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VeriFone Systems Inc (PAY - Analyst Report) posted a net income of $26.9 million or 24 cents in the fourth quarter of 2012 compared with a net income of $37.7 million or 34 cents per share in the third quarter of 2012 and $198.8 million or $1.94 per diluted share in the year-ago quarter. 

Excluding one-time charges but including stock-based compensation expenses, net income came in at 66 cents per share, missing the Zacks Consensus Estimate by a penny. 
 
Revenues 
 
VeriFone reported revenues of $485 million, almost flat sequentially and up 18.0% year over year. 
 
Excluding amortization of step-down in deferred revenue on acquisition, revenues came in at $489 million, essentially flat on a sequential basis and up 17.5% annually. Revenues, however, were below management’s guidance of $495 million – $500 million. 
 
Organic revenues, which exclude net revenues from businesses acquired in the past 12 months, grew 4% from the year-ago quarter. North America revenues grew 22% organically as the company’s investments in new technology and solutions over the past 2 years are beginning to pay off. 
 
International revenues declined 3% organically as core demand remained strong across all geographies except Brazil. 
 
On a segment basis, System Solutions generated revenues of $335.7 million, up 5.2% year over year. Services revenues shot up 63.6% year over year to $149.7 million.
 
In 2012, net revenues came in at $1.866, up 43% year over year. Excluding amortization, revenues came in at $1.866 billion, up 44% year over year. 
 
Latin America revenues declined 24% year over year. In Europe, the Middle East and Africa, revenues increased 36% year over year and 1% organically. Point contributed revenues of $58 million to the top line. Asia recorded 32% year-over-year growth. 
 
VeriFone has integrated both Point and Hypercom units into its operations smoothly. On January 4, 2012, VeriFone completed the acquisition of Point, one of Northern Europe’s largest providers of payment and gateway services and solutions for retailers.
 
Based in Stockholm, Sweden, Point provides payment and gateway services and solutions for retailers in Northern Europe. Founded in 1988, the company has operations in 11 Northern European countries and currently serves a captive network with over 475,000 merchants. Nordic Capital acquired Point in 2004.
 
The company continues to bundle encryption services, content and advertising, gateway services, e-commerce capabilities and cloud-based retail application processing, which provides it with an edge over other competitors. VeriFone has begun the process of rolling out Point’s payment as-a-service offering beyond Point's traditional markets. 
 
Margins
 
Gross margin (excluding stock-based compensation and one-time items) came in at 44.2%, compared to 45% in the previous quarter. Gross margin from System solutions declined 2.1 points, driven primarily by customer and geographic mix. Services gross margins improved 0.6 points sequentially, driven by a favorable mix toward service offerings that generate higher incremental margins such as Point and other managed service offerings.
 
Operating margin came in at 22.7%, marginally down from 22.8% in the previous quarter but up from 17.8% in the year-ago quarter. VeriFone generated $72 million in cash from operating activities and incurred $10 million in capital expenditure. VeriFone exited the quarter with cash and equivalents of $454.0 million, down from $409.8 million at the end of the previous quarter.
 
Outlook
 
For the first quarter of 2013, VeriFone expects to report net revenues between $495 million and $500 million. Excluding stock-based compensation, net income per share is projected between 70 cents and 73 cents.
 
For fiscal 2013, management reiterated its guidance. Revenues are estimated between $2.05 billion and $2.10 billion. Excluding stock-based compensation, net income per share is projected between $3.25 and $3.30.
 
VeriFone has invested aggressively in its U.S. business over the last two years. The company bought a $5 million tablet-based software business, which will likely grow mobility into a $40 million or more business in fiscal 2013. The company has also invested significantly in taxi systems and media systems infrastructure. The company estimates to increase its R&D and channel investments to replicate its GlobalBay, taxi, LIFT Retail and Point businesses for deployment in other key international markets 
 
Competition continues to be stiff from the likes of NCR Corp. (NCR - Analyst Report), which recently acquired Retalix Ltd. approximately $650 million. Earnings estimates have been more or less static in the last 90 days with no movement in either side. Organic growth also remains a matter of concern. Hence, we maintain our Neutral recommendation ahead of the fourth quarter results. 
 
Our Neutral recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold. 
 
The weaker-than-expected sales and disappointing guidance led to a 7.37% decline in the stock price to $30.78 in after-hours trading. In regular trading, the stock was down 0.48%.

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