Shares of VeriFone Systems Inc (NYSE:PAY) plunged after the company reported earnings earlier this week. Before that decline, shares of the company had already fallen nearly 40% in the past year.
VeriFone is a company primarily involved in credit card transaction terminals. As it struggles on execution, and consumers begin to embrace alternative, digital forms of payment, this might only be the beginning of VeriFone Systems Inc (NYSE:PAY)’s problems.
VeriFone’s poor earnings
Wednesday’s release was the second consecutive disappointment for the company. Earlier in the year, (now former) CEO Doug Bergeron stepped down after the company issued poor guidance for the first quarter.
As Piper Jaffray noted in their downgrade of the stock back in February, VeriFone Systems Inc (NYSE:PAY) blamed its problems on global economic weakness, particularly in Europe, and difficulty in the Brazilian market.
Historically, VeriFone has made its money selling the terminals that process credit card payments (go into your local gas station — they probably have one). But recently, they’ve shifted their strategy to a system of subsidized hardware supported with a stream of monthly payments. That might’ve been the cause behind some of the company’s problems.
But also playing a factor is an ongoing technological shift. The rise of new mobile payment systems, like Square, could be eating away at VeriFone’s market. The company’s interim CEO,
Richard McGinn, said (in the company’s most recent earnings release) that VeriFone Systems Inc (NYSE:PAY) would spend the next 12 months investing heavily in research and development.
But at this point, it might be far too late.
The rise of Square
After founding Twitter, Jack Dorsey turned his attention to the mobile payment company Square. In the last few years, Square has grown rapidly, largely on the proliferation of tablets and smartphones.
Square’s readers plug right into one of these devices, which can then accept credit card payments through a mobile app. Square has made a deal with Starbucks, and has received investment money from Visa Inc (NYSE:V).
Hedge fund manager Karen Finerman has been short VeriFone, and has called Square’s deal with Starbucks “highly disruptive” to VeriFone.
VeriFone Systems Inc (NYSE:PAY) launched a competitor to Square last year (called Sail), but killed it in December, citing razor-thin margins.
Could Apple Inc. (NASDAQ:AAPL) shake up the mobile payment world?
While Apple Inc. (NASDAQ:AAPL)’s devices are integral to Square’s business, some analysts have wondered if Apple would soon move to assert itself directly in the space. To be sure, the building blocks are already there: millions of consumers have iPhones, which are linked to iTunes accounts, which are in turn linked directly to credit cards.
At least year’s WWDC, Apple Inc. (NASDAQ:AAPL) announced Passbook — an app to digitally store boarding passes, movie tickets, and reward cards. Could this app be expanded to payment systems?
Further, the company’s 2012 acquisition of Authentic has left many speculating that future models of the iPhone and iPad would include fingerprint scanners — an ideal security measure for any form of mobile payment.
Morgan Stanley analyst Katy Huberty said Apple’s mobile payment system could be unveiled as early as next week, at the 2013 WWDC.
Without knowing the details, claims that Apple will crush VeriFone simply can’t be made. Apple’s system — if it exists at all — could actually supplement VeriFone’s business. The two companies have worked together in the past.
Nevertheless, if Apple wanted to disrupt the payment business, they certainly could. And it’s not clear how VeriFone would be effected.
eBay Inc (NASDAQ:EBAY)’s PayPal has expanded into in-person payments
eBay Inc (NASDAQ:EBAY)’s PayPal has long been a popular way to pay for things online. But recently, the company has started to bring PayPal into the world of in-person payments, partnering with stores like The Home Depot, Inc. (NYSE:HD) to allow customers to buy things with their PayPal account.
eBay Inc (NASDAQ:EBAY)’s system does not directly compete with VeriFone’s hardware. As can be seen from this picture of eBay CEO John Donahoe testing the system, it works with existing solutions (in this case, a machine from VeriFone Systems Inc (NYSE:PAY) competitor Ingenico SA).
But that said, eBay’s entrance into the space just raises the possibility of more disruption. Paying with PayPal doesn’t require a traditional credit card, only a pin number.
The mobile payment revolution
Despite a management shakeup, VeriFone just can’t seem to get its act together. Right now, its problems might be tied more to its own execution failures than anything else, but in the future, new innovations could really start to hamper results.
The payment area is clearly ripe for disruption. Square is VeriFone Systems Inc (NYSE:PAY)’s biggest new competitor, while innovations from established technology companies like Apple and eBay could eventually take a toll.
The bottom line is that VeriFone seems like a company misfiring in an increasingly competitive market. Until management can demonstrate a convincing turnaround strategy, investors might wish to stay away.
The article Is This the End for VeriFone? originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and eBay. The Motley Fool owns shares of Apple and eBay. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
