Certification Delays Crash VeriFone’s EMV Party

It was great while it lasted, but it looks like the chip card party is over for VeriFone Systems Inc., the leading U.S.-based point-of-sale terminal maker, at least for now.

The U.S. conversion to EMV chip cards had produced a North American revenue windfall for VeriFone over the past couple of years, and the company on June 7 reported record revenues for the quarter ended April 30. But delays in getting EMV equipment certified contributed to sharply lower profits and reduced financial expectations for the rest of the year.

Also crimping profits were weaker advertising revenues from taxicabs as well as price competition and slowing economies in some of VeriFone’s emerging markets.

San Jose, Calif.-based VeriFone now expects fiscal 2016 revenues to total $2.1 billion, about $60 million lower than earlier predicted, and per-share earnings will be down about 17%. As a result, VeriFone announced a restructuring intended to save $30 million next year.

The company plans to cut 5% of its workforce, which, based on its headcount of 5,400 employees in fiscal 2015 ended last Oct. 31, means about 270 employees could lose their jobs. VeriFone also will trim its product offerings, especially older ones.

Certifications of EMV equipment by processors have emerged as one of the biggest problems in the U.S. switch to EMV chip cards from fraud-prone magnetic-stripe cards.

Although the card networks first announced plans for the conversion nearly five years ago, many merchants delayed equipment purchases until shortly before or after the networks’ Oct. 1, 2015, point-of-sale EMV liability shift, leading to certification bottlenecks. A merchant can’t accept chip cards until its POS equipment has the needed certifications (“Extreme Merchant Vexation,” May).

Many of VeriFone’s largest retail customers have their certifications, but delays are hitting some multilane retailers and small and mid-sized businesses hard, chief executive Paul Galant said on a conference call with analysts.

“The EMV bottleneck in the U.S., driven by integration and certification complexity and testing delays, is beginning to take a far more pronounced toll on the speed of sales and deployment of EMV-ready devices for our SMB and multilane businesses,” Galant said. “It is also delaying the implementation of higher-margin attached services such as our Point payment-as-a-service offering as well as encryption, tokenization, and estate management. VeriFone is also dedicating more resources than we anticipated to support our U.S. clients with their EMV implementations.”

VeriFone can’t recognize EMV service revenues until systems are actually processing chip card transactions. Galant, however, said the certification problem should begin easing in the fiscal fourth quarter.

“This is a temporary set of issues, we will get through those,” he said at the end of the call.

But investors, focusing on the present, dumped VeriFone shares. The next day, the company’s stock closed down $6.96, or 25%, from its previous $28.23 close, and it trended lower over the next week.

On the bright side, VeriFone posted record revenues from North American petroleum retailers, a big merchant segment for the company, in its fiscal 2016 second quarter. And services revenues, which are less volatile than hardware sales, grew nearly 11% to $183.8 million versus the 5.6% increase, to $342.5 million, for so-called systems.

In all, VeriFone posted revenues of $526.3 million, up 7.4%. But net income plunged almost 84% to $2.9 million. In North America, revenues increased 8.4% to $209.3 million, or 40% of VeriFone’s total.

—Jim Daly