Buy Recommendation Christian Taylor, Bobby Tzonev October 3 rd, 2015

Transcription

1 Buy Recommendation Christian Taylor, Bobby Tzonev October 3 rd, 2015

2 Company Overview Business Overview Verifone provides electronic payment solutions and services for the financial, retail, hospitality, petroleum, transportation, government, and healthcare vertical markets Its system solutions consist of point of sale electronic payment devices, security and encryption software, certified payment software, and valueadded applications Verifone operates in over 150 countries and has installed over 27 million terminals Executive Team Revenue Breakdown CEO Paul Galant Former CEO of Citi Enterprise Payments EVP & CTO Alok Bhanot 20 years experience in global operations EVP & CFO Marc E. Rothman Former CFO of Motorola Mobility President NA Jennifer Miles 14 years experience at Verifone Key Financials Ticker NYSE: PAY Share Price $26.20 (USD) 52 Week Range $26.05 $39.25 Equity Value $3.039 Billion Enterprise Value $3.612 Billion 2014 Revenue $1.87 B (+9.8% YOY) Total Debt / EBITDA 2.7 Revenue Breakdown The Americas: 45% of overall revenue. +6.9% YOY Europe, Middle-East and Africa: 40% of overall revenue. +7.4% YOY Asia-Pacific: 14% of overall revenue. +26% YOY 2

3 Business Model Terminal Solutions Verifone offers Mobile, Portable, and Countertop hardware that runs proprietary operating systems and third-party value-added applications EMV migration will increase the total addressable market by 30% beginning October 2015 Verifone is the industry leader for secure transactions. Verifone Protect is used for 95% of US Transaction volume and Verifone Protect is the de facto standard for 8 of the 9 top US financial institutions Payment as a Service Subscription based bundle of services and solutions through multi-year fixed fee contracts Recently endorsed by Oracle Retail and Microsoft Dynamics Expanding to Australia and New Zealand (18 total countries) in 2015 Verifone encryption services executed 1.5 billion transactions in 2014, a 170% increase YOY Commerce Enablement Verifone is adding commerce enablement features to existing terminals in Taxis, Gas Pumps, and Retail locations and has signed contracts with 35 of the 50 largest US retailers Multimedia terminals lead to a more personalized experience through the display of targeted digital advertisements, third-party applications, real-time offers, and location-based promotions Mobile beacons and triggers allow for more accurate marketing efforts towards customers 3

4 Investment Thesis Current Market Perception Recent decline in North American equity markets has led to decreased investor confidence Product deficiencies in key markets and poorly integrated acquisitions have negatively affected share prices Past mismanagement continues to be factored into the current share price Contactless Payment Growth Verifone is favourably positioned to be able to take advantage of imminent increased demand for contactless payment terminals Demand for contactless payment terminals will be driven by competing mobile wallets offering consumers lucrative loyalty and discount offers Verifone has an 80% market share of US mobile payment terminals, and offers commerce creation services at the POS Why Verifone is Undervalued Most Secure Platforms Verifone S&P 500 VeriShield is used for 95% of all United States Transaction Volume VeriShield has leading end-to-end encryption to protect data while it is in transit VeriShield uses unique tokenization methods to protect data while it is at rest Majority security breaches have disproportionately devalued Verifone due to its top of the line security software features Favoured Market Position 51.5% of United States point of sale terminal market share 18.6% of global point of sale terminal market share Installed base touches 40% of global physical card transactions Large barriers to entry due to high upfront capital costs and security concerns Major software research and development costs for cutting edge security technology 4

5 Catalysts United States EMV Liability Shift on Oct 1, 2015 EMV is an open-standard set of specifications for smart card payments and acceptance devices. EMV chip cards contain embedded microprocessors that provide strong transaction security features The liability shift will make issuers and merchants using non-emv compliant devices that choose to accept transactions made with EMV-compliant cards assume liability for any and all transactions that are found to be fraudulent Greater adoption of the mobile wallet Android Pay and Samsung Pay were oﬀicially released within the past two weeks in the United States. McKinsey estimated the demand for mobile POS terminals among small and medium sized businesses grew 25% in the last year alone. Major consumer retailers seeking to emulate Starbucks highly successful mobile application and loyalty program are expected to enter their respective market Retail banks such as Scotiabank and RBC have released mobile wallets. Other banks are expected to follow to remain competitive in the market Fiscal turnaround 2 year fiscal transformation program will improve margins substantially SKUs have been reduced by 60% to lower legacy costs, R&D sites have been consolidated from 75 to 34, and over 100 cost-saving projects including a $30.4 million restructuring plan, will be finished in

6 Industry Analysis Major Competitors Ingenico Verifone s major competitor Based out of Paris, France Control 26% of United States market share, and 50% of global market share Have 27 million installed terminals, operate in 170 countries, and have 5800 employees New Entrants Square, Pay Anywhere, and Phone Swipe are start-ups offering offline mobile payments software Their intuitive and sleek devices directly compete with Verifone s mobile products Diebold and NCR Companies offer similar products or services such as, self-service transaction systems, electronic and physical security products, and point of sale terminals Both companies are less exposed to the terminal market, and instead market software and integrated systems Key Takeaways Ingenico and Verifone dominate the global payments industry Though Ingenico has a higher market share, Verifone has more secure products, a greater exposure in the US and rapidly decreasing margins New entrants cannot compete with Verifone s full product line, security apparatus, customer service systems, and brand loyalty Significant marketing buzz behind these products has altered Verifone s market perception Verifone is valued at lower multiples than other payments companies like Diebold and NCR No one other company offers as many integrated payments solutions as Verifone 6

7 7 Macroeconomic Analysis Billions Emerging Growth in Non-Cash Payments $350 $300 $250 $200 $150 $100 $50 $ E 2016E 2017E 23% estimated CAGR for growth in non-cash payments in emerging markets compared to only 5% in mature markets Rapid GDP growth of emerging markets leads to greater spending from emerging middle classes Greater adoption of non-cash payment methods due to technological and infrastructural development leads to even higher growth in noncash payments volume Emerging Asia and EMEA Mature Markets Top Mobile Device Market Growth of 2015 The 15 top countries with highest mobile device 18% 16% market growth are all in the emerging Asia or EMEA 14% region 12% 10% 8% 6% 4% 2% 0% A lacking pre-established payments infrastructure in many of these countries will lead to a more rapid adoption of mobile payment methods Several major mobile wallets are planning on expanding into these emerging markets

8 Valuation I PAY is undervalued compared to its peers on forward P/E and EV / EBITDA Analysis Verifone and Ingenico Group dominate the global terminal market (78%) yet Ingenico trades at higher EV / EBITDA multiples and P/E multiples Verifone has larger market share in the US, which means they are expected to capture a greater share of revenue from the upcoming EMV switch (61% YOY growth) Verifone s debt to EBITDA and EBITDA margins are in line with its competitors Implied Valuation 2016 P/E Upside = 21.1% increase 2016 EV / EBITDA Upside = 5.7% increase 8

9 9 Valuation II Discounted Cash Flow analysis suggests PAY s upside is 38.5% Valuation Assumptions 5-year revenue projections are based off expected growth as a result of catalysts and analyst projections Operating Margins, Depreciation & Amortization, and Capital Expenditures are in line with historical averages Working Capital assumptions are projected based on historical turnover and payable rates WACC assumptions are detailed in the Appendix

10 10 Risk Factors Competitive Pressures Ingenico, Verifone s major competitor, has a greater global market penetration Verifone's global market share can be threatened if Ingenico leverages its higher profit margins and prices Verifone out of several key markets Major losses can be incurred if Verifone loses some of its emerging market share where they are seeing greatest regional revenue growth Product Obsolescence If the growth rate of mobile payment technology overtakes that of terminal technology, then alternative payment solutions may become more widespread Mobile to mobile payments may pose a greater threat to in-person mobile payments if the security technology advances and it becomes more widely adopted Non-terminal solutions to in-person mobile payments may become more widespread due to potential cost and operating efficiencies Prolonged Macro Softness With operations in over 150 countries, Verifone is exposed to significant foreign exchange risk Verifone s sales and growth are strongly correlated with the global business cycle Verifone s high emerging Asia- Pacific revenue growth, largely driven by China, faces the risk of slowdown in the Chinese economy However Verifone has comparable abilities to compete in contested markets and is less globally stratified However Non-terminal solutions lack the same depth of security features present on payment terminals However Verifone s management team has shown to be flexible, responsive, and willing to take cost-cutting initiatives

11 11 Recommendation We recommend buying Verifone at its current price, $26.20 Price Target Current Price $26.20 Comparable Company Analysis $31.73 Discounted Cash Flow Analysis $36.28 Analyst Average Target $39.56

12 12 Appendix I Assumptions Cost of debt is an average of Verifone s existing credit terms. Verifone is able to pay a low tax rate by using its subsidiaries in Singapore and Israel The risk-free rate is the US 10-year Treasury Bill interest rate Verifone s re-levered beta is found from the beta s of its competition Market risk premium and size premium are best estimate sourced from Bloomberg