support
payment systems in 6,500 taxis in the capital.
The contract was canceled in November after the Contract
Appeals Board ruled that the process that ended up selecting
VeriFone's bid had been riddled with "pervasive improprieties."
Some analysts were slightly more forgiving.
J.P. Morgan, while downgrading the stock to "neutral" from
"overweight", said moving from selling equipment to more regular
revenue from offering a service was difficult and it was
optimistic the new CFO could clear the accounting doubts.
UBS Investment Research cut its price target to $26 from
$39, saying risks had increased for the company in executing the
change in approach, but it reiterated its "buy" on the stock.
"We think the problems are largely fixable over the next
6-12 months," UBS said.
But an analysis of the quality of VeriFone's earnings shows
their quality is well below that of peers.
VeriFone's earnings quality score was 10 out of 100 as of
the quarter ended October 2012, compared with the industry's
median score of 81, according to Thomson Reuters StarMine.
The model measures the sustainability of future earnings
based on past results and focuses on financial components such
as accruals, cash flow, operating efficiency and one-time
One of the main reasons for the low score was the
significant rise in goodwill, which StarMine said was possibly
due to acquisitions. The company has made 15 acquisitions in the
past three years, according to Thomson Reuters data.
VeriFone shares closed down 43 percent at $18.24 on the New
York Stock Exchange on Thursday.
(Editing by Rodney Joyce and Ted Kerr)