Spring soon will be here, a time for renewal. Bears are waking after a rejuvenating winter rest. Some will be stronger than ever. For others, the long sleep will have made them a little older, a little slower and less likely to make it to the next winter.
  This winter, terminal manufacturer VeriFone Inc. announced plans to conduct an initial public offering of company stock, signifying its return to public ownership after a nearly four-year sojourn as a privately held concern. The question for the largest payment-terminal marketer in North America is, is this bear ready to roar, or has the competition gotten too strong in the last few years?
  Under the leadership of Chairman and Chief Executive Douglas G. Bergeron for the last 3-1/2 years, VeriFone has more than held its own against competitors Hypercom Corp., Ingenico, Lipman Electronic Engineering Ltd. and others. Its revenues are up, costs are down, and profits recently replaced losses, according to the S-1 Registration Statement that parent VeriFone Holdings Inc. filed in January with the U.S. Securities and Exchange Commission. Further, the terminal business looks to be on a growth path, as electronic payments continue to displace the use of cash and paper checks.
  But VeriFone's reawakening will not be easy. Ingenico and Hypercom are experienced companies with entrenched business relationships with clients, while Lipman brings the youthful energy of a newcomer. And all four must battle the so-called commoditization of their product lines that has brought brutal price competition for market share.
  The top challenge for the terminal houses is keeping their own costs low while delivering products with all the features that merchants demand, says Robert Dodd, a senior analyst who covers Hypercom for Memphis-based investment group Morgan Keegan & Co. Inc. "It's a price-competitive market. You must address market needs without a cost structure that gets out of line," says Dodd.
  Financial Turnaround
  San Jose, Calif.-based VeriFone's net revenues rose from $338.5 million in its fiscal year 2000 to $390 million in fiscal 2004, according to its filing. VeriFone's fiscal year ends Oct 31. Net income attributable to common stockholders was $647,000 in fiscal 2004, a dramatic turnaround from a $63.7 million loss in fiscal 2001.
  Costs are down, too, with operating expenses totaling $113.4 million in fiscal 2004 compared with $173.1 million in fiscal 2000. Still, at the end of its last fiscal year VeriFone had negative stockholder equity of $135.4 million caused, in part, by a $97.4 million special dividend payment last year.
  VeriFone's revenues put it behind France's Ingenico, which had $526 million in revenues in fiscal 2004, but ahead of Phoenix-based Hypercom, which had estimated revenues of $260 million, and Israel-based Lipman, which generated $115 million in revenues for the nine months ended last September. (Hypercom, however, reported in February that it would restate some 2004 revenues.)
  The S-1 filing is a preliminary prospectus for the IPO, and VeriFone did not disclose the IPO's stock-offer price, the timing of the sale or the number of shares it would offer.
  VeriFone declined to comment for this article while it was in a quiet period before the offering. The leading investment firms on the IPO are Credit Suisse First Boston and J.P. Morgan Securities Inc. VeriFone says it hopes to use "PAY" as its trading symbol.
  IPO Plans
  VeriFone is seeking $230 million from the sale. The company plans to use the funds to repay a $72 million loan and to cover a prepayment premium on the loan of $2.2 million. VeriFone states that the remaining $155.8 million will be used for general corporate purposes along with acquisitions of both companies and technologies. (VeriFone proved it was on the prowl for technology in December when it paid $13 million in cash for GO Software Inc., a manufacturer of point-of-sale software for card and check transactions.)
  Going public may prove to be positive for VeriFone because of its plans to use the capital to pay off debt, says Peter J. Swanson, vice president and senior research analyst with Piper Jaffray & Co., a Minneapolis-based investment firm.
  "They are highly leveraged with about $262 million in debt," says Swanson, a chartered financial accountant. "Raising equity will de-leverage their balance, lower their debt-service costs and improve their profitability."
  Going public also means opening up your books, and VeriFone's competitors are looking forward to reading the fine print. "Going public tells us exactly what they are doing," says Michael English, Ingenico's marketing director. "We can compete better and analyze the company (from its filings)."
  There is no love lost between Hypercom and VeriFone, competitors that share a rivalry on par with the New York Yankees and Boston Red Sox. A Hypercom spokesperson said cryptically, "Welcome to the world of public companies." Otherwise, both Hypercom and Ingenico declined to discuss VeriFone.
  Over its 24 years of existence, VeriFone has gone through several ownership structures. Founded in the early 1980s, the company grew as its Zon and Tranz lines of simple, reliable terminals helped hundreds of thousands of merchants convert from slow and cumbersome paper-based card payments to electronics.
  Big Loss
  It was publicly held from 1990 to 1997, when computer giant Hewlett-Packard Co. paid nearly $1.3 billion in stock for VeriFone with hopes of exploiting its smart card expertise and payment technology. Internet mania was near its peak and VeriFone was hot, with 1996 revenues of $472.5 million. Analysts hypothesized that consumers would soon be using their smart-card enabled H-P computers to shop instead of visiting the corner store.
  The deal was a disaster for H-P, as reality set in regarding the 'Net, and the two corporate cultures failed to mesh. H-P eventually sold VeriFone in 2001 for $164.6 million to Gores Technology Group LLC, led by Bergeron. In 2002, Bergeron teamed with Chicago-based equity investor GTCR Golder Rauner LLC to recapitalize VeriFone with GTCR as the majority stockholder.
  After the IPO, GTCR will remain a significant shareholder and control three of VeriFone's seven board seats, according to the SEC filing. Bergeron also will hold a significant stake, and it may be "difficult for the board of directors to remove Mr. Bergeron or other members of senior management," VeriFone reported.
  Swanson notes that Bergeron's numbers look strong, with revenue growth of 15% in the last fiscal year and an operating margin of 9% in fiscal 2004, up from 6.3% in the previous year.
  Some Danger
  One danger is that much of VeriFone's sales are concentrated in a small group of buyers. First Data Corp. and its Tasq Technology division accounted for 16.9% of VeriFone's net revenues, while VeriFone's 10 largest customers accounted for over 36% of its net revenues. That might suggest VeriFone sales staff should be seeking new buyers, or it may be a bottom-line example of First Data's domination of the merchant-acquiring market.
  VeriFone did not help itself last year when it committed a major faux pas with the independent sales organizations it relies on to sell its terminals. Press reports revealed in August that it quietly created a Web site that was selling refurbished and discontinued VeriFone terminals, bypassing the ISOs. The www.bluewavepos.com site made no mention that VeriFone was running the show, instead presenting itself as a bunch of low-key surfer dudes.
  After the news broke, angry ISOs lambasted VeriFone, and some pledged to drop its products. VeriFone folded the bluewave site within a day, claiming it was designed to be an anonymous way for it to research the refurbished-terminal market.
  Observers generally agree that VeriFone is the leader in individual terminal sales in North America, though manufacturers have become increasingly cagey in sharing worldwide shipment numbers. VeriFone claimed it sold 656,428 terminals in the U.S and Canada in 2003, while Ingenico reported it shipped 443,600 units in the region, according to CCM sister publication ATM&Debit News. The newsletter estimated that Hypercom notched 625,800 terminal sales in North America that year.
  A survey of worldwide sales in 2003 by Card Technology magazine estimated that Ingenico shipped 1.55 million terminals, VeriFone 1.5 million and Hypercom 1.3 million. Lipman was a way-behind fourth with 515,000 units sold, but its sales rose 35%, easily topping the stagnant growth experienced by the big three vendors. (Last year Lipman completed its purchase of Dione plc, a United Kingdom-based vendor with 2003 sales of 150,700 units.)
  Offshore is old hat to VeriFone. It outsources all its manufacturing to plants in Mexico, Singapore and Brazil. And over one-third of its 223 sales and marketing staff members are located overseas, according to the SEC filing.
  VeriFone is a well-known brand in payments, an industry that will grow 10% annually through 2008, says Swanson. "There's good underlying growth, and that's good for point-of-sale terminal manufacturers," he says. The terminal firms themselves should experience a worldwide growth rate of about 15% for the next several years as foreign markets expand electronic payments, Swanson says.
  VeriFone generated 36.3% of its fiscal 2003 revenue from its international operations, according to its S1 filing.
  The most promising market now is Europe, according to Swanson. The driver on the Continent is the need to meet Europay/MasterCard/Visa, or EMV, smart card requirements, and that has many merchants buying terminals that can read smart cards. Europe's so-called chip-and-PIN antifraud system has gained the most ground in the U.K., but only about 55% of merchants there were EMV compliant in January, says Swanson.
  The problem here and abroad is that VeriFone and its competitors have created terminals that work so well and for so long, many buyers see no need to buy new ones. That puts the manufacturers under pressure to lower prices but also to build new technology to convince clients to open their wallets.
  The must-include technologies for terminal manufacturers in recent years have been smart card capability, Transmission Control Protocol/Internet Protocol (TCP/IP, or IP, for short) compatibility, and acceptance of contactless cards or devices. VeriFone has added all these technologies with mixed results, primarily because of customers that are slow to adapt to change and are reluctant to buy new equipment.
  Smart card capability is proving to be a revenue generator in Europe because of the chip-and-PIN shift, but the news has not been so positive in the states. Still, smart cards are offering some payment opportunities here, such as in public-transit and related systems.
  New Haven, Conn., this year is scheduled to begin accepting smart cards for payment at 500 of its 2,500 parking meters. VeriFone is participating in the project with Parcxmart Technologies Inc., a smart card payment company, and Duncan Parking Technologies Inc., a designer of single-space parking meters.
  VeriFone plans to sell, rent or lease its Omni 3750 payment terminal to downtown New Haven merchants so they can accept the Parcxmart card for purchases.
  VeriFone last year experienced greater acceptance of its IP-based payment terminals. Merchants are willing to invest in IP because it reduces transaction time at the point of sale to as little as two seconds compared with 15 seconds with a standard dial-up transaction.
  The IP terminals are always on, and merchants can use a single Ethernet connection to replace multiple dial-up lines, a cost saver.
  VeriFone wisely jumped on the IP bandwagon and sold it to quick-service restaurants, just as major fast-food companies had decided to embrace card acceptance.
  Burger King Corp. last July reported it had installed VeriFone's Omni 3750 payment terminals in 2,000 of its U.S. company-owned and franchise restaurants. This was a short six months after the Miami-based chain had pledged to begin accepting credit and debit cards at its 7,900 U.S. restaurants. Depending on the restaurant, the terminals are available at both the drive-up window and inside the store, according to VeriFone. Burger King is the nation's second-largest quick-service restaurant chain. The company had sales of $11.1 billion in its fiscal year ended June 2003.
  The deal reflects the advantage that comes with being among the payments industry's movers and shakers. Visa USA made the quick-service category a top priority and agreed to waive signatures for card transactions under $25, cutting down transaction time considerably. Shortly thereafter, Chase Merchant Services, the nation's largest merchant acquirer that is co-owned by First Data and J.P. Morgan Chase & Co., contributed to Burger King's "Pay It Your Way" campaign designed to encourage consumers to use their card when buying their burgers.
  New-Technology Support
  By November, First Data was reporting that 9,000 card-accepting IP-enabled terminals-again the VeriFone 3750-were being used in about 4,000 fast-food restaurants nationwide. The terminals also work in dial-up mode.
  VeriFone is also a supporter of MasterCard's PayPass tap-and-go payment product. That, too, has fast-food chain connections, as McDonald's Corp. participated in the test of the contactless radio frequency identification technology that began over two years ago in Florida.
  Last summer, McDonald's reported that 500 of its restaurants in the New York City area, and 200 around Dallas, would begin accepting PayPass. Over the long haul, McDonald's said it would deploy VeriFone's Omni 7000 terminal at its corporate-owned restaurants to accept PayPass. McDonald's owns about one-third of its 31,561 restaurants worldwide.
  These kind of deals and a strong turnaround in the bottom line make VeriFone's near term future look pretty good. The industry's prospects are positive, too. Now, VeriFone will take on the added burden of public ownership, opening it to the careful scrutiny of investors monitoring its ability to weather the long road.

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