VeriFone Systems, Inc (PAY) Q3 2012 Earnings Call September 05, 2012 4:30 pm ET Executives Doug Reed - Vice President, Treasurer and Executive officer of Investor Relations Douglas G. Bergeron - Chief Executive Officer and Executive Director Robert R. Dykes - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Analysts Darrin D. Peller - Barclays Capital, Research Division Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division Philip Stiller - Citigroup Inc, Research Division Wayne Johnson - Raymond James & Associates, Inc., Research Division Julio C. Quinteros - Goldman Sachs Group Inc., Research Division John T. Williams - UBS Investment Bank, Research Division Gil B. Luria - Wedbush Securities Inc., Research Division Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division Michael J. Grondahl - Piper Jaffray Companies, Research Division Keith M. Housum - Northcoast Research Presentation Operator
First for the legalities. VeriFone desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements in this conference call, including management's view of future events and financial performance, are subject to various factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For a description of these factors, I refer you to our filings with the Securities and Exchange Commission.Any forward-looking statements speak only as of today, and VeriFone is under no obligation to update these statements to reflect future events or circumstances. In addition, today's call will cover certain non-GAAP financial measures on both historical and forecast bases. Our management uses these measures to evaluate our operating performance and to compare our results to those of prior periods, as well as to those of peer companies. Please note that VeriFone expects to continue to incur types of income and expense items that are excluded from the non-GAAP results discussed today. These GAAP measures are not substitutes for disclosures made in accordance with GAAP. Reconciliations of these measures to the most comparable GAAP measures are presented in our earnings release, which is available on our website. [Operator Instructions] Now I'd like to turn the call over to Doug Bergeron, CEO of VeriFone. Douglas G. Bergeron Thanks, Doug, and good afternoon, everyone. Today, I want to address 2 main topics. First, we will explain the dynamics of the third quarter and how our revenue will grow in fiscal '13. Secondly, I want to comment on recent industry news and how it affects VeriFone. We are very pleased with the results of our third quarter of fiscal year 2013. For the 11th consecutive quarter, we posted all-time record results. Q3 non-GAAP revenues were $493 million, a 56% increase over the previous year. Excluding the impact of all acquisitions over the past 12 months, organic revenue growth accelerated to 16%. On a constant currency basis, organic revenue growth was a very strong 21%.
Non-GAAP services revenue continued to expand and comprised a record 29% of total revenues in Q3. Non-GAAP gross margins were 45.4% of revenue, an all-time high. Non-GAAP operating margins were 23% of revenue, also an all-time high. Non-GAAP fully diluted earnings for the second quarter -- I'm sorry, for the third quarter, were $0.75 per share, an increase of 53% over Q3 last year.Today, I will review our performance by region and follow with comments on some of our strategic activities. Finally, I will turn the call over to Bob, who will provide a detailed review of the financials and update guidance. Our international operations continued to show great momentum in Q3, posting year-over-year growth of 82%. Organic growth was 21%. On a constant currency basis, organic growth was 28%. Latin America had another impressive quarter with 45% year-over-year revenue growth and 30% growth, excluding acquisitions. On a constant currency basis, organic growth was 40%. We experienced a setback in the last month of the quarter with a fire that completely destroyed our Brazilian staging and repair center. The impact to the quarter is less than $10 million, causing a reduction of services revenue and a major distraction to our sales efforts where all product sales depend upon services commitments. We have recently moved to a new facility and expect full coverage of our physical losses under our insurance policy. But we do expect a further impact to revenue in the fourth quarter due to the disruption. Revenues are expected to return to recent levels in Q1 FY '13 and beyond. In Europe, the Middle East and Africa, revenues grew 109% over Q3 last year and 16% organically. Organic growth was 24% on a constant currency basis. We won a contract with one of the largest French retailers for a 3-year Wynid Managed Services contract. In the U.K., we enjoyed great wins at Halfords, Phones 4U and WHSmith.
Our African business is still very strong. We continued deployment of devices to aid the Central Bank of Nigeria's program to convert Lagos into an electronic payment society. In South Africa, we see many of the retailers now investing in rolling out our VX contactless integrated products, and we have also enjoyed significant wins in Saudi Arabia and Egypt.In Germany, we are introducing our new H5000 product and expect to see a steady ramp of sales over the next few quarters. While in France, we are still seeing some weakness reflecting Hypercom product deficiencies that will be remedied later in fiscal 2013 with the introduction of VeriFone Systems and new software. Point revenues were $56 million in Q3. Other than the impact of FX headwinds to this all European business, Point is performing even better than the aggressive growth plan we have established at acquisition. All-in-one revenues were up 7% sequentially on a constant currency basis. The all-in-one business, which bundles systems and a suite of software and services into a multi-year contract, increases overall revenue significantly over the life of a contract, but does defer revenue over many quarters rather than generating an immediate benefit. The deployment of the payment-as-a-service, all in one model, across Point's home markets continues to be extremely successful. The installed base of payment-as-a-service solutions has grown 22% compared to a year ago and 12% since the day the acquisition closed. We recently signed the largest payment-as-a-service deal in Point's history with S Group in Finland. We will provide a compressive payment-as-a-service offering that includes payment systems, software, state management, maintenance, integration, security and gateway services. S Group is one of Nordic's largest retail organizations with more than 1,600 locations and 11,000 lanes, primarily in Finland. The value of this deal should approach $20 million over the life of the contract. Deployment will begin this year with the majority of systems installed in 2013 and a scheduled completion in 2014. Read the rest of this transcript for free on seekingalpha.com