Verifone Holdings: Q1 EPS Beat on Gross Margin Upside

Verifone Holdings (PAY, Hold) recently reported its Q1:FY09 results. EPS of $0.17 came ahead of our estimate of $0.12 (and consensus of $0.15), although revenues of $214 million (down 13% sequentially) came in lower than our and consensus expectation. The EPS beat came in on better-than-expected gross margins and effective cost control. Q1 adjusted gross margins of 35.2% declined 50 bps from 35.7% in 1Q08, but higher than our 34.2% expectation.

The Q1 13% sequential revenue decrease to $214 million was a result of across-the-board decline geographically: Revenue decreased (10)% in North America, (15)% in Europe, (6)% in Asia and (17)% in Latin America. Management pointed to the U.S. processor and ISO channel as the weakest segment, somewhat offset by key multilane wins. In Europe, severe weakness in Russia was somewhat offset by key wins in Turkey. Brazil and Mexico weighed on Latin American results, and Asian revenues were impacted by currency weakness in Australia and India.

FY09 EPS guidance was lowered to $0.60-0.85 on $830-$880 million of revenue from previous guidance of $0.85-$1.10 in EPS on $920 million-$1 billion of revenue. We believe the current guidance to be more realistic.

Nevertheless, we believe further downside is possible given continued weakness in the U.S. and Western Europe, and deceleration in emerging markets, particularly Eastern Europe. Management noted that their leverage ratio of 1.5x trailing 12-months’ EBITDA and fixed charge coverage ratio of 4.2x were both in compliance with their debt covenants of <3.5x and >2.0x, respectively. Management also noted that their guidance implies a larger cushion at the end of FY09.

We continue our coverage of PAY with a Hold rating.

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